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Order in the matter of Kothari Investment & Stock Broking Services

Jan 30, 2006
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Orders : Orders of AO

ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF KOTHARI INVESTMENT & STOCK BROKING SERVICES.

1.      I was appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to as SEBI) in terms of an order dated February 15, 2005 to inquire into and adjudge under Section 15 I read with Sections 15 A (c), 15 F (a), 15F (b) and 15 H B of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) the violations of various provisions of SEBI (Stock Brokers and Sub-brokers Regulations), 1992 (hereinafter referred to as Brokers Regulations) and directions issued by SEBI through various circulars etc. alleged to have been committed by Kothari Investment & Stock Broking Services, sub-broker affiliated to ISE Securities Ltd., member NSE.

 

FACTS OF THE CASE

  1. SEBI conducted an inspection of the books of accounts and other records of Kothari Investment & Stock Broking Services (hereinafter referred to as the ‘sub broker’). The period covered under the inspection was 2002-2003. During the inspection, various irregularities/ contraventions such as failure to maintain order book, failure to issue confirmation memos, delay in payment and delivery of securities, failure to maintain proper segregation of clients’ funds and own funds, irregularities in maintaining the client agreement, failure to comply with the directions issued by the board and failure to exercise due skill, care and diligence etc. alleged to have been committed by the sub-broker were noticed. In respect of the said violations alleged to have been committed by the sub-broker, adjudication proceedings were initiated against it.

    2. SHOW CAUSE NOTICE AND SUBMISSIONS OF KOTHARI INVESTMENT AND STOCK BROKING SERVICES

  2. A Show Cause Notice dated June 10, 2005 was issued to the sub - broker in terms of the provisions of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officers) 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.

    3.  

  3. The sub-broker did not reply to the show cause notice. However, in the interest of justice it was decided to grant an opportunity of hearing to it on August 23, 2005. Vide letter dated August 19, 2005, the sub-broker requested for withdrawal of hearing notice and submitted that it had already replied to the show cause notice vide its letter dated June 24, 2005 and enclosed a copy of the letter dated June 24, 2005.

    4.  

  4. In the interest of justice, another opportunity of hearing was granted to the sub-broker on December 12, 2005. It is noted that the sub - broker did not attend the hearing scheduled on December 12, 2005 and vide its letter dated December 10, 2005 requested for withdraw al of notice of hearing.

    5.  

    6.      The charges levelled against the sub-broker, its submissions and the findings of the inquiry in respect of each charge is mentioned below

     

    CHARGE: FAILURE TO MAINTAIN ORDER BOOK

  5. It is alleged that the sub-broker failed to maintain order book containing information like identity of the person placing the order, date and time of order received, terms and conditions of the order etc. This is in violation of the provisions of Regulation 15 of Brokers Regulations. 

    6.  

  6. Regulation 26 (iii) of Brokers Regulations provides that a Stock Broker or a Sub Broker shall be liable for monetary penalty for failure to maintain books of accounts or records as per the SEBI Act, rules or regulations framed thereunder. 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 there under 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. 

    7. SUBMISSIONS

  7. The sub-broker vide its reply dated June 24, 2005 submitted that it was not maintaining the records for the Financial Year 2002-2003. The sub-broker has admitted the default committed by it in this regard.

    8. FINDINGS

  8. As the sub-broker has admitted the default, it is concluded that it had violated the provisions of Regulation 15 of the Brokers Regulations and this makes it liable for penalty under Regulation 26 (iii) of Brokers Regulations and Section 15A(c) of the SEBI Act.

    9. CHARGE: FAILURE TO ISSUE CONFIRMATION MEMOS

  9. It is alleged that the sub-broker was not maintaining duplicate of the purchase / sales memos issued to the clients and duly acknowledged by the clients.

    10.  

  10. Regulation 26 (v) of Brokers Regulations provides that a Stock Broker or Sub broker shall be liable for monetary penalty for failure to issue contract notes in the form and manner specified by the Stock Exchange of which such broker is a member. Section 15 F(a) of the SEBI Act provides that if any person who is registered as a Stock Broker under SEBI Act fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker.

