ADJUDICATION RELATING TO
M/S. MANI & CO., SUB BROKER
AFFLIATED TO 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 Mani & Co., (herein referred to as the “member broker”) having SEBI registration No. INS010699317 is a member of Madras Stock exchange and a sub broker affiliated to MSE Financial Services Ltd. (INB011116931) member of the Stock Exchange, Mumbai (BSE). 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 2001-02, 2002-03 and for a short period after April 2003. The findings of inspection containing details of irregularities and violations of various provisions of SEBI Act, the rules and regulations made there under 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 19, 2003.
2. ADJUDICATION PROCEEDINGS
Based on the violations observed during the inspection, and pursuant to the member broker’s reply the Whole Time Member, SEBI has, in the powers conferred upon him under Section19 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 22, 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, No.:IVD/ID1/PKN/SRP/7475/04 based on the 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 him in view of the alleged violations. It was also mentioned in the show cause notice that their earlier reply to SEBI of June 19, 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. An opportunity of personal hearing to the member broker was also granted on September 21, 2004. However, the member broker vide their letter dated September 14, 2004 requested for considering the case with the material facts already submitted by them.
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 show cause notice are as follows.
a. Acted as unregistered sub-broker in violation of Section 15HB of the Securities and Exchange of India Act, 1992 (hereinafter referred to as the “Act”) read with Regulation 26(xiv) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”)
As per the inspection report it has been observed that the member broker was dealing with a NSE member M/s. Venkataraman & Co. without valid registration from SEBI in violation of Rule 3 of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992 and the circular issued on January 16, 1998.
The member broker has explained that their transactions in the MSE, of which they are a member, had practically started dwindling to a large extent during the beginning of the year 2000-01 and they had to carry out the business in the interest of their survival and that of clients. During this period they could not find any NSE member who was willing to take them as registered sub broker resulting in their transactions with M/s. Venkatraman & Co., without being a registered sub broker. After their trading in BSE picked up during the subsequent periods from the beginning of 2002-03 onwards through MSE Financial Services, their trading as unregistered sub broker with M/s. Venkatraman & Co. had come down almost to nil (their gross volume was Rs. 9 crore in 2000-01 which came down to Rs. 61 lakhs in 2001-02 and mere Rs. 980 in 2002-03) and have stopped sub broking with any NSE member.
It is clear from the above that the member broker acted as unregistered sub broker in violation of aforesaid Regulations.
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 has failed to ensure that their clients do not in turn act as sub brokers without registration from SEBI. The member broker was dealing with a firm in the name and style of M/s. Sri Vari Consultants and executing orders for the clients of the said entity. For such an arrangement, the member broker has entered into an agreement with the said entity on 29. 7.02, that categorically states that the said entity would like to purchase and sell shares through the BSE BOLT terminal of the member broker on behalf of its clients subject to various conditions contained therein. One of the conditions for such an arrangement was that they would charge a maximum brokerage of 0.90% out of which 0.40% would be paid to M/s. Sri vari Consultants as business commission. Further, all correspondence including the contract notes, statement of accounts, cheques, deliveries etc. would be collected from the member broker.
The member broker has submitted that the clients of Sri Vari consultants placed orders directly with them and contracts were issued only by them and payments were made / received directly to / from those clients. Brokerage of 0.40% has been paid to them as business commission for providing assistance by them in bringing clients to the member broker and not as a sub brokerage to them.
The undersigned has noted from the inspection report that the confirmation memos are not in turn issued by M/s. Sri Vari Consultants to their clients (as done by sub brokers) and also that the contract notes and cheques were issued by the member broker. However, Sri Vari Consultants should get registered as sub broker in accordance with the provisions of SEBI Act and rules and regulations made thereunder.
c. Indulged in off the floor transactions in violation of Section 15HB of the Act read with Regulations 26(xv) and (xvi) of the Regulations
As per the inspection report, the member broker has indulged in off the floor transactions. The member broker had not reported any of the transactions executed by them through a member of the National Stock Exchange viz. M/s. Venkataraman & Co. for the periods 200-01, 01-02, 02-03 in Madras Stock Exchange (as mentioned earlier).
The member broker has submitted that during the year 2000-01, they had reported “off the floor” transactions done during the first four months of the year to the MSE vide their letter dated 9th August 2000. However, due to oversight they have omitted to report such transactions to MSE during the subsequent period. Even when such transactions were not reported to MSE, they had always included the income derived from such transactions in their P&L A/c and Balance Sheet submitted to the concerned statutory authorities. Further such “off the floor” transactions by the member broker had virtually come down to nil from the beginning of the year 2002-03.
It is clear from the above that the member broker did not report their transactions to the Exchange as required under the Regulations.
d. Not maintained Order Book in violation 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 has not maintained the basic statutory books viz. Order book.
