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Order against Anil Kumar Aggarwal

Mar 22, 2004
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Orders : Orders of Chairman/Members

MO/73/MIRSD/03/04

 SECURITIES AND EXCHANGE BOARD OF INDIA

Order

 

  1.  

      1.1.Anil Kumar Agarwal (hereinafter referred to as "the said broker") is a member of the Uttar Pradesh Stock Exchange (hereinafter referred to as "UPSE") and a stock broker registered with the Securities and Exchange Board of India (hereinafter referred to as "SEBI") under certificate of registration No. INB 100950215.

       

      1.2.An inspection of the books of account and other records of the said broker was carried out by SEBI on 13.3.2001. The period in respect of which the inspection was done was 1.4.1999 to 28.2.2001. In the course of inspection, several violations including the following were observed:

    2. 1.0.Background  

  

  1.  
    1. Contract notes issued by the said broker did not bear pre-printed serial numbers

      2.  

    2. Broker note stamps were not affixed on the contract notes issued by the said broker

      3.  

    3. Time of placement and of execution of order including order number and trade number were not indicated on the contract notes

      4.  

    4. Terms and conditions of the contract notes were not mentioned on the contract notes

      5.  

    5. The said broker had acted as a sub-broker without obtaining registration from SEBI

      6.  

    6. The said broker had indulged in carry forward transactions which had been prohibited

      7.  

    7. The said broker had not reported off-the-floor transactions to the UPSE

      8.  

    8. The said broker had failed to obtain/maintain broker-client agreement forms and client registration forms

      9.  

    9. The said broker had not maintained strict segregation between own account and clients’ account

      10.  

    10. There were delays on the part of the said broker in making payments to clients

      11.  

    11. The said broker had failed to pay fees based on turnover to SEBI.

 

1.3 A copy of the inspection report was forwarded to the said broker on 4.5.2001 and he submitted his comments/explanations to the same vide his letter dated 27.9.2001. As the said comments were found to be unsatisfactory, Chairman, SEBI, vide order dated 19.7.2002 appointed an Enquiry Officer to enquire into the irregularities committed by the said broker and whether the irregularities observed constituted violation of the SEBI Act, SEBI (Stock Broker and Sub Broker) Rules, 1992 (hereinafter referred to as "the rules"), SEBI (Stock Broker and Sub Broker) Regulations, 1992 (hereinafter referred to as "the broker regulations"), Bye laws of UPSE and directives of SEBI.

 

2.0 Enquiry proceedings

 

  1.  

      2.1.The Enquiry Officer issued show cause notices dated 26.9.2002 and 25.10.2002 to the said broker, but he failed to submit any reply to the same. Further, an opportunity of hearing was also given to the said broker by the Enquiry Officer, but he failed to avail of the same. The said broker vide notice dated 21.2.2003 sought for change of Enquiry officer, but his request was rejected by the competent authority and again the said broker was granted an opportunity of hearing. However, he failed to appear before the Enquiry officer and make submissions. Consequently, the Enquiry officer, after considering the material on record viz. the inspection report and the comments/explanation of the said broker dated 27.9.2001, submitted his report to SEBI on 30.6.2003 recommending that the certificate of registration granted to the said broker be suspended for a period of 4 months.

       

      2.2.The Enquiry Officer has recommended the penalty of suspension of the certificate of registration for a period of four months based on the following violations: 

  1.  
    1. Contract notes issued by the said broker did not bear pre-printed serial numbers

      2.  

    2. Broker note stamps were not affixed on the contract notes issued by the said broker

      3.  

    3. Time of placement and of execution of order were not indicated on the contract notes

      4.  

    4. The said broker had acted as a sub-broker without obtaining registration from SEBI

      5.  

    5. The said broker had indulged in carry forward transactions which had been prohibited

      6.  

    6. The said broker had not reported off-the-floor transactions to the UPSE

      7.  

    7. The said broker had failed to obtain/maintain broker-client agreement forms and client registration forms

      8.  

    8. The said broker had not maintained strict segregation between own account and clients’ account

      9.  

    9. There were delays on the part of the said broker in making payments to clients

 

3.0 Show Cause Notice and Personal hearing

 

3.1 Show cause notice dated 10.7.2003 was issued to the said broker under Regulation 13 (2) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as "Enquiry Regulations"). Thereafter, upon his request, a Hindi translation of the said notice was also sent to the said broker on 12.9.2003. However, the said broker did not submit any reply to the same; instead, vide letter dated 17.10.2003, the said broker requested for a personal hearing in the second week of November, 2003. The same was granted to him on 12.11.2003, but again the said broker failed to appear before me and make submissions. In view of the above, I am of the opinion that sufficient opportunity has been granted to the said broker and the requirements of natural justice have been complied with and therefore I proceed further in the matter based on the material placed before me.

