ORDER OF ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S SINGHI FINLEASE PVT LTD, MEMBER, BgSE, SEBI REG. NO INB81068331 READ WITH SECTION 15A(c), 15B, 15HB, 15F(a) & (b) OF THE SEBI ACT, 1992
I was appointed as Adjudicating Officer by SEBI vide order dated 1st December 2003 and 11th February 2004 to inquire into and adjudge under Section 15A(c), 15B, 15HB, 15F(a) & (b) the irregularities arising from the inspection of M/s Singhi Finlease Pvt Ltd, Member, BgSE (hereinafter referred to as ‘broker’) for the years 2000-2001, 2001-02 and for the period 1.4.2002 to 19.8.2002.
SHOW CAUSE NOTICE AND REPLY
Accordingly, a show cause notice dated 15th June 2004 was issued to the broker. The broker submitted the reply vide his letter dated 29th June 2004.
Shri Ralph C Robert appeared on behalf of M/s Singhi Finlease Pvt Ltd and made submissions in support of the reply dated 29.6.2004. In terms of Rule 4 of Sebi (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules 1995, the nature of allegations were explained to the party. The allegations and the reply thereto are as under:
Charge
1) It is alleged that the broker had not maintained the following books of accounts which is in violation of Regulation 26(iii) of SEBI(SB & SB) Regulations, 1992 which makes him liable for penalty under Section 15A(c) of SEBI Act, 1992 :
a) Sauda Book
b) Documents Register
c) Member’s Contract book
d) Contract notes
e) Written consent of the clients in respect of contracts entered into as principals
f) Margin deposit book
Reply
It was submitted that the broker has commenced business from Dec’99 onwards and most of the violations took place in the initial 4 months due to inexperience. It was further submitted that most of the trades are proprietary in nature and there was little business for the clients and there was no client transactions from Apr’00 onwards. Therefore, maintenance of all the books was not practically required.
Charge
2) It is alleged that the broker had not issued contact notes to any of the clients for the transactions done on their behalf. He had also not issued contract notes in Form B to the clients when the broker acted as principal. This is in violation of Regulation 26(v) of SEBI(SB & SB) Regulations, 1992 and makes the broker liable for penalty under Section 15F(a) of SEBI Act, 1992.
Reply
As submitted earlier there was no client related transactions since Apr’00 onwards. Even prior to that the client transactions were few restricted to close friends and relatives for whom contract notes were issued.
It was admitted that Form B contract notes were not issued to the clients as specified in the Show Cause Notice for charge no.2.
Charge
3) It is alleged that the broker had not made payments to the clients within 48 hours of relevant payout as detailed in the show cause notice which is in violation of Regulation 26(vi) of SEBI (SB & SB) Regulations, 1992 and makes the broker liable for penalty under Section 15F(b) of SEBI Act, 1992
Reply
While admitting that there was delay in credit of funds to the three clients in 4 instances as stated in the show cause notice, it was however submitted these clients were close friends and relatives who have not raised any objections.
It was admitted that there was delay in delivering securities to the clients as stated in the show cause notice. However, it was submitted that the clients had no problems in this regard and most of the clients are close friends and relatives.
Charges
4) It is alleged that the broker had not maintained the client database for any of the clients which is in violation of Regulation 26(xv) of SEBI(SB & SB) Regulations, 1992 and liable for penalty under Section 15HB of SEBI Act, 1992 .
5) It is also alleged that the broker had not maintained the client registration forms for any of the clients which is in violation of Regulation 26(xii) of SEBI(SB & SB) Regulations, 1992 and liable for penalty under Section 15HB of SEBI Act, 1992.
6) It is further alleged that the broker had not maintained the client agreement forms for any of the clients which is in violation of Regulation 26(xii) of SEBI(SB & SB) Regulations, 1992 and liable for penalty under Section 15B of SEBI Act, 1992.
Reply
It was submitted that the total client transaction were very few and most of the clients were friends and relatives and in any case there was no client business from Apr’00 onwards. Much of the trades are proprietary in nature. Hence, client database, KYC and member client agreement were not obtained.
