IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 410/2004
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Date of Hearing
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7.3.2005
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Date of Decision
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10.3.2005
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In the matter of:
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Victory Portfolio Ltd.
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Appellant – Represented by
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Mr. Jayesh Shah, Company Secretary
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Versus
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Securities & Exchange Board
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Respondent –Represented by
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of India
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Mr. Vivek Menon, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
Per: Justice Kumar Rajaratnam, Presiding Officer
1. Appeal is taken up for disposal with consent of parties.
2. The appellant challenges the order passed by the adjudicating officer of SEBI dated 8.9.2004. By the impugned order the respondent has imposed a penalty of Rs. 1 lakh on the appellant under Section 15FA of the SEBI Act.
3. The appellant is registered as trading member of the National Stock Exchange. The charge against the appellant as per the impugned order was that he had not maintained few of the books of accounts and other records as per rule 15 of SC(R) Rules and Regulation 17(1) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, like the order book or the margin deposit book
4. With regard to the Margin Deposit Book not being maintained it was submitted by the counsel for the appellant that the margin deposit book is maintained in electronic form. The margin from clients are received in either by way of deposit or securities or the credit balances in the statement of account of the clients are treated as margin and even the pay out shares are retained by them are treated as margin. Hence, it was submitted that a separate margin deposit book in physical form is impractical and was not called for. It was further submitted that the respondent was in error in holding that the appellant had not maintained margin deposit book in view of the fact that it is in electronic form.
5. With regard to non-maintenance of document register, it was submitted that even the inspection report has stated as follows: “with the introduction of dematerialisation of shares, the maintenance of this register has become outmoded.” It is also submitted that the statement issued by the depository participant itself is a document register since all the deliveries are to be given in demat mode to the stock exchange for each of the settlement of the trading done by the clients.
6. Another charge against the appellant was that there was violation of the generation of the serial numbers for the contract notices for the non-sequential order. To this charge, the appellant has stated that software has been rectified to ensure that serial numbers are appearing in the contract notes continuously.
7. The adjudicating officer only found that there was deficiency in issuing contract notes and imposing a penalty of Rs. 1 lakh.
8. The adjudicating officer ought to have noticed that for the same violation the NSE has also imposed a penalty of Rs. 1 lakh.
9. Although there is no bar in SEBI proceeding against the appellant independently, due regard has to be given to the fact that for the very same violation NSE has imposed a penalty of Rs. 1 lakh. The object of the exercise is to make sure that such violation did not occur again. It is not disputed that the appellant has made all the necessary corrections and remedial steps have been taken.
10. The learned representative of the appellant has relied on a number of pronouncements by SEBI as well as this Tribunal where only a warning was given to the broker in similar cases. This Tribunal has also made a reference to those cases in Chona Financial Services Pvt. Ltd. in appeal 95/2003 dated 23.8.2004. In the case of Chona Financial Services Pvt. Ltd. the Tribunal has extracted the orders rendered by SEBI and SAT and the nature of penalty and we feel it appropriate to extract the same from the judgement.
“a) M/s. Bakliwala Investment
Irregularities
Ø Provision for Tax for the interim period from April 1 to September 30, 2000 not made
Ø Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
Ø Broker had not time stamped the order slip/records
Ø Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
Ø Contract notes not issued within the specified time.
Ø Consolidated stamp duty not paid.
Ø Client Registration forms were not completed
Ø Order book was not maintained.
Ø Delay in payment of funds
Ø Delay in delivery of securities
Ø One client account being adjusted against another client without any authorization
Ø Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
Ø Compliant register not maintained.
Ø Client account were used for other purposes
Ø Margin money not collected
Ø In 10 cases, deals were done outside the NEAT System
Order
¬ Irregularities are basically technical lapses and do not deserve a substantive punishment.
¬ Minor Penalty – Warning
(b) M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities
Ø Failure to obtain client registration forms and agreement
Ø Failed to maintain separate client account.
Order
Warning
(c) M/s. Bama Securities
Irregularities
Ø Contract notes were missing
Ø Acknowledgement from the clients not obtained
Ø Not maintaining client registration forms
Order
Warning
Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
1. M/s. Ratanbali Capital Markets Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Contract notes
Ø Non-collection of margins from clients
Ø Misuse of client’s funds
Ø Share lending/borrowing
Ø Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange
Order
Warning
2. M/s. Twenty First Century Shares & Securities Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Delay in payment to clients
Ø Misuse of client’s funds
Ø Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
Ø Booking payment in different clients account.
Ø Loan against shares of holding company and loan transaction in clients account.
Order
Warning
3. M/s. Sanjay C. Bakshi
Irregularities
Ø Not maintaining margin registers
Ø Dealing with unregistered sub-brokers
Ø Not entering into agreement with few clients
Ø Non-segregation of clients funds with own funds
Ø Dealing with broker of other Stock exchange without getting registered as a sub-broker
Ø Irregularities in respect of contract notes
Ø Delay in payment/delivery of funds/shares to clients
Order
Warning
4. M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Dealing with unregistered sub-brokers
Ø Irregularities in issuance of contract notes
Ø Non-segregation of clients account with own account, misuse of client’s fund
Ø Delay on delivery of securities and not reporting off the floor transactions
Order
Warning
5. M/s. Mukesh Sawhany
Irregularities
Ø Non-maintenance of document registers
Ø Irregularities in issuance of contract notes
Ø Non-maintenance of separate client account
Ø Non-segregation of separate client account with own account
Ø Not reporting off the floor transactions
Ø Non redressal of investor complaints
Order
Warning”
11. We feel it is imperative that for the efficient functioning of the securities market there should be cordial relation between the brokers, the stock exchanges and the regulator. Brokers should not be mechanically penalised and there must be consistency in the orders passed by the respondent. That is why 15J in the SEBI Act mandates certain factors to be taken into account by the adjudicating officer. Section 15J reads as follows:
“15J. Factors to be taken into account by the adjudicating officer – While adjudging the quantum of penalty under 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; the repetitive nature of the default.”
12. Although the adjudicating officer has made a mention of Section 15J, there has been no application of mind regarding the mandate of the Parliament under 15J. Mere repetition of sections without application of mind does not carry us any further. Taking into account that SEBI has rehabilitated brokers (as referred to above) who have committed greater violations, I find it appropriate to reduce the penalty from Rs. 1 lakh to Rs. 20,000/- in the fact and circumstances of the case.
13. It is submitted that this amount has already been paid to the respondent when the matter came up for interlocutory orders. The order of the respondent is modified accordingly. The amount of Rs. 20,000/- already paid shall be treated as penalty.
14. The appeal is disposed of accordingly. No order as to costs.
Justice Kumar Rajaratnam
Presiding Officer
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Place: Mumbai
Date: 10.3.2005
//SR3059