ORDER
UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995, IN THE MATTER OF KARVY STOCK BROKING LTD.
1. Background:
Securities and Exchange Board of India (for the sake of brevity hereinafter referred to as ‘SEBI’) vide its letter dated 26th March, 2003 appointed Raju & Prasad, Chartered Accountants to inspect the books of accounts and other records of Karvy Stock Broking Limited, Hyderabad (hereinafter referred to as ‘KSBL’ or ‘Noticee’). Inspection period was restricted to the financial years 2001-02 and 2002-03. Inspection started on 28.4.2003 and ended on 09.07.2003, thereafter, an Inspection report was submitted by them to SEBI. A copy of the inspection report was sent to the Noticee by SEBI vide letter dated September 1, 2003. The Noticee vide its letter dated September 27, 2003 submitted reply to SEBI. Prior to this inspection, NSE had conducted an inspection covering settlement Nos. 2001015, 2001023, 2001039 and 2001053 covering the period from February 1, 2002 to February 31, 2002 of the Noticee.
2. Appointment of Adjudicating Officer:
I was appointed as an Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties by Adjudicating Officer) Rules,1995 (hereinafter referred to as Adjudication Rules) by SEBI vide order dated Nov. 25, 2004 in place of Shri. J. Ranganayakulu(since proceeded on study leave) to enquire into and adjudge the alleged contraventions of the provisions of law as mentioned in the original order dated March 11, 2004, by the Noticee.
3. Show cause Notice and Reply:
Show cause notice dated April 30, 2004 was issued to the Noticee and the Noticee replied vide letter dated May 24, 2004. After my appointment another notice dated 6th June 2005 was issued giving another opportunity to the Noticee to submit additional reply, if any, and attend personal hearing, if so desired. The Noticee availed the personal hearing through its authorized representatives viz., Mr. S. Gopichand and Mr. J. Ramaswamy on 17th June, 2005 and denied the allegations made in the said show cause notice dated 30th April, 2004. Subsequently, vide letter dated June 22, 2005 submitted copies of few consent letters stated to have been issued by the clients of the Noticee. Now, I shall proceed to examine the allegations, the reply of the Noticee and my findings are as under.
4. Allegation No.1: Whether the Noticee failed to maintain the Order Book in violation of Regulation 26(iii), 26(xv), 26 (xvi) and Regulation 17(1) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
Reply: The Noticee vide letter dated May 24, 2004 submitted that order book was submitted to the inspecting official. The Noticee further submits that order log report downloaded from the NSE is maintained in soft copy. The report contains details of orders placed, modified and cancelled. The Noticee vide its reply dated May 24, 2004 enclosed an Annexure A which is an extract of order book.
Finding: I have considered the replies, inspection report and the annexure ‘A’ submitted by the Noticee. In the inspection report submission of copy of order book is not mentioned. In fact, the report concluded that the order book is not properly maintained. Moreover, the requirement of Order Book is to be maintained in physical register form, the maintenance of soft copy of order log cannot be considered to be sufficient compliance of the Regulation. The Noticee has enclosed only page no.1 and 2 of the Xerox copies of the non existing order book which also does not have the required serial numbers. Hence the genuineness of the annexure is in serious doubt. On consideration of the above, I hold that the Noticee has failed to maintain Order Book in violation of Regulation 17(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. The said violation of Reg. 17(1) is adjudicatable under Section 15HB of the SEBI Act, 1992 and thus attracts penalty.
5. Allegation No.2 Whether the Noticee used multiple client code for the same client thereby violating the provisions of Regulation 26(xv) and 26 (xvi) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and SEBI circular No. SMDRP/Policy/Cir-39/2001 dated 18.7.2001.
Reply: The Noticee submitted that Karvy Consultants Limited is a group company and had requested the Noticee that separate accounts be opened for the purpose of operational convenience and to facilitate easy reconciliation and monitoring of the said accounts. It was further submitted that separate accounts were opened at the request of the clients. It was further submitted that as on the date of reply there is only one code for the said client. KAR01 account of KCL had only Rs.11 lakhs of volume in both the financial years put together. The account had been opened in September 2001 and no transactions were executed in the account subsequent to April 2002.
