ADJUDICATION RELATING TO
M/S KASTHURIRANGAN & CO,
MEMBER OF MADRAS STOCK EXCHANGE
SUB-BROKER AFFILIATED TO M/S MSE FINANCIAL SERVICES LTD.,
ORDER UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.
1. BACKGROUND
M/s. Kasthurirangan & Co., (herein referred to as “member broker”) is a member of Madras Stock Exchange and sub-broker of MSE Financial Services Ltd., (Member, BSE) having SEBI registration No: INS010700818. The Securities and Exchange Board of India (SEBI) carried out an inspection of their books of accounts, documents and other records for the period 1.4.01 to 8.5.03. 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. They replied to findings of inspection vide their letter dated June 14, 2003.
2. ADJUDICATION PROCEEDINGS
Based on the violations observed during the inspection and pursuant to their reply, the Whole Time Member, SEBI in accordance with 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 appointed the undersigned as the Adjudicating Officer vide Order dated March 15, 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 April 16, 2004, Ref. No.- IVD/PKN/SRP/7476/2004 based on Order of 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 June 14, 2003 on the findings of inspection had been taken on record.
The member broker replied to the show cause notice vide letter dated May 3, 2004. As requested by them, an opportunity of personal hearing was granted on September 27, 2004 at Mumbai office of SEBI. As they requested for a hearing in Chennai office of SEBI, they were advised vide letter dated October 15, 2004 to make additional submissions, if any, along with supporting documents; their comments on specific issues were also sought. They sent further detailed replies vide letters dated October 19, 2004 and October 21, 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 each of the alleged violation committed by the member broker as per Order and show cause notice are as follows:
a) Acted as an unregistered sub-broker 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 (xiv) of the SEBI (Stock brokers and sub-broker) Regulations, 1992 (hereinafter referred to as the “Regulations”).
According to inspection report, the member broker acted as an unregistered sub-broker on behalf of clients through brokers M/s Rajnarayan Capital Services Ltd., M/s Mangal Keshav Securities Ltd., M/s Prerang Financials and M/s Aldan Investments Pvt. Ltd.
The member broker has explained that they have been a stock broker of Madras Stock Exchange since 1988. They were initially dealing with M/s Rajnarayan Cap. Mkts. Serv. Ltd. as a registered sub-broker. Due to some internal problems M/s Rajnarayan Cap. Mkts. Serv. Ltd. stopped operations in Chennai office and they were forced to deal with M/s Mangal Keshav and M/s Aldan Inv. as stop gap arrangement. This was done to facilitate their clients. Subsequently, when MSE Financial Services Ltd. started to function, they routed all their transactions through them. They also enclosed copies of certificates of registration dated 20.3.2001 and 30.8.2000 issued by SEBI for dealing with M/S Rajanarayan Capital and MSE Financial Services, respectively.
They further stated that after receipt of aforesaid SEBI inspection report they had stopped dealing with M/s Mangal Keshav and M/s Aldan Inv. Vide letter dated October 21, 2004, they also stated that they put through trading with these brokers on their behalf and their close relatives and associates. They also explained that M/s Prerang Financials was not a broker but was their client.
The undersigned finds that the member broker acted as un-registered sub-broker of aforesaid stock brokers and stopped business only after SEBI inspection report. They have violated the provisions of the Act, Rules and Regulations and directives issued by SEBI from time to time. According to the member broker they had done transactions with M/S Rajanarayan Capital during 2000-01 amounting to Rs. 76 crore. The undersigned finds that they got registration as a sub broker on March 20, 2001 only. Thus they acted their unregistered sub broker during the year.
Regarding allegation that the member broker acted as unregistered sub-broker to M/s Prerang Financials, in the absence of any further details on this aspect in the inspection report, the undersigned gives benefit of doubt to the member broker.
b) Dealt with clients who in turn act as sub-brokers without registration in violation of Section 15HB of the Act read with Regulation 26 (xiv) of the Regulations
As per the inspection report, the member broker had dealt with M/s Shah & Co., executing orders for their clients on NSE. The said firm was not registered as a client with the member broker but was a registered sub-broker of two other brokers.
The member broker admitted to having placed orders with M/s Shah & Co., Member MSE, with the knowledge and instruction of their clients. By oversight they had generated contract notes for the transactions executed by them. They further stated that total volume done by the member broker was meagre. After receipt of inspection report they had stopped dealing with them.