  1.  
       

      4.1.Whether there were irregularities in the contract notes issued by the said broker and whether such irregularities constituted violation of the Broker Regulations

    2. 4.0.Consideration of issues

     

    I have considered the inspection report, the comments/explanations of the said broker, the enquiry report and other material on record. The following issues arise for consideration: 

     

    4.1.1.I note that the contract notes issued by the said broker did not contain any serial number, let alone a pre-printed serial number. Absence of pre-printed serial numbers on contract notes permits brokers to avoid chronology in the issue of contract notes and gives scope for abuse. Therefore, absence of pre-printed serial numbers on contract notes was identified as an irregularity and vide circular dated 5.8.1996, SEBI had brought this to the notice of all stock exchanges. The exchange vide its circular dated 5.8.1996 had in turn communicated this directive of SEBI to all its members including the said broker. The explanation of the said broker that the contract notes were issued date-wise on the stationery purchased from the exchange is not satisfactory

     

    4.1.2.I further note that the contract notes issued by the said broker do not mention the time of placement of order and time of execution of order. The record of time of placement and execution of order is relevant to determine whether the broker has ensured the best possible deal for his client. SEBI vide circular dated 11.2.1997 had directed that brokers should maintain a record of the time when the client has placed the order and that the same should be reflected in the contract notes. I also note that vide its circular dated 1.12.1997, the exchange has informed all its members that the facility for time stamping was available in its trading software. The explanation of the said broker that there was no provision in the software of the exchange for time stamping is incorrect and fallacious.

     

    4.1.3.I note that Broker Note Stamps were not affixed on the contract notes issued by the said broker. The said broker has not made any submissions regarding the same.

     

    4.1.4.In view of the observations made in above paragraphs, I find that:

     

  1. the said broker, by not affixing pre-printed serial numbers on contract notes issued by him, violated the directives of SEBI given vide Circular dated 5.8.1996 and directives of the exchange vide circular dated 5.8.1996.

    2.  

  2. The said broker by not affixing the time of placement of order and the time of execution of order on the contract notes issued by him violated the directives of SEBI vide Circular dated 11.2.1997 and the directive of the exchange vide circular dated 1.12.1997

    3.  

  3. The said broker, by not affixing broker note stamps on contract notes issued by him violated Article 5 (b) of Schedule I of the (B)(UP) of the Indian Stamp Act, 1899.

    4.  

    4.2.1.I note that the said broker has been having transactions with the following stock brokers who are members of other stock exchanges:

     

    4.2.Whether the said broker has acted as a sub-broker without obtaining registration from SEBI

     

     

  1. M B Gandhi , member, The Stock Exchange, Mumbai

    2.  

  2. Manmohan Gandhi, member, National Stock Exchange

    3.  

  3. DSM Share Broker, member, National Stock Exchange

    4.  

  1.  
    1.  

        4.2.2.The said broker, in his reply has submitted that he has paid brokerage in respect of the transactions with the aforesaid stock brokers.

         

        4.2.3.I find that the said broker should not have dealt with members of other stock exchanges without obtaining registration as a sub-broker. By acting as an unregistered sub broker, the said broker has violated Section 12(1) of the SEBI Act which provides that No Sub broker shall buy, sell or deal in securities except under, and in accordance with the conditions of the certificate of registration obtained from the Board in accordance with the Regulations made under the Act.

     

    4.4.1.I note that the said broker did not produce Client Registration Forms and Member Client Agreement Forms in respect of their top 5 clients although they were asked to do so by the inspection team vide letter dated 5.2.2001. In his reply, the said broker has submitted that the Client Introduction Forms have been filled and the same are available in his records. Since the said broker has failed to produce the Client Registration Forms and Broker Client Agreements and since he has failed to submit any explanation in this regard, I find that the said broker has failed to maintain Client Registration Forms and Broker Client Agreements.

     

    4.4.2.In this regard, I note that SEBI vide Circular dated 11.2.1997 had directed all stock exchanges to require their members to maintain a database of their clients. Further, vide Circular dated 11.4.1997,SEBI also forwarded the formats in which Client Registration and broker Client Agreement were to be entered into. The said Circular also specified that it would be the responsibility of the broker to provide for details of their clients when called upon to do so. In this regard, UPSE vide its Circular dated 22.4.1997 had advised its members including the said broker to implement the directives of SEBI with immediate effect and complete Client Registration before 31.5.1997. Since the said broker has failed to maintain Client Registration and Broker Client Agreements, he has violated the directives of the stock exchange and directive of SEBI.