In the KAR02 account, it registered volumes of Rs.20.30 crores in the two financial years and continues to be the only account now for any investment / trading activity. In KAR05 account initiated in the month of February 2002, the transactions closed in the month of December 2002. KAR04 account was opened by KCL to compensate the post issue claims as KCL has acted as Registrar to Issue. KCL opened two separate accounts K 8888 and K 9999 to service its customers in the capacity of acting as Depository Participant. In KAR 06, the account was initiated in May 2002 and transactions closed in September 2002. It had a total volume of Rs. 3.06 crores in the years 2002-03. KCL has been issued a separate show cause notice for having multiple client code. The reply of KCL was annexed vide letter May 24, 2004.
Finding: I have carefully gone through the Replies and Inspection Report and related annexures. The usage of different codes was done continuously for the years 2001-02 and 2002-03 and huge volume had been done in these two years by the client amounting to Rs. 85.96 crores and Rs. 109.49 crores respectively. The Adjudication Officer of SEBI vide order dated July, 21, 2004 imposed a monetary penalty of Rs. 30,000 against KCL for having multiple client code. The Noticee has admitted the usage of multiple client code. It’s only explanation is limited to the purposes for which the client of KCL opened multiple client accounts. The circular does not allow usage of multiple client codes for the above said purposes. The consideration that as on this date there is only one client code does not mitigate the previous violations. In the reply dated March 13, 2004 submitted by KCL to the Adjudicating Officer in response to the show cause notice dated 23 February, 2004, KCL has stated that the transactions in K0888 were stopped in January 2003 and in K0999 in May, 2003. This letter was also produced before me. At this juncture, I note that Section 15 HB of SEBI Act, 1992 reads as under.
Section 15 HB:
“Penalty for contraventions where no separate penalty has been provided 15HB. 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.”
The circulars are directions of the Board to be complied with. Hence I hold that the Noticee has violated SEBI’s circular No. SMDRP/Policy/Cir-39/2001 dated 18.7.2001. The failure to comply with the same attracts penalty under Section 15 HB of the SEBI Act, 1992.
6. Allegation No.3 Whether the Noticee indulged in funding activities in violation of Regulation 26(xv) read with Clause A(5) of Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and Rule 8(1) (f) and 8(3)(f) of Securities Contracts (Regulation) Rules, 1957.
Reply: The Noticee contended that the report submitted by the auditors at page no.28 mentioned that there were no direct fund based activities, though there have been instances of client trading in spite of having debit balances in their account. The Noticee also submitted that the client cases cited, there were securities collected as collateral margins. The Noticee submits that the evidence of such collateral securities were shown to the auditors.
Finding: I find no such documentary evidence of such collaterals to the credit of the clients with the Noticee in margin deposit or any other deposits being annexed in the Inspection Report and no such documentary evidence was produced vide replies or during the course of the personal hearing. Hence I hold that the Noticee has failed to substantiate its submissions.
As far as the KCL is concerned, the Noticee submits that it is the principal company in its group which has helped the Noticee to tide over temporary cash flow needs to meet the pay-in-obligations on account of the shorter settlement cycles. The Noticee denied funding for KCL with regard to any of its transactions. It is observed from the records, that the Noticee has been borrowing money from KCL to meet the settlement obligations of its clients. Inspection team has found out such violations upto the period of March 2003. Hence I am convinced that the Noticee has indulged in funding activities in violation of Clause A (5) of Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The inspection report reveals indirect funding by the Noticee as on 31-03-2002as well as 31-03-2003. Rs.28,134,933.82 is shown as closing balance as on 31-03-2003 lying with the group companies of the Noticee. Section 15HB of the SEBI Act, 1992 came into force w.e.f. 29-10-2002. Since the indirect funding as on 31-03-2002 was committed before Section 15HB came into force, therefore, penalty cannot be imposed under Section 15HB. Whereas, the indirect funding as on 31-03-2003 is adjudicatable under Section 15HB inasmuch as the same was committed after Section 15HB came into force. Hence, I hold that the Noticee is liable for penalty under Section 15HB for the indirect funding made as on 31-03-2003.
