SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION ORDER
ADJUDICATION ORDER RELATING TO SHRI GIRISH AGGARWAL, TRADING MEMBER, UPSE (SEBI REGN. NO. INB 101063015)
Order under sub-section (1) of Rule 5 of Securities and Exchange Board Of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.
1.0. BACKGROUND
1.1. Shri Girsh Aggarwal (hereinafter referred to as the “trading member”) is a member of UPSE with Securities and Exchange Board of India (hereinafter referred to as the “SEBI”) registration No. INB 101063015. An inspection of the books of accounts, other records and documents maintained by the trading member for the period 1st April, 2000 to 13th September, 2002 was conducted through M/s. Kapoor Tandon & Co., Chartered Accountants under the provisions of regulation 19(1) of the SEBI (Stock Broker & Sub-Brokers) Regulations 1992. M/s. Kapoor Tandon & Co., Chartered Accountants has submitted the inspection report to SEBI.
2.0. ADJUDICATION PROCEEDINGS
2.1. Based on the alleged violations observed during the inspection and pursuant to the clarification given by the trading member for the above alleged violations, 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 31st March 2004, to enquire into and adjudge the violations allegedly committed by the trading member.
2.2. The alleged violations are as given below:
· Failure to maintain books of account in violation of Section 15A(c) of the Act read with Regulation 26(iii) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations,1992 (hereinafter referred to as the “Regulations”);
· Not adhered to the unique client code in violation of section 15HB of the Act read with regulations 26(xv) and 26(xvi) of the Regulations;
· Indulged in off-the-floor transactions in violation of section 15HB of the Act read with regulations 26(xv) and 26(xvi) of the Regulations;
· Not appointed compliance officer in violation of Section 15HB of the Act read with Regulations 26(xv) and 26(xvi) of the Regulations;
· Indulged in carry forward transactions in violation of Section 15HB of the Act read with Regulations 26(xv) and 26(xvi) of the Regulations;
· Delayed payment of monies / delivery of securities to clients in violation of Section 15HB of the Act read with Regulation 26(vi) of the Regulations;
· Failed to issued Contract Notes in the form and manner prescribed in violation of Section 15F(a) and 15HB of the Act read with Regulations 26(v), 26(xv) and 26(xvi) of the Regulations;
· 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;
· Not exercised due skill, care and diligence in violation of section 15HB of the Act read with regulation 26(xvi) of the Regulations.
3.0. SHOW CAUSE NOTICE AND HEARING:
3.1. A show cause notice under Rule 4 (1) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 was issued on July 12, 2004 to the trading member 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 it in view of the alleged violations committed by it. The trading member submitted its reply to the show cause notice vide its letter dated August 14, 2004. Subsequently, the trading member was given an opportunity for personal hearing. Shri Girish Aggarwal, proprietor along with Shri Krishna Kumar Dubey, staff member of the trading member appeared on 1st November, 2004 and were heard.
4.0. ANALYSIS AND FINDINGS
I have taken into consideration the facts and circumstances of the case, the material available on record, the reply of the trading member to the show cause notice and the oral submissions made by it during the personal hearing. The findings in respect of the allegations against the trading member are as follows:
4.1. Failure to maintain books of account
Inspection report states that in certain cases payments were made to clients with some delay, clients bank account has not been operated for transactions with clients, order book is maintained manually and does not contain time when the order was placed by the client and it is not serially maintained which is in violation of SEBI Circular No. SMD / POLICY / IECG / I – 97 dated February 11, 1997 and Section 15A (c) of the Act read with Regulation 26 (iii) of the Regulations.
It was stated in the reply of the member, that there were no clients but only family members having blood relations i.e. father, mother etc and each of them had given letter of authority to him, to retain the money or security till they themselves call upon to collect or instruct in this regard and to use money as margin in future transactions, if any. Member had submitted that orders are punched in the computer and given copy of the computer print out of the orders punched in. It contained details of time when orders were put in. However, it is found that the member has simply denied the allegation made in the inspection report, but has not substantiated his stand. The fact that the books had not been maintained properly at the time of inspection has been brought out in the inspection report. If the member’s reply that the books of account had been properly maintained was true, then what stopped him from producing necessary evidence at the time of inspection. In view of the above it appears that the member’s reply is only an after thought and the member has violated the provisions of section 15 A (c) of the SEBI Act.