    4.5.1.I note that from the inspection report that the following transactions of the said broker with members of other stock exchanges have not been reported to the stock exchange.

  1.  
       

      4.4.Whether the said broker failed to maintain Client Registration Forms.

       

       

      4.5.Whether the said broker has indulged in off-the-floor transactions and failed to report them to the stock exchange

       

 

 

Broker of other Exchange

 

Turnover (2000 – 2001)

M B Gandhi

1,38,503.60

1,38,288.51

Manmohan Gandhi

15,96,858.21

15,97,548.76

Mani Stock Broker

14,18,764.56

14,17,923.90

 

 

4.5.2 SEBI vide circular dated 14.3.1995 had directed all stock exchanges to ensure that all brokers report to them all transactions done on a spot basis on the same day and that brokers are required to execute cross deals and negotiated deals through the software of the exchange.

 

4.5.3 As per Regulation 4.2 of the Regulations of UPSE, all members of the exchange are required to submit on each business day, a statement in respect of the business done by them on the previous business day. This daily business statement is to be submitted as per Form 21 prescribed in those Regulations. Further, UPSE vide Circular No.UPSE/96-97/A&I dated 20.8.1996 had directed all its members to report all transactions done with members of other stock exchanges.

 

4.5.4 In his reply to the enquiry officer, the said broker has merely mentioned that he has communicated the said transactions to the exchange. No documentary evidence in this regard has been submitted before the enquiry officer or has been submitted before me. In view of the above, there is no ground to differ with the finding in the inspection report and the enquiry officer’s report that the said broker has failed to report transactions entered into by him with members of other stock exchanges to UPSE. Therefore, I also find that the said broker has thereby violated the directives issued by UPSE & SEBI and also Regulation 4.2 of the regulations of UPSE.

 

4.6 Whether the said broker had failed to ensure segregation between their own account and the account of the client maintained with them.

 

4.6.1 I note from the inspection report that the said broker had accounts in 3 banks viz. i) A/c No.1238 with M/s. Vysya Bank, ii) A/c. No.29386785 with ANZ Grindlays Bank and A/c. No.622-0-502769-1 with M/s. Standard Chartered Bank. It is mentioned in the Inspection report that the said broker has not opened any separate client account with any Bank and that there were numerous instances where he had deposited cheques received from clients into his accounts with ANZ Grindlays Bank and Standard Chartered Bank. The following are the details of such instances:

ANZ Grindlays Bank

 

Sr. No.

  

Name of Client

 

Cheque No.

  

Date of Deposit

  

Amount

1.

A.K. Gupta HUF

974029

15.12.2000

2,50,000

2.

A.K. Gupta HUF

974030

18.12.2000

2,50,000

3.

Shikha Jain

022242

21.12.2000

16,029.40

4.

Raj Narayan Gupta

387814

25.7.2000

66,018.10

5.

KK Pandey

318754

26.7.2000

84,927

6.

Shailendra Mohan

388465

23.5.2000

9,292.50

7.

Veena Singh

719935

12.6.2000

4,647

8.

Anju Agarwal

031880

2.7.99

22,540

9.

Amar Prakash Aggarwal

022728

2.7.99

17,613

 

Standard Chartered Bank:

 

Sr. No.

  

Name of Client

  

Cheque No.

  

Date of Deposit

  

Amount

1

Meera Bansal

031157

15.12.2000

2,646

2

Devi Dutt Pahadia

031156

15.12.2000

2,177

3

Anupam Pahadia

031154

15.12.2000

4,644.60

4

Dharmen Pahadia

031158

15.12.2000

126

5

Harsha Rani Urai

031159

15.12.2000

394

6

Ajay Garg Urai

031155

15.12.2000

6,945.80

 

 

4.6.2 Bye law 225 A of UPSE Bye laws provides that, "It shall be compulsory for all member brokers to keep the money of the clients in a separate account and their own money in a separate account." In hisreply the said broker has submitted that cheques received from clients after depositing in the Bank account are given to the Clearing section of UPSE. The reply of the said broker is not relevant to the allegation, nor does it address the issue. Therefore, I find that the reply of the said broker is not satisfactory

 

4.6.3 In view of the above, I find that the said broker has failed to maintain segregation of the broker’s own account and client’s account and thereby violated SEBI Circular No.SMD/SED/CIR/93/23321 dated November 18, 1993 and Bye Law 225 A of UPSE Bye laws.