7. Allegation No.4 Whether the Noticee dealt with Unregistered Sub Brokers in violation of Regulation 26(xiv) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 read with circular No. SMD /Policy/Cir-3-97/ dated 31.03.1997 and Circular No.02/2001 dated 15.01.2001 issued by SEBI.
In the Inspection Report, it is mentioned that the Noticee has allowed Arihant Consultancy to commence their operations to act as a sub broker even before obtaining the registration from SEBI. Arihant Consultancy commenced its trade on 12.12.02 while the date of certificate of Registration granted by SEBI is 18.02.03, D.K Consultancy Services commenced its trade on 15.05.01 while its date of registration is 6.6.02, Sarojwala investments commenced its trade on 29.06.01 while its date of registration is 29.05.2002 and Senibar Securities commenced its trade on 2.09.98 while its date of registration is 09.2.1999.
Reply: The Noticee submitted that these were instances wherein the Noticee continued with the same ledger account in their books for the said sub brokers who initially started in individual capacity and on expressing interest to become its sub broker the registration was done.
Finding: The Noticee has not substantiated its claim that the above entities dealt with it as its own clients before they got registered as sub brokers by producing client registration form or broker client agreements with reference to the above entities in the relevant period. The above entities if transacted with the noticee as clients these documents must have been executed by them. Moreover, the receipt of the cheques from third parties by Noticee’s clients indicates that the clients (sub-brokers) are executing transactions on behalf of their clients. Arihant Consultancy commenced its trade on 12.12.02 while the date of SEBI registration is 18.02.03. In other cases, it is observed that the violation is before the coming into operation of Section 15HB of SEBI Act, therefore, penalty cannot be imposed for the said violations. Under Section 15 HB of SEBI Act, any violation of circular can be adjudicated upon inasmuch as circular being in the nature of a direction. Hence I hold that the noticee has allowed Arihant Consultancy to act as sub broker, even before grant of Certificate of Registration as a sub broker by SEBI, thereby becoming liable for penalty under Section 15 HB of the SEBI Act.
Reply: As far as the allegation of Karvy Consultants Ltd. (KCL) as its unregistered sub broker, Noticee submitted that KCL is the principal company and is registered for the DP business besides being registered as Share transfer agent. It also has dealership at the OTCEI and hence a registered broker.
The noticee further submitted that an account was opened with KSBL, KCL used to carry out purchase and sale transactions for investors having accounts with KCL as Depository participant. The noticee submitted that this was necessitated primarily on demand from investors who did not transact regularly. It was further submitted only investors who held their DP accounts with KCL were allowed to transact. The Noticee further contended that since it was purely incidental to their DP business and they were not carrying out this activity for any outside investors, KCL requires no registration. Further it was submitted as KCL holds stake in KSBL and is a promoter company it is considered to be carrying any broking activity. The Noticee vide letter dated May 24, 2004 submitted the reply of KCL dated March 13,2004 in response to the show cause notice issued by AO, SEBI in another Adjudication proceeding for the violations for multiple client code and acting as sub broker among other things. The noticee further submits that since then KCL has stopped activity and every investor of its DP business who intended to transact is now registered as a Client with KSBL
Finding: I have carefully considered the submissions of the Noticee. The Noticee has admitted that it was within his knowledge when KCL acted as sub broker. The contention of the noticee that acting as such sub broker only for the investors who avail KCL services as Depository Participant is not exempted under any of the provisions. The consent of investor to act as his sub broker cannot be a justification for violation of a Regulation. There is no duty cast upon the Depository participant to act sub broker to it’s account holders. Dealership at the OTCEI does not dispense with the need to be registered sub broker. KCL has conducted purchase transactions in the account codes K8888/K0888 on behalf of their clients and sale transaction in account codes K99999/K0999 on behalf of its clients. Hence KCL is acting as a sub broker on behalf of its clients. But KCL is not registered as sub broker with SEBI. In the reply dated March 13, 2004 submitted by KCL to the Adjudicating Officer, Mr. Anantha Barua in response to his show cause notice dated 23rd February, 2004, KCL has stated that the transactions in K0888 were stopped in January 2003 and in K0999 in May, 2003. This letter was also produced before me. This shows the violations were admittedly done till May 2003. Therefore I hold that the act of failure to comply with the circular by the Noticee is liable for monetary penalty under Section 15 HB of the SEBI Act, 1992.
