ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15HB
OF
THE SEBI ACT, 1992
AGAINST
M/s. NETWORTH STOCK BROKING LTD
BACKGROUND
1. M/s. Networth Stock Broking Ltd. (for brevity’s sake hereinafter referred to as NSBL) is registered with the Securities and Exchange Board of India, 1992 (for brevity’s sake hereinafter referred to as SEBI) as a broker and is a member of the Stock Exchange, Mumbai, with registration no. INB 010638634
2. The SEBI initiated an investigation into the scrip of Spanco Telesystems & Solutions Limited (for brevity’s sake, hereinafter referred to as the STSL). In the course of the said investigation, it was inter alia observed that there was concerted trading amongst certain entities and individuals, essentially to create liquidity /volumes in the scrip. NSBL, as one of the said entities, was alleged to have executed several transactions in the scrip of STSL with certain clients, without entering into the mandatory broker-client agreements thereby violating the provisions of the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). In view of the same, Shri S.V.Krishnamohan was appointed as the Adjudicating Officer, vide order dated October 10, 2003 to enquire into and adjudge the liability incurred by NSBL under Section 15B of the SEBI Act, 1992 (hereinafter referred to as the Act) for their alleged failure to enter into broker-client agreements with their clients.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
3. Accordingly adjudicating proceedings were initiated against NSBL in the first instance by the issuance of a notice dated 30th April, 2004 where under NSBL was called upon them to show cause as to why adjudication proceedings should not be initiated against them in terms of Rule 4 of the SEBI (Procedure for holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) and penalty should not be imposed upon them under Section 15B of the Act for their failure to enter into member client agreements with their clients. NSBL was advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and were also advised that in case they failed to reply within the stipulated period, it would be presumed that they had no adequate explanation to offer.
4. In reply to the same, Shri S.P. Jain, Managing Director, NSBL made the following submissions :-
a. STSL is a fundamentally sound scrip and a number one domestic call centre employing more than 1500 people with 10 call centers throughout the country and clients like Air India, BSNL etc.
b. The allegation of price manipulation in the scrip of STSL was biased and misplaced.
c. NSBL had submitted the agreements entered into with M/s Kabir Global Ltd to the BSE.
d. M/s Hitesh C Shah and M/s Rashi Investments had not traded in the scrip of STSL.
e. The agreements relating to Ms Geeta K Gala , Ms Kanchan P.Shah Ms Vimla Gala and Ms Ratanben M Shah had been misplaced and not readily available as already informed to the BSE.
f. Had SEBI forced them to submit these agreements, the same would have been submitted or else the clients would have been produced.
On the basis of these submissions, it was requested that a lenient view be taken.
5. Thereafter a notice of hearing dated 28th June, 2004 was issued to NSBL to appear for a hearing before the then adjudicating officer on June 15, 2004. However nobody appeared on behalf of NSBL on the said date.
6. In the interim period, I was appointed as the Adjudicating Officer by the Chairman, SEBI; vide order dated October, 1,2004 to enquire into the above mentioned acts of omission and commission by NSBL.
7. Thereafter in terms of Rule 5(1) of the Rules, a notice of hearing dated October 17, 2004 was sent to NSBL advising them to attend the hearing proceedings to be held on 13th December, 2004.
8. However during the course of the hearing granted to NSBL on December 10, 2004 in the enquiry proceedings which were also initiated against NSBL, Mr Girish V. Dev, Head Operations, NSBL, brought to my attention the fact that under the said enquiry proceedings also, NSBL had been charged for not entering into broker-client agreements with their clients, which is also the subject matter of the present proceedings. Hence he requested that the submissions advanced by him as regards the failure of NSBL to enter into broker-client agreements with their clients be taken on record and that the hearing proceedings to be held on 13th December, 2004 be dispensed with. Subsequently vide letter dated December 21, 2004, the contentions made earlier by NSBL, were once again reiterated.
CONSIDERATION OF ISSUES:
9. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of NSBL as well as the material available on record which includes the facts leading to the investigation and the findings of the investigation report relevant to the subject under consideration.
10. I have noted that the show cause notice dated April 30, 2004 has been issued to NSBL primarily due to their alleged failure to enter into broker-client agreements with seven of their clients who had substantially traded in the scrip of STSL.
