Order in respect of SI Investments and Broking Pvt Ltd,Member,BSE

Nov 17, 2004

Orders : Orders of AO

ADJUDICATION ORDER IN RESPECT OF SI INVESTMENTS & BROKING PVT. LTD.– MEMBER BSE (INB 010991534) UNDER SECTION 15 I OF THE SEBI ACT READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY BY ADJUDICATING OFFICER) RULES, 1995

1. BACKGROUND

Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of SI Investments & Broking Pvt. Ltd (hereinafter referred to as Broker), and pursuant to this appointed me as adjudicating officer vide order dated March 31, 2004 under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under sections 15A(c), 15B and 15 HB of the SEBI Act.

2. NOTICE

Pursuant to this a notice dated May 26, 2004 under Rule 4 (1) of the said rules was issued to broker communicating the charges levelled against them based on inspection of the books of accounts and other documents conducted by SEBI for the period 01.04.2001 to 31.03.2003. The said inspection report had already been communicated to the broker vide SEBI letter no. MIRSD/DPS-1/115/RRM/24040/2003 dated December 17, 2003.

3. REPLY

Reply to the aforesaid notice was received vide letter dated June 18, 2004 , wherein the broker submitted a detailed reply.

4. PERSONAL HEARING

The personal hearing in the matter was scheduled for 18^th October, 2004 vide notice dated September 16 ,2004. However , the broker sought adjournment vide letter dated 14^th October, 2004 stating that their director is unwell. To adhere to the norms of natural justice , another opportunity of personal hearing was granted on October 26,2004 vide letter dated October 15,2004. Shri Shridhar P Iyer, Director, Sh. Anand Padmanabhan, Compliance Officer, Sh. Vinay Chauhan, Advocate and Sh. S.N. Ananthasubramanian, Company Secretary & Consultant appeared on 26^th October, 2004 and made submissions on behalf of the broker. Letters of authorisation were filed by letters dated October 25, 2004. Subsequent to the hearing further reply was filed by the broker vide letter dated 2^nd Nov. 2004.

5. FINDINGS AND CONCLUSION

In view of the above, I now deal with the submissions made by the broker before me for the purpose of this adjudication.

a) The broker has not maintained Sauda Book in violation of Section 15A(c) and 15HB of the Securities and Exchange Board of India Act,1992 read with Regulation 26(iii), 26(xv) and 26(xvi) of the SEBI(Stock- Brokers and Sub- Brokers) Regulations,1992.

The broker has submitted that “As per the requirement of The Stock Exchange, Mumbai, the Company is required to maintain a ‘Sauda Book’ which contains details of all deals transacted by them on a day to day basis and should contain inter alia the following :-

1. Name of the Scrip

2. Name of the Client on whose behalf of the deals have been done,

3. Rate and quantity of Scrip bought or sold.

and the same should be maintained on a daily basis.

The Company has been generating detailed client-wise and scrip-wise list of transactions detailing the purchase/sale of securities daily. The Client-wise statement contains the following information: -

1. Serial Number

2. Name of the Client

3. Name of the Scrip

4. Quantity Bought/Sold

5. Rate (inclusive of brokerage)

6. Net Amount

The Scrip-wise statement contains the following information:-

1. Name of the Scrip

2. Name of the Client

3. Order Number

4. Stock Exchange Transaction ID

5. Quantity Bought/Sold

6. Time of the Transaction

7. Market Rate

8. Brokerage

9. Net Rate

As such the existing back office software and records generated do in fact give the details as required by the sauda book. The Company submits that notwithstanding the availability of the required data in another format, it is in the process of identifying a Computer Software, which would generate the aforesaid details in a single statement on a daily basis so as to comply with the requirement of maintaining a Sauda Book both in letter and spirit.” The broker has further stated that “ As the existing software used by the Company is DOS based and has limited scope for modification , the necessary changes needed to comply with the requirements of SEBI Regulations was not possible. The Company has therefore decided to migrate to an Windows based software which is also being used by other Broking Companies, in respect of which trials are underway and the target date for migration and implementation of the Software is Scheduled on 1^st December,2004. As confirmed at the hearing, specimen copies of Client wise and Scrip wise List of transactions is enclosed as Annexure’A’ and Annexure ‘B’ respectively.”

