ORDER UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST GINI ENTERPRISES
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated March 3, 2005 appointed the undersigned as the Adjudicating Officer to inquire into and adjudge under Section 15I of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violation alleged to have been committed by Gini Enterprises (hereinafter referred to as the noticee), on account of acting as unregistered sub broker while dealing in the scrip of Soundcraft Industries Limited (hereinafter referred to as SIL).
FACTS OF THE CASE
2. SEBI conducted investigation into the trading in the scrip of SIL during the period July 2001 and January 2002. During the course of the investigation it was observed that the noticee had acted as a sub broker to H Nyalchand Financial Services Ltd., member NSE for its clients Bharat H Jain and Asmita R Shah in the scrip of SIL. As it is alleged that the noticee was not affiliated to the broker, on account of the allegation of acting as unregistered sub broker, adjudication proceedings were initiated against the noticee under the provisions of Section 15I and Section 15 HB of the SEBI Act.
NOTICE AND REPLY
3. A show cause notice A&E/BS/56448/2005 dated December 27, 2005 was issued to the noticee in terms of Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) seeking reply of the noticee as to why an inquiry should not be held in respect of the violations alleged to have been committed by it.
4. The noticee vide letter dated January 10, 2006 replied to the show cause notice. Considering the reply submitted by the noticee, it was decided to conduct an inquiry in the matter and the noticee was advised to attend the inquiry on March 7, 2006. Shri Tarun Gandhi, proprietor of Gini Enterprises attended the hearing on March 7, 2006 and submitted the following:
a. We had submitted the copy of sub-broker application to H Nyalchand Financial Services Ltd. (Nyalchand). But the same Xerox copy is missing from our record.
b. We have submitted the Xerox copy of the letters establishing that we have not only submitted the application to Nyalchand but also got the lease line from NSE at our premises on behalf of Nyalchand.
c. We had also applied for BSE lease line as a sub-broker affiliated to Parklight Investment Pvt. Ltd. So we were under the impression as conveyed by Nyalchand that we will get registration for NSE sub-brokership. Further, we were under the impression as conveyed by Nyalchand that it had submitted our application to NSE and we will receive our sub-broker registration soon.
d. I am following up with NSE as to what happened with my application form as a sub-broker. The details shall be submitted by March 14, 2006.
CONSIDERATION OF EVIDENCE AND FINDINGS
5. The issue for consideration in the matter is whether the noticee acted as a sub-broker without obtaining certificate of registration from SEBI and whether on account of acting as an unregistered sub-broker, the noticee is liable to the penalty prescribed under Section 15 HB of the SEBI Act, 1992.
6. Section 12 (1) of the SEBI Act, 1992 mandates that no sub-broker shall buy, sell or deal in securities except under and in accordance with the conditions of certificate of registration obtained from the Board in accordance with the regulations made under the Act. Rule 3 of SEBI (Stock Brokers and Sub-brokers) Rules, 1992 provides that no Stock Broker or Sub-broker shall buy, sell or deal in securities unless he holds a certificate granted by the Board under the Regulations.
7. It is undisputed that the noticee was acting as a sub broker to H Nyalchand Financial Services Ltd. without obtaining a certificate of registration from SEBI. The noticee has also admitted the said fact in its reply dated January 10, 2006 and during the personal hearing on March 7, 2006.
8. The noticee has submitted that earlier it had submitted the application for sub-broker registration through H Nyalchand Financial Services Ltd (hereinafter referred to as HNFSL). It is also admitted by the noticee that it was under the impression that it will get registration as a sub-broker in NSE. Though the noticee stated that it had submitted its application through the stock broker HNFSL, it has not submitted any proof of the same. Copy of the application and other details could not be submitted by the noticee. The noticee had submitted a copy of the work order no. MMC/NSE/D/239/W/KVL dated 26.9.2000 of MTNL which indicate that a data circuit to be installed between National Stock Exchange and H Nyalchand Financial Services Ltd., Gini Enterprises, 2/18, Bansi Park, Narsing Land, Malad (W), Mumbai – 400064. Though the said document indicate that a leased line is installed at HNFSL address which is also stated to be the address of the noticee, no proof has been submitted by the noticee to indicate that it had submitted its application for registration as sub-broker through HNFSL. The noticee was under the impression that it would get the sub-broker registration and it was doing business as a sub-broker without obtaining a valid registration from SEBI. Considering the same and also considering the fact that no record of application submitted by the noticee is seen, on the basis of facts and circumstances of the case and the evidence available on record, it is concluded that the noticee was acting as an unregistered sub-broker.
9. It is pertinent to note that SEBI vide circular Sub-brok/CIR/02/2001 dated January 15, 2001 has advised that the sub-brokers are permitted to start business only after clearance and receipt of registration certificate from SEBI and they should not start their business with their recommending brokers without obtaining certificate of registration from SEBI by merely making an application to their brokers / stock exchanges.
10. Registration of sub-brokers is a very important measure for protecting the interests of investors who deal with sub-brokers. As stated above, the noticee acted as unregistered sub-broker and thereby violated the provisions of Section 12 (1) of the SEBI Act, 1992 and Rule 3 of SEBI (Stock Brokers and Sub-brokers) Rules, 1992. On account of the violations as stated above, the noticee is liable to the penalty prescribed under Section 15HB of the SEBI Act which provides the following:
‘Whoever fails to comply with any provision of this Act, the rules of the regulations made or directions issued by the Board thereunder for which no separate penalty has been prescribed, shall be liable to a penalty which may extend to one crore rupees’.
11. 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
12. 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 loss caused to an investor or group of investors also cannot be quantified on the basis of available facts and data. With regard to the repetitive nature of the default, it is noted that the noticee had executed substantial trades on behalf of the clients Bharat H Jain and Ashmita R Shah in the scrip of SIL and considering the fact that the trades were executed on many occasions, it is concluded that failure on the part of the noticee is repetitive in nature.
ORDER
13. Considering the facts and circumstances of the case, it is established that Gini Enterprises acted as sub broker to H Nyalchand Financial Services Ltd. without obtaining certificate of registration from SEBI. However considering the submissions of Gini Enterprises that it had submitted an application through HNFSL and further it was acting as a registered sub-broker of Parklight, a lenient view is taken with regard to the penalty. For the violation of acting as a sub-broker without obtaining registration from SEBI, I, impose a penalty of Rs.1,00,000/- (Rupees one lakh) on Gini Enterprises in terms of the provisions of Section 15 HB of the SEBI Act. In the facts and circumstances of the case, I am of the view that the said penalty is commensurate with the violation committed by Gini Enterprises.
14. 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 the General Manager, Investigation Department (ID3), Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, First Floor, 224, Nariman Point, Mumbai -400 021.
15. 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 Gini Enterprises and to the Securities and Exchange Board of India.
Place: Mumbai S. Biju
July 31, 2006 Adjudicating Officer