ADJUDICATION ORDER IN RESPECT OF BAKLIWAL FINANCIAL SERVICES ( INDIA) PVT. LTD.– MEMBER, THE STOCK EXCHANGE, MUMBAI, UNDER SECTION 15 I OF THE SEBI ACT READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY BY ADJUDICATING OFFICER) RULES, 1995
1. BACKGROUND
Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of. M/s Bakliwal Financial Services (India) Pvt. Ltd .(hereinafter referred to as Broker) (INB 011070332), and pursuant to this appointed me as adjudicating officer vide order dated March 31, 2004 under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under sections 15F(a), 15 HB of the SEBI Act.
2. NOTICE
Pursuant to this a notice dated May 28, 2004 under Rule 4 (1) of the said rules was issued to broker communicating the charges levelled against them based on inspection of the books of accounts and other documents conducted by SEBI for the period 01.04.2001 to 31.03.2003. The said inspection report had already been communicated to the broker vide SEBI letter no. MIRSD/DPS-1/Post-insp./RRM/16984/2003 dated September 5, 2003.
3. REPLY
Reply to the aforesaid notice was received vide letter dated July 10, 2004 of the broker, in which the broker submitted a detailed reply.
4. PERSONAL HEARING
The personal hearing in the matter was granted on October 27, 2004 vide notice dated October 18,2004. Shri Kamal R. Bakliwal , Director , Bakliwal Financial Services (India) Pvt. Ltd. appeared and made submissions on behalf of the broker. Subsequent to the hearing further reply was filed by the broker vide letter dated November 02, 2004.
5. FINDINGS AND CONCLUSIONS
In view of the above, I now deal with the submissions made by the broker before me for the purpose of this adjudication.
(a) The broker has failed to issue Contract Notes in the form and manner prescribed in violation of Section 15F(a) and 15 HB of Securities & Exchange Board of India Act 1992 read with Regulation 26(v), 26 (xv) and 26 (xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
As per the inspection report contract notes do not bear pre-printed serial numbers. The computerised nos. generated are also on daily basis and not on annual basis. Besides in the contract note there is no provision of the time when the client has placed the order.
The broker has submitted that they have a lot of old printed stationary of contract notes and since their clientele business is small they are using the old contract notes. The broker has also submitted that they are mainly arbitrage business and their own turnover is 99% of the total turnover of the broker. Regarding the order time not reflected in the contract notes it has been submitted that the format of the contract note is prescribed by the Stock Exchange in consultation with SEBI and accordingly software companies has developed the software and provided to the brokers and there is no provision of order time in the contract notes. It has been further submitted that they have now printed contract noted strictly in accordance with the format prescribed in regulations 14.2 of the rules, bylaws and regulations of the exchange. A copy of the new contract note has been enclosed.
From the explanation of the broker it is seen that broker was mainly engaged in arbitrage business on his own account; the client business was very small; they had a lot of old printed stationery of contract notes and due to that they continued to issue the old contract notes which were not as per the requirements. This explanation of the broker does not appear to be satisfactory in view of the fact that contract note is the prime document establishing the prime contractual relationship between the client and the broker. However the fact that the broker has already taken corrective steps by printing the contracts notes as per the requirement, has also been considered while imposing the penalty.
(b) The broker has transferred trade (indulging in off floor transactions) margins in violations of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) & 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.
The broker has submitted that “Since we are doing arbitrage our dealer who operate Terminals to take the advantage of price difference in different segments. For arbitrage dealer needs lot of concentration. In reported case dealer got order from a client in name of his family member but due to oversight he forget to change the code no of the office account and the entire order was punched in office account, the dealer realized this mistake when he checked his office account. Facility is provided by The Stock Exchange, Mumbai to correct the code of clients in case of punching error. The same mistake is rectified in the evening and accordingly contract notes and bills were issued. All the trades of clients are as per their order and are reflected in Contract notes, Sauda register and BRK. This has happened due to punching error “
From the inspection report it is seen that the codes which have been converted have changed from YS1001 in the exchange BRK file mainly to 2 clients. It is generally possible that few stray instances occur due to punching error and for that purpose only a facility has been provided by the stock exchanges to correct the codes of clients in case of punching error after the trading is over. In the present case the instances are numerous running into several pages across several days and various scrips, which can not be termed as few stray instances. Keeping all this in view the explanation of the broker is not acceptable.