The broker has not maintained the sauda book containing all the details as required. The broker has itself admitted that it is in the process of identifying a Computer Software, which would generate the aforesaid details in a single statement on a daily basis so as to comply with the requirement of maintaining a Sauda Book both in letter and spirit. Hence I find that broker has not complied completely with the requirement of maintenance of sauda book. I have also noted that broker is already in the process of taking corrective action.

(b) The broker has failed to obtain/maintain client agreement forms in violation of Section 15B of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xii) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “The Company obtains, the necessary Client Registration and Client Agreement Forms including requisite documents such as proof of identity, before registering a client and the said documents are maintained. After registration the Company allots a unique client code to the Client. Further, as per the direction of the Stock Exchange, the client is also further registered with the Stock Exchange.

The Company has on its rolls 225 registered clients. However, in respect of seven cases as indicated in Annexure 5 of the Inspection Report, the Company on the date of inspection could not produce the aforesaid forms for inspection. The Company has out of the said seven cases, enclosed copies of agreements with the following clients as Annexure ‘A’.

Sl. No.	Client Code	Name of the Client
1.	A138	Arun H Patel
2.	M178	Manmohan Rathi
3.	P135	Pushpa Ramakrishnan

In respect of the remaining four clients as given below the Company has not entered into any transaction after the last transaction date mentioned below and has also decided not to undertake any transaction henceforth too.

Sl. No.	Client Code	Name of the Client	Last transaction date
1.	L048	Latha Krishnan	01^st June 2002
2.	N104	Nagaprasad V	01^st June 2002
3.	K139	Kumar Raman	01^st April 2003
4.	Z001	Zaki Abbas Naseer	16^th October 2003

I find that client agreement forms for the 7 clients mentioned in the inspection report were not available at the time of inspection. Now the broker has submitted the registration forms in respect of 3 clients and has stated that the broker has not done any transaction with balance 4 clients since long. The fact that the broker has already taken the corrective action, has been taken note for the purpose of imposing penalty for this lapse.

(c) The broker has failed to obtain/maintain client registration forms/ client data base in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xii), 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “As stated in para 2 above the Company has been obtaining Client Registration forms along with Client Agreement(s) before registration and the same is being maintained.

In respect of six cases of corporate clients, the Company could not produce for inspection, the Annual Reports for the previous three financial years on the date of inspection. However, subsequently and as indicated in our letter dated 15^th January 2004, the Company has obtained the Annual Reports and updated the records.

In respect of twelve clients, the Company could not produce for inspection, Proof of Identity on the date of inspection. The Company has since then obtained Proof of Identity from the following clients. Copies of the ‘Proof of Identity’ of the said clients are enclosed as Annexure ‘B’” It has been further submitted that “ In respect of one of its clients Mr. Subhash M Kamat, as the client is not traceable the Company is not in a position to furnish the Proof of Identity. However, the Company has not entered into any transaction with him from 4^th February 2002 and there is no amount either due to or from him. AS on date the Company has obtained proof of identity in respect of all its clients.”

I note that the broker has already taken the corrective action and the deficiencies were not of very serious nature. These facts have been taken note for the purpose of imposing penalty for this lapse.

(d) The broker has failed to obtain acknowledgement on Contract Notes and not maintained despatch records in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “The Company issues contracts to its clients on trades executed on their behalf within twenty- fours hours of execution of transaction. The contracts are signed and delivered to the clients either through courier or their authorised representatives collect the contract(s) from the office of the Company. The Company obtains acknowledgements of receipt of the Contract on the duplicate copy(ies) while issuing them and the duplicate copies are maintained in a bound manner. The Company also maintains the courier receipts as proof of contracts being mailed to the clients. The Company has started maintaining Contract Despatch Register from April 2004. Copy of the dispatch register is enclosed as annexure ‘C’.” The broker has further submitted that “ As already submitted, the Company has been maintaining Contract Despatch Register manually. Further, on implementation of the new software , the register also would be maintained electronically.”

