ADJUDICATION RELATING TO
M/s. ANAND RATHI SECURITIES PVT. LTD., MEMBER BSE
(INB 011121754.)
ORDER UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.
1. BACKGROUND
M/s. Anand Rathi Securities Pvt. Ltd., (herein referred to as “member broker “) is a member broker of the Stock Exchange, Mumbai (BSE) having SEBI registration No.INB011121754. The Securities and Exchange Board of India (SEBI) carried out an inspection of the books of accounts, documents and other records maintained by member broker during the period February 2002 to March 2003. The findings of inspection containing details of irregularities and violations of various provisions of SEBI Act, the rules and regulations made thereunder and directives issued by SEBI from time to time, were communicated to the member broker vide letter dated January 23, 2004 to which they replied vide their letter dated February 10, 2004.
2. ADJUDICATING PROCEEDINGS
Based on the violations observed during the inspection, and pursuant to the member broker’s reply, the Whole Time Member, SEBI has in exercise of the powers conferred upon him under Section 19 of the SEBI Act 1992 (hereinafter referred to as the “Act”) read with Section 15-I of the Act and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 has appointed the undersigned as the Adjudicating Officer vide order dated March 31, 2004, to enquire into and adjudge the alleged violations committed by the member broker.
3. SHOW CAUSE NOTICE AND HEARING
A show cause notice dated May 05, 2004, Ref.No:IVD-ID1/PKN/NS/9076/2004, based on Order of the Whole Time Member, was issued by the undersigned to the member broker to show cause as to why penalty under the provisions of the Act read with Rule 5 of SEBI (Procedure for holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 should not be imposed upon them in view of the alleged violations. It was also mentioned in the show cause notice that their earlier reply to SEBI on the findings of inspection had been taken on record.
The member broker replied to the show cause notice vide letter dated May 21, 2004. As requested by them, an opportunity of personal hearing was granted on October 4, 2004. The authorized persons of M/s. Anand Rathi Securities Pvt. Ltd. - Shri Amit Rathi (Managing Director) along with Shri R. K. Bhootra (Senior V.P.) attended the personal hearing. During the hearing, they offered their explanations and clarifications on the allegations made in the show cause notice. As stated by them at the time of hearing, they subsequently submitted documents in support of their contentions on certain points on October 5, 2004.
4. FINDINGS AND CONCLUSIONS
The undersigned has taken into consideration the facts and circumstances of the case and the material available on record. The findings and conclusions in respect of the allegations against the member broker are as follows:
a. Transferred funds between different client accounts in violation of Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “Act”) read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”);
b. failed to maintain proper segregation of clients funds and own funds in violation of Section 15HB of the Act read with Regulation 26(xiii) of the Regulations;
According to inspection report, there are six instances of funds transfer from the Bank of India Clients A/c 1401 to Own A/c 1534 as given in the following table
|
Date
|
Chq. No.
|
Particulars
|
Amount
|
|
2/4/02
|
20352
|
Transfer to OD a/c No. BOI-Own a/c
|
8,00,000
|
|
3/4/02
|
20354
|
Transfer to OD a/c No. BOI-Own a/c
|
1,000,000
|
|
4/4/02
|
20358
|
Transfer to OD a/c No. BOI-Own a/c
|
1,000,000
|
|
5/4/02
|
20361
|
Transfer to OD a/c No. BOI-Own a/c
|
6,600,000
|
|
6/4/02
|
20363
|
Transfer to OD a/c No. BOI-Own a/c
|
8,00,000
|
|
26/4/02
|
273236
|
Vsat of Ahmedabad cancelled Indo Trust Financial services
|
75,000
|
With regard to above amounts transferred from clients account to own account, the member broker has explained that due to the T+2 settlement scenario, payment of clients pay-in obligations are not received on time and in such a situation funds are met from their overdraft account (by way of transfer from own a/c to client a/c) and paid to the Exchange. After receipt of pay-in amount from the clients, which is deposited in the clients account, funds are transferred back to the member broker’s bank account. Hence, at any point of time some amount of funds will be pending to be transferred from Clients Account to Own Account.
They further submitted that the auditors (who were assigned the work of inspection) failed to consider transfer of funds from Own account to Clients Account on those respective dates. The member broker also furnished a statement of such transfers while replying to show cause notice. The statement shows that the funds used from their Own Account for payment made for clients to the Exchange as on March 31, 2002 were to the tune of Rs. 92 lakh.
Supplementary report given by the auditors to SEBI gives instances of transfer of funds from Own account to Clients Account and vice versa for the period March 1, 2002 to April 30, 2002. It also includes clarification given by the member broker to the auditors that they had earlier deposited funds in Clients Account which they had withdrawn later. However, exact details of funds deposited in clients account were not provided to auditors.