APPRECIATION OF EVIDENCE AND FINDINGS
Non-maintenance of statutory books and registers
Admitting that the broker had not maintained the following books and registers, it was submitted that as there were no trading on behalf of clients since April 2000 and the irregularities relate to initial four months when the broker had commenced business:
a) Sauda Book
b) Documents Register
c) Member’s Contract book
d) Contract notes
e) Written consent of the clients in respect of contracts entered into as principals
f) Margin deposit book
The details of proprietary and client trades submitted vide the broker’s letter dated 23rd July 2004 is as under:
|
|
1999-2000
|
2000-2001
|
2001-2002
|
2002-2003
(till June 25, 2003
|
|
Number of clients
|
66
|
1
|
NIL
|
NIL
|
|
Number of client
Transactions
|
149
|
4
|
NIL
|
NIL
|
|
Value of client transactions
|
64,867,456.50
|
2,516,036.00
|
--
|
--
|
|
Value of Proprietary Transactions
|
722,740,212.75
|
100,683,653.70
|
7,821,517.65
|
1,506,917.67
|
|
Value of both 3&4 above
|
787,607,669.25
|
103,199,689.70
|
7,821,517.65
|
1,506,917.67
|
|
Percentage of client transactions
|
8.24%
|
2.44%
|
0.00%
|
0.00%
|
|
Percentage of proprietary transactions
|
91.76%
|
97.56%
|
100.00%
|
100.00%
|
While it may be that there are no client trades since April 2000 as claimed, it may be seen that for the period of inspection the client transactions are to the tune of Rs.64,867,456.50 for financial year 1999-00 and Rs.2,516,036 for the financial year 2000-01. For a single client in the financial year 2000-01, in four transactions, the amount is quite substantial as can be seen from the above table.
In view of the above, it is not correct to contend that maintenance of the aforesaid books and registers is not practically necessary. Some of the books such as sauda book, written consent for acting as principals, margin deposit book, contract notes, etc. are important books which are required to be maintained mandatorily to facilitate any inspection or investigation into the transactions in securities. These are statutory books which are required to be mandatorily maintained as per Rule 15 of SCR Rules, 1957 and the non-compliance would attract Regulation 26(iii) of SEBI (SB & SB) Regulations, 1992 and Section 15C of SEBI Act, 1992.
Non-issuance of Contract Notes
Similarly, for non-issuance of contract notes the broker had submitted that as majority of the trades are proprietary trades, no contract notes were issued and there were few clients transactions for which contract notes are stated to have been issued. It was however admitted that in respect of the following clients contract notes in Form B were not issued.
|
Client Name
|
Date of Transaction
|
Scrip
|
Qty
|
|
Sushil Singhania
|
20.12.99
|
ITC
|
1005
|
|
Suman Goyaul
|
20.12.99
|
ITC
|
250
|
|
Deepak Goyal
|
20.12.99
|
ITC
|
248
|
|
Rathan Goyal
|
20.12.99
|
ITC
|
255
|
|
Rakhee Goyal
|
20.12.99
|
ITC
|
252
|
|
Sangeetha Surana
|
20.12.99
|
ITC
|
290
|
|
Pinky Surana
|
20.12.99
|
ITC
|
290
|
|
Rekha Surana
|
20.12.99
|
ITC
|
140
|
As already seen earlier in the table furnishing the proprietary and clients trades of the broker, the clients trades although stated to be absent from April 2000 were nevertheless significant prior to the said period. The non-issuance of contract notes cannot be treated as technical violation. Contract notes is a primary document evidencing the contract between the parties. In the absence of a proper contract note, the client does not have any recourse in law to enforce the obligations arising out of the transaction. There would be difficulties in resolving the disputes in the absence of a valid contract note or for reference of dispute to the arbitration by the stock exchange. In view of the above, it is concluded that the member was not issuing the contract notes in the manner specified by SEBI which is in violation of Circulars dated 11/02/1999, 11/04/1997 and 18/11/1993. The broker is also not in order in not issuing contract notes in Form B to the aforesaid clients.
Delay in making payments to clients and delay in delivery of securities
It is admitted that in the following cases there was delay in making payments to the clients. As per the Regulations, the payment has to be made within 48 hours of the pay-out. However, it was submitted that the clients are close friends and relatives who did not raise any objections.
|
Name of the client
|
Amount Due
|
Date of credit to members account
|
Date of Credit to clients a/c
|
Amount of credit.
|
|
Balchand Chhajer
|
1,07,158.50
|
18.02.00
|
15.03.00
|
1,07,160.00
|
|
Sanjay Kumar Chhajer
|
1,07,158.50
|
-do-
|
-do-
|
-do-
|
|
Sandeep Kumar Chhajer
|
90,850.32
|
-do-
|
18.03.00
|
90,852.00
|
|
Dilip Kumar Bafna
|
1,00,900.32
|
-do-
|
22.03.00
|
100,902.00
|
Similarly, it was also admitted that there was delay in delivering securities to the clients as under:
|
Client Name
|
Settl . No. & Date
|
Scrip & Qty
|
Date of credit to Member’s A/c.