I do not accept the explanation of the broker as the inspection report clearly mentions that in majority of the cases acknowledgements of the clients were missing. Besides, broker itself has submitted that it has started maintaining Client Despatch Register from April 2004 only. I have also noted that broker has already taking corrective action.

(e) The broker has failed to collect upfront margins in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “The Company’s clientele includes five major clients representing almost 70% of the total turnover. As these clients trade daily, ad-hoc margins based on their average net outstanding positions has been collected by the Company and is being maintained in a separate Client Margin Account. In respect of most of the other clients, as the outstanding positions do not exceed Rs.5 Lacs, the Company has not collected margins.”

The system followed by broker of collection of ad-hoc margins based on average net outstanding position is not as per the provisions prescribed by SEBI. SEBI Circular No. SMDRP/POLICY/ CIR-07/2000 dated Feb 4, 2000 provides that in all cases where the margin in respect of a client in a settlement would work out to be more than Rs. 1,00,000/-, the member brokers would have to mandatorily collect the margin from the client. Besides as per the SEBI Circular No. SMD/Policy/ CIR-12/2002 dated May 17,2002 , the broker has to necessarily collect 10% upfront margin from the client if the client’s position exceeds Rs. 5,00,000/-. The broker has not complied with these requirements. Even the broker has submitted a certificate of the auditor to the inspecting authority stating non- compliance of the circular of SEBI in this regard. Keeping all this in view I do not find that the broker has complied with the requirements of collection of margin from clients as prescribed by SEBI from time to time.

(f) The broker has granted trading terminals at unauthorised locations in violations of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xix) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “The Company had granted three trading terminals as given below for operating the same for execution of orders of the clients. These trading terminals were located at the offices of relatives of Promoter-Directors of the Company and were monitored by the Company.

Terminal No.	Address.	Remark
7	2B, 1^st Floor Grease House Zakaria Bunder Road Sewri(W), Mumbai 400 015	Opened as a branch with effect from 1^st May 04
10	G/13,Motlibai Wadia Building, Ground Floor, 22,S A Brelvi Road, Fort, Mumbai 400 023	Terminal withdrawn with effect from 04^th May 04
11	158, Eldams Road, Teynampet, Chennai 600 017	opened as a branch with effect from 01^st May 04

Since the receipt of the notice from SEBI, the Board of Directors of the Company have passed necessary resolutions for opening branch offices at the places wherein the terminals are located and the information of the same has been communicated to the Stock Exchange, Mumbai.”

The broker has admitted that these terminals were located at the premises of relatives of Promoter- Directors of the broker. This is in violation of SEBI Circular No. SMDRP/ Policy/Cir-49/2001 dated 22.10.2001 which requires that the broker can have trading terminals only at it’s registered office, branch office or their sub-brokers’ office. I have also noted that the broker has taken the corrective measure by opening branches at two of these places and withdrawing the terminal from the third location.

(g) The broker has not issued advertisements regarding cancellation of affiliated sub-brokers in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulations 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that “The Company had inadvertently not issued the requisite advertisement regarding cancellation of sub-broker Viz., M/s. Adroit Capital and Securities Private Limited bearing SEBI Registration No. INS010535438 dated 02/02/1996. It may be pointed out that the Company had stopped dealing with the Sub-broker since 31^st March 2001 and has not received any complaints from any of the clients of the said sub-broker. The Company as informed vide its letter dated January 14, 2004, published the requisite advertisement on 20^th February 2004. A copy of the said notice is enclosed for your reference as per Annexure ‘D’.

It appears that lapse on the part of the broker was of technical nature.