4.2. NON-ADHERANCE TO THE UNIQUE CLIENT CODE.
During inspection of records it was observed that member had not assigned unique client code to two of its clients because they did not possess PAN Card, Driving Lisence, Voter ID, Passport or Ration Card. Further details of unique client code have not been intimated to the Exchange. These actions are stated to be in violation of Section 15HB of the Act read with regulations 26(xv) and 26 (xvi) of the Regulations.
The trading member, in its reply to the show cause notice and during the personal hearing, has submitted that there were only 7 clients and all are his relatives. The said two clients were not having PAN Card, Driving Lisence, Voter ID, Passport or Ration Card. Unique client code was intimated to UPSE on 01.01.03 which was after the period of inspection.
Although, it was a mistake on the part of the trading member to allot client code to any person/ entity, however considering that all the clients were relatives and there were only 7 clients, the nature of violation is not serious. In view of the above, it appears that although there was deviation from the laid down procedure, it has not resulted in any market manipulation or loss to the investor. The findings relate to procedural lapse, which as per the trading member’s oral submission has already been rectified. In view of the same no further action in this regard is considered necessary. Further, the alleged violations are for the financial year 2001-2003, (i.e. 01/04/2001 to 30/04/2003) while the regulations 26(xv) and 26(xvi) of the Regulations were introduced vide the SEBI (Stock Brokers and Sub-brokers) (Second Amendment) Regulations, 2003 with effect from November 20, 2003. Accordingly, these regulations are not applicable in the present case and the entity is not liable for any penalty in terms of Section 15HB of the Act.
4.3 THE MEMBER HAS INDULGED IN OFF THE FLOOR TRANSACTIONS
As per the inspection report, the broker indulged in off the floor trading, this is stated to be in contravention of SEBI Circular No. SMD/Policy/Cir – 3/98 dated January 16, 1998 and SEBI Circular No. SUB – BROK/CIR/02/2001 dated January 15, 2001. It is stated that the above action is in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
The trading member in its reply stated that the trades were entered between member to member only and for own business and not for client. He further stated that the spot transactions were stated to the exchange but the exchange does not give any acknowledgement. Moreover there were only 9 such instances during the period amounting to Rs 54 lac.
From the above, it is seen that the trading member made an attempt to comply with the provisions. Further, no manipulation or loss to investors accrued on account of the above action. Further, the alleged violation occurred in the financial year 2001 – 2002 while Section 15HB was inserted in the Act vide SEBI (Amendment) Act, 2002 with effect from October 29, 2002 and Regulation 26(xv) and Regulation 26(xvi) of the Regulations were inserted vide the SEBI (Stock Brokers and Sub – brokers) (Second Amendment) Regulations, 2003 with effect from November 20, 2003. Hence, these regulations are not applicable in the present case and the entity is not liable for penalty in terms of Section 15HB of the Act.
4.4 APPOINTMENT OF COMPLIANCE OFFICER
As per the inspection report, the trading member has not appointed a Compliance Officer responsible for monitoring the compliance of the Act, Rules and Regulations, Notifications etc issued by SEBI or the Central Government. This is in contravention of the provision of Regulation 18A of the Regulations and is in violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations.
The trading member in his reply submitted that he himself is the compliance officer from the beginning and has been acting as such exclusively and the said fact has been intimated to UPSE vide letter dated 29-04-00. When UPSE advised to appoint a compliance officer in prescribed format he appointed himself as compliance officer.
As the member stated that he had been acting as compliance officer and appointed himself as compliance officer for which letter of appointment in prescribed format has also been submitted, therefore it is not possible to hold him liable for the alleged violation.
4.5. DELAYED PAYMENT OF MONIES / DELIVERY OF SECURITIES TO CLIENTS
As per the inspection report, there were six instances of delay in payments to clients. Maximum delay was for 6 days. This is in contravention of Section 15F(b) and 15HB of the Act read with Regulation 26(vi) of the Regulations.