|
Due date of credit to client a/c
|
Actual date of credit to client a/c.
|
|
Meena Kumari
|
44/ 31.01.00
|
Silverline 115
|
31.01.00
|
02.02.00
|
Retained by member
|
|
Pukhraj
|
-do-
|
Silverline
85
|
31.01.00
|
02.02.00
|
-do-
|
|
Pushpa Devi
|
44/ 31.01.00
|
Silverline 95
|
31.01.00
|
02.02.00
|
-do-
|
|
Shoba Devi
|
-do-
|
Silverline 95
|
31.01.00
|
02.02.00
|
-do-
|
|
Chandrika Devi
|
44/ 31.01.00
|
Silverline 95
|
31.01.00
|
02.02.00
|
-do-
|
|
Abhayamathi
|
44/ 31.01.00
|
Silverline 115
|
31.01.00
|
02.02.00
|
-do-
|
|
Rekha Devi
|
- do -
|
Silverline 115
|
31.01.00
|
02.02.00
|
-do-
|
|
Dungarmal
|
- do -
|
Silverline 85
|
31.01.00
|
02.02.00
|
-do-
|
|
Ummedmal
|
- do -
|
Silverline 85
|
31.01.00
|
02.02.00
|
-do-
|
|
Bharat Kumar
|
- do -
|
Silverline 115
|
31.01.00
|
02.02.00
|
-do-
|
From the aforesaid table it can be seen that in all the instances cited the delivery was not made to the clients although the same was due on 2nd February 2000. The shares were retained by the broker. There is no material to suggest that the parties themselves have authorized the broker to retain the shares. Neither such averment was made nor is there any supporting authorization letters from the parties in this regard. This delay in delivery of securities is against the obligation of the broker to deliver securities within 48 hours of the payout which is not in consonance with SEBI Circular SMD/SED/CIR/93/23321 dt 18.11.1993. Similarly, as regards payment to be made to the client, there was a delay of more than 48 hours in making payments to the clients. In the instances cited in the aforesaid table, while the credit to the broker’s account was made on 18th February 2000, the credit to the clients account was made almost a month thereafter on the dates specified against each of them. This delay is not satisfactorily explained nor there is any material to suggest that the clients have authorized the broker to retain the funds. No such authorization letters are there either.
Non-maintenance of clients data base, client registration forms and member client agreement forms
Since clients business was nil from April 2000 onwards and much of the trades are proprietary in nature, client database, KYC and member client agreements were not obtained. As already seen earlier in the table furnishing the proprietary and clients trades of the broker, the clients trades although stated to be absent from April 2000 were nevertheless significant prior to the said period.
Client identification is important since that makes it easier for the audit trail to identify the clients behind the transactions. Details like bank account, PAN number, introducer etc would establish the credentials of the clients and would be relevant to determine whether the member had acted in good faith and without negligence before doing business for a client. These are important documents which will help the Exchange/Regulator during inspection and investigation to ascertain the antecedents of the clients and whether rules were followed in opening an account for client funds. Failure to obtain the client registration forms and entering into member client agreement forms, etc. is in contravention of SEBI Circular SMD/POLICY/Cir/5-97 dated 11th April, 1997.
ORDER
Having regard to the gravity of the charges established, the submissions made and the factors contained in Section 15J of the SEBI Act, 1992, I hereby impose the following penalty on M/s Singhi Finlease P Ltd, Member, BgSE:
|
Nature of violation
|
Penal Provision
|
Penalty Amount
|
|
1. Non-maintenance of statutory books
|
Section 15A(c)
|
Rs.50,000/-
|
|
2. Not issuing of contract notes
|
Section 15F(a)
|
Rs.25,000/-
|
|
3. Failure to obtain client registration form & enter into agreements with the clients
|
Section 15HB & Section 15B
|
Rs.10,000/-
|
|
4. Delay in payment of funds/delivery of securities
|
Section 15F(b)
|
Rs.15,000/-
|
Total Rs.1,00,000/-
(Rupees one lakh only)
The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” and payable at Mumbai, may be sent to Smt Usha Narayanan, Chief General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
| Date: NOVEMBER 1, 2004 |
S V Krishna Mohan |
| Place: Mumbai |
Adjudicating Officer |