 

 

4.7 Whether the said broker has indulged in carry forward transactions which were not permitted.

  1.  
       

      4.7.1.I note from the inspection report that in several instances, the said broker had squared off his outstanding position with other members of UPSE on the last day of the settlement and had re-opened the same transactions on the first day of the next settlement with the same counter party members at a mutually decided rate. I further note that these transactions were in highly liquid scrips like those of State Bank of India, ACC and Reliance India Ltd. The details of such transactions are as under :

 

 

S.NO.

  

Qty

  

Date

  

Rate

  

Scrip

  

Contra Broker

  

Qty

  

Date

  

Rate

1

-30

14.9.2000

828

ITC

Naveen Securities

30

15.9.2000

820

2

-50

14.9.2000

832

ITC

Naveen Securities

50

15.9.2000

821

3

50

14.9.2000

831

ITC

Kusum Stock Br

-50

15.9.2000

811

4

100

14.9.2000

58

RELE

A.S. & Co.

-100

15.9.2000

58.15

5

-100

29.11.2000

143.95

ACC

Prashant Jain

100

30.11.2000

141.80

6

-100

29.11.2000

344.50

Satyam

MS Stock Brokers

100

30.11.2000

341

7

1000

11.9.2000

119

ACC

Ganga Narain

-1000

12.9.2000

119.45

8

200

11.9.2000

119

ACC

Mehra Brothers

-200

12.9.2000

119.45

9

-400

11.9.2000

45

Jain

SDL Share & Stock

400

12.9.2000

45

10

-600

11.9.2000

45

Jain

Nikhil Sec

600

12.9.2000

45

11

200

11.9.2000

500

Peso

Multi Stock Br

-200

12.9.2000

502

12

-700

11.9.2000

740

Ranb

Deep K Aggarwal

700

12.9.2000

740

13

-100

11.9.2000

381.75

RIL

Kukki Stock & Sh

100

12.9.2000

388.05

14

100

11.9.2000

620.05

Satyam

Tirubala Finance

-100

12.9.2000

617

15

100

11.9.2000

622

Satyam

HS Stock Br

-100

12.9.2000

619

16

1000

11.9.2000

213

SBIN

HS Stock Br

-1000

12.9.2000

213.40

17

-500

11.9.2000

255

TATE

AS & Co

500

12.9.2000

256.25

18

-1000

11.9.2000

255

TATE

Vinod K & Co

1000

12.9.2000

256.25

19

-100

11.9.2000

443

Silv

SK Jindal Sh

100

12.9.2000

434

20

-300

11.9.2000

255

Tate

DRB Securities

300

12.9.2000

256.25

21

200

10.5.99

1117.55

ITC

Deep K Aggarwal

-200

11.5.99

1098

22

1000

10.5.99

54

LML

JK Jain & Co.

-1000

11.5.99

54.50

23

600

10.5.99

54

LML

Rajratan Finse

-600

11.5.99

54.50

24

800

10.5.99

246

LT

Arch Enterprise

-800

11.5.99

246

25

900

10.5.99

54

LML

Geeta Share

-900

11.5.99

54.50

 

I note that Bye law 20 of UPSE Bye laws prohibits dealings in securities other than those expressly permitted by the Bye laws and regulations of the exchange. Thus, transactions that are not permitted or that are prohibited in any law enforced are also prohibited under Bye law 20. In this regard, I note that the Central Government in exercise of powers conferred on it under Section 16(1) of the Securities Contracts(Regulation) Act, 1956 issued a Gazette Notification NO.SO/2561 dated 27.6.1969 that no person shall save with the permission of the Central Government enter into any Contract for sale or purchase of securities other than spot delivery contracts or Contracts for cash or hand delivery or special delivery as permitted by the Rules, Bye laws and Regulations of a recognized stock exchange. Thereafter, the Central Government vide Notification No.1/62/Securities and Exchange Board of India /81 dated 2.2.1983 provided for an extension of the overall period for performance of hand delivery contracts in active scrips for not more than 3 months from the date of initial contract. SEBI vide its letter dated 13.12.1993 directed all stock exchanges that transactions in all securities shall be settled at the end of each settlement by delivery and payment and that no carry forward of transactions shall be permitted. Thereafter, although a modified carry forward transaction was permitted on other exchanges by SEBI, the same was not permitted on the UPSE.

 

4.7.3 In his reply, the said broker submitted that no carry forward transaction took place on the UPSE and that more transactions were undertaken with the brokers mentioned and hence the question of carry forward did not arise.