7.1 Dealing with Krishi Shares, an un registered sub broker:
Reply: In so far as the dealings with Krishi Shares are concerned, the Noticee submitted that the account of Krishi Shares was initially registered in an individual capacity. When the noticee found that client was dealing for others, Krishi Shares explained that those dealings were done only for its family members and relatives and not for general investors. When the noticee demanded the client to register as sub broker, it could not be done as the paid up capital was less than 5 lakh. Subsequently, the client registered as Anjeneya securities. Before initiating transactions in the new account, as the client expressed its interest to settle and close all deliveries in the existing account, settlement of the existing account was done.
Finding: I have considered carefully the reply and report. The noticee has admitted dealing with Krishi Shares in its capacity as sub broker, despite being not registered with SEBI. The justification of this client that Krishi Shares acted only for its relatives falls to ground and does not hold water. Its subsequent registration only goes to show that it must have had voluminous clients on its own. The reply is not convincing inasmuch as the prohibition not to act as sub broker without obtaining certificate of registration is complete one. The same cannot be relaxed if the persons the client is dealing with are his relatives. In Annexure 37 of the report DP statement evidencing third party deliveries to the effect Krishi shares is executing transactions on behalf of its clients is noticed for the period from March 2002 and March 2003. The transaction statements (Annexure 37 at page No.334 to 337 of the inspection report) evidences third party deliveries during the period February 2003 to March 2003 made by Krishi Shares in the capacity of unregistered sub-broker. Hence, I hold that the Noticee is liable for penalty under section 15HB of the SEBI Act. Circular No.SMD /Policy/Cir-3-97/ dated 31.03.1997 mandates that no broker shall deal with a person who is acting as a sub-broker unless he is registered with SEBI. It shall be the responsibility of the broker to ensure that its clients are not acting in the capacity of a sub-broker unless they are registered with SEBI as sub-broker and Circular No. 02/2001 dated 15.01.2001 mandates all the brokers to ensure that their sub-brokers are permitted to start business only after clearance and receipt of registration certificate from SEBI. The violation of the above circulars attract penalty under Section 15 HB of the SEBI Act, 1992.
8. Allegation No.5 Whether the Noticee delayed the Payment of moneys/delivery of securities to clients in violation of Regulation 26(vi) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 read with SEBI circular SMD/SED/CIR/93/23321 dated 18.11.1993 and SEBI Circular No. SMDRP/policy/Cir No. 5/2001 dated 1.2.2001.
Reply: The noticee submitted that it has got general authorisation in the client registration forms for such withholding the payment and deliveries. The Noticee submitted vide letter dated June 22, 2005 copies of six consent letters all dated in the years 2001 and 2002 except one letter which is dated 2003. The consent letters of the following were enclosed vide the above said letter namely, 1) Vijay Oswal 2) A.VijayKumar 3) D.Venkata Narishimha Reddy 4) K.Venkata Radha 5)Venkata Reddy. B 6) R.S. Vasudev Rao.
Finding: I have considered the reply and report and consent letters carefully. I note that detail of instances of delay is mentioned in Annexure-19 attached to the Report. The above said consent letters submitted by the Noticee are not with reference to the persons whose names are found in the Annexure 19. The Noticee has not substantiated its claim before me by showing the consent letters from the parties mentioned in Annexure 19 of the Inspection Report. Hence, I am convinced that the noticee has violated SEBI circular SMD/SED/CIR/93/23321 dated 18.11.1993 and SEBI Circular No. SMDRP/policy/Cir No. 5/2001 dated 1.2.2001 by making delayed payments/securities to the clients mentioned in the Annexure 19 of the Report. Hence only those violations of the above said circulars which were committed after 29.10.2002 are liable for being imposed monetary penalty inasmuch as Section 15HB came into force w.e.f. 29.10.2002. In annexure 19 of the report at serial no.12 and 13 are the violations of the circular committed after 29.10.2002. The failure to comply with the circulars attracts penalty under Section 15 HB of the SEBI Act, 1992.
