ORDER
UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND
IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.
Against
M/s Vaibhav Share Market,
Udaipur
Sub-broker (SEBI Registration No. INS 011507816)
1.0 Background
1.1 M/s Vaibhav Share Market is a proprietorship concern of Mr. Virendra Kumar Mahatma. The administrative office of the entity was situated at 56, Indraprastha Complex, Shastri circle, Delhi Gate Road, Udaipur. M/s. Vaibhav Share Market (hereinafter referred to as “VSM / entity ”) is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) as a sub broker affiliated to M/s. Renaissance Securities Ltd., broker-member, Bombay Stock Exchange Ltd., Mumbai. The SEBI registration no. of VSM is INS 011507816. The current address of VSM is 164, Shakti Nagar, Udaipur – 313 001.
1.2 On July 24, 2004, Bombay Stock Exchange Ltd. (hereinafter referred to as ‘BSE / Exchange’) received a letter from Central Depository Services Ltd. hereinafter referred to as “CDSL”) stating that their Depository Participant (hereinafter referred to as “DP “), M/s. Renaissance Securities Ltd. had reported fraudulent withdrawal of holdings from certain beneficiary accounts by its employee, Mr. Nikhil Arya. CDSL had conducted an inspection and were informed by Mr. Nikhil Arya that he was trading through M/s MPS Securities and M/s Vaibhav Share Market, sub-brokers of BSE member, Renaissance Securities Ltd. (hereinafter referred to as ‘RSL’). RSL is registered with SEBI as a broker of BSE having registration no. INB 010683856 and a DP of Central Depository Services Ltd. RSL is now known as M/s Mehta Equities Ltd. CDSL further observed that some fraudulent deliveries had taken place in the pool account of BSE member, M/s P K Jain Securities Pvt. Ltd. (PKJ) and beneficiary account of its sub-broker, M/s Sulabh Share Broking Pvt. Ltd.
1.3 In view of the above, SEBI conducted an inspection of books of accounts and other documents of VSM on August 27-28, 2004 and found certain violations /shortcomings in its working. In view of the alleged violations, it was decided to institute adjudication proceedings against VSM. The undersigned was appointed as the adjudicating officer vide SEBI order dated December 29, 2005 to inquire into and adjudge under Section 15 I of the Securities and Exchange Board of India Act, 1992 the alleged violations of SEBI Act, 1992 and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘Brokers Regulations’) by VSM.
2.0 Notice / Reply / Personal Hearing
2.1 Accordingly, I issued a show cause notice dated July 11, 2006 to VSM under Rule 4 of SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 to show cause as to why an inquiry should not be initiated against it and penalty be not imposed on it for its failure to comply with the provisions of SEBI Act, 1992, Broker Regulations and various SEBI circulars etc. as mentioned in the inspection report and the show cause notice.
VSM was advised to make submissions, if any, along with supporting documents, within 14 days from the date of receipt of notice. VSM was also advised to note that in case it failed to reply within the stipulated time, it would be presumed that it has no suitable explanation / reply and that the matter would be further proceeded with on the basis of evidence on record.
2.2 Mr. Virendra Mahatma, proprietor, VSM, submitted its reply vide letter dated July 24, 2006. A notice of inquiry dated January 22, 2007 was issued fixing February 02, 2007 as date of hearing. The notice was returned undelivered with the remarks ‘Left’. Thereafter, the current address of VSM was ascertained from the main broker, RSL, and a copy of the notice was sent to the new address viz. 164, Shakti Nagar, Udaipur – 313 001. VSM, vide letter dated February 10, 2007 made additional submissions in the matter. As VSM’s reply was silent about personal hearing, another opportunity of hearing was given vide notice dated March 06, 2007, fixing March 15, 2007 as date of hearing. This notice was duly delivered as per signed A.D. card received. However, no one appeared on behalf of VSM on said date.
3.0 Consideration of issues
3.1 I now propose to discuss in detail the charges that have been leveled against VSM for being adjudicated in the present proceedings, the submissions made by it and my findings on the same.
Charge
Dealing as unregistered sub broker in violation of Section 12 of SEBI Act, 1992 Rule 3 of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 and SEBI Circular No. SMD/Policy/CIR-3/98 dated January 16, 1998 read with regulation 26 (xiv) of the Regulations.
