Against

 

M/s Alpesh J. Parekh

Member, Saurashtra Kutch Stock Exchange Ltd. (INB 180572911)

Sub Broker, SKSE Securities Ltd. (INS 010819519)

 

1.0 Background

1.1 M/s Alpesh J. Parekh is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a stock broker being a member of Saurashtra Kutch Stock Exchange Ltd. (hereinafter referred to as “SKSE / exchange”) and as a sub broker affiliated to M/s SKSE Securities Ltd., member, Bombay Stock Exchange. The proprietor of the firm is Shri Alpesh J. Parekh and its registered and administrative office is located at 224, P.S. Bhavan, SKSE Building, Sadar Bazar, Rajkot – 360 001.

 

1.2 An inspection of M/s Alpesh J. Parekh (hereinafter referred to as “AP”) was conducted on February 22-23, 2005 by a team of SEBI officials. Certain shortcomings were observed during the inspection of AP. The inspection report covering the observations of inspection along with shortcomings observed was forwarded to AP vide SEBI letter dated March 28, 2005. AP submitted its reply vide its letter dated April 14, 2005. As the reply did not satisfactorily explain the shortcomings observed during inspection, it was decided to institute adjudication proceedings against AP and I was appointed as Adjudicating Officer vide SEBI Order dated November 25, 2005.  

 

2.0 Notice / Reply / Personal Hearing

 

2.1 Accordingly, I issued a show cause notice dated April 10, 2006 to AP under Rule 4 of SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 to show cause as to why an enquiry should not be initiated against it and penalty be not imposed on it for its failure to comply with the various SEBI circulars, SEBI Regulations etc. as mentioned in the inspection report and the show cause notice. AP was advised to make its submissions, if any, along with supporting documents, within 14 days from the date of receipt of notice. It was also advised to note that in case it failed to reply within the stipulated time, it would be presumed that it has no suitable explanation / reply and that the matter would be further proceeded with on the basis of evidence on record. AP was also asked to indicate whether it would also like to have a personal hearing in this regard.

 

2.2 The show cause notice was delivered to AP on April 13, 2006 and a reply dated April 17, 2006 was received from AP on April 25, 2006.  In the reply AP submitted that he would like to reiterate the earlier reply dated April 14, 2005 as a reply to the show cause notice issued by Adjudicating Officer and enclosed a copy thereof. AP also sought a hearing so as to provide further explanation and evidence. Accordingly, I issued a notice of inquiry dated September 28, 2006 fixing October 09, 2006 as date of hearing.

 

2.3             On October 09, 2006, Mr. Ronak S. Davda, chartered accountant (membership no. 109901) appeared before me along with authority letter dated October 05, 2006 and made submissions on behalf of AP.  He also mentioned that if AP wanted to submit any additional documents, it would do so by October 16, 2006. No additional documents / evidence have been submitted by AP.

 

3.0 Consideration of  issues :

 

3.1 I now propose to discuss in detail the charges that have been leveled against AP for being adjudicated in the present proceedings, the submissions made by AP in this regard and my findings on the same.

 

3.2 Charge 1- Failure to issue confirmation memos in the form and manner prescribed in violation of SEBI circular SMD/Policy/Circular-11/97 dated May 21, 1997 and regulation 26(v), 26(xv) and 26(xvi) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”). The specific charges and observations in this regard are mentioned below:-

 

Charge 1 (a):- Confirmation memos / notes are being numbered on a settlement-to-settlement basis instead of annual basis.

 

Reply - AP submitted that the back-office software does not permit such facility and incorporation of this facility needs upgrading the software.

 

Findings -  AP has indirectly admitted the shortcoming in the confirmation memos. Further it has simply stated that rectification would require upgrading the software without detailing any steps therefore. As it has not submitted any proof of rectification, I conclude that it is still continuing with this violation.

 

Charge 1 (b):- Confirmation memos / note do not depict corresponding contract note reference no. issued by the broker.

 

Reply - AP has submitted that the contract note details though not depicted in the confirmation note, are readily available in his back office and would be upgraded and would be revealed on the confirmation memo by April 30, 2005.