(h) The broker has not framed code of internal procedures for prevention of insider trading in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) and 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has submitted that the Company had appointed S. N. ANANTHASUBRAMANIAN & CO., Company Secretaries to frame the Model Code of Conduct for Prevention of Insider Trading Regulations and they have framed the Code and the same has been adopted on 18^th May,2004.

It is noted that broker has taken the corrective action.

(i) The broker has failed to comply with the directions issued by the Board in violation of Section 15HB of Securities and Exchange Board of India Act, 1992 read with Regulation 26(xv) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The broker has not exercised due skill , care and diligence in violation of Section 15HB of the Act read with Regulation 26(xvi) of the SEBI (Stock Brokers and Sub Brokers) Regulation 1992.

The company has submitted that “The Company has been generally complying with the directions of the Board. Further the Company has recently appointed S. N. ANANTHASUBRAMANIAN & CO., Company Secretaries, Thane to generally advise on matters relating to compliance with the Regulations. The Company undertakes to comply with all the directions issued by the Board and assures that it will not violate any of the Regulations in future.

The Company has been taking adequate steps to ensure protection of its clients and investors at large. Further the Company has not received any complaints from investors, stock-brokers, sub-brokers or any other person on any matter having a bearing on the activities of the Company.”

The broker has also submitted:

“1. We have not derived any gain disproportionate or otherwise.

2. No arbitration cases have been lodged against the Company by any of our clients or investors,

3. No loss has been caused to the Investors or group of investors as a result of the lapses.

4. The alleged act of omission and commission are trivial and technical in nature and no harm, injury or loss has been caused or suffered by any one on account of such alleged acts, nothing untoward –financial and otherwise has happened.

5. The lapses are nominal in nature and administrative in character.

6. We have not been found guilty of price or market manipulation of any scrip or index or assisting in such manipulation or of insider trading.

Considering the foregoing we would kindly request you to condone the violations as listed in the Inspection Report. We reiterate we would comply with all the directions of the Board.”

The above deficiencies indicate that broker failed to comply with directions issued by the Board from time to time and has not exercise due skill, care and diligence in their operations. However, it has also been noted that broker has taken the corrective actions to remove the deficiencies.

6. IMPOSITION OF PENALTY

Keeping all above in view, I find that there were certain deficiencies and irregularities in the systems and procedures of the broker and 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.

Considering all above facts and circumstances , I am of the view that the broker has become liable to penalty and some amount of penalty need to be imposed upon them for certain violations as described in detail in the earlier paragraphs, so that they comply with all the regulatory requirements in future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interest of investors.

In order to adjudge the quantum of penalty, following factors as provided in the Section 15J of Securities and Exchange Board of India Act ,1992 need to be considered:

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 and

c) the repetitive nature of the default.

As regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the broker. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. Besides, no investor complaints have been received against the broker. However, as for the reasons stated above the monetary penalty needs to be imposed on the broker.

In addition to these factors the broker has drawn my attention towards some orders passed by SEBI for deciding on the quantum of penalty. It has been submitted by the broker that in the cases referred to by it the nature of violations was far more grave vis a vis the violations alleged against them and SEBI had issued simple warning in those cases. The broker has referred to the cases of M/s Bakliwal Investment , J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities, Ratanbali Capital Markets Ltd., Sanjay C. Bakshi, Mahesh Kothari Share & Stock Brokers Pvt. Ltd. and Mukesh Sawhany.

The broker has also put his reliance on the Orders passed by Hon’ble Securities Appellate Tribunal (SAT) in Appeal Nos 53/2003 (Samkit Shares & Stock Brokers Pvt. Ltd. vs SEBI ) dated 31/08/04 and Appeal No 95/2003 ( Chona Financial Services Pvt. Ltd. vs SEBI) dated 23/08/04 wherein Hon’ble SAT has reduced the penalty from suspension to warning taking into account the following factors:

a) whether there was irregularity;

b) whether the irregularities were merely of technical nature or were serious irregularities;

c) what is the nature of penalty to be imposed.