(c ) The broker has failed to obtain/maintain client registration forms/ client data base in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xii), 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulations 1992.
As per the inspection report though the broker has maintained client database, on verification the discrepancies have been found in some cases , the list of which has been enclosed. The discrepancies mainly relate to bankers certificate not available, old format of agreement and no signature on photograph. In some cases the deficiency such as only one proof of identity or Pan no. not available/applied for has been observed.
The broker has submitted that “ There were total 46 clients in two year period most of the clients were either having single trade or maximum four to five trades in two year period. Generally we obtained all details before opening of his/her account. Some time staff of the client comes with the form and we found that minor things are left and we did the trade.” It has also been submitted that the broker is updating client data base with respect to registration forms & broker client agreements.
It is seen that the broker has very less client business and is now updating the data base.
(d) The broker has delayed payment of monies/delivery of securities to clients in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(vi) of the SEBI (Stock Brokers and Sub Brokers) Regulations 1992.
As per the inspection report the broker has made full payment/delivery within 48 hours of the relevant pay out in most of the cases, however violations have been noticed in some cases.
The broker has submitted that in most of the cases they have made payment of funds and securities within 48 hours of pay-out and in the cases cited in the inspection report they had obtained specific letters from the clients to retain the fund/securities. Copies of the letters have been furnished. It is felt that the broker should have produced the consent letters from clients at the time of inspection itself.
(e) The broker has failed to collect/maintain minimum margin deposit from clients in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulations 1992.
As per the inspection report in some cases broker has not collected the margin from the clients even though the contract valve has exceeded Rs.5,00,000/-. He broker has submitted that “ Cases cited by the Inspection team are those where there were wrong punching of code in office account and which resulted into profit or loss. In case Fatehchand Cunnilal, he sold the shares and transferred the same in our pool account. In case of Oasis securities Ltd we received full payment immediately, Bakliwal investment is our sister concern and we are having credit balance in other account.” The broker has not submitted any explanation for other cases mentioned in the inspection report and it is presumed that broker has not collected margin in those cases.
(f) The broker has not framed code of internal procedures and conduct for prevention of insider trading in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulations 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulations 1992 .
The broker has not made any submission in this regard.
(g) The broker has failed to comply with the directions issued by the Board in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.
The broker has not exercised due skill , care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.
The broker has submitted that the mistakes were done innocently without any malafide intention and has assured that these irregularities will not repeat in future.
6. IMPOSITION OF PENALTY
Keeping all above in view, I find that there were certain deficiencies and irregularities in the systems and procedures of the broker and has failed to strictly comply with the provisions of the Act, Regulations and directions issued by the Board from time to time and has not exercised adequate due skill, care and diligence in their operations.
Considering all above facts and circumstances , I am of the view that the broker has become liable to penalty and some amount of penalty need to be imposed upon them for certain violations as described in detail in the earlier paragraphs, so that they comply with all the regulatory requirements in future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interest of investors.
In order to adjudge the quantum of penalty, I have considered the following factors as provided in the Section 15J of Securities and Exchange Board of India Act ,1992:
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 broker. 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. Besides, no investor complaints have been received against the broker. However, as for the reasons stated above the monetary penalty needs to be imposed on the broker.
7. ORDER
In exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.1,00,000 (Rupees One Lakh) on the broker. The broker shall pay this amount of penalty of Rs.1,00,000/- 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 Mrs. Usha Narayanan, Chief General Manager of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
In terms of Regulation 6 of the SEBI ( Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules ,1995 , a copy of this order is served on the broker and a copy is submitted to the Board.
| Date: NOVEMBER 19, 2004 |
P.K. BINDLISH
|
| Place: Mumbai |
Adjudicating Officer |