IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 402/2004
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Date of Hearing
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31.10.2005
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Date of Decision
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9.11.2005
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In the matter of:
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P.K. Capital Services P. Ltd.
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Appellant – Represented by
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Mr. Bharat Merchant, Advocate
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Versus
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Securities & Exchange Board
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Respondent –Represented by
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of India
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Mr. V.N. Shingnapurkar, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
C. Bhattacharya, Member
R. N. Bhardwaj, Member
Per: Justice Kumar Rajaratnam, Presiding Officer
1. Appeal is taken up with consent of parties.
2. The appellant being aggrieved by the order of the respondent in imposing a penalty of Rs. 1 lakh by its order dated 3.11.2004 has preferred this appeal.
3. The appellant is a sub-broker. An inspection was conducted by the respondent and the inspection report indicated that there were certain irregularities which required action under the penal provisions of the SEBI Act. Accordingly, a show cause notice was sent and after hearing the parties the appellant was directed to pay a penalty of Rs. 50,000/-. The appellant has been found to be guilty of violating 15HB of the SEBI Act. Section 15HB reads as follows:
“15HB. Penalty for contravention where no separate penalty has been provided – Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”
4. An amendment by way of Section 15HB was brought in on 29.10.2002 bringing in a provision which deals with penalty for contravention of the provisions where no separate penalty has been provided for.
5. It was vehemently argued by Mr. Bharat Merchant the learned counsel for the appellant that some of the alleged irregularities relate back to a period prior to the introduction of 15HB and yet the appellant has been found to be guilty of 15HB. It was submitted by the learned counsel for the appellant that there was no application of mind by the adjudicating officer and if this aspect of the matter was taken into account, the adjudicating officer would not have imposed any penalty.
6. Mr. Shingnapurkar, the learned counsel for SEBI submitted even assuming that Section 15HB was not in the statute book with respect to certain irregularities which took place prior to 29.10.2002, certain other transactions took place after Section 15HB came into force.
7. The learned counsel for the appellant to summarise the matter has given a chart which we feel appropriate to extract, since the chart gives the summary of the alleged irregularities.
ISSUE LOCATOR
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Sr.
No.
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Charge
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Section/
Reg
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I/Report
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Reply
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W/S.
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Grounds
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Adj/Order
3.11.2004
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Remarks
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(A)
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(i)Transferred
Trade (p.34)
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15HB
R/w
26(xvi)
& (xvi)
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©(1)(a)
P-5
Tr- Self sale
Self Purchaser
C/Notes issued entered in the books as Principal to Principal
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86
Recording of transaction as per software of UPSE
No transfer of trades
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89
using U(code)
T/Trades not executed
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Self sale Purchase
Not defined
Code- Prop & client
Evidence given on 5.11.04 as per assurance
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P. 95(a)
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Order
Log Book
Submitted on 5/11/04
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(ii) Off the floor transactions
(p 36)
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WAIVED
NO ADVERSE INFERENCE
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(iii) Evasion
of Margin payable to Exchanges
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No Evidence
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86
Regularly follow margin
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89
Margin Account
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P36
No evidence in I/Report
No basis Rs.5 Lacs with UPSE margin
Ledger Exh.H
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P95
Margin & consequences of self transfer to show how much margin penalty
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Cases cited – I/R all prior to 29.10.02
15HB w.e.f. 29.10.02
26(xv) & (xvi) wef 20.11.03
ex post fact
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(B)
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Failed to issue confirmation memos as per form (p.38)
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15F(a)
26(v)
(xv)
(xvi)
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P96
Benefit of Doubt given
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(C
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Failure to mention Data Base
(p. 39)
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15HB
26(xv)
Cir 11/4/97
(Ex. J)
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(c)(2) p 6 – 7
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P.87 (c)
Database as per proforma of UPSE
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P 90
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42 contrary to Record
inadvertent omission rectified - 35 crores individual 8 a/c. after 29/10/02 - App. Submitted – Rectified
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Allegations that rectification not produced not correct
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penalty
8 instance after 29.10.02
27 instance before 29.10.02
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(D)
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Failed to mention segregation of clients funds and own bonds (p.43)
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15 HB
26 (xiii)
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2(iii) p.12-13
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87 (D)
Rectified w.e.f. 20.8.03 client funds not used
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p.90 (4)
Banks statement Furnished
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p.43
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At 98
Amount not big Opened a separate client account – During inspection.
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(E)
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Dealing with unregistered sub-brokers (p.47)
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15HB
26(xiv)
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87(E) Appellant cannot appoint Sub-Brokers
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P 90(5) App. A sub broker so cannot appoint sub-brokers. Everyone as individual client 79 Registration Forms given
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P.49
Finding not related to charge
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98
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(F)
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Not adhered to unique client code
(p.54)
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15HB
26(xv)
(xvi)
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5(d) at p.19
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87(F)
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--
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54.
