SHOW CAUSE NOTICE AND SUBMISSIONS OF R. KOHLI & CO.
- A Show Cause Notice A&E/BS/42351/2005 dated June 10, 2005 was issued to RKC in terms of the provisions of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the Rules) requiring it to show cause as to why an inquiry should not be held against it for the violations alleged to have been committed by it.
- RKC replied to the show cause notice vide letter dated October 14, 2005. Considering the reply of RKC, it was decided to conduct an inquiry in the matter and RKC was advised to attend the hearing scheduled on December 12, 2005. It is noted that RKC vide its letter dated December 9, 2005 informed that it is a small sub-broker, unable to afford the expenses to visit Mumbai or to appoint any lawyer to plead its case and requested to consider the case on merit.
5. The charges levelled against RKC, its submissions and the findings of the inquiry in respect of each charge is mentioned below
CHARGE: FAILURE TO MAINTAIN DOCUMENT REGISTER
- It is alleged that RKC failed to maintain Document Register. Regulation 26 (iii) of Brokers Regulations provide monetary penalty for a Stock Broker or Sub broker for failure to maintain books of accounts or records as per the SEBI Act, rules or regulations framed thereunder. Regulation 15 (2) of Brokers Regulations provides that a sub-broker shall maintain document register. Section 15 A(c) of the SEBI Act provides that if any person, who is required under SEBI Act or any rules or regulations made thereunder to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
SUBMISSIONS
- RKC has submitted that document register is being maintained in the computer system. RKC has further cited the case of J M Morgan Stanlay Retail Services Pvt. Ltd. in support of its contention that maintaining the records in electronic form is a statutory compliance.
FINDINGS
- Considering the submissions of RKC that it was maintaining Document Register in electronic form and further considering its submissions that the inspecting authority also found the same in its report, no violation is found in this regard and it can not be concluded that RKC violated Regulation 15 (2) of Brokers Regulations.
CHARGE: NON SEGREGATION OF CLIENTS’ FUNDS AND OWN FUNDS
- It is alleged that RKC did not segregate clients’ funds from own funds and also used clients’ funds for its own personal purposes. Regulation 26 (xiii) of the Brokers Regulations provide for monetary penalty for a Stock Broker or Sub-broker for failure to segregate his own funds or securities from the clients’ funds or securities or using the securities or funds of the client for his own purpose or for purpose of any other client. Section 15 HB of the SEBI Act provides that whoever fails to comply with any provisions of SEBI Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
- In this regard, it is noted in the inspection report that in the following instances expenses were debited in clients’ accounts:
|
Date
|
Amount (Rs.)
|
Nature of Expense
|
|
10.05.2002
|
3089.00
|
Mediclaim
|
|
12.08.2002
|
2154.19
|
Telephone Expenses
|
|
20.09.2003
|
6191.50
|
LIC Premium
|
|
22.09.2003
|
3361.90
|
LIC Premium
|
|
23.09.2003
|
13863.00
|
LIC Premium
|
|
04.11.2003
|
7000.00
|
Advance to staff
|
|
07.01.2004
|
13447.00
|
LIC Premium
|
|
27.01.2004
|
6480.00
|
Audit Fees
|
|
25.03.2004
|
10000.00
|
Pension Plan Premium
|
|
08.10.2002
|
8750.00
|
LIC Premium
|
It is further noted in the inspection report that in the following instances cash was withdrawn from the clients’ account:
|
Date
|
Amount (Rs.)
|
|
26.04.2003
|
65000.00
|
|
10.06.2003
|
50000.00
|
|
23.06.2003
|
150000.00
|
|
21.07.2003
|
90000.00
|
|
22.07.2003
|
60000.00
|
|
12.08.2003
|
80000.00
|
|
23.10.2003
|
50000.00
|
|
04.12.2003
|
70000.00
|
|
10.12.2003
|
60000.00
|
|
26.12.2003
|
75000.00
|
|
30.01.2003
|
30000.00
|
It is further noted in the following instances that amount was transferred from clients’ account to sub brokers’ account.
|
Date
|
Amount (Rs.)
|
|
02.04.2002
|
140000.00
|
|
04.04.2002
|
40000.00
|
|
01.10.2002
|
90000.00
|
|
05.10.2002
|
30000.00
|
|
14.01.2003
|
125000.00
|
|
16.05.2003
|
40000.00
|
It is further noted that in the following instances amounts received from clients was deposited in proprietary account of RKC.
|
Date
|
Name of the client
|
Amount (Rs.)