It has been submitted that in their case also the alleged violations are also in the nature of procedural and technical lapses and therefore has pleaded that in light of the action taken by them to cure said lapses, no monetary penalty should be imposed on them.

The broker has also requested that the following mitigating factors may also be considered while imposing penalty:

“Impeccable track record;
No prejudice has been caused to any investor in the market as a result of the alleged procedural lapses;
We have not indulged in any manipulation;
In the alleged transactions, we have only earned our brokerage;
No default done either by us or by our clients in meeting payment/ delivery obligations;
There are no complaints against us either by our clients or by any body else;
We have not made any gains or derived any unfair advantage as a result of alleged technical and minor lapses;
No loss has been caused to any client or investor group as a result of alleged technical and minor lapses;
We have already initiated steps to cure the alleged deficiencies as pointed out in the Notice. The same is evident from the Action Taken Report.”

The broker has again submitted that imposition of any monetary penalty on them would be disproportionate to the gravity of the situation and the ends of justice can be met by censuring them.

From the perusal of some of the orders referred to by the broker, I note that the penalties in those cases have been imposed under SEBI (Procedure For Holding Enquiry By Enquiry Officers And imposing Penalty ) Regulations, 2002. The Regulation 13 (1) of these regulations provide for the following penalties:

“13. (1) The enquiry officer shall, after considering the written statement and the oral submissions, if any, of the intermediary and the provisions of the relevant Regulations, submit a report to the Chairman or a member designated in this behalf and recommend for the imposition of any of the following penalties by the Chairman or the member, as the case may be, with the justification for the imposition thereof:-

(a) Minor penalties -

i) warning or censure;

ii) prohibiting the intermediary to take up any new assignment or mandate or launch a new scheme for a period upto six months;

iii) debarring a partner or a whole time director of the intermediary from carrying out the activities as intermediary in the intermediary firm or company and other capital market related institutions for a period upto six months ;

iv) suspension of certificate of registration for a period upto three months;

v) debarring a branch or an office of the intermediary from carrying out the activities for a period upto six months.

(b) Major penalties –

i) cancellation of certificate of registration;

ii) suspension of certificate of registration for period exceeding three months;

iii) taking of action under sub-clause (ii), (iii) or (v) of clause (a) for a period exceeding six months”.

The Orders of Hon’ble SAT relied upon by the broker also relates to the penalties imposed under these regulations. It has been noted that ‘warning’ is also one of the penalties which can be imposed under these regulations and it is not exoneration from charges.

The present proceedings have been initiated under Chapter VI-A of SEBI Act, 1992 read with SEBI ( Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officers ) Rules, 1995. The said regulations and Section 15-I (2) provides that if the Adjudicating Officer is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub section (1) i.e. 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA and 15 HB, the Adjudicating Officer may impose such penalty as he thinks fit in accordance with the provisions of any of those sections. The provisions of these sections prescribe only for monetary penalty and not about other penalties which may be imposed as per the provisions of other regulations. Accordingly, I proceed with imposition of monetary penalty for the violation committed by the broker considering all the factors mentioned in forgoing paragraphs.

7. ORDER

The submissions of the member have been considered and dealt in detail as above and in view of the findings arrived at, I consider it to be a fit case for imposition of penalty under section 15 HB of the SEBI Act, 1992. In view of the same and in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.1,00,000 (Rupees One Lakh) on the broker. The member shall pay this amount of penalty of Rs.1,00,000/- by way of demand draft in favour of "SEBI - Penalties Remittable to Government of India" payable at Mumbai within 45 days of receipt of this order.

The said demand draft should be forwarded to the Ms. Usha Narayan, Chief General Manager of SEBI, MIRS Department (DPS- I) at SEBI, World Trade Centre, 29^th Floor, Cuffe Parade, Mumbai 400 005.

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 broker and a copy is submitted to the Board.

Date: NOVEMBER 17, 2004	P.K.BINDLISH
Place: Mumbai	Adjudicating Officer