11. In this context, from the material available on record, I have noted that prior to the period of investigation; STSL was relatively illiquid scrip in the Stock Exchange, Mumbai with very low floating stock. As on August 21, 2001, only 8.26% of the equity of the STSL was available with the public. However the trading in the said scrip rose from 500 shares on 1st October 2000 to a peak volume of 78,700 shares on 30 May 2001. The total volume of shares traded during the period of investigation was found to be 28,04,111 shares. The price of the scrip was shown to move from Rs. 18.80 on 20th April 2001 with a volume of 14,660 shares to Rs.44.55 on June, 29, 2001 with a volume of 61,460 shares. Subsequently, the price of the share fell to Rs.26 on July, 31, 2001 with a traded volume of 7,600 shares. The average daily volume of STSL rose from 3,975 shares during January, 18, 2000 and September 29, 2000 to 9,224 shares per day during the period of investigation.
12. I have noted that during the relevant period, between settlement No 32 of 2000-2001 and settlement No 19 of 2001-02, NSBL had admittedly traded 488965 shares of STSL. Allegedly a majority of these trades included the trades entered into on behalf of their clients; Ms Geeta G.Bala, Kabir Global Ltd, Ms Kanchan P. Shah, Ms Vimla P Gala , Ms Ratanben M. shah, Mr Hitesh C Shah and M/s Rashi Investment.
13. However NSBL on their part have denied entering into trades on behalf of M/s Hitesh C Shah and M/s Rashi Investments in the scrip of STSL. Upon a closer scrutiny of the material available on record, I too do not find any evidence on record evidencing such trades entered into on their behalf in the scrip of STSL. In fact there is no material in the investigation report to suggest that they have traded in the scrip of STSL through NSBL. Neither has any instance been recorded of these entities being the clients of NSBL. As such I would like NSBL to be granted the benefit of doubt for not obtaining the member-client agreement for these entities.
14. As regards the clients; Ms Geeta G.Bala, Ms Kanchan P. Shah, Ms Vimla P Gala and Ms Ratanben M. Shah, although NSBL has submitted that the agreement entered into with these entities were never produced before SEBI for verification since they were not forced by SEBI to submit the said documents, it is to be noted that in proceedings of such nature, when charges are leveled against an entity by the capital market regulator, such an entity is bound to submit any written documentary evidences to support their contentions. I have noted that in the present proceedings also, NSBL failed to produce any documents to substantiate their contentions as regards these entities. Even during the course of the enquiry proceedings, no such documents were submitted by NSBL.
15. However Mr. Girish V. Dev was fair enough to admit during the course of the proceedings before me that although NSBL had the basic particulars relating to knowing their clients, as per the requirement specified by SEBI, they did not possess the agreements entered into with these clients as on that date in the format specified by SEBI since a majority of their clients came either on a self introduction basis or by way of introduction from existing clients as was the prevailing practice and that there were no walk in clients.
16. I have also noted the submissions made on behalf of NSBL vide their letter dated 21.12.2004 to the effect that since the clients were mainly on a referral basis, the non-availability of the said documents should not be construed as a violation, in as much as “there was no dispute as to the fact that one Shri Ketan Vadalia was stated to have introduced these clients to NSBL”. It was also emphasized on their behalf that the ledger extracts clearly evidence payments received from the clients and made to the clients, which have been duly realized by them / from them, and that the same cleary indicated that these transactions were genuinely routed for the clients.
17. However, upon a closer reading of the statements recorded during investigation, especially as regards the contention raised on behalf of NSBL that “it was SEBI’s own observation that Shri Ketan Vadalia had introduced various clients to NSBL”, I have noted that such submission was in fact made by NSBL. In fact, Shri S P Jain, Director of NSBL, during his statement before the investigating authority, submitted that Geeta K Gala, Kabir Global, Kanchan P Shah, Vimla Gala and Ratanben M Shah wer introducd by Shri Ketan Vadalia. Shri Jain also confirmed of being unsure as to whether the client introduction forms for these clients were obtained or not. Even assuming that Shri Ketan Vadalia had traded on behalf of these clients in the scrip of STSL through NSBL, every broker is required to exercise due diligence while accepting third party orders on behalf of the clients. In fact, a broker is also required to obtain individual authorization from the clients to allow the third party (Shri Ketan Vadalia, in this case) to trade on their behalf.
- Notwithstanding the contention of payments made and received from clients being realized apparently indicating the genuineness of these transactions, due note has to be made as regards the very purpose of SEBI emphasizing on the requirement of entering into member-client agreements. The essence of these agreements is that they provide for provisions relating to keeping the money of the clients separately, to protect the interest of the investors. The investors in turn come to know of such rights, inter alia, by executing such agreements. Thus the broker-client agreement is the first and the foremost step initiated by the broker before executing trades on behalf of his clients. Moreover, every broker, trading on behalf of a client, is not only required to obtain the client registration form which enlists the details regarding the client, but also enter into an agreement with such a client on whose behalf the trades are being executed. The absence of such a requirement is clearly non compliance of the SEBI Circular No. SMD/POLICY/CIRCULAR/5-97 dated 11.04.1997 resulting in the invocation of the provisions of Regulation 26(xii) of the Broker Regulations read with Section 15B of the Act.