 

Findings -  AP has admitted the violation that the main contract note details were not being shown on the confirmation memo. Its statement that these details are readily available in its back office is of no consequence as the back office data is not readily accessible to its clients. The obligation of the sub broker is to mention the specific contract number of the main broker’s contract with the sub broker so that the client is assured that his transaction has happened on the stock exchange and that he can also verify his transaction details with the stock exchange / main broker. By not mentioning the contract note details in the confirmation memo, AP has  denied this information to its clients and has not exercised due care and diligence in his working. AP had further submitted that he would upgrade his software by April 30, 2005 in this regard. However, even in the reply dated April 17, 2006 and submission dated October 09, 2006, AP has neither commented on this issue nor enclosed any other evidence of rectification of the shortcoming. I am therefore constrained to conclude that AP has continued to issue confirmation memos without mentioning the main contract details in respect of the trades done and has thus violated the directions given in SEBI Circular No.SMD/Policy/Circular-11/97 dated May 21, 1997 and Regulations 26(v), 26(xv) and 26(xvi) of Broker Regulations.

 

Charge 1 (c):- The brokerage charged by the entity and main broker is not shown separately on the confirmation memo / note.

 

Reply – AP has submitted that this facility would be incorporated and brokerage would be shown separately. It was also submitted that the rate of brokerage was within limit and aggregate brokerage never exceeds 1%. Further that all their clients knew that the main broker charges 1 paise brokerage.

 

Findings – I have perused the copies of confirmation memos collected from AP during the inspection and note that they are mentioning the brokerage amount separately. Thus it appears to be meeting the requirements and hence no violation is made out against AP in this regard.

 

Charge 1 (d):- No confirmation memos were issued to a client, M/s Yogesh J Holding and Co. Pvt. Ltd.(hereinafter referred to as “YJH”). It was observed that only bills were issued to the client.

 

Reply – AP has submitted that he has obtained instruction letter from the client in this regard and that if required he would issue the confirmation memos and obtain acknowledgement. During the hearing held on October 09, 2006, it was submitted that the client has confirmed that for the said inspection period they have received all the contract notes.

 

Findings – The obligation to issue confirmation memos to clients within 24 hours of receipt of contract notes from main broker is an important obligation on the sub broker. The confirmation memo is the main official document which describes the details of the transaction viz. name of security, quantity, transaction date, transaction identification details, transaction price, brokerage etc. In absence of the confirmation memo, it would be difficult for the client to ascertain the full transaction details as well as enforce the contract.

 

Though AP stated that it had obtained instruction letter from the client vis-à-vis non-issuance of confirmation memos, it failed to produce documentary evidence in this regard. Notwithstanding the above statement of AP, a perusal of documents collected during the course of inspection reveals that AP had pre-printed formats of terms and conditions of trade which mentioned that while AP was insisting about sending the confirmation memos, the client desired that the same be retained in AP’s office and only a telephonic confirmation of trade be given to client as it was impractical to receive the confirmation memo through post. The fact that these terms and conditions were on pre-printed formats indicates that these were AP’s standard terms and conditions of trade which were entered into with, perhaps, all the clients. This indicates that AP was not sending the confirmation memos to its clients which is not a desirable practice. In view of above, I hold that AP has violated the directions given in SEBI Circular No.SMD/Policy/Circular-11/97 dated May 21, 1997 and Regulations 26(v) and 26(xv) of Broker Regulations.

 

 

3.3             Charge 2 : Failure to maintain proper segregation of clients’ funds and own funds.

 

Reply – AP has submitted that it is maintaining clear segregation of client and own funds from April 01, 2005. It has also been submitted that the non-segregation of account does not lead to misutilisation of clients funds as the expenses made from brokerage account were far below the amount of brokerage amount undrawn from the client account. AP has also submitted that many times its (AP’s) money is used for making pay-in pending credit of clients’ cheques. During the hearing, AP’s representative reiterated the earlier submission that the expenses made out of client account were much less than the brokerage amount.

 

Findings – In his reply to the inspection report, AP submitted that clear segregation of client and own funds is being maintained from April 01, 2005. In other words, it has been admitted that prior to this date there was violation of the requirement relating to segregation of client and broker funds. Although AP has argued that at all times the amount utilized for AP’s expenses out of client Account was less than the brokerage due, no supporting documents have been submitted in this regard. I therefore hold that AP has violated the provisions relating to segregation of broker and client funds as stipulated vide SEBI circular No.SMD/SED/CIR/93/23321 dated November 18, 1993.