|
|
05.04.2002
|
Kanta Rani jain
|
200000.00
|
|
11.06.2002
|
Bharat Bhushan (HUF)
|
100000.00
|
|
17.06.2002
|
Kanta Rani Jain
|
100000.00
|
|
17.06.2002
|
Bharat Bhushan Jain
|
35000.00
|
|
22.06.2002
|
Bipan Jain
|
40000.00
|
|
22.06.2002
|
Bipan jain
|
40000.00
|
|
22.06.2002
|
Bipan jain
|
20000.00
|
|
10.08.2002
|
Bindu jain
|
47400.00
|
|
22.08.2002
|
Rajeev Jain
|
160000.00
|
|
29.08.2002
|
Bipan Jain
|
70000.00
|
|
31.08.2002
|
Inderpal Singh & Sons (HUF)
|
60000.00
|
|
16.11.2002
|
Gurudeep Singh & Sons (HUF)
|
32500.00
|
|
05.12.2002
|
Bhupinder Kaur
|
39000.00
|
|
12.12.2002
|
Bipan jain
|
175000.00
|
|
12.12.2002
|
Bipan jain
|
250000.00
|
|
12.12.2002
|
Bipan Jain
|
275000.00
|
|
21.12.2002
|
Bipan Jain
|
800000.00
|
|
28.12.2002
|
Bipan Jain
|
850000.00
|
|
08.01.2003
|
Bipan Jain
|
300000.00
|
|
10.01.2003
|
Kanta Rani Jain
|
300000.00
|
SUBMISSIONS
- RKC has submitted that as far as meeting of some expenses from clients’ account is concerned, it met those expenses out of the brokerage lying there. Further, its pay-in and pay out was done through HDFC Bank and the client account was with Vysya Bank and therefore it withdrew cash to meet pay in and pay out obligations. RKC also submitted that subsequent to the inspection it has opened client account with the HDFC Bank and it is doing all transactions from client account to own account and vice versa only through cheques and no cash transaction of any kind is being done.
FINDINGS
- RKC has admitted that it had not properly segregated its own account and clients’ account. Failure on the part of the sub-broker to segregate the clients’ funds and own funds have to be viewed seriously. Further, it is also noted that the sub broker has been withdrawing the money from the client’s accounts for its own purposes. This makes RKC liable for penalty under Regulation 26 (xiii) of the Brokers Regulations and Section 15 HB of the SEBI Act.
CHARGE: OFF THE FLOOR TRANSACTIONS
- It is alleged that RKC indulged in off the floor transactions and did not report it to the exchange thereby violating circular SMD/MDP/CIR/043/96 dated August 5, 1996. This makes it liable for penalty under Regulation 26 (xv) of the Brokers Regulations which provides for monetary penalty for a Stock Broker or a Sub Broker for failure to comply with directions issued by the Board under the SEBI Act or the regulations framed thereunder. Section 15 HB of the SEBI Act provides that whoever fails to comply with any provisions of SEBI Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
- In this regard it is noted in the inspection report that in various cases rate difference bills were issued without giving the settlement number and RKC did not produce sauda book for these transactions. It is alleged that these transactions are off the floor transactions which was not reported to the exchange.
SUBMISSIONS
- RKC has submitted that the few off market transactions pointed out were spot transactions due to non availability of exposure limit and not with any motive to violate law but to earn some money within the rules of spot transaction.
FINDINGS
- It is noted from the submissions of RKC that it had indulged in few off the floor transactions which were not reported to the exchange. The contention that the intention for the same was not for violating law is unacceptable as exposure limit has been fixed taking into account the financial soundness of the entity and circumventing the same has to be viewed seriously. In view of the same RKC failed to comply with the directions issued by SEBI circular SMD/MDP/CIR/043/96 dated August 5, 1996 and hence liable to the penalty in terms of the provisions of Regulation 26 (xv) of the Brokers Regulations and Section 15 HB of the SEBI Act.
CHARGE: ACCEPTING CASH FROM THE CLIENTS
- It is alleged that RKC accepted cash violating the provisions of SEBI circular SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 which prohibit the sub broker from accepting cash from the clients. Failure to comply with the provisions of the said circular makes RKC liable for penalty under Regulation 26 (xv) of the Brokers Regulations which provides for monetary penalty for a Stock Broker or a Sub Broker for failure to comply with directions issued by the Board under the SEBI Act or the regulations framed thereunder. Section 15 HB of the SEBI Act provides that whoever fails to comply with any provisions of SEBI Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
- In this regard it is noted in the inspection report that RKC issued rate difference bills which were allegedly off market transactions and received cash from the clients in respect of these trades.
SUBMISSIONS
- RKC has submitted that inspection period was from 1.4.2002 to 31.3.2004 and SEBI vide circular dated 27.8.2003 has banned the cash receipts and mandated all payments through cheques. RKC has submitted that for its case most of the cash transactions were for the period before this circular. RKC has admitted few violations, however submitted that now all payments are through cheques only.
FINDINGS
- It is noted from the submissions of RKC that the few instances which have been cited in the inspection report had occurred prior to the circular dated 27.8.2003 issued by SEBI. In this regard it is noted that the inspection report has not stated the dates on which the alleged violation had taken place. Considering the submissions that the said violations had taken place prior to the circular dated 27.8.2003, no adverse finding is recorded with regard to the violation alleged against RKC.