Observations
As per inspection report, VSM was granted SEBI registration as sub broker in the month of April 2003 on the basis of application made in the month of February 2003. However it was observed that the entity had started operations in the month of February 2003 itself through the main broker Renaissance Securities Ltd.
Further during the period November 2002 to February 2003, VSM was dealing for its clients through M/s MPS Securities, another sub-broker of Renaissance Securities Ltd. As per authenticated copies of statements of account collected during the inspection, during the period November 2002 to February 2003 i.e. before being registered with SEBI, VSM traded for clients such as Neeta Parikh, Shanti Lal Hingad, Nitesh Saraf, S N Suwalka etc.
Reply
In its reply dated July 24, 2006, VSM has stated that as the registration as sub broker was required, the requisite papers which were sent by main broker were submitted in time. VSM has further stated that the main broker should not have allowed dealing with clients, executing saudas till the registration certificate was obtained.
Findings
Section 12 (1) of SEBI Act 1992 stipulates that any entity buying, selling or dealing in securities as a sub-broker could do so only in accordance with the certificate of registration obtained from SEBI. Further, rule 3 of SEBI (Stock Brokers and Sub brokers) Rules, 1992 stipulates that no stock broker or sub-broker would buy, sell or deal in securities unless he holds a certificate of registration from SEBI under the Broker Regulations. Regulation 26(xiv) of the Brokers Regulations provides for monetary penalty for those who act as unregistered sub brokers. SEBI Circular No. SMD/Policy/CIR-3/98 dated January 16, 1998 also stipulates the requirement of registration.
VSM has accepted that it was required to be registered as a sub-broker and that it had accordingly submitted the requisite application / documents to its main broker viz. RSL. VSM has also accepted that it was acting as an unregistered sub-broker from November 2002 till grant of registration by SEBI. This is evidenced by the authenticated copies of statements of account of clients of VSM collected during the inspection pertaining to the period November 2002 to February 2003 i.e. before being registered with SEBI.
Further, in trying to blame its main broker, RSM, VSM has also admitted that it was dealing as an unregistered sub-broker before grant of registration certificate. I therefore hold that VSM has violated the provisions of section 12 (1) of SEBI Act 1992, rule 3 of SEBI (Stock Brokers and Sub brokers) Rules, 1992, regulation 26(xiv) of the Brokers Regulations and SEBI circular No. SMD/Policy/CIR-3/98 dated January 16, 1998.
3.2 Charge
Unique Client Code not used while entering trades for the clients in violation of regulation 26(xx) of the Regulations and SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001.
Observations
The inspection team observed that in one instance dated 17.06.2004, the Client Code and client name in BRK file was VD01 and Mr. D S Singh whereas in the contract note, the Client Code and name was VD24 and Mr. D S Rudra. The investigation team further mentions that this solitary instance is quoted because all the transactions behind the fraudulent transfers from various CDSL a/c holders were done either in the name of Mr. Nikhil Arya ( VA24 ) or Mr. D S Rudra ( VD24 )
Reply
In its reply dated July 24, 2006, VSM has stated that the inspection team has found only one instance of wrong punching of client code. It further states that it had informed RSL in this regard but RSL did not allow VSM to rectify the mistake in the ‘post closing’ session as it was late. However, the transaction was correctly recorded in the books of VSM. VSM has further mentioned that on 17.06. 2004, (the day on which wrong punching was done) there were 42 trades executed in the shares of Hindustan Zinc Ltd. whereby 3100 shares were bought and 4100 shares were sold, so no intention can be imputed for wrong punching of 25 shares. VSM has emphasized the fact that the value of 25 shares of Hindustan Zinc Ltd. on that particular day was Rs. 74/- each totaling to Rs. 1,850/-only and that for such a petty amount a change in client code necessarily implies wrong punching, i.e., clerical mistake.
Findings
The inspection covered a period from 2002-03 to 2004-05 (till date of inspection) and mentions one instance of punching of wrong client code. Over such a long period, it is quite possible that some errors like this may have happened. I notice that the names of the clients are quite similar viz. D.S. Singh and D. S Rudra. As there are no more instances of this kind on record and also considering the fact that the value of this transaction was also quite low, it is difficult to attribute motives for this wrong punching.