The member broker has stated that during the functioning of the “outcry system” on the floor of the Exchange they had maintained an Order book to enter the orders received from clients by telephone or in person mentioning therein the quantity, name of the scrip, rate, etc. However, after commencement of on-line trading system whenever they received any order from their clients, either through telephone or in person, they used to feed the online computers the particulars of orders received and did not feel any need to register the orders received in an order book.
The member broker has further submitted that after the inspection they have started maintaining such an order book.
The undersigned has noted the contentions of the member broker and subsequent compliance.
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 has not collected margins from the clients and has not furnished the auditor’s certificate on quarterly basis to MSE Financial Services Ltd. as required.
The member broker has explained that during the previous years no net positions of the transactions of any client done during a single day had exceeded Rs.5 lakhs and as such no margin was collected from any client during the previous years. This fact was reported on a quarterly basis to MSEFSL. They also enclosed compliance officer’s letter dated April, 2004 submitted to MSEFSL in this regard.
SEBI Circular stipulates that at any point of time a member is expected to maintain at client’s level a minimum of 10% of their net outstanding position as margins. The member broker has not given details on this aspect. Further, MSE Financial Services Ltd. has clarified to SEBI vide letter dated October 28, 2004 that the sub broker during the financial years 2001-02 and 2002-03 have submitted a self certification to them in respect of collection of margins from their clients only for the quarters ended December 31, 2002 and March 31, 2003. Thus it is clear that the member broker was not submitting any auditors’ certificate to their main broker as per requirement.
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 it has been observed that the member broker has not transferred the scrips / funds to the clients’ accounts within the mandatory period of 48 hours from the date of relevant delivery/ payout date and instead the same is retained in the member broker’s account. This is in violation of SEBI directive issued on November 18, 1993.
At the time of inspection, the member broker explained that most of their clients’ accounts are running accounts, and consent had been obtained from the clients for the retention of the scrips for future transactions or towards margins. However, the member broker could not produce the copies of the consent letters so obtained from the clients to substantiate their claim. In case of 7 clients the scrips had been retained and not delivered within the stipulated time period and there was delay in the payments by the member broker to 4 clients.
The member broker has submitted in response to show cause notice that the transfer of the scrips/payments to the clients accounts within the mandatory period of 48 hours from the date of receipt has been done in all cases except in the case of clients who had orally authorized them to hold the funds/securities on their behalf and transfer funds /securities only upon their instructions. They have obtained written instructions from such clients who desire such a delayed action. They enclosed copies of the instructions received from clients mentioned in the inspection report.
The member broker should have obtained these copies of consent letters at the time of trading itself and should have produced them at the time of inspection. However, as per inspection report, there are no complaints from investors and there are a small number of instances and small amount of delays. The member broker should have exercised adequate due diligence.
g. Delayed/not paid margins/ pay-in dues 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 has delayed / failed to make payments towards margin and pay in dues to the Exchange. It has been observed during the inspection that there are instances where margin money has not been paid to the Exchange by the member broker.
The member broker has submitted that in some instances as sighted in the inspection report margin money could not be paid to the Exchange owing to shortage of funds. They have now ensured that no such failure / delay take place in paying the margins due to the Exchange.
It is clear from the above that by failing to pay the margins within the due dates, the member broker has violated the Code of Conduct and the aforesaid provisions of the Regulations.
h. Aided and abetted in evasion of margins 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 has been dealing with another member of the Madras Stock Exchange (MSE) “Rajagopalan and Co.” on Principal and Agent basis and aided and abetted in evasion of margins.
The member broker has explained that they were doing such transactions only in their capacity as an individual and not as a sub broker and as such they had not aided or abetted in evasion of margin by anyone. In response to show cause notice, they have also submitted a copy of the letter of Rajagopalan & Co., explaining their position that they dealt with the member broker as investor and not as a sub broker.
There are no other facts available on this aspect in inspection report and hence the benefit of doubt is given to the member broker.
i. Failed to comply with directions issued by the board in violation of Section 15 HB of the Act read with Regulation 26(xv) of the Regulations
j. Not exercised due skill, care and diligence in violation of Section 15 HB of the Act read with Regulation 26(xvi) of the Regulations
By not complying with the provisions of Regulations as mentioned above, the member broker has failed to comply with directions issued by the Board and has not exercised due skill, care and diligence in their operations.
The member broker has stated that they are now exercising due skill, care and diligence so that such violations are not repeated. They have further stated that during their 15 years of working as a member of MSE, they had not faced any investor complaints, arbitrations or disciplinary actions.
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 who has failed to strictly comply with the provisions of SEBI Act and rules and regulations made thereunder and directions issued by SEBI and has not exercised adequate due skill, care and diligence in their operations. However, the member broker also reported that they initiated corrective steps after the inspection.
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 and 15F(a) 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. Mani & 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.
P K NAGPAL
Adjudicating Officer