    11. SUBMISSIONS

  11. The sub-broker has submitted that it issued client wise statement of account on particular settlement. Further, if any client required confirmation memos, it issued the same to the particular client.

    12. FINDINGS

  12. The sub-broker has admitted that it issued confirmation memos to the clients only when the client asked for it. The sub-broker was not issuing confirmation memos to all clients and this makes it liable for penalty under Regulation 26 (v) of Brokers Regulations and Section 15 F(a) of the SEBI Act.

    13. CHARGE: DELAY IN PAYMENT OF MONEY AND DELIVERY OF SECURITIES TO CLIENTS

  13. It is alleged that the sub-broker delayed payment to the clients in certain cases. The following instances illustrate the delay on the part of the sub-broker:

    14. Client

    Period of delay (days)

    Jay Kumari Bardia

    21

    Madhuri Dalmia

    15

    Sanjay Kothari

    8

    High Value Securities Pvt. Ltd.

    8

    IEE Business Finance Pvt. Ltd.

    21

    Gouri Shankar Sarda & Others (HUF)

    7

    Arati Prova Bhattacharjee

    24

    Winston Finvest (P) Ltd

    29

     

  14. It is further alleged that the sub-broker failed to deliver the securities to the clients within 48 hours in the following instances.

    15. Client

    Scrip

    Quantity

    Pay out date

    Date of transfer to client

    Bhiksu Advisory P. Ltd.

    Oriental Bank

    500

    23.1.03

    18.02.03

    Sunita Saraf

    Indo Rama Synthetics

    500

    23.1.03

    18.2.03

    Snehlata Mehta

    BOC Ltd

    1000

    23.1.03

    18.02.03

    Paresh Kumar Srimal

    SPL Ltd

    500

    30.12.03

    3.1.04

    Rani Jhunjhunwala

    Chambal Fertilizer

    1000

    30.12.03

    6.1.04

    Rajiv Ranjan Srivastava

    IOC

    100

    3.1.04

    27.2.04
  15. Regulation 26 (vi) of the Brokers Regulations provides that a Stock Broker or Sub Broker shall be liable for monetary penalty for failure to deliver any security or make payment of the amount due to the investor within 48 hours of the settlement of trade unless the client had agreed in writing otherwise. Section 15 F(b) of the SEBI Act provides that if any person who is registered as a Stock Broker under SEBI Act fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations, 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.

    16. SUBMISSIONS

  16. The sub-broker has submitted that it always tried to make payment to its clients within time. However, there are some instances of delay as the client requested to keep the money as margin for purchase of new shares.

    17. FINDINGS

  17.  The sub-broker has not submitted the consent letters from the clients for keeping their money or delayed payment. Further it has not provided any explanation for the delay in delivery of securities. This makes it liable for penalty under Regulation 26 (vi) of the Brokers Regulations and Section 15 F(b) of the SEBI Act.

    18. CHARGE: FAILURE TO MAINTAIN PROPER SEGREGATION OF CLIENTS’ FUNDS AND OWN FUNDS

  18. It is alleged that the sub-broker used clients’ accounts with HDFC Bank to make other payments. Following are the instances of the above violation:

    19. Particulars

    Date

    Amount (Rs)

    Printing & Stationary

    3.4.03

    630

    Telephone Charges

    2.5.03

    12075

    Salary

    7.5.03

    15500

    Consultancy Fees

    14.5.03

    4000

    Maintenance Charges

    16.6.03

    3500

    Magazines & Periodicals

    23.6.03

    230

    General Expenses

    30.7.03

    1404

    Salary

    23.9.03

    78700
  19. SEBI vide circulars SMD/SED/CIR/93/23321 dated 18.11.1993 and SMD/Policy/cir-11/97 dated 21.5.1997 required that the Stock Brokers / Sub brokers shall segregate their accounts from that of the clients which should not be used for any other purpose. Regulation 26 (xiii) of the Brokers Regulation provides for monetary penalty for Stock Brokers and Sub brokers for failure to segregate his own funds or securities from the clients’ funds or securities or using the securities or funds of the clients 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 the SEBI Act or the rules or 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.

