SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION ORDER AGAINST SAMINDRA RATILAL SHAH, MEMBER, AHMEDABAD STOCK EXCHANGE UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992.
(I) Whereas Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of Samindra Ratilal Shah (hereinafter referred to as Member), and pursuant to this appointed me as adjudicating officer vide order dated March 10, 2004 under Rule 3 of SEBI (Procedure for holding inquiry by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under section 15 B, 15F(a) and 15 F (b) of the SEBI Act.
(II) NOTICE
Pursuant to this a notice dated April 7, 2005 under Rule 4 (1) of the said rules was issued to member communicating the detailed charges levelled against them. The inspection report in respect of the member was also sent alongwith the said notice.
(III) REPLY
Reply to the aforesaid notice was received vide letter dated April 28, 2005 of the member, in which the member submitted a detailed reply and also raised some preliminary objections.
(IV) PERSONAL HEARING
The personal hearing in the matter was fixed on May 16, 2005 vide notice dated May 2, 2005. In response to the said notice the member vide its fax dated May 13, 2005 stated that their submissions/replies made vide their reply letter dated April 28, 2005 may be considered for the purpose of personal hearing and they will not be able to personally present for the said hearing.
In view of the above and in terms of the proviso of sub-rule 5 of Rule 4 of the said Rules the opportunity of personal hearing is treated as waived pursuant to the request of the member vide its letter dated May 13, 2005.
I proceed with the proceedings on the basis of the submissions made by the member through his letter for the purpose of this adjudication.
(V) FINDINGS ON PRELIMINARY OBJECTIONS
It is submitted by member that as the enquiry proceedings have already been initiated against him in respect of the same inspection and wherein I have been appointed as an Enquiry Officer, the appointment of the undersigned as Adjudicating Officer in the adjudication proceedings based on the same inspection report, is devoid of fairness and against the principals of natural justice. I have taken into consideration the objection of the member and in this regard no cognizance is taken under the enquiry proceedings of the violations which are to be adjudicated upon in these proceedings. The violations as observed during the inspection for the purpose of initiating adjudication proceedings under Section 15B, 15F (a) and 15F (b) of the SEBI Act, 1992 have been exclusively dealt in these proceedings only.
(VI) THE REPLY OF THE MEMBER VIS A VIS THE VIOLATIONS OBSERVED AS PER INSPECTION REPORT AND THE FINDINGS.
1.0 CHARGE
The member has not filled in client registration form for many clients. The KYC form is lacking proof of identity, PAN number etc.
1.1 REPLY OF THE MEMBER
It is submitted by the member that due to voluminous records in his back office and under pressure of inspection he was not able to produce some client registration form at the time of inspection. It is also submitted that the requirement to enter into an agreement with clients was prescribed through SEBI circular no. SMD/POLICY/CIR/5-97 dated April 11, 1997 and therefore the said requirement can not be deemed to be a direction to the stock brokers as it is not a part of Act, Rules or Regulations.
1.2 FINDINGS
It is observed from the annexure 4 of the inspection report that approximately 100 number of instances were found where client registration form was not duly filled by the member which is a quite a substantial number. I find no merits in the submissions of the member that they have all the forms for clients mentioned in the inspection report and they were unable to produce before the inspection team. The member has not substantiated his submissions and no documentary proof has been filed in respect of the said 100 clients in support of their submission that they were maintaining these records. The member had three opportunities in the entire process to file the documentary evidence, firstly before the inspection team, secondly before the operational department of SEBI while replying to it on the observations of the inspection report and thirdly before the undersigned in these proceedings. The member had on the other hand chosen to attack and challenge the said requirement based on legal requirement. I find no merit in the objection of the member that these circulars issued by SEBI are not binding on them. I am inclined to rely upon Section 11 of SEBI Act, 1992, which empowers the Board to take measures as it thinks fit, to protect the interests of the investors in securities and to promote the development and to regulate the securities market. Circular are issued by the Board in exercise of the powers conferred under the provisions of the aforesaid section and therefore are binding on the stock brokers. I therefore find it a violation under SEBI Act, 1992 for which adjudication penalty is prescribed under Section 15B of the SEBI Act, 1992.
2.0 CHARGE
Regarding issuance of contract notes the inspection report has following observations:
a. The contract notes do not carry the required stamps
b. The contract notes are signed by the authorised person but the authority to sign the contract note is not communicated to the ASE.
c. The member is not preparing duplicate copies of the contract notes in al the cases and there was no acknowledgement for the receipt of contract notes.
d. The duplicates or the counterfoils of the contract notes were found missing.