 

4.7.4 I find the reply of the said broker to be unsatisfactory and not relating to the charge. As mentioned earlier, the transactions detailed above were closed on the last day of one settlement and opened on the first day of the next settlement with the same counter party broker and with a very small difference in the price. The nature of these transaction clearly establishes that these were carry forward transactions and no rebuttal of the charge has been made by the said broker. In view of the above, I find that the said broker has indulged in carry forward transactions which were not permitted dealings in securities and that he has thereby violated Bye law 20 of the UPSE Bye laws and the directives of SEBI 

     

    4.8.1.I note from the inspection report that there were several instances of delay in making payments to clients. Details of the same are as under :

     

 

    1.  

       

      4.8.2.In his reply, the said broker has submitted that there has been no delay in payments and that wherever moneys were outstanding, the same were margin moneys retained or interest paid on such margin moneys.

       

      4.8.3.I find that the said broker has failed to make payments to clients within the period of 48 hours as directed by SEBI vide its Circular dated 18.11.1993. I further find that by delay in making payments to clients, the said broker has also violated Clause B (1) of the Code of Conduct of Stock Brokers specified in Schedule II of the Broker Regulations.

    2.  

    4.8.Whether the said broker has delayed making payments to clients.

     

 

4.9 Whether the penalty recommended by the Enquiry Officer is to be imposed on the said broker.

 

 

4.9.1 I note that Rule 4 of the Broker Rules, 1992 provides that:

 

"4. The Board may grant a certificate to a stock broker subject to the following conditions, namely:-

(a)…

(b) he shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member.

 

4.9.2 I further note that Clause A (5) of the Code of Conduct for Stock Brokers specified in Schedule II to the Broker Regulations provides that:

 

"A. General

 

(1)…

(2)…

(3)….

(4)…

(5) Compliance With Statutory Requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the stock exchange from time to time as may be applicable to him..."

 

Further, Regulation 7 of the Broker Regulations provides that:-

 

"Stock Broker to abide by Code of Conduct

 

7. The Stock Broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II

 

4.9.3 I note that Regulation 25 of the broker regulations as they stood then provided that:

 

 

"Liability for action in case of default

 

25. A stock broker who –

     

  1. fails to comply with any conditions subject to which registration has been granted,

    2.  

     

  2. contravenes any of the provisions of the Act, rules or regulations.

    3.  

     

  3. contravenes the provisions of the Securities Contracts (Regulation) Act or the rules made there under;

    4.  

     

  4. contravenes the provisions of the Depositories Act, 1996 or the rules made there under;

    5.  

     

  5. contravenes the rules, regulations or bye-laws of the stock exchange.

    6.  

 

shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002."

  1.  
    1.  

        4.9.4.I note that Regulation 13 of the Enquiry Regulations provides for imposition of minor penalties and major penalties. The minor penalties include warning or censure and suspension of the certificate of registration for a period upto 3 months. The major penalties include cancellation of the certificate of registration and suspension for a period exceeding 3 months. I further find that in case of major penalties sub-regulation 6 of Regulation 13 provides for the circumstances under which major penalties may be imposed. These include violation of the conditions of registration, and failure to obey directions of SEBI passed under Section 11 or Section 11B of the Act.

         

        4.9.5.I have found in Paragraphs supra that the said broker has failed to comply with the Bye-laws and regulations of UPSE and the directives of UPSE and SEBI issued through various Circulars. These constitute violation of one of the conditions of registration viz. that the broker shall abide by the rules, regulations and bye-laws of the stock exchange of which he is a member. I also note that the said broker acted has an un-registered sub broker and thereby violated Section 12 of the SEBI Act and Rule 3 of the SEBI (Stock Broker and Sub Broker) Rules, 1992 and that the said broker has also violated Para A (5) of the Code of Conduct specified in Schedule II to the Broker Regulations and thereby violated Regulation 7 of the Broker Regulations. In view of the above, I find that the recommendation of the Enquiry Officer is not disproportionate.

 

  1.  

      5.1.Therefore, I, in exercise of powers conferred on me under Section 19 of the SEBI Act and Regulation 13(4) of the Enquiry Regulations do hereby suspend the certificate of registration No.INB100950215 granted to Anil Kumar Aggarwal for a period of 4 (four) months.

    2.  

    5.0.Order

 

This Order shall come into effect on the expiry of 21 days from the date of this Order.

 

 

 

Order under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 13 of the of Securities and Exchange Board of India (Procedure for holding enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 in the matter of enquiry against Anil Kumar Aggarwal

 

A K BATRA

Date: March 22, 2004

 WHOLE TIME MEMBER
Place: MUMBAI  SECURITIES AND EXCHANGE BOARD OF INDIA