ADJUDICATION RELATING TO
M/S. TEES & TOES FINANCE & INVESTMENT LTD.
MEMBER- NSE, (INB 230881039)
ORDER UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995.
1. BACKGROUND
M/s. Tees & Toes Finance & Investment Ltd., (herein referred to as “member broker”) is a member of the National Stock Exchange (NSE) having SEBI registration No.INB230881039. The Securities and Exchange Board of India (SEBI) carried out an inspection of the books of accounts, documents and other records maintained by Tees & Toes for the period 2001-03. The findings of inspection containing details of irregularities and violations of various provisions of SEBI Act, the regulations made thereunder and directives issued by SEBI from time to time, were communicated to the member broker. They replied to findings of investigation vide their letter dated February 26, 2004.
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 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 has appointed the undersigned as the Adjudicating Officer vide order dated March 31, 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 May 05, 2004, Ref. No.-IVD/PKN/NS/9061/2004 based on the 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 to SEBI on the findings of inspection had been taken on record.
The member broker replied to the show cause notice vide their letter dated June 19, 2004. As requested by them, an opportunity of personal hearing was granted on October 29, 2004 at SEBI Northern Regional office, New Delhi. Their directors, Shri Anil Kishore and Shri Arun Kishore, appeared for hearing. They clarified the issues raised in the show cause notice and also submitted a letter dated October 29, 2004 at the time of hearing.
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 issue contract notes in the form and manner prescribed and failed to obtain the date of acknowledgement in violation of Section 15F(a) and 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “Act” ) read with Regulation 26(v), 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”).
As per the inspection report, due to the absence of dated acknowledgements in few cases it could not be verified whether the contract notes were issued within the specified time. The contract notes do not provide for the time when the client has placed the order; however, the time of the execution of the order is mentioned.
The member broker has submitted that paragraph 15.2 of the Inspection report states that ‘Contract notes were issued in the prescribed format’. It was only in few instances that the date of acknowledgement was not there on the duly receipted/signed and acknowledged contract notes. These cases were very few and pertained to clients to whom the contract notes had been sent by messenger boy on the date of transaction or the next day itself. It was by oversight that on few occasions that the clients missed out putting the date. They have since contacted few clients and their letters stating that they had been receiving the contract notes within time are enclosed. Further, the member broker has submitted that approximately 95% of total turnover/trades were on proprietary account and even out of the balance small percentage of trades on account of client business only a few instances of lack of date were noticed. For all practical purposes, due adherence to SEBI requirements was made.
They also submitted at the time of hearing that being a member of NSE they had followed the format of NSE and all details are being provided in contract notes. They also produced a copy of specimen of the contract note as prescribed by NSE which does not contain order time.
In view of above facts, the undersigned has accepted the explanation of the member broker.
b. Not maintained Order book in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations
According to the inspection report, the member broker does not maintain the order book (as prescribed by SEBI circular No. SMD/POLICY/IECG/1-97 dated February 11, 1997).
The member broker has submitted that the entry of order in the book before it is placed becomes very difficult as the client is always in a hurry to get his trade executed and does not want to wait for writing the order first which delays the order entry into the system. Many times the orders are placed on telephone and simultaneously executed under direct instructions of the client. Movement of trading is so fast that at many times it is very difficult to maintain the order book manually; however in future they will make every effort to maintain the order book.
The member broker has further submitted vide their reply dated June 19, 2004 that in terms of books of account, records, etc. as required to be maintained by a broker under Regulation 17(1), there are no instances of absence of records mentioned therein as per inspection report. They have further submitted that approximately 95% of their trades are proprietary trades. As regards the client trades, the same have been in most instances placed by the clients over telephone. The clients demand immediate order entry in the system due to rapid changes in market prices of securities in the market in the electronic trading system of National Stock Exchange. Hence it is not practical to first make manual entry in a physical order book before placing the order because the market price changes in the meantime. However, a record of time when the order is placed by the person, i.e. user who has placed the order and all other attributes as required are maintained in the activity log of trading system and the said detail also appears on each contract note.
They also submitted at the time of hearing that NSE vide Circular dated October 17, 2002 has also done away with the requirement of compulsorily maintaining the order brook because of practical difficulty of maintaining it. They also produced the copy of the circular.
Considering all above facts and circumstances, the undersigned has accepted the explanation of the member broker.
c. Delayed delivery 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 in certain cases the member broker has failed to deliver securities to the clients within stipulated time period. The details of the late transfer of deliveries (checked for a few settlements) indicate that there were delays of 4-13 days for giving deliveries of small quantities.
The member broker has submitted that as regards to delay in deliveries of few instances, these were kept with them for the purpose of ensuring timely pay-in at the directions of the clients. They also enclosed copies of the directions of some of the clients. This avoids botheration of time and again receiving and then again delivering the securities in the market. Barring these few case and that too on the directions of the clients, they have always delivered the securities to the clients within the stipulated time.
At the time of hearing they also explained each case of delay and submitted that out of six instances, only 4 cases were deliveries for clients and 2 cases were the transactions in their own account. They also produced copies of letters from clients giving directions in this respect.
The undersigned finds that the member broker did not produce written directions of clients at the time of inspection nor when their comments were sought on findings of inspection. Therefore, there is a deficiency in the systems of the member broker to that extent and they should have exercised adequate due diligence in their operations.
d. Not complied with ALBM operational guidelines 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 complied with the ALBM operational guidelines, as follows:
i) The contract notes were not issued for the ALBM trades.
ii) The confirmation slips were not issued to the constituents for ALBM transactions, however daily confirmations were given.
iii) No separate agreements were entered into with the constituents for ALBM transactions.
The member broker has submitted that during this period the software used for back-office was on Doss system and contract notes for the ALBM could not be taken out correctly. However, regular confirmations were given to the respective clients at all times, which were checked personally by the auditors at the time of inspection.
They also clarified that ALBM transactions have two legs, while one leg is always in the regular capital market segment, therefore exact details in the form of a regular capital market segment contract note were given to the clients who used ALBM mechanism. As per requirements of NSCCL, confirmation memo and not contract notes were required to be given to the constituents. They also enclosed Investor’s guide to ALBM of NSCCL wherein under para 25 it is stated that the participant is required to issue confirmation memo.
As regards ALBM, it required redesign of software on account of new format and while the system was being redesigned they provided daily confirmation memos as has also been pointed out in the inspection report. Hence all details required to be provided to clients were being provided. A copy of the confirmation memo has also been enclosed. Further, approximately 95% of ALBM transactions were for their regular clients and as has been shown in the inspection report, they had entered into agreements with all these clients. As already pointed out in the inspection report as well, the ALBM mechanism was used for a very short period and has since been abolished by the Exchange and there is no question of any continuance of any non compliance in this matter.
The undersigned finds that the member broker entered into agreements with clients who executed ALBM transactions and also issued confirmation memos to them for such transactions. However, according to NSE rules, the clients are required to sign agreements with the participants to lend/borrow securities also and this requirement was not followed by the member broker.
e. 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
f. Not exercised due skill, care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the Regulations
Thus there are a few deficiencies in the systems of the member broker and they have failed to strictly comply with directives of SEBI and have not exercised due skill care and diligence in their operations.
The member broker has submitted that no gain or unfair advantage was made by them on account of above discrepancies, no loss was caused to any investor, and default is not of repetitive nature.
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 and they failed to strictly comply with all the provisions of the Act, Regulations and directions issued by the Board from time to time and have 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 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. Tees & Toes Finance & Investment Ltd.
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 |