The trading member in its reply stated that all his clients had given him letter of authority to use the amounts due to them for his business. If needed these amounts were given when demanded.
The delay in most of the cases is less than a week. The inspection report does not report any complaints / grievances on the part of the clients whose payments were delayed. However, the fact remains that there was delay in the payment to clients which is in violation of the provisions of Section 15F(b) of the Act. The member’s reply regarding giving the amounts to the clients as and when demanded is not in conformity with provisions of the Act in this regard.
4.6. FAILURE TO ISSUE CONTRACT NOTES IN THE FORM AND MANNER PRESCRIBED
As per the inspection report, the trading member has not complied with the provisions of SEBI Circular no. SMD/POLICY/IECG/1 – 97 dated February 11, 1997, which provides that the contract note should provide for the time when the client has placed the order. It was further alleged that the broker was not affixing stamps on the contract note. Further, the contract notes were not serially numbered. Sr. No was written manually. The above is in contravention of the provisions of Section 15F(a) and 15 HB of the Act to be read with regulation 26(v), 26(xv) and 26(xvi) of the Regulations.
The trading member in its reply stated that contract notes were issued as per the guidelines of UPSE. The reply did not mention anything about the order time. He further stated that original contract notes were stamped and the cost of stamps was borne by the clients. The stamped copy was issued to the client and the copies are available with them. He has denied the charges of contract notes not being serially numbered and stated that the annualized serial number is used in contract notes.
The member has not brought copies of contract notes in support of his reply. Further, he had stated that all his clients are close relatives and had given authority to use the money the way he desired. In such circumstances, he could have easily brought the copies of contract notes from them to clarify the above matter. The copies of the contract notes and evidences of having complied with the stamp duty and other regulatory requirements were neither provided at the time of inspection nor in the course of adjudication proceeding. This would show that the member has failed to substantiate his contention that the contract notes were made as per required norms. In view of the above the member has violated provisions of Section 15F (a).
4.7. MEMBER FAILED TO COMPLY WITH DIRECTIONS ISSUED BY THE BOARD AND HAS NOT EXERCISED DUE SKILL, CARE AND DILIGENCE.
The aforesaid actions as enumerated in the proceeding paragraphs are stated to be in violation of Section 15HB of the Act read with Regulation 26(xv) and (xvi) of the regulations.
The trading member in its reply has submitted that it had not failed to comply with any general or specific directions issued by the board till date and had never acted in negligent or careless manner.
I am of the view that the alleged violations of not exercising due skill, care and diligence, which have not been documented, seem too general in nature.
Further, the alleged violations are for the financial year 2001-2003, (i.e. 01/04/2001 to 30/04/2003) while the regulations 26(xv) and 26(xvi) of the Regulations were introduced vide the SEBI (Stock Brokers and Sub-brokers) (Second Amendment) Regulations, 2003 with effect from November 20, 2003. Accordingly, this regulation is not applicable in the present case and the entity is not liable for any penalty in terms of Section 15HB of the Act.
5.0. IMPOSITION OF PENALTY
In view of the discussion in the proceeding paragraphs, the member M/s. Girish Aggarwal is found to have violated provisions of Section 15F(a), 15F(b) and 15F(c ) of the Act ( as elaborated specifically in Para 4.1, 4.5 and 4.6 above). Considering the facts and circumstance of the case and the provision of section 15 J of the SEBI Act, 1992, in this regard , I think it fit to impose a penalty of Rs. 30,000/- (Rupees Thirty Thousand Only) on account of the above violations.
5.1. ORDER
Shri Girish Aggarwal is directed to pay a penalty of Rs.30,000/- (Rs. Thirty Thousand Only) by way of a crossed Demand Draft drawn in favour of “SEBI – PENALTIES REMITABLE TO GOVERNMENT OF INDIA” and forward the same to Smt. Usha Narayanan, Chief General Manager, SEBI, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai – 400 005. M/s Bhupendra & Co. shall pay the penalty within 45 days of the receipt of this order.
As required under Rule 6 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 a copy of the instant order is being sent to Shri Girish Aggarwal and also to SEBI.
| Date: December 30, 2004 |
(M S RAY) |
| Place: Mumbai |
Adjudicating Officer |