2.1 REPLY OF THE MEMBER
The member submitted that they were required to maintain and preserve duplicates of contract notes issued to the clients for a period of two years and since the inspection report has not mentioned the exact period when he has not maintaining the duplicates of contract notes there is no violation on his part in this regard. Further the member has pointed out that inspection report itself has a finding as under:
“Whether the contract notes issued for all trades done on behalf of constituents- Yes”
“Whether it is in a format prescribed by exchange – Yes “
It is also submitted by the member that there is no single complaint by any investor in respect of above violation.
2.2 FINDING
Section 15F (a) of SEBI Act, 1992 provides that “if any person who is a registered as stock broker under this Act fail to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract notes required to be issued by that broker”. The very plain reading of this provision will decide that there is no violation for which the provisions of 15F (a) could be invoked since the inspection report itself has a finding as under:
“Whether the contract notes issued for all trades done on behalf of constituents- Yes”
“Whether it is in a format prescribed by exchange – Yes “
3.0 CHARGE
(a) Payment to Client
During the course of inspection, the inspection team have verified the client account with settlement schedule and observed that in many cases the member broker has delayed payment to clients according to scheduled pay out. The member broker has given the explanations that he has obtained general letter of authority from clients to keep the amount in their account outstanding till their consent to payment. But the member produced few letters of authority in this regard against us. The some instances where delay has been made by member in payment to client account.
(b) Delivery to clients
During verification of CM pool account with settlement schedule, it was found that the member broker in most of the cases was transferring scrips from his pool account to client account within stipulated period but on some occasions he has delayed in delivering the scrip to client from his CM-pool account to client accounts.
3.1 REPLY FROM MEMBER
i. The member submitted that they are generally making payment to clients in schedule pay out. In some of the cases the member have delayed the payment due to the following reasons:
(a) General letters of authority from clients to keep the amount in their account till their consent to payment and such situation normally arises when a regular customer doing transactions for sale and purchase both.
(b) When a customer having more than one accounts in their family member's name and one account we have to make payment and in other account of same customer balance outstanding (payable to us), and such account position continues till customer settles all accounts sitting with us.
ii. Normally we transferred the delivery in our pool account to client account in stipulated time. In eight cases narrated in inspection report, the delivery has been delayed because either the client does not have demat account and going to open demat account in some days after transaction with us.
iii. The regulations do not prescribe any time period as clearly stated in Code of Conduct. The fact that we have given deliveries and payments to all clients is clearly established by the Inspection Report itself on account of its positive observations on customers' complaints etc. The fact that there are only few instances of delay recorded clearly bring out the fact that we have always delivered securities and made payments to clients expeditiously. In a few cases where delay has occurred on account of client not wanting money or keeping the same for adjustments against other debits cannot be held against us. The delay in transfer of securities has happened at the instance of clients only.
iv. The Letters of Authority issued by clients allowing us to withhold balances till their instructions were shown to the Inspection Team and finding recorded as such. We can not be held guilty for non payment when the client himself does not wish to receive the payment.
3.2 FINDING
The observation in the inspection report with respect to delivery of shares and payment to clients is not based on any investor complaint and in the absence of any investor complaint the reply of the member is accepted that the delay in transfer of securities if any, has happened at the instance of clients only. As regards delay in payments it is submitted by the member that the letters of authority were issued by clients allowing them to withhold balances till further instructions. In the absence of any investor complaint pending for delay in delivery of shares or payments, I am inclined to rely on the submission of the member and therefore do not hold him guilty for imposition of adjudication penalty under Section 15F(b) of SEBI Act, 1992.
(VII) CONCLUSION
I, therefore, observe that the member has failed to enter into an agreement with some of its clients as mentioned in the inspection report and therefore has made himself liable for imposition of penalty as prescribed under Section 15B of SEBI Act, 1992.
In order to adjudge the quantum of penalty, I have to consider the following factors:
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 and
c) the repetitive nature of the default.
As regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the member. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. However, for the default with respect to deficiencies found in client's agreement, I consider that the monetary penalty needs to be imposed on the member as a corrective measure. The client's agreement is a requirement for the benefit of the member since in case of default by the client the member has a trace of the client and the corrective actions to protect the interest of the stock broker can be taken under such circumstances. The said violation on the part of the member is found to be repetitive nature since there were as many as 100 cases where Inspection Authority found that the member was not maintaining client registration form in required manner.
(VIII) ORDER
The submissions of the member have been considered and dealt in detail as above and in view of the findings arrived at, I consider it to be a fit case for imposition of token penalty under sections 15B of the SEBI Act, 1992. In view of the same and in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the said Rules, I hereby impose a penalty of Rs.10,000 (Rupees Ten Thousand Only) on the member. The member shall pay this amount of penalty of Rs. 10,000/- by way of demand draft in favour of "SEBI - Penalties Remittable to Government of India" payable at Mumbai within 45 days of receipt of this order.
The said demand draft should be forwarded to the Chief General Manager of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
DATE: MAY 18, 2005 AMIT PRADHAN
PLACE: MUMBAI ADJUDICATING OFFICER