19. In this context it would be relevant to peruse the provisions of Regulation 26 (xii) of the Brokers Regulations, which inter alia provides that a stock broker or a sub-broker shall be liable for monetary penalty where trades are executed trade without entering into an agreement with the client under the Act, rules or regulations framed thereunder or in case of a failure to maintain client registration form or commission of any irregularities in the maintenance of such a client agreement.
20. Further I have also noted the contents of the above mentioned Circular whereunder all the stock exchanges were advised to introduce the concept of “know your client”. Thereafter, member-brokers were also advised to maintain the data base of their clients. In continuation with the same principle vide Circular No.SMD/POLICY/CIR /5-1997 dated April 11,1997, SEBI had forwarded the clients’ registration form and broker-client agreement form to the stock exchange. In terms of the said circular, it was the responsibility of the broker to provide for the clients’ details as and when the need arose. Further all the stock exchanges were advised to implement the above with immediate effect and complete the client-registration before May 31, 1997. Keeping in mind the rationale behind the issuance of such a circular, it cannot be disputed that entering into the broker-client agreement is also one of the investor protection measures initiated by SEBI in as much as the said agreement lists down the various clauses that the broker needs to look into, to trade on behalf of these clients. It is thus the responsibility of a broker to provide for the clients’ details as and when the need arises. However by admittedly failing to comply with the scheme as formulated by SEBI in case of few of their clients, it is clear that there has been a certain amount of failure on the part of NSDL to exercise due diligence required of that of a broker while carrying out their duties, resulting in the violation of the provisions of the above mentioned circular and Regulation 26(xii) of the Broker Regulations. As regard M/s Kabir Global, although NSBL has stated that the agreement entered into with them was already forwarded to BSE, proof of the same was once again not submitted during the proceedings.
21. In view of the foregoing, it is clearly established that NSBL is guilty of having failed to enter into member client agreements with their clients as brought out earlier and have thereby violated SEBI Circular No. SMD/POLICY/CIRCULAR/5-97 dated 11.04.1997 read with Regulation 26(xii) of the Broker Regulations. I consider it relevant to state here that the non-compliance with the said requirement is not a mere technical violation which can be pardoned off, in as much as it is in fact one of the investor protection measures formulated by SEBI against any default by the broker in meeting his contractual obligations.
22. Any evasion of the regulatory provisions issued by the regulator in the interests of the investors or non adherence to the same for any reasons whatsoever, is bound to affect the interests of such investors. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose behind their enactment. The very purpose of enacting any legislation is due adherence to the procedures laid down there under to ensure the sound and smooth functioning of the capital market. If no cognizance were to be taken of any breach of these provisions and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.
23. Accordingly, Parliament in its wisdom has also provided for a penalty to be levied under Section 15 B of SEBI Act, 1992 for such an offence which ( as on the date of commission of the offence ) reads as under :
15B. If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty not exceeding Rs. 5 lac for every such failure.
24. While adjudging the quantum of penalty, the adjudicating officer is required to have due regard to the factors laid down in Section 15 J of the Act which are as under:-
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
25. These provisions also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995.
26. As brought out earlier, considering the nature and quantum of the offence, the relevance of such an agreement for regulation of the capital market, it is unlikely that no loss/damage was caused to any of the investors was on account of the alleged contravention. As brought out earlier, a member-client agreement enables imparting transparency to the functioning of the broker as an intermediary and ensuring that all professional dealings that are carried out, are effected in a prompt, efficient and cost effective manner, which ultimately have a bearing upon the interests of the investors. Hence, the failure of any intermediary to adhere to the provisions prescribed in the regulations governing them, would amount to depriving the general public and the investors of a fair and regulated market. However on a judicious exercise of the discretion conferred upon me, considering the offence in its entirety, bearing in mind the factors enumerated above as well as after taking into consideration the facts and circumstances of the present case and after analysing all the material available on record, I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15B of the Act, the imposition of a token penalty is very much necessitated.
ORDER:
27. In view of the foregoing, in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, and in the interest of justice, equity and good conscience I think that a penalty of Rs.10,000 on M/s. Networth Stock Broking Ltd for their failure to enter into member client agreements with five of their clients would be appropriate and proportionate to the offence committed.
28. The penalty amount shall be paid 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 Shri. P.K Bindlish, General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: MARCH 3, 2005 ADJUDICATING OFFICER