ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATION 26(xii), (xiii) (xiv) & (xx) of SEBI (STOCK BROKERS AND SUB BROKERS) REGULATIONS, 1992 AND SECTION 15HB OF THE SEBI ACT, 1992 AGAINST M/s B. K. SHARES & STOCK BROKERS PVT. LTD.(SEBI REGD. NO.- INS010729734)
1.0 BACKGROUND:
1.1 M/s. B.K.Shares & Brokers Pvt Ltd. (hereinafter referred to as “sub-broker”) having Securities and Exchange Board of India (hereinafter referred to as SEBI) registration no.INS010729734 is a sub-broker affiliated to ASE Capital Markets Limited (SEBI registration no.INB011107431), Member of The Stock Exchange, Mumbai (BSE)
1.2 An inspection of the books of accounts, documents and other records of sub-broker was conducted by SEBI on January 09, 2003 covering the period from April, 2000 to December, 2002. During the inspection, certain irregularities and violations of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as Broker Regulations) by the sub-broker were observed.
1.3 Vide letter dated March 24, 2003 a copy of the inspection report alongwith its findings was forwarded to the sub-broker advising it to submit its explanation/comments together with supporting documents, if any, within 14 days of the receipt of the said letter.
1.4 The sub-broker vide its letter dated April 08, 2003 forwarded its comments on the findings of the aforesaid inspection report. SEBI after examining the comments offered by the sub-broker, being not satisfied with the same, decided to initiate Adjudicating Proceedings under section 15HA of SEBI Act, 1992 and accordingly vide order dated January 07, 2004 under Rule 3 of SEBI (Procedure for Holding Enquiry and Imposing penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Adjudicating Rules’) appointed Shri J.Ranganayakulu (herinafter referred to as “ The erstwhile Adjudicating Officer”) to enquire into and adjudicate upon the alleged violations by the sub-broker.
2.0 SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2.1 The erstwhile Adjudicating Officer issued a show cause notice dated June 17, 2004 to the sub-broker mentioning the findings of the inspection report and advising the sub-broker to show cause as to why penalty cannot be imposed on it in terms of section 15HB of SEBI Act, read with regulation 26 (xii) (xiii) (xv) and (xx) of Broker Regulations. The sub-broker replied to the said show cause notice vide its letter dated July 06, 2004.
2.2 In the meanwhile, the erstwhile Adjudicating Officer proceeded on study leave. Consequently, vide order dated November 08, 2004 the case was transferred to the undersigned and the undersigned was appointed Adjudicating Officer. It was clarified in the said order that excepting the change of Adjudicating Officer, the other terms and conditions of the original order, appointing Shri J.Ranganayakulu as the Adjudicating Officer, shall remain unchanged. As per the order, the undersigned was to proceed and deal with the case from the stage which was reached before such transfer or from any earlier stage as may deemed fit by the undersigned to complete the Adjudication in accordance with the terms of reference made in the original order read with present order.
2.3 Having considered the charges levied and the reply submitted by sub-broker available on the records, the undersigned was of the view that the enquiry should be held in the matter. Therefore, while adopting the charges levied in show cause notice dt. 17.06.04 issued by erstwhile Adjudicating officer and treating said show cause notice as part and parcel of the present proceedings, the undersigned issued a notice to the sub-broker in terms of Rule 4(3) of the Adjudicating Rules, fixing a date of personal appearance of the sub-broker. The sub-broker was given the liberty to appear either in person or through duly authorised advocate or other representative. It was also given the liberty, if it so chose, to make additional submissions relevant to the case.
2.4 The sub-broker did not submit any additional submissions and appeared before me on October 21, 2005 through Shri Kamlesh B Shah, Director/ Authorised Signatory of the sub-broker. During the course of the personal hearing, in terms of Rule 4(4) of the Adjudicating Rules, the charges levied in show cause notice dated 17.06.04 and subsequent notice dated 30.09.05 were explained to its representative, Shri Kamlesh B Shah. The provisions of the Act, Rules or Regulations alleged to have been violated were also explained and the representative submitted that they have understood the charges levied.
2.5 The representative stated that they have already submitted their reply in detail to the show cause notice vide their letter dated 06.07.04 and they do not wish to add anything further. It was however stated that this was the first instance wherein certain irregularities/violations have been found. There were very few trades for the outsiders as otherwise most of the trades were done in their own account.
2.6 It was further submitted that all the discrepancies alleged in the show cause notice have been corrected subsequently and that now the business is being conducted in accordance with the applicable laws. Though the sub-broker admitted the charges, it requested that taking into consideration that it was the first violation and corrective measures have been taken, a lenient view may be taken. The representative undertook to forward the latest balance sheet as well as turnover details of the latest financial year by 04.11.05.
3.0 CONSIDERATION OF ISSUES:
3.1 I have carefully considered the inspection report, the submission/explanation of the sub-broker, Show cause notices, the replies and the submissions made during the personal hearing before me. The summary of the charges alleged, the reply received from the sub-broker and my findings thereon are as under :
a) Charge 1 – Failure in issuing confirmation memos in the form and manner prescribed [Violation of Reg. 26(xx) r/w Circular SMD/Policy/Cir.-11/97 dated 21.05.97].
Reply of the sub-broker : “In respect of the above query we would like to state that corrective action has been taken by us since the inspecting team had brought this defect to our notice. The following rectifications are undertaken –
i. Trade time and trade number are now mentioned in the confirmation memo.
ii. Confirmation memos are now serially numbered and these numbers are generated on annual basis.
iii. Acknowledgement from clients is duly taken on copies of confirmation memos along with date.”
b) Charge 2 - Failed to obtain/maintain client agreement/ registration forms [Violation of Reg. 26(xii) r/w Circular SMD/Policy/Cir.-11/97 dated 21.05.97].
