SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: DR. T. C. NAIR, WHOLE TIME MEMBER
WTM/TCN/ID3/30/06/2007
ORDER
UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002, AGAINST M/s. HB SECURITIES PRIVATE LIMITED (SEBI REGISTRATION NO. INB 230607337), MEMBER, NATIONAL STOCK EXCHANGE IN THE MATTER OF M/s. JAIPRAKASH INDUSTRIES LIMITED
BACKGROUND
1. An investigation was conducted by Securities and Exchange Board of India (hereinafter referred to as SEBI) into the trading in the scrip of M/s. Jaiprakash Industries Limited (herein after referred to as ‘JIL’) for the period June 1999 to December 1999. The investigation revealed that M/s. H B Securities Limited, (hereinafter referred to as “HBSL” or “broker”) a member of the National Stock Exchange, (hereinafter referred to as ‘NSE’) having SEBI Registration Number INB 230607337, had transacted for its client M/s. Yellow Sapphire Investment Limited (herein after referred as ‘YSIL’) and it was alleged that such transactions were non-genuine trades.
2. It was also alleged that the broker had failed to exercise due diligence while acting on behalf of its client and that it had failed to collect the required margin money from its client. In view of the above, the broker was alleged to have violated the provisions of Sub-clauses (2), (3) and (4) of Clause A of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, Regulations 4(b) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and the provisions of SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993.
ENQUIRY PROCEEDINGS
3. In view of the aforesaid findings of the investigation, SEBI appointed an Enquiry Officer vide its order dated 24.08.04 to inquire into the allegations made by the investigations and recommend appropriate penalty, if necessary against the broker. A notice dated 29.09.04, in terms of Regulation 6(1) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 was issued to the broker communicating the said allegations and asking it to show cause as to why penalty as prescribed under Regulation 13(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 should not be recommended against it.
4. The Enquiry Officer after following the due procedure in this regard, completed the inquiry proceedings and submitted a Report dated 28.03.06 wherein it has observed that:
i. It cannot be concluded that the broker failed to adhere to the margin requirements while acting on behalf of the client.
ii. In the absence of any other evidence to the contrary the contention of the broker that it acted on behalf of the client only after exercising due diligence and care appears to be correct.
In view of the above, the Enquiry Officer has recommended that no penalty may be imposed on the broker.
FINDINGS
5. I have perused the finding of the investigations, charges made out in the show cause notice issued to the broker and findings and recommendation of the Enquiry Officer. I have carefully considered all the material aspects of this case. The main issues for consideration in this case are as follows:
a) whether the broker had collected the requisite margin money from its client YSIL for the trades done on its behalf,
b) whether the broker has violated the provisions of Regulations 4(b) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 by placing non-genuine trades on behalf of its clients, and
c) whether the broker had exercised proper care and diligence for the transactions done on behalf of YSIL.
6. One of the allegations against the broker was that it had failed to maintain the requisite margin money for the trades executed on behalf of YSIL. The broker has submitted that it had received securities for a total value of Rs. 40,55,270 from YSIL. SEBI Circular No. SMD/SED/CIR/93/23321 dated 18.11.93 prescribes that the broker shall collect a margin equal to 20% of the transaction to be performed on behalf of its client or shall have the shares in case of sale or the consideration in case of purchases. Considering the prescription in the circular, the submission of the broker that it has received certain shares as margin prior to performing the transaction, shall not amount to a compliance of the requirement therein. But over the period, the concept of margin and its collection/maintenance has undergone various changes. As pointed out by the Enquiry Officer the circular dated 23.02.05 has liberalized the system of collection/maintenance of margins by allowing the broker to decide the quantum of the margins and the form and mode of collection the same. Therefore, I agree with the finding of the Enquiry Officer that it cannot be concluded that the broker failed to adhere to the margin requirements while acting on behalf of YSIL.
7. The next issue that has to be considered is whether the broker had violated the provisions of Regulation 4(b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 by placing artificial trades in the scrip of JIL. The broker has placed orders on behalf of YSIL after undertaking the due process of verification of records and fulfilling the know your client requirements. The total orders placed by the broker, as per its contention is about 5.69% in the month of November 1999. Also, as submitted, the orders have been placed at the prevailing market rates, without any undue influence on the price of securities. Considering these factors, I feel there has been no violation of the provisions of Regulation 4 (b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 by virtue of the trades carried out by the broker for YSIL.
8. The other allegation is with regard to whether the broker has exercised due diligence and care while entering into transactions for its client, YSIL. I note that the broker had traded for its client as per the instructions from time to time. The broker has obtained the copies of Memorandum of Association and Articles of Association of YSIL to ensure that they have the requisite authority to transact business. The broker had also sought the authorization of a director by the board of its client for obtaining instructions regarding the transactions to be entered into on its behalf. I also take into account the admission made by Mr. Sharma, Director of YSIL that he was authorized to place orders on behalf of YSIL. I, therefore opine that the broker has exercised due diligence and care with respect to the transactions entered on behalf of YSIL.
ORDER
9. In view of the aforesaid findings on the allegations made against the broker, M/s. H B Securities Limited, I agree with the recommendation of the Enquiry Officer that no penalty needs to be levied on the broker. Therefore, in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby direct that no penalty needs to be levied on the broker M/s. H B Securities Limited, Member, National Stock Exchange, under the instant proceedings.
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PLACE: Mumbai
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T C NAIR
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DATE: 19.06.2007
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WHOLE TIME MEMBER
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SECURITIES AND EXCHANGE BOARD OF INDIA
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