    20.  

     

    SUBMISSIONS

  20. The Sub-broker has submitted that it tries to maintain proper segregation of clients’ fund and own fund but sometime failed in doing this. It has now opened separate bank account for client’s funds and assured to maintain the proper segregation of clients’ money and own money as per SEBI guidelines.

    21.  

    FINDINGS

  21. The Sub-broker has admitted that it was not maintaining segregation of client money and own money. However, now it has opened a separate account for clients and assured to maintain proper segregation of funds. In view of the same it is concluded that it is liable for penalty under Regulation 26 (xiii) of the Brokers Regulation and Section 15 HB of the SEBI Act.

    22. CHARGE: IRREGULARITIES IN MAINTAINING THE CLIENT AGREEMENT

  22. It is alleged that client agreement and client registration forms are not being properly maintained by the sub-broker and following are few instances of the same:

    23. Client

    Deficiency noted in the client agreement form

    Ganga Devi Daga

    No Proof of identity / residence

    Ram Nath Daga

    Agreement not signed, No Proof of identity / residence

    Suresh Kr Choudhary

    No Photograph, No Proof of identity / residence

    Renu Devi Sethia

    Agreement not on stamp paper

    Madhabi Nandi

    Agreement not signed, No Proof of identity / residence

    Babita Poddar

    No Introducer details, No Proof of identity / residence

    Sajjan Devi Ghorawat

    No Introducer details, No Proof of identity / residence

  23. Regulation 26 (xii) of Brokers Regulations provides that a stock broker or sub broker shall be liable for monetary penalty for execution of trade without entering into agreement with the Client under the 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 the SEBI Act or the rules or 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.

    24. SUBMISSIONS

  24. The sub-broker has submitted that nowadays it is trading with only those clients of whom it has proper client agreement and other documents as per SEBI guidelines.

    25. FINDINGS

  25. The sub-broker has admitted that there were deficiencies in the client agreement and client registration forms, however now it is trading with only those clients who have proper client agreement and other documents. Failure to maintain the registration form in the proper manner makes the sub-broker liable for penalty under Regulation 26 (xii) of Brokers Regulations and Section 15 HB of the SEBI Act.
    1. 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.
      1. 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 Kothari Investment and Stock Broking Services and to Securities and Exchange Board of India.

      2.  

       

       

      Place: Mumbai S. Biju

      January 30, 2006 Adjudicating Officer

       

    26.  

    28. It is noted from the above that the violation of non maintenance of order book, failure to issue confirmation memos, delay in payment of money and delivery of securities to clients, failure to maintain proper segregation of clients’ funds and own funds and irregularities in maintaining the client agreement leveled against the sub-broker are established. As discussed above, the said violation attract a penalty under Sections 15A(c), 15F(a), 15F(b) and 15HB 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. However, it is pertinent to note that many instances were noticed where the sub-broker failed to make payment and to deliver securities within the prescribed time limit. Hence the investors had suffered losses in the above instances. With regard to the repetitive nature of the default, it is noted that some of the violations such as using clients’ money for other purposes were committed on many occasions as detailed above. Hence some of the violations committed by the sub-broker are repetitive in nature. However, it is noted that the sub-broker has taken remedial measures for the above violations. It is noted from the submissions of the sub-broker that it has opened separate bank account for the clients and now it is trading with those clients only who have proper client agreement and other documents as per the SEBI guidelines. In view of the same, a lenient view is taken with regard to the quantum of penalty attracted in respect of the violations committed by the sub-broker.

    ORDER

    31. Considering the facts and circumstances of the case, it is established that Kothari Investment and Stock Broking Services failed to maintain order book, failed to issue confirmation memos, failed to segregate clients’ funds and own funds, delayed payment of securities and funds to the clients and also failed to maintain the client agreement forms in the prescribed manner. For the above violations committed by Kothari Investment and Stock Broking Services, in terms of the provisions of Sections15A(c), 15F(a), 15F(b) and 15HB of the SEBI Act I, hereby impose a penalty of Rs20,000 (twenty Thousand) on Kothari Investment and Stock Broking Services.