9. Allegation No.6 Whether the Noticee has failed to maintain client database in violation of Regulation 26(xv) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Reply: The noticee submitted that they maintain client registration forms and the client data base in an appropriate manner. The procedure followed in the client registration process that in select cases the noticee does a physical verification and the trading limits and exposure are fixed based on the client’s deposit with them by way of funds or securities. The client registration form also provides for proof of income. Presently in the client registration form, the annual income of the customer is filled and this is further substantiated by a copy of the bank statement. As far as the non inclusion of clause 7 in the member-client agreement the Noticee submitted that those are the cases where the client registrations were done prior to November 2001 or instances at their branches where old client registration forms were used. Later clause 7 was separately signed as addendum to the member-client agreement.
Finding: No documentary evidence of such addendum was produced before me. Annexure 28 of the Report shows the deficiencies of the member -client agreement. The deficiencies include failure to mention portfolio details, failure to get signature and attestation. In the case of client, Krishi shares (client code K0789) the agreement was executed on 30th September, 1999 while the client company got registered only in 6.12.99. Further, the failure includes not affixing photographs, not filling up indemnity bond, not producing proof of identity, copy of income-tax return, certificate of incorporation/Banker’s certificate. In the case of Client, viz. Apple Advertising Marketing P.Ltd. client no. A 0023, the agreement was made in January, 1998 while the company was incorporated in February, 1999. The member client agreement and client registration forms are to be maintained as per SEBI circular No. SMD/POLICY/Cir./5-97 dated April 11, 1997. The deficiencies above found are violations of the said circular. The above said violations are continuing in nature as no documentary proof of remedy of the above said violations were produced before me. The act of failure to comply with the said circular is liable for penalty under Section 15 HB of the SEBI Act, 1992.
10. Allegation No: 7 Whether the Noticee failed to redress the Investor Grievances in violation of Regulation 26(iv) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
The Noticee submitted that no investor grievance is pending. I have carefully perused the Reply. Annexure 30 of the report mentions 16 complaints which are outstanding. The Report further mentions that the Noticee is generally prompt in redressing the investor grievances. Taking into account this general observation I hold that the Noticee is in breach of redressal of investor grievances only in the cases mentioned in the annexure. The list of investor grievances pending is the status as on 22.05.2003 and 26.05.2003.The applicable law on the date of violation is Section 15C of the SEBI Act, 1992. I note that Section 15C of SEBI Act, 1992 reads as follows:
Penalty for failure to redress investors' grievances 15C. If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
Since the noticee has failed to substantiate its contentions by producing documentary evidence towards redressal of investor complaints, I hold that Noticee has failed to redress the Investor Grievances which attracts penalty in terms of Section 15C of SEBI Act, 1992.
11. Allegation no. 8 Whether the Noticee continuously violated the rules in spite of being pointed out in the earlier Inspection Report in violation of Regulation 26(xv) and 26(xvi) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
The earlier Inspection report of NSE pointed out the non collection of margin money in case of 234 active constituents. The present report in page no.42 and 43 mentions the instances of non collection of margin monies in four instances.
Reply: The Noticee submitted that in respect of its client viz.Buoyant, the client was allowed to purchase securities against an authorization from a group account which owed monies to its client account and there were credits available in the group account in its books.
In the case of Aghoram, the client has deposited a Cheque of Rs. 19.65 lakhs on 7.02.03 in its bank account towards its previous settlement obligation, for which the pay in/out was on 7.02.2003 and the securities due in the payout were considered as collateral margin for purpose of initiating transactions on 7.02.2003. On the date of this transaction, the client had issued to the noticee a Cheque for Rs. 2 lakh which was duly encashed on 10.2.2003. On the scheduled pay in/pay out date i.e., 11/02/2003, the balance monies also were received.
In the case of the client Gayathri Reddy Kommara, the client’s securities valued at Rs. 23 lakh as on the date of the transaction were held by the noticee. In the case of the client Kokila Parthasarathy, the notice submitted that the client had actually a credit of Rs. 1406844.45 in the ledger as on 25/02/2003.