Repetitive charge (a) and (c) wrongly levied Log Book given
No reference
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99
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(G)
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Not framed code of internal procedure & control for prevention of Insider trading (p.55)
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15HB
26 (xvi)
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87(G)
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90 (6)
Being as sub broker not indulging with Insider trading
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55
Code does not apply to Sub broker w.e.f. 29.10.02
No evidence
No basis
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100
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(H)
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Failure to comply with directions
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15HB
26(xv)
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p.91
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p.88
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p.91
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Generic change
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(I)
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Not exercising due skill care and
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15HB
26(xvi)
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15(J)
p.59
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8. It is clear from the materials on record that at least some irregularities did take place after the amendment. One has to take a practical view in this matter.
9. The learned counsel for the appellant relied on a judgement of this Tribunal in Chona Financial Services Ltd. reported in [2004] 55 SCL 276. The relevant portion of the order where the SEBI and the Tribunal have taken a reasonable view of the matter are extracted below:
“The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.
● M/s. Bakliwala Investment
Irregularities
i. Provision for Tax for the interim period from April 1 to September 30, 2000 not made
ii. Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
iii. Broker had not time stamped the order slip/records
iv. Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
v. Contract notes not issued within the specified time.
vi. Consolidated stamp duty not paid.
vii. Client Registration forms were not completed
viii. Order book was not maintained.
ix. Delay in payment of funds
x. Delay in delivery of securities
xi. One client account being adjusted against another client without any authorization
xii. Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
xiii. Compliant register not maintained.
xiv. Client account were used for other purposes
xv. Margin money not collected
xvi. In 10 cases, deals were done outside the NEAT System
Order
1. Irregularities are basically technical lapses and do not deserve a substantive punishment.
2. Minor Penalty – Warning
● M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities
i. Failure to obtain client registration forms and agreement
ii. Failed to maintain separate client account.
Order
Warning
● M/s. Bama Securities
Irregularities
i. Contract notes were missing
ii. Acknowledgement from the clients not obtained
iii. Not maintaining client registration forms
Order
Warning
Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
● M/s. Ratanbali Capital Markets Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Contract notes
Ø Non-collection of margins from clients
Ø Misuse of client’s funds
Ø Share lending/borrowing
Ø Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange
Order
Warning
● M/s. Twenty First Century Shares & Securities Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Delay in payment to clients
Ø Misuse of client’s funds
Ø Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
Ø Booking payment in different clients account.
Ø Loan against shares of holding company and loan transaction in clients account.
Order
Warning
● M/s. Sanjay C. Bakshi
Irregularities
Ø Not maintaining margin registers
Ø Dealing with unregistered sub-brokers
Ø Not entering into agreement with few clients
Ø Non-segregation of clients funds with own funds
Ø Dealing with broker of other Stock exchange without getting registered as a sub-broker
Ø Irregularities in respect of contract notes
Ø Delay in payment/delivery of funds/shares to clients
Order
Warning
● M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Dealing with unregistered sub-brokers
Ø Irregularities in issuance of contract notes
Ø Non-segregation of clients account with own account, misuse of client’s fund
Ø Delay on delivery of securities and not reporting off the floor transactions
Order
Warning
● M/s. Mukesh Sawhany
Irregularities
Ø Non-maintenance of document registers
Ø Irregularities in issuance of contract notes
Ø Non-maintenance of separate client account
Ø Non-segregation of separate client account with own account
Ø Not reporting off the floor transactions
Ø Non redressal of investor complaints
Order
Warning”
10. The learned counsel relied on an order of the adjudicating officer of SEBI dated 30.11.2004 at Exhibit I in the matter of Girish Aggarwal, Trading Member, UPSE and submitted in similar circumstances SEBI has imposed a penalty of Rs. 30,000/- taking into account the factors mentioned in Section 15J. Section 15J reads as follows:
“15J. While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, 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.”
11. Taking an overall picture of the case and following orders of SEBI in Girish Aggarwal’s case and other precedents, we feel it appropriate to impose a penalty of Rs. 30,000/-.
12. Accordingly, in the facts and circumstances of the case, the impugned order is modified to the extent that the appellant is directed to deposit a sum of Rs. 30,000/- within four weeks from the receipt of the order. It is submitted that a sum of Rs. 25000/- has already been paid. The balance amount shall be deposited within the stipulated time.
13. The appeal is disposed of accordingly. No order as to costs.
Justice Kumar Rajaratnam
Presiding Officer
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R.N. Bhardwaj
Member
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C. Bhattacharya
Member
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Place: Mumbai
Date: 9th November 2005
//SR11057