 

3.4 Charge 3 : Acceptance of cash and making payment to clients in cash. A perusal of the inspection report reveals that there are numerous instances of cash dealings with clients as mentioned below:-

 

Sl. No.	Date	Amount	Receipt / Payment	Name of person	Client Code
	10.04.2004	2,109.33	R	Mina Jitesh Parekh	A288
	12.04.2004	5,000.00	R	Sonalben K. Malkan	A923
	15.04.2004	12,000.00	R	Hemendra K. Kotak	A909
	16.04.2004	10,000.00	R	Ravi Padnani	A505
	21.04.2004	5,000.00	R	Sonalben K. Malkan	A923
	21.04.2004	18,000.00	R	Hemendra M. Kotak	A909
	22.04.2004	18,000.00	R	Hemendra M. Kotak	A909
	22.04.2004	10,000.00	R	Ravi Padnani	A505
	07.05.2004	10,000.00	R	Sonalben K. Malkan	A923
	09.07.2004	39,500.00	R	Rajni N. Korat	2008
	20.07.2004	5,000.00	R	Sonalben K. Malkan	A923
	28.07.2004	2,50,000.00	R	Rajni N. Korat	2008
	04.08.2004	28,808.93	R	Hemendra M. Kotak	A909
	04.08.2004	24,621.07	R	Kusumben M. Kotak	A711
	12.08.2004	10,000.00	R	Rajni N. Korat	2008
	14.08.2004	7,000.00	R	Sonalben K. Malkan	A923
	24.08.2004	1,25,000.00	P	Rajni N. Korat	2008
	25.08.2004	5,000.00	R	Sonalben K. Malkan	A923
	13.09.2004	18,000.00	P	Piyush J. Parekh	J108
	26.10.2004	10,000.00	R	Kusumben M. Kotak	A711
	27.10.2004	70,000.00	R	Hemang Dave	J190
	11.12.2004	33,076.00	R	Mukundbhai Malaviya	A304
	11.12.2004	8,000.00	R	Sonalben K. Malkan	A923
	17.12.2004	25,000.00	R	Kusumben M. Kotak	A711
	20.12.2004	10,000.00	R	Sonalben K. Malkan	A923
	22.12.2004	1,80,000.00	R	Rajni N. Korat	2008
	23.12.2004	50,000.00	R	Rajni N. Korat	2008
	18.02.2005	50,000.00	R	Niradbhai S. Desai	A351
	18.02.2005	50,000.00	R	Rajulben R. Desai	A360
	18.02.2005	50,000.00	R	Rajesh S. Desai	A900

 

 

Reply  : During the hearing, the representative of AP mentioned that cash transactions were done on exceptional and need based basis only. It was submitted that in few exceptional cases cash was accepted to meet pay-in liability as it was not possible to clear the out-station cheque of client within the available time limit. It was further submitted that it had now made it compulsory for clients to have accounts in banks having MICR cheque facility and that no cash transactions had been done after the date of inspection.

 

Findings : While there may be some merit in the argument that it was not possible to realize outstation cheques within time to meet the pay-in obligations, the observations made during the inspection do not support such argument. The findings of the inspection as mentioned above indicate that AP was regularly having cash transactions with certain clients such as Hemendra M. Kotak, Rajni N. Korat, and Sonalben K. Malkan etc. The transactions with these clients do not appear to be payments received against settlement. I therefore hold that AP has violated SEBI circular no. SMD-1/23341 dated November 18, 1993 and circular no. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003.   

 

3.5 Charge : Dealing with unregistered sub brokers

 

 Reply : In the reply, AP has stated that it has stopped dealings with M/s Yogesh J Holdings & Fin. Co Pvt. Ltd. (YJH) right from the date of inspection and segregated the dealings of the group whereby the family members and group members are  now directly registered with AP. During the hearing, it was submitted that AP came to know during the inspection that one of its clients (viz. YJH) was dealing on behalf of further clients who were their family members.

 

 Findings : The inspection report mentions that YJH who got itself registered as a client with AP is itself a member-broker of SKSE and is holding SEBI Registration No. INB 181191934. It is also mentioned that a trading terminal of AP was installed in the office of YJH which was being operated by Sh Haresh Patel, Director-YJH. YJH was trading through AP on behalf of clients as evidenced by the authenticated copies of bills, ledger copies and other documents of YJH collected during inspection.  AP would have been very well aware of the fact of YJH being a registered broker of SKSE and should therefore have exercised due diligence while registering YJH.