Findings: The Noticee has not substantiated by providing any documentary evidence as to the authorisation from Buyont on the one hand and on the other hand no mention of account numbers of the group accounts are made. In the case of Aghoram, the payment of consideration by the above said Cheque payment is in furtherance of the settlement obligation of the client towards purchase of scripts which cannot be considered to have satisfied the margin requirement of the client. Hence I hold that on this count also the Noticee failed to maintain the margin amount as required under the law. In the case of the client Gayathri Reddy Kommara and Kokila Parthasarathy, no documentary proof was given substantiating the claim of the Noticee with regard to the custody of securities or credit in the ledger. Therefore, I am convinced that the charges stand proved.
Hence I hold that the failure to collect margin money is in violation of circulars No. SMDRP/policy/Cir-35/98 dated December 4, 1998, SMDRP/Policy/Cir-7/00 dated February 4, 2000, SMDRP/Policy/Cir-33/00 dated July 27, 2000 and SMDRP/Policy/Cir-12/2002 dated May 17, 2002 and the noticee is liable for penalty under section 15 HB of the SEBI Act.
12. Allegation No.9: Whether the Noticee failed to comply with directions issued by the Board vide Circular Nos. SMDRP/Policy/Cir-39/2001 dated 18.7.2001, SMD /Policy/Cir-3-97/ dated 31.03.1997, Circular 02/2001 dated 15.01.2001 and SMD/SED/CIR/93/23321 dated 18.11.1993 in violation of Regulation 26(xv) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Reply : The Noticee contended that the transfers made by it from the clients accounts were within the brokerage due to the member and the same are permitted. The member thereby denied the allegations of misutilisation of funds.
Findings : Circular SMD/SED/CIR/93/23321 dated 18.11.1993 mandates that no broker can utilize the money from client account unless to the extent allowed by the circular. The notice submitted that there is no misutilisation of the clients funds. I have carefully considered the Report and Reply. Inspection has found out withdrawals from clients bank account for purposes other than for clients use which nearly are 21 in number. However, withdrawal of money from clients is permissible under the circular itself for the purposes mentioned in the Circular. The instances quoted in the inspection report only pertain to the amount paid to the affiliated broker (BSE). The transfer to General expense Account is permissible if such transfer is within the limits of the brokerage amount which the client owes to the Broker. Annexure 25 of Inspection report indicates a sum of Rs. 169.37 lakhs representing balance of brokerage remaining in the clients accounts. But it is not mentioned in the Inspection Report whether the individual instances of withdrawal of money from client’s account is within the limit of brokerage due to the Broker at the time of each withdrawal. Since no specific conclusion can be arrived at that the withdrawal of the clients money is within or beyond the limit of brokerage and also in view of the observations in the inspection report at page no.36 that “generally there has not been any misutilisation of clients monies”, I hold that the allegation of misuse of clients funds stands disproved on the ground of insufficient evidence.
13. Consideration of Section 15J of SEBI Act:
I note that Section 15J of SEBI Act enjoins the Adjudicating Officer to 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.
I shall proceed to examine these factors in the context of present Adjudication. As far as the first allegation is concerned the failure to comply with the regulatory requirement helps to reduce the regulatory cost of the Noticee, as non compliance dispense with the requirement of manpower necessary to comply with this regulatory requirement. As the unfair advantage the noticee derives is minimal, it accordingly deserves to be treated.
As far as the second allegation is concerned the usage of multiple client code would facilitate to conceal the identity of the investor to a greater extent. Any investor willing to conceal his identity would naturally tempt to have investment relations only with the broker who provides that facility. This in turn results in unfair advantage to the Broker/noticee in comparison with other brokers who comply with the multiple client code requirement. This non compliance indirectly increase the brokerage commission also.
As far as the third allegation is concerned, funding activity will help the Noticee to attract more number of clients as it helps the client to trade though he may not have enough balance to meet out the settlement obligations. This in turn would further result in more brokerage. This violation has the effect of placing the Noticee in an unfair advantageous position vis a vis other brokers. Moreover, the increase in the brokerage commission on this score is a disproportionate gain to the Noticee.
