ADJUDICATION RELATING TO
M/S. SUBHASH GANGWAL,
MEMBER, JAIPUR STOCK EXCHANGE
SUB-BROKER AFFILIATED TO JSEL SECURITIES LTD., MEMBER BSE
ORDER UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.
1. BACKGROUND
M/s. Subhash Gangwal, (herein referred to as “member broker”) is a member of Jaipur Stock Exchange and sub-broker affiliated to JSEL Securities Ltd.(Member of the Stock Exchange, Mumbai) having SEBI registration number INSS011057537. 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 31.5.03. 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 September 2, 2003.
2. ADJUDICATION PROCEEDINGS
Based on the violations observed during the inspection and pursuant to their reply, the Whole Time Member, SEBI 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 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/7493/2004 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 of September 2, 2003 on the findings of inspection had been taken on record.
The member broker replied to the show cause notice vide letter dated June 1, 2004. As requested by them, an opportunity of personal hearing was granted on October 29, 2004 at Northern Regional Office of SEBI, New Delhi. Shri Subhash Gangwal attended the personal hearing. During the hearing, he offered explanations and clarifications on the violations alleged in the show cause notice.
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 show cause notice are as follows:
a) Failed to maintain books of account in violation of Section 15 A (c) of the Act read with Regulation 26 (iii) of SEBI (Stock Brokers and sub-broker) Regulations, 1992 (hereinafter referred to as the Regulations)
As per the inspection report, the member broker did not maintain documents register, member’s contract books, written consent of clients, margin deposit book and order book of clients as required under Regulation 17(1) which is also in violation of SEBI Circular No. SMD/Policy/IECG/1-97 dated 11.2.97.
The member broker has replied that they use accounting software and the same software is used by all brokers and sub brokers in Jaipur. The software provides for generation of all books of account/records as required under SEBI Regulations. Normally hard copy of records is generated and kept in records. However, in some cases this may not have been done, but this can be generated at any time if so desired. They further stated that document register and contract notes are being maintained in the computer and are being filed regularly in a file.
The member broker has further stated that their entire share business is done telephonically and a separate contract note is sent to the clients immediately at the end of trading session and some of the clients have not sent confirmations duly signed by them. Where it is received is kept in the records. They also stated that sometime it is not possible to maintain order book of clients indicating recording of time of order. The member broker has stated that they are now maintaining a separate day book.
Regarding margin deposit book, they stated that margins received from clients were shown in clients’ financial ledger in regular account and now a days separate clients margin account is opened in Financial Ledger.
Considering the above facts and circumstances as well as the provisions of Regulation 15 (2) of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, which prescribes the books and records to be maintained by the sub brokers, the explanation of the member broker is accepted.
b) Mis-utilised client monies in violation of Section 15 HB of the Act read with Regulation 26 (xiii) of the Regulations;
As per the inspection report, the member broker operated only a single bank account for clients’ transactions as well as their own transactions, thereby not segregating between own funds and clients’ funds. This is in violation of SEBI Circulars SMD/SED/Cir/93/23341 dated 18.11.93 and SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003.
The member broker in their reply have admitted that though a separate bank account was opened for clients, since their main business was the member broker’s own jobbing transactions, some of the clients business was done with a single bank account. Now they are doing business through separate bank account for clients. They also stated that there is no specific case of mis-utilisation of funds of clients by them pointed out in the report and there are no complaints against them.
The undersigned has noted the reply of the member broker, however, the fact remains that there was no strict segregation of funds for a certain time period.
c) Not issued confirmation memos in the form and manner prescribed in violation of Section 15F (a) of the Act read with Regulation 26(v) and 26(xv) of the Regulations.
As per the inspection report, the confirmation memos issued by the member broker did not contain pre-printed serial numbers but instead contained printed numbers on a daily basis (violation of SEBI Circular No.SMD/NDP/Cir/043/96 dated 5.8.96).
In their reply the member broker has stated that this is not correct that confirmation memos were not issued to the clients as the same were issued to them. The facility of pre-printed serial numbers on annual basis was not available earlier in their software. The serial numbers were printed on the confirmation notes date wise which was subsequently sent to the clients and bill given on the same date. They also stated that after the inspection report, they are printing serial numbers annually.