The undersigned observes that the member broker failed to follow the aforesaid provisions of Regulations. Their total volume of business with M/s Shah & Co. amounted to Rs. 4.09 crore over a period of time.
c) Indulged in off the floor transactions in violation of Section 15HB of the Act read with Regulation 26 (xv) and 26 (xvi) of the Regulations;
As per the inspection report, the member broker had entered into off the floor transactions to the tune of more than Rs.200 crore, through 3 members namely M/s Rajanarayan Capital Market Services, M/s Prerang Financials and M/s Aldan Investments Pvt. Ltd. The inspection report also indicated that the total volume of off the floor transactions with M/s Rajnarayan Capital was Rs.180.94 crore, M/s Aldan Inv. Pvt. Ltd – Rs. 108.34 crore and M/s Prerang Financials - Rs. 0.95 crore, during the period of inspection.
The member broker stated that for the year 2000-01 their total volume of transactions with M/s Rajnarayanan Capital Market Services was Rs.76.38 crore and they did not have any off the floor transactions with M/s Aldan Investments Pvt Ltd. For the year 2001-02 they had erroneously reported turnover with M/s Rajanarayanan Capital Market Services as Rs. 104.56 crore whilst their actual turnover was only Rs.10.45 crore. Similarly for the same year their actual turnover with M/s Aldan Investments Pvt Ltd. was erroneously reported as Rs.106.23 crore whilst it was only Rs.10.61 crore. As advised to them by the undersigned, they produced auditor’s certificate to this aspect vide letter dated October 21, 2004. They also stated that once M/s MSE Financial Services Ltd, commenced their operations, all their business was routed through them. Subsequently they also stated that only the member brokers are required to report their transactions to the Exchange whereas they acted as a sub-broker.
The undersigned has accepted their explanation about the actual turnover as per auditor’s certificate. However, it is clear from the above that the member broker while dealing for the clients did not report their transactions to the Exchange and for a certain period they were not even registered sub brokers and thus committed aforesaid violations.
d) Not maintained basic statutory books viz Order book, Margin Deposit Book in violations of Section 15HB of the Act read with Regulation 26 (iii), 26(xv) and 26(xvi) of the Regulations.
As per the inspection report, the member broker does not maintain order book and margin deposit book.
The member broker stated that they had not maintained order book since their clients placed orders on phone and took confirmation immediately. They also maintained Kachcha order book. Orders given by the clients who come to their office are entered directly on the trading system. They also submitted that they would maintain the order book in the future. Similarly they have rough register to note the margin deposits.
The undersigned has given benefit of doubt to the member broker in respect of order book. However, in case of margin deposit book, the member broker has violated the aforesaid provisions of Regulations particularly during the period when they were acting as a member broker and not registered as a sub broker.
e) Failed to maintain deposit of minimum margin by clients in violation of Section 15HB of the Act read with Regulation 26 (xv) and 26(xvi) of the Regulations.
As per the inspection report, the member broker failed to collect upfront margins from some of the clients whose positions exceeded prescribed limits. Further, the member broker failed to maintain a deposit of minimum margins of not less than 10% of net open position of the clients at any point of time. They also did not furnish auditor’s certificate on quarterly basis to the affiliated broker to this effect, as required under SEBI directives. Some instances of non-collection of margins have been given in the inspection report.
The member broker has stated that they had retained securities of clients in lieu of margins as per clients’ instructions. They also gave details of securities of three clients as stated in inspection report and also produced their consent letters for retaining the securities. Hence, they collected the margins from the clients.
The undersigned finds only a few such instances in inspection report (of course these were taken on sample basis). However, the member broker should have shown these documents/details of securities at the time of inspection. Also, they did not submit certificate to the main broker on quarterly basis and thus violating the aforesaid provisions of Regulations.
f) Delayed payment of monies/deliveries of securities to clients in violation of Section 15HB of the Act read with Regulation 26 (vi) of the Regulations.
As per the inspection report, there were instances of delays in making delivery or payments to clients - beyond 48 hours from date of pay-outs as required under SEBI directive. The report also gives 7 specific instances of such clients.
The member broker informed at the time of inspection that most of the client accounts were running accounts and consent had been obtained from them for retention of scrips for future transactions or towards margins. However, the inspection report also states that the member broker could not produce copies of the consent letters from clients to substantiate their claim.
While replying to show cause notice, the member broker forwarded letters of authorization from 7 clients to retain securities or to withhold funds from payout. As per report, there are no complaints from the investors. It is felt that the member broker should have produced copies of consents from clients at the time of inspection.
g) Failed to obtain/maintain client registration forms/client database in violation of Section 15HB of the Act read with Regulation 26 (xii), 26(xv) and 26 (xvi) of the Regulations.
As per the inspection report, though the member broker had entered into client registration forms, the agreements with the clients have not been made in legally valid stamped documents. In many cases, the basic details like PAN/GIR numbers have not been obtained.