Reply of the sub-broker : “..we have now obtained and are maintaining client agreements and registration forms from all our active clients and updated all the details required in the registration forms, and can produced as and when required.”
c) Charge 3 - Failed to maintain client database [Violation of
Reg. 26(xv)r/w Circular SMD/Policy/Cir.-11/
97 dated 21.05.97].
Reply of the sub-broker : “..we are now maintaining client database which has all the details of clients and client code as allocated by us in back office and as uploaded in unique client code of the exchange.”
d) Charge 4 - Failed to maintain proper segregation of clients funds and own funds –[Violation of Reg. 26(xiii) r/w Circular SMD/SED/CIR/93/23321 dated 18.11.93].
Reply of the sub-broker : “..we have taken adequate steps and placed adequate internal control systems to ensure that no client funds are routed through our own or expense bank accounts and all client funds are routed through only client account.”
e) Charge 5 - Indulged in off the floor transactions –[Violation of
Reg. 26(xx) r/w Circular SMD/Policy/Cir.-11/97
dated 21.05.97].
Reply of the sub-broker : “..we had wrongly entered our client trades in our own client code. We thought that it would be a better from compliance point of view that instead of changing client code in the broker query file and issuing contract notes with changed client code, we issued principal-to-principal contract notes. Accordingly we informed our clients of this situations and after their approval only we had issued contract notes. There had been no maladies in it. We have now obtained their written approval for the same and submit herewith for your kind perusal. We henceforth assure you that we will not indulge in any off floor transactions and all the principal-to-principal transactions will be informed to the exchange immediately.
Having regard to above, we request your goodself to take the above into consideration and take a lenient view as there had been no intention on our side to damage the public interest or the securities market. The violations on our side had been technical and we ensure that we would be taking best possible actions to ensure that such violations are not repeated in future. We also request your goodself to provide us with an opportunity to be heard in person.”
4.0 FINDINGS
4.1 From the aforesaid submissions advanced on behalf of the sub-broker, it is quite clear that the sub-broker has not only violated but also admitted the lapses on its part in complying with regulatory requirements/instructions/circulars issued by SEBI from time to time. I also note that the sub-broker has claimed to have taken necessary corrective measures viz-a-viz the deficiencies/shortcomings pointed out/discovered/observed during the inspection and has claimed that now its business is being conducted in accordance with the applicable laws.
4.2 Upon cumulative analysis of the facts, I am of the view that whatsoever may be the reason, the fact remains that the sub-broker has admittedly failed to comply with the statutory requirements in the conduct of its business and thereby violated the provisions of Regulation 26 (xii) (xiii) (xv) and (xx) of the Broker Regulations read with relevant circulars issues by SEBI. These undisputed acts of omission and commission of the sub-broker, no doubt make the sub-broker liable to be penalized in terms of section 15HB of SEBI Act.
4.3 So far as the amount of penalty, it would be pertinent to refer to the relevant provisions of the SEBI Act as under:
(a) Penalty for contravention where no separate penalty has been provided.
15HB
Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
(b) Factors to be taken into account by the adjudicating officer
15J While adjudging quantum of penalty under section 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;
(c) the repetitive nature of the default.
4.4 There is nothing on record to suggest that the sub-broker extracted any disproportionate gain or unfair advantage as a result of its default. Also nothing has been brought to my notice that the sub-broker has repeated those faults/violations subsequently. I note that the sub-broker has submitted that it is generally dealing in its own account and on behalf of a small group of retail clients and its family members.
4.5 It can however not be denied that any non compliance of the statutory/regulatory requirements/provisions made for the protection of the investors in securities and to promote the development of and to regulate securities market, for whatsoever reason is bound to affect the interest of such investors and deprive them of a fair and well regulated market. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose and the very purpose of enacting any legislation and requiring some compliances to be observed by the persons concerned, is to ensure the sound and smooth functioning of the market. Therefore, even if no specific or identifiable loss is caused to any investor the cognizance has to be taken for any breach of the legal provisions and the violator has to be failing which the whole purpose of not only incorporating the regulations but also the regulatory jurisdiction would get defeated.
4.6 Thus keeping in mind the facts and circumstances of the above case, as also the factors enumerated in section 15J of SEBI Act on a careful consideration of the case and the discretion entrusted upon, I am of the view that since the charges levied against the sub-broker are not very serious as the same have not resulted in any direct loss to the investors, though some of them such as non-maintenance of client agreement/registration form, non-segregation of clients’ funds and its own funds etc. were potentially serious and were against the fairness of the securities market, the penalty to be imposed on the sub-broker need not be strictly as per the quantum specified in section 15HB and the ends of justice would meet by imposing a token penalty on the sub-broker which would act as deterrent for future, specially in view of the submissions of the sub-broker that it has since taken all corrective measures is doing its business strictly in accordance with law.
5.0 ORDER
5.1 Accordingly, in exercise of the powers conferred upon me in terms of Rule 5 of SEBI (Procedure for holding inquiry and Imposing penalties by the Adjudicating Officer ) Rules, 1995, I hereby impose a penalty of Rs. 40,000/- (Rupees forty thousand only) as penalty on M/s. B.K.Shares & Brokers Pvt. Ltd., bearing SEBI Regn. no.INS010729734.
5.2 The penalty amount shall be paid within a period of 45 days from the date of receipt of this order 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 Smt Usha Narayanan, Chief General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400005.
| Dated : March 31, 2006 |
PRAVEEN TRIVEDI
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| Mumbai |
ADJUDICATING OFFICER
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