As far as the fourth allegation is concerned the unlawful facility of allowing the unregistered sub brokers to deal with the noticee would fetch an unfair advantage to the noticee when compared to other brokers who deal with only registered sub brokers. By having financial relations with the noticee, the unregistered sub broker deals in his own account as well his clients account. This gives rise to the client who want to perform sub broking activity but without registration an incentive by way of non payment of necessary fee to the Regulatory Agency. This again would help more clients with similar intention to have trade relations with the noticee who in turn increases number of clients and result in increased profit when compared to the broker who complies with this requirement. This violation is more serious and it deserves to be treated with proportionate penalty in as much as the same would militate against the Regulatory frame work envisaged by SEBI Act, 1992 and also the rules, regulations made thereunder.
As far as the fifth allegation is concerned the violation of this requirement results in loss to the investor as the investor does not get the securities and payments in time. But in the present case the delay is only 7 days and 3 days respectively and it deserves to be treated accordingly.
As far as the sixth allegation is concerned the failure to keep client database helps the violation of clients go undetected. As the necessary details to be maintained in the client database will help tracing the identity and other related aspects, the non compliance would help such clients to have trade relation with the Noticee which fetches an unfair advantage to it in comparison to the other brokers who maintain the client data base.
As far as the seventh allegation is concerned, only in few cases the redressal of grievances of the investor is pending. Hence it is to be treated accordingly.
As far as the eighth allegation is concerned the Noticee is a repetitive defaulter. Hence this violation deserves to be treated accordingly. Margin money requirement is a risk management mechanism which helps mainly the brokers. While the Noticee takes the risk which the Circulars prohibit him to take, when taken by him would place in an advantageous though risky position when compared to the other brokers who comply with this requirement. Since the clients can deal without margin requirement it results in increase of more clients and turn over which in turn places the Noticee in unfairly advantageous position when compared with other brokers who comply with this requirement. This violation also has the potential to affect the safety and the integrity of the securities market.
Further, while dealing with the applicability of Section 15C and 15HB of SEBI Act, I have relied on the ratios laid down by Hon’ble Securities Appellate Tribunal in Rameshchandra Mansukahni vs SEBI (Appeal No.151/2004) to the effect that penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment. I have also considered section 6 of the General Clauses Act,1897 and ratios laid down by Supreme Court while interpreting the said section in Ambalal Sarabai Enterprises Ltd. vs. Amrithlal & Co (2001) 8 SCC 397, Darshan Singh vs. Ram Pal Singh and Another 1992 Supp (1) SCC 191, Govind Das v. ITO, (1976) 1 SCC 906, Jose Da Costa v. Bascora Sadasiva Sinai Narcornium, (1976) 2 SCC 917 and Garikapati Veeraya v. N. Subbiah Choudhry, AIR 1957 SC 540, to the effect that statute unless expressly made retrospective is prospective in operation.
Any breach or deviation of the regulatory provisions or directions issued by SEBI in the interest of investors cannot be treated lightly inasmuch as adherence to regulatory framework is a sine qua non for the healthy growth and safety of the securities market otherwise, the very purpose of regulatory legal framework would be defeated. If no cognizance were to be taken of any breach of the provisions of law and no penalty imposed thereupon, the same would send wrong signals to the market albeit there are no figures or data available on record to quantify the amount of disproportionate gain or unfair advantage or loss caused to the investors as a result of the breach of the provisions of law by the Noticee. Therefore, in the light of this, imposition of quantum of penalty has to be decided keeping these factors also in mind, in addition to the factors laid down under Section 15 J of SEBI Act.
14. ORDER:
Therefore in exercise of the powers conferred under section 15-I read with Section 15C and 15 HB of the Securities and Exchange Board of India Act, 1992 and Rule 5 of the Adjudication Rules, I hereby impose a penalty of Rs.2,00,000 (Rupees Two lakhs) on M/s KARVY STOCK BROKING LTD. In my view, the above penalty is commensurate with the defaults of the Noticee, in the facts and circumstances of the case.
The Noticee shall pay the amount of penalty by way of demand draft drawn 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 Chief General Manager, Ms. Usha Narayanan, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
In terms of Rule 6 of the Adjudication Rules, a copy of this order is sent to the Noticee and also to Securities and Exchange Board of India.
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Mumbai
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D. Sura Reddy
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Date : November 18, 2005.
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Adjudication Officer
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