 

 While YJH can make own investments as a corporate entity, executing transactions for third parties as a business venture is the activity of an intermediary which requires SEBI registration. It is surprising that YJH who was itself eligible of being registered as a sub-broker of SKSE Securities Ltd. chose to take a trading terminal in its office from AP and conducted trades for clients. Further, in the hearing before me, AP’s representative stated that it came to know of their client actually dealing for other clients only during the course of inspection. This submission contradicts the statement made by Sh Alpesh Parekh, proprietor-AP, during the course of inspection that he was aware that YJH was trading on behalf of clients. I, therefore, hold that AP has knowingly violated regulation 18B and 26(xiv and xv) of Broker Regulations. Further as AP was fully aware of the fact that YJH was a registered broker of SKSE (and therefore competent to be directly registered as sub broker of SKSE Securities Ltd.) and that YJH was doing trades on behalf of its own clients, I am of the view that AP has not exercised the requisite skill, care and diligence in its working and has thus violated the clause A(2) of Code of Conduct for sub brokers stipulated in schedule II of regulation 15 and regulation 26(xvi) of Broker Regulations.

 

3.6 In view of above, I am of the view that AP has violated various SEBI circulars and regulations 15, 18B, 26(v), 26(xiv), 26(xv) and 26(xvi) of Broker Regulation and is thus liable for penalty under section 15HB of SEBI Act, 1992 which states as under :

 

“Penalty for contravention  where no separate penalty has been provided

 

15HB. Whoever fails to comply with any provision of this 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.”.

3.7 While imposing penalty it is important to consider the factors stipulated in section 15J of SEBI Act, 1992 which states as under :

“15J - Factors to be taken into account by the adjudicating officer

While adjudging quantum of penalty under section 15-I, 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. “

3.8 AP is not a new entrant in the securities market. He is a broker of Saurashtra Kutch Stock Exchange Ltd. (SEBI Registration No. INB 180572911) by virtue of which he became a sub broker of SKSE Securities Ltd. Being an existing registered broker, AP was well aware of its obligations such as issuance of confirmation memos, segregation of broker-client funds, not dealing in cash with clients etc.  

 

While some disproportionate gain or advantage has definitely accrued to AP from use of clients’ funds or through other violations, it is not possible to quantify the same in monetary terms.

 

A perusal of documents collected during the course of inspection reveals that AP had pre-printed formats of undertakings / agreement / terms & conditions with respect to maintaining running accounts, retention of money & securities and even with respect to no obligation of sending contract note / confirmation memo to clients. Thus it was premeditated action that confirmation memos need not be sent to clients. These undertakings/ agreements / terms & conditions made it possible for AP to avoid / delay almost all its obligations to clients by not sending contract notes / confirmation memos, neither making timely payments nor delivering securities in a timely manner etc. The investors have definitely lost out in terms of opportunity loss on account of non-receipt of payment / securities from AP. However, such loss is not readily quantifiable in terms of money.

 

Another aspect which is to be considered is whether the violations are repetitive in nature. As already stated above, AP did not issue confirmation memos to YJH atleast during the period covered under inspection viz. 2003 – 2004 and 2004 – 2005 (till date of inspection). YJH was having AP’s trading terminal in its own office (AP’s) and Mr. Ashok Patel, director – YJH was operating the same and thus could execute all its transactions directly. Further there are repeated incidents of receipts and payments to clients in cash (refer para 3.4 above) and of issuance of confirmation memos with incomplete details by AP. I therefore hold that there are repeated instances of violations by AP.

 

AP is well aware of its shortcomings vis-à-vis issuance of confirmation memos, non-segregation of broker-client funds etc. In its reply dated April 14, 2005, AP admitted its shortcomings and explained the reasons therefor. It is expected that as a responsible broker / sub broker, on knowing of the shortcomings AP would immediately take steps for rectification of the same. Yet even till October 2006 AP had not taken any action in this regard. This is not a desirable attitude on the part of a responsible intermediary.

 

It is also observed that AP repeatedly dealt with YJH who was acting as an un-registered sub broker. Dealing with an un-registered sub broker is a violation of regulation 18B and regulation 26(xiv) of Broker Regulations.

 

4.0 Penalty

 

4.1 Considering the material available on record, and upon a judicious exercise of powers conferred upon me under Rule 5 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by the Adjudicating Officer) Rules 1995, I impose a penalty of Rs. 1,50,000/- (Rupees one lac fifty thousand only), on M/s. Alpesh J. Parekh, Member, Saurashtra Kutch Stock Exchange Ltd. (INB 180572911) and Sub Broker, SKSE Securities Ltd. (INS 010819519)  under section 15HB of SEBI Act, 1992. I think this amount would be appropriate in view of the facts of the case.

4.2 The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India and payable at Mumbai which may be sent to Mr. P.K. Kuriachen, General Manager, SEBI, C – 4 A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

 

PLACE: MUMBAI                                                                               PIYOOSH GUPTA

DATE: JANUARY 31, 2007                                                                ADJUDICATING OFFICER