ADJUDICATION ORDER IN RESPECT OF M/S LAKSH SHREE FINANCIAL SERVICES LTD.– SUB BROKER TO OTCEI SECURITIES LTD., MEMBER NSE 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 Laksh Shree Financial Services Ltd., Sub Broker to OTCEI Securities Ltd., Member NSE (hereinafter referred to as Sub-Broker) (INS 230597333), 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 section 15 HB of the SEBI Act.
2. NOTICE
Pursuant to this a notice dated May 26, 2004 under Rule 4 (1) of the said rules was issued to sub-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 till date. The said inspection report had already been communicated to the sub- broker vide letter dated February 27, 2004.
3. REPLY
The sub-broker replied to the notice vide letter dated 17th June,2004 stating that it has already surrendered sub brokership of OTCEI securities Ltd. & SEBI Registration and SEBI has cancelled their sub-brokership also w.e,f. 19.02.2004 as per NSE letter to OTCEI. It was also stated that no claim and any grievances has been registered against them.
4. PERSONAL HEARING
The personal hearing in the matter was granted to the sub-broker on 4th November, 2004 at Northern Regional Office, SEBI at New Delhi vide notice dated October 29, 2004. Shri Chander Prakash Jain appeared and made submissions on behalf of the sub- broker. A letter dated 02.11.2004 was submitted during the course of hearing. Subsequent to the hearing further submissions were made vide letter dated November 5, 2004.
5. FINDINGS AND CONCLUSIONS
In view of the above, I now deal with the submissions made by the sub-broker before me for the purpose of this adjudication.
(a) The sub-broker has not maintained Order Book in violation of Section 15 HB of Securities & Exchange Board of India Act 1992 read with Regulation 26 (xv) and 26 (xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
The sub-broker has stated that maintenance of Order Book was not possible as the clients were mainly conducting the business through phone only. Though the sub-broker should have maintained the Order Book, keeping in view the explanation of the sub-broker I do not take a serious view of this lapse.
(b) The sub-broker has failed to maintain client data base 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) Regulations, 1992.
The sub-broker has submitted that they have sent the client data base with unique client code I.D. to NSE before inspection, hence has denied the allegation that that they have not maintained the client data base.
From the inspection report I have noted that the sub-broker has not entered into the agreement with most of the clients and the inspection team was provided with agreements entered with only 7 clients and none of them complied with all the requirements of “know your client” as laid down in the rules and regulations of the exchange. I also note from the inspection report that on much pursuance by investigating team, they were not shown the missing client agreements. As the sub-broker has not submitted any documentary evidence to suggest that it has entered into agreements with all the clients, I find that sub-broker has not complied with the requirements.
(c) The sub-broker has delayed delivery of securities to the 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) Regulation 1992.
The sub- broker has submitted that as they were the sub-broker, they could not have a ‘pool account’ with the depository and due to that the shares were credited in their beneficiary account. Besides due to T+2 settlement mechanism the clients were getting their shares transferred and the written instructions were given by the clients towards the same. It has been claimed that a photocopy of these instructions were provided to the inspection team. It has also been stated that as every transaction used to cost Rs.18/-, the transfer of shares was being accorded as per the instructions of the clients.
I have noted from the inspection report that the consent letters from clients for delayed transfer were not taken by the sub-broker. It appears from the inspection report that one major reason for this lapse could have been heavy DP charges & no online DP in Merrut from where the sub-broker was operating. The cases mentioned in the inspection report also do not appear to be of high magnitude. Besides, there is no investor complaint. Hence on the issue of delayed delivery of securities to the clients I accept the reply of the sub- broker in order.
(d) The sub-broker has not passed on corporate benefits to 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) Regulation 1992.
The sub-broker has submitted that they have credited all the benefits to the account of the clients by debiting their bank account and has denied the allegation that they have not passed on the corporate benefit to the clients.
From the inspection report it has been noted that during the year 2001-02 dividend amount of Rs. 2162/- has been transferred to the brokerage account of the sub-broker. Hence I do not find the explanation of the sub-broker satisfactory.
(e) The sub-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 and had 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.
As no specific violation has been brought out in the inspection report in this regard, no finding are been made.
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 sub-broker and it 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 sub-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. 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 sub-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 sub- broker. However, as for the reasons stated above the monetary penalty needs to be imposed on the broker.
7. ORDER
The submissions of the sub-broker 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 penalty under section 15 HB 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 Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.15,000 (Rupees Fifteen Thousands) on the sub-broker. The member shall pay this amount of penalty of Rs. 15,000/- 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 Ms. Usha Narayan, 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 sub- broker and a copy is submitted to the Board.
| Date: NOVEMBER 17, 2004 |
P.K.BINDLISH
|
| Place: Mumbai |
Adjudicating Officer |