CHARGE: FAILURE TO OBTAIN / MAINTAIN CLIENT REGISTRATION FORMS / IRREGULARITIES IN MAINTAINING CLIENT AGREEMENT
- It is alleged that RKC failed to obtain / maintain client registration forms and committed irregularities in maintaining the client agreement. Regulation 26 (xii) provides for monetary penalty to a Stock Broker or a Sub broker for execution of trade without entering into agreement with the client under SEBI Act, rules or regulations framed thereunder or failure to maintain client registration form or commission of any irregularities in maintaining the client agreement. Section 15 HB of the SEBI Act provides that whoever fails to comply with any provisions of SEBI Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
- In this regard it is noted in the inspection report that client registration forms in respect of Parveen Singh, Paramjit Singh and Bal Krishan were not available. Further, in the cases of S.K. Gupta, Baldev Kishan, Deva Singh, Kundan Lal and Makhan Singh, photographs of the clients were not placed on the registration form. Further, in the cases of Satish Kumar Gagneja and S.K. Gupta, client agreement was not complete. Further, the broker client agreement was not executed on stamp paper.
SUBMISSIONS
- RKC has submitted that deficiencies pointed out in the registration forms are duly rectified and now complete forms are with RKC.
FINDINGS
- Though it is noted from the submissions of RKC that in respect of the few instances cited in the inspection report, it has rectified the deficiencies and the forms are complete in all respect, however it is pertinent to note that in respect of few clients the registration forms were not available with RKC. The same can not be equated with minor deficiencies in maintenance of registration forms. In view of the same it is concluded that RKC failed to comply with the provisions of Regulation 26(xii) of the Brokers Regulations and hence liable for penalty under Section 15 HB of the SEBI Act.
CHARGE: FAILURE TO COMPLY WITH THE DIRECTIONS ISSUED BY SEBI AND FAILURE TO EXERCISE DUE SKILL, CARE AND DILIGENCE
- It is alleged that RKC failed to comply with directions issued by SEBI and failed to exercise due skill care and diligence in the conduct of its business. This makes it liable for penalty under Regulation 26 (xv) of the Brokers Regulations which provides for monetary penalty for a Stock Broker or a Sub Broker for failure to comply with directions issued by the Board under the SEBI Act or the regulations framed thereunder. Regulation 26 (xvi) of the Brokers Regulations provides for monetary penalty for a Stock Broker or a Sub broker for failure to exercise due skill, care and diligence. Section 15 HB of the SEBI Act provides that whoever fails to comply with any provisions of SEBI Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
SUBMISSIONS
- RKC has submitted that under this charge no specific direction or regulation has been mentioned which it had violated, it is not in a position to reply. Further, RKC also submitted that it has not been specified as to how RKC failed to exercise due skill, care and diligence.
FINDINGS
- As no specific instances of failure to comply with the directions issued by SEBI has been cited in the inspection report in addition to the charges mentioned above, it can not be held that RKC is liable for penalty for failure to comply with the directions of SEBI except in respect of the violations detailed in the preceding paragraphs.
- The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to Chief General Manager, Market Intermediaries Regulation and Supervision Department, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai – 400 005.
- In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to R. Kohli & Co. and to Securities and Exchange Board of India.
Place: Mumbai S. Biju
January 30, 2006 Adjudicating Officer
28. It is noted from the above that the violation of non maintenance of client registration forms, non segregation of clients’ funds and own funds and utilising clients’ money for own purposes and non reporting of off the floor transactions levelled against RKC are established. As discussed above, the said violations attract a penalty under Sections 15 HB of the SEBI Act.
29. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely :
a) the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default
b) the amount of loss caused to an investor or group of investors as a result of the default
c) the repetitive nature of the default
30. It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage made as a result of the default. Further, the amount of exact loss caused to an investor or group of investors also cannot be quantified on the basis of the available facts and data. With regard to the repetitive nature of the default, it is noted that some of the violations such as using clients’ money for own purposes were committed on many occasions as detailed above. Hence the said violations committed by RKC are repetitive in nature. However, it is noted from the submissions of RKC that it has opened separate bank account for the clients and has taken remedial measures to ensure that the said violations are not repeated in future. In view of the same, a lenient view is taken with regard to the quantum of penalty in the matter.
ORDER
31. Considering the facts and circumstances of the case, it is established that R. Kohli & Co. failed to maintain client registration form in the prescribed manner, failed to segregate clients’ funds and own funds and utilised clients’ money for own purposes and also executed certain off the floor transactions which were not reported to the Stock Exchange. For the said violations committed by R. Kohli & Co., in terms of the provisions of Section 15 HB of the SEBI Act I, hereby impose a penalty of Rs.20,000(Twenty Thousand) on the Sub - broker R. Kohli & Co.
| Place: Mumbai |
S. Biju |
| January 30, 2006 |
Adjudicating Officer |