The undersigned finds from the supplementary report of auditors that transfer of funds from clients account to own account and vice versa occurs on a regular basis. During the hearing, the member broker also explained their statement of transfer of funds and how Clients Account always had credit balance and funds were not used by them for their own purpose.
Considering all facts and circumstances, the undersigned has given benefit of doubt to the member broker on this aspect, though it is felt that they should have given exact details to the auditors earlier.
c. failed to collect margins from clients in violation of Section 15HB of the Act read with Regulation 26(xv), and 26(xvi) of the Regulations;
According to inspection report, it has been observed that the member broker is not maintaining the margin register in respect of his clients and only the records of deposits collected from sub-brokers are maintained. It also states that no margin money is collected from the clients. This is in violation of SEBI circulars issued from time to time.
The member broker has submitted that in place of margin register they are maintaining the records by way of their internal MIS and the same was made available as soft copy and thus they comply with the requirement.
Regarding collection of margins, they have stated that in most of the cases they have collected sufficient margins from clients in cash or by way of securities. However, in some of the cases as an exception they could not collect or partly collected the margins. These clients are making their pay-in obligation normally the next day itself. They are further streamlining their procedures to collect margin from all the clients.
The member broker submitted at the time of hearing that they had 35-40 high net worth individual clients (HNIs) during the period of inspection who were not paying the margins separately. However, they used to collect cheques/ deliveries in case of purchase/sales on the same day evening, which satisfies the criteria of the margin.
The undersigned finds that while in some cases the member broker did not collect margins or partly collected margins, they did not collect margins from HNIs before executing their transactions i.e. upfront margins. Thus they failed to follow the requirements of SEBI Regulations and Guidelines strictly. Moreover, they could not explain at the time of hearing that they have taken any corrective steps to follow the regulatory requirements, though they are the member of major stock exchange.
d. not framed code of internal procedures and conduct for prevention of insider trading in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;
According to inspection report, the member broker has not framed the code of internal procedures and conduct for prevention of insider trading.
The member broker has submitted that they are taking an undertaking from their employees to carry out their trading activities with them only. They also take undertaking to this effect from all their employees. They also stated that they monitor the position of each of their employees on regular basis, square off (speculation) transactions are not permitted and excessive exposure, if any taken by the employee is curtailed immediately by their risk management team. They also have a system whereby they generate on a daily basis, client wise scrip-wise report which shows % of volume done by a client in comparison to % of market volume.
The reply of the member broker is not satisfactory. The above steps taken by them would serve the purpose of risk management or prescribe exposure limits. They need to have separate detailed code of conduct for prevention of insider trading. Their attention was drawn at the time of hearing that SEBI (Prohibition of Insider Trading) Regulations, 1992 have also specified model code of conduct. Thus, the member broker has failed to comply with regulatory requirements.
e. failed to comply with directions issued by the Board in violation of Section 15HB of the Act read with Regulation 26(xv) of the Regulations;
f. not exercised due skill, care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the Regulations.
The above instances of deficiencies and irregularities indicate that the member broker could not comply with directions issued by the Board from time to time and failed to exercise due skill, care and diligence in their operations. Moreover, they could not explain any corrective steps taken by them to improve their systems.
5. IMPOSITION OF PENALTY
Keeping all above in view, the undersigned finds that there were certain deficiencies in the systems and procedures of the member broker and they have failed to strictly comply with the provisions of aforesaid Rules, Regulations and directions issued by the Board from time to time and they have not exercised adequate due skill, care and diligence in their operations.
Considering all above facts and circumstances, the undersigned is of the view that the member broker has become liable to penalty and some amount of penalty should be imposed upon them so that they comply with all the regulatory requirements in the future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interests of investors. While deciding the quantum of the penalty, the undersigned has taken into account the factors under Section 15J of SEBI Act, 1992, 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.
In accordance with the provisions of Section 15HB of the SEBI Act, 1992 read with Rule 5 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 100,000 (Rs. One Lakh only) upon the member broker, M/s Anand Rathi Securities Pvt. Ltd.
They shall pay the amount of penalty by way of demand draft / pay order drawn in favour of “SEBI penalties remittable to Government of India” and the demand draft / pay order shall be sent to Mrs. Usha Narayanan, CGM, (MIRSD), Securities and Exchange Board of India, World Trade center, 29th Floor, Cuffe Parade, Mumbai-400 005, within 45 days of receipt of this order.
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 member broker and a copy is submitted to the Board.
| Date: NOVEMBER 3, 2004 |
P K NAGPAL |
| Place: Mumbai |
Adjudicating Officer |