The inspection report also mentions that the reason why this instance has been quoted is that all the transactions behind the fraudulent transfers from various CDSL account holders were done in the name of Nikhil Arya (VA 24) or D S Rudra (VD 24). However, there is nothing on record to explain whether this transaction was fraudulent. In the absence of any explanation regarding fraudulent nature of the quoted transaction or of numerous instances of wrong punching, I am inclined to give benefit of doubt to VSM in this regard.
3.3 Charge
Non-segregation of client/own bank accounts in violation of regulation 26(xiii) of Broker Regulations and SEBI Circular No. SMD-1/23341 dated November 18, 1993.
Observations
The entity has not opened separate bank account for clients transactions. It is maintaining only one bank account for trading purposes viz. HDFC Bank A/c. No. 1192000002373. Hence, own and clients funds have not been segregated in separate bank accounts.
Reply
In its reply VSM has accepted that it was not maintaining separate bank accounts for clients because of lack of knowledge about SEBI laws and that no fraud was committed. It is further submitted that VSM never used clients funds for own purposes because its overall withdrawals were less than sub brokerage earned.
Findings
Lack of knowledge about the SEBI regulations cannot be considered as a valid ground for non-segregation of sub-broker and client funds. I note that vide letter dated February 10, 2007, VSM has forwarded letters from various clients ratifying VSM’s action in holding their credit funds in its bank account and securities in its demat account. However, the findings of inspection and the submission by VSM prove that VSM had not segregated the client funds and own funds and thus violated regulation 26(xiii) of Broker Regulations and SEBI circular no. SMD-1/23341 dated November 18, 1993.
3.4 In view of above, I am of the view that VSM is liable for penalty under section 15HB of SEBI Act, 1992 which states as under:
“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.”.
3.5 While imposing penalty it is important to consider the factors stipulated in section 15J of SEBI Act, 1992 which states as under :
“15J - Factors to be taken into account by the adjudicating officer
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. “
3.6 It has been proved that VSM was acting as an unregistered sub broker even before grant of registration. VSM has itself admitted that it was aware of the requirement of registration as sub broker and had submitted its application for registration. Thus it was also well aware that acting as unregistered sub broker before grant of registration was an unlawful activity. The sub brokerage earned by VSM during the period that it acted as an unregistered sub broker was thus an unlawful gain. Similarly the benefit derived by VSM by use of client funds which were retained in VSM’s account due to non-segregation of accounts was a wrongful gain to VSM. While some disproportionate gain or advantage has definitely accrued to VSM through this sub-brokerage earned and from use of clients’ funds, it is not possible to quantify the same in monetary terms.
VSM had been acting as an unregistered sub broker for many months. During this period if any customer had any dispute, complaint against VSM, it could not make use of the redressal mechanism available with the stock exchange. The investors have definitely lost out in terms of opportunity loss on account of non-receipt of payment / securities from VSM. However, such loss is not readily quantifiable in terms of money. As discussed above, VSM has conducted many transactions during the period it was acting as an unregistered sub broker. Thus his default can be termed as repetitive. In his submission, Mr. Virender Mahatma, proprietor, VSM, has sought leniency as he is a person with weak economic background & is in a financial crunch and that these mistakes occurred due to ignorance of law.
As the violation of statutory obligations has been established, VSM is liable for penalty. Hon’ble Supreme Court of India in its order dated May 23, 2006 in the matter of SEBI Vs. Shriram Mutual Fund (Civil Appeal Nos. 9523 and 9524 of 2003) has held that levy of penalty is attracted once the violation of statutory obligations is established and the intention of parties committing such violation is irrelevant.
4.0 Penalty
4.1 Considering the material available on record, and upon a judicious exercise of powers conferred upon me under Rule 5 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by the Adjudicating Officer) Rules 1995, I impose a penalty of Rs.1,00,000/- ( Rupees one lac only) on M/s Vaibhav Share Market, (Proprietor- Mr Virendra Mahatma) 56, Indraprastha Complex, Shastri Circle, Delhi Gate Road, Udaipur under section 15HB of SEBI Act, 1992. I think this amount would be appropriate in view of the facts of the case.
4.2 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 Mr. P. K. Kuriachen, General Manager, SEBI, C – 4 A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
PLACE: MUMBAI PIYOOSH GUPTA
DATE: MARCH 28, 2007 ADJUDICATING OFFICER