It is clear from the above that the confirmation memos were not pre-numbered and the member broker started compliance only after inspection.
d) Delayed payment of monies/delivery of securities to clients in violation of Section 15 HB of the Act read with Regulation 26(vi) of the Regulations.
As per the inspection report, there are some instances of clients when the member broker had not made pay-outs - payment or delivery - within 48 hours in violation of SEBI Circular Nos. SMD/SED/Cir/93/2332 dated 18.11.93 and SMDRP/Policy/Cir.05/2001 dated 1.2.2001. There was no written confirmation from the clients to maintain running accounts.
Details of such instances are given in Annexure A and B of the Report. (It is observed that the names of some of the clients appear again and again).
The member broker in their reply has stated that they make payment/deliver the securities in 48 hours to the clients. However, in some cases, delays in payments were due to oral requests from the clients to defer payment for their future purchases or clients do not collect cheques on time, which are re-issued after cancellation of previous cheques. They also stated that the amounts were petty as compared to the total client turnover of the member amounting to Rs.78.92 crore as in 2001-02 and of Rs.34.82 crore as in 2002-03. They showed some of consent letters from clients to inspection team and in response to show cause notice they further produced 18 letters of authorisation from clients to retain shares/payment for further transactions. They also quoted from the inspection report that there was no evidence of cheques issued to clients being dishonoured or any case of grievances from investors.
The undersigned has noted the contentions of the member broker. However, the member broker should have produced the letters of authorisation from all the clients at the time of inspection. To that extent there is deficiency in their systems and they should have exercised adequate due diligence in their operations.
e) Failed to maintain client database in violation of Section 15 HB of the Act read with Regulation 26 (xv) of the Regulations;
As per the inspection report the member broker had not obtained client registration forms from many clients on whose behalf they had transacted business. No agreements with clients have been entered into. The inspection report also indicated that out of 5 client forms available with the member broker some columns in some forms were not filled up. (This was in violation of SEBI Circular No. SMD/POLICY/IECG/1-97 dated February 11, 1997 and SMD/Policy/Cir-5/97 dated April 11, 1997).
The member broker has submitted that they are in the process of obtaining the client forms from all clients with all columns filled in with proofs as address, photo, identity and D-mat account no. etc. The member broker in their reply also enclosed client forms of clients.
The undersigned observes that the member broker started collecting client registration forms/ agreements only after the inspection and thus failed to follow the regulatory requirements strictly.
f) Indulged in off the floor transactions 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 entered into off the floor transactions on behalf of clients which were not reported to the stock exchange, however, volume was not very large. The report further states that the volume of these transactions coupled with regular exchange transactions was within prescribed limit of 33.33 times of the deposit made by the member broker with the Exchange.
The member broker has stated that the auditors have pointed out 10 instances of off the floor transactions out of thousands of transactions carried out by the member broker. These are the cases where there were some disputes with clients as regards to price and quantity of shares and they were compelled to make certain off market transactions under compulsion which were bonafide in nature.
The undersigned finds that the quantity involved in these transactions is small. In view of above facts and the explanations of the member broker, the benefit of doubt is given.
g) Not appointed compliance officer 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 (Shri Gangwal) was himself the compliance officer.
In response to show cause notice, the member broker enclosed a copy of their letter to JSE for appointing a separate compliance officer.
The undersigned finds that in the Regulations, there is no specific prohibition against the member broker himself acting as the compliance officer. Moreover, they have now appointed a new compliance officer.
h) 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;
i) Not exercised due skill, care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the Regulations.
All above (a to i) indicates that the member broker failed to strictly comply with all directions issued by the Board from time to time and did not exercise adequate due skill care and diligence in their operations.
The member broker has stated that the deficiencies pointed out in the inspection report are procedural in nature and without malafide intention. Further, they have taken care of these deficiencies. They also stated that in their 15 years of career as a broker, no adverse instance has come across to the notice of the Exchange and they always followed the instructions of SEBI and the Exchange issued from time to time.
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. However, the member broker has 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 the member broker 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, I hereby impose a penalty of Rs. 40,000 (Rs. Forty Thousand only) upon the member broker, M/s Subhash Gangwal.
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 |