The member broker stated in their letter dated June 14, 2003 that they had maintained agreements in plain paper but now were making fresh agreements in stamp paper from all their clients. Also, they were in the process of obtaining the PAN/GIR numbers from the clients. Subsequently they also stated that these requirements are not mandatory and they had obtained other documents in place of PAN/GIR.
The above shows that the member broker could not take corrective steps in spite of lapse of considerable time period.
h) 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.
As per the inspection report the member broker was maintaining only one bank account for receipts and payments pertaining to both the member broker and clients in violation of SEBI circular SMD/SED/CIR/93/23321 dated 18.11.93 and code of conduct prescribed under Regulation 15 read with Schedule II of the Regulations. Also, they have utilized this account for meeting various expenses and thus there was no clear segregation of clients’ funds from own funds of the member broker.
The member broker stated that they were maintaining the clients’ accounts with Bank of Baroda, E C Street Branch and their own account with Bank of Baroda, Egmore branch. Their OD account was maintained with Bank of Baroda, E C Street for Rs. 25 lakh and there is no question of utilizing clients’ money. Also that at any point of time their realized brokerage was more than expenses incurred by them out of consolidated bank account. They further stated that this was also stopped after the findings of inspection and now they maintain proper segregation of clients’ funds and own funds. Subsequently, they also stated that the requirement was not mandatory for sub brokers.
The undersigned finds that there was no strict segregation of clients’ funds and own funds during the period of inspection. The member broker is also a member broker of the Exchange and they were not registered as a sub broker for a certain period. Their view that the requirement was not mandatory is not accepted. However, it is observed from the inspection report that the amount used for various types of expenses during the period selected on random basis is not substantial.
i) Delayed/Not paid margins/pay-in-dues in violation of Section 15 HB of Act read with Regulation 26 (xv) and 26(xvi) of the Regulations;
As per the inspection report the member broker had failed on 17 occasions to meet their margin obligations and had delayed in meeting pay-in dues on 4 occasions during the period selected on random basis and thus violating code of conduct.
The member broker has denied the allegation stating that they have given mandate to MSE Financial Services to debit their bank account as and when liabilities arise on account of margin/ pay-in which they have fulfilled without default till date. In response to show cause notice, they also forwarded 2 letters from Madras Stock Exchange and MSE Financial Services Ltd. stating that no investor complaints were pending against them, no amount was due to them and there was no delay in the payments.
Madras Stock Exchange and MSE Financial Services have also informed SEBI separately that during the years 2001-02 and 2002-03 there were no defaults/delays by the member broker in payment of settlement dues and margins in respect of transactions done on the Exchange. In view of this, the undersigned has accepted explanation of the member broker.
j) Indulged in direct client matching transaction (off the floor transactions/cross deal) in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;
As per the inspection report the member broker had directly matched the purchase and sale transactions between clients without routing the same through the main broker M/s MSE Fin. Services with whom the member broker was affiliated and thus violating code of conduct. The report also gives 3 specific cases as instances.
The member broker has stated that only a few transactions were done out of 20000 contracts executed and were done only with a view to protect clients interest. They also stated that one scrip had hit the circuit breaker on 5.5.03 and their clients who wanted to buy and sell at that price, could not have done so if the deal was put through the system. They had not derived any direct or indirect benefit from any of the transactions.
The undersigned observes that there are only a few such transactions.
k) Evaded trading limits and exposure limits in violation of Section 15 HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
As per the inspection report, the member broker had evaded margin requirements and trading limits by trading through M/s Aldan Inv. Pvt. Ltd. as an unregistered sub-broker. The volume transacted through M/s Aldan Inv., Member BSE, was in excess of Rs.108 crore in a 2 year period from 2001-2003.
The member broder stated that M/s Rajnarayan Capital Markets Ltd. with whom they were dealing had suddenly closed their Chennai office and keeping their clients’ interest, the member broker was forced to deal with M/s Aldan Inv. Pvt. Ltd. and M/s Mangal Keshav Sec. The member broker further stated that the total turnover done with M/s Aldan Inv. during the period from 2001-02 was only Rs.10 crore and not Rs.106.23 crore which was wrongly reported earlier. The said transactions carried out on NSE were not to evade any trading rule.
The undersigned observes that this issue has been dealt with earlier.
l) 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;
m) 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 points a to k indicate that the member broker failed to comply with directions issued by the Board and did not exercise due skill care and diligence in their operations.
5. IMPOSITION OF PENALTY
Keeping all above in view, the undersigned finds that there were certain deficiencies and irregularities in the systems and procedures of the member broker who 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, 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 for certain violations as described in detail earlier 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, the undersigned hereby imposes a penalty of Rs. 100,000 (Rs. One Lakh only) upon the member broker, M/s Kasthurirangan & Co.
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 2, 2004 |
P K NAGPAL |
| Place: Mumbai |
Adjudicating Officer |