ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATION 26(iii), (vi), (xv), (xvi) and (xix) of SEBI (STOCK BROKERS AND SUB BROKERS) REGULATIONS, 1992 AND SECTION 15HB OF THE SEBI ACT, 1992 AGAINST M/s CIL SECURITIES LTD. (SEBI REGD. NO. INB230643037).
1.0 BACKGROUND:
1.1 M/s CIL SECURITIES LTD. (hereinafter referred to as “broker”) having Securities and Exchange Board of India (hereinafter referred to as SEBI) registration no. INB230643037 is a member of National Stock Exchange (NSE).
1.2 An inspection of the books of accounts, documents and other records of broker was conducted by SEBI between August 06, 2003 to August 22, 2003. The period covered under the inspection was April 1, 2001 to August 22, 2003. During the inspection, certain irregularities and violations of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’) by the broker were observed.
1.3 Vide letter dated September 2, 2003 a copy of the inspection report alongwith its findings was forwarded to the broker advising it to submit its explanation/comments together with supporting documents, if any.
1.4 The broker vide its letter dated September 13, 2003 submitted its comments on the findings of the aforesaid inspection report. SEBI after examining those comments, being not satisfied with the same, decided to initiate Adjudicating Proceedings under section 15HA of SEBI Act, 1992 and accordingly vide order dated March 11, 2004 under Rule 3 of SEBI (Procedure for Holding Enquiry and Imposing penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Adjudicating Rules’) appointed Shri J. Ranganayakulu (hereinafter referred to as “The erstwhile Adjudicating Officer”) to enquire into and adjudicate upon the alleged violations by the broker.
1.5 While the above proceedings were going on, SEBI came to know that the broker had also extended the use of trading terminal to an unauthorised person and place in violation of Regulation 26(xix) of the Broker Regulations, 1992. Therefore, SEBI vide its another order dated March 29, 2004 extended the scope of the ongoing Adjudicating Proceedings and advised the Adjudicating Officer to adjudicate on the alleged aforesaid violation as well.
2.0 SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2.1 The erstwhile Adjudicating Officer issued a combined show cause notice dated April 23, 2004 to the broker pursuant to both the above mentioned orders and advised it to show cause as to why penalty cannot be imposed on it in terms of section 15HB of SEBI Act, read with regulations 26(iii), (vi), (xv), (xvi) and (xix) of Broker Regulations. The broker replied to the said show cause notice vide its letter dated May 11, 2004. Vide another letter dated September 07, 2004 the broker forwarded confirmation letters from some of its clients and requested to place those letters also on record.
2.2 Due to administrative reasons, vide order dated November 25, 2004 the case was transferred to the undersigned and the undersigned was appointed Adjudicating Officer. It was clarified in the said order that except the change of Adjudicating Officer, the other terms and conditions of the original orders, appointing Shri J.Ranganayakulu as the Adjudicating Officer, shall remain unchanged. As per the order, the undersigned was to proceed and deal with the case from the stage which was reached before such transfer or from any earlier stage as may deemed fit by the undersigned to complete the Adjudication in accordance with the terms of reference made in the original orders read with present order.
2.3 Having considered the charges levied and the reply submitted by the broker available on the records, the undersigned was of the view that the enquiry should be held in the matter. Therefore, while adopting the charges levied in show cause notice April 23, 2004 issued by erstwhile Adjudicating officer and treating said show cause notice as part and parcel of the present proceedings, the undersigned issued a notice dated September 30, 2005 to the broker in terms of Rule 4(3) of the Adjudicating Rules, fixing a date of personal appearance of the broker on October 21, 2005. The broker was given the liberty to appear either in person or through duly authorised advocate or other representative. It was also given the liberty, if it so chose, to make additional submissions relevant to the case.
2.4 The broker vide its letter dated October 18, 2005 requested for an adjournment and accordingly the hearing were adjourned to November 18, 2005. On the said date Shri K.K. Maheshwari, the Managing Director and Shri Gulab Maheshwari the Branch Manager (Mumbai) of CIL Securities (hereinafter referred to as ‘representative’) appeared before me and made submissions. During the course of the personal hearing, in terms of Rule 4(4) of the Adjudicating Rules, the charges levied in show cause notice dated April 23, 2004 and September 30, 2005 were explained to the representative. The provisions of the Act, Rules or Regulations alleged to have been violated were also explained and the representative submitted that they had understood the charges levied.
2.5 While referring to the replies dated 11.5.04 and 18.10.05 it was submitted on behalf of broker that all the explanations have already been detailed in their replies. Representatives submitted a letter dated 18.11.05 enclosing therewith certain additional documents in support of their explanations/replies and requested the same to be considered while taking a view in the matter.
3.0 CONSIDERATION OF ISSUES AND FINDINGS :
3.1 I have carefully considered the inspection report, the submission/explanation of the broker, Show cause notices, the replies and the submissions made during the personal hearing before me. The summary of the charges alleged, the reply received from the broker and my findings thereon are as under:
CHARGE 1:
Non maintenance of Order Book, Document Register, Correction Note Book and Margin Deposit Book in violation of Regulation 26 (iii), 26(xv) and 26 (xvi) of the Broker Regulations, 1992.
Reply of the Broker
Books of accounts for each branch are maintained at the place of operation and all the data and records pertaining to the branch are kept at the branch. Consolidated Accounts of all the branches are maintained at the Head Office at Hyderabad besides the books of accounts for the Hyderabad Branch which have been placed before the Auditors and have been thoroughly scrutinized.
Orders are being received from the clients over telephone and over the counter and the same are entered into the NEAT system. Order book is maintained in soft copy for the orders entered/modified/edited/cancelled and executed. In our compliance report to NSE we have informed NSE of the procedure adopted.
Findings :
It is clearly indicated in the report that the member was not maintaining Documents register and Margin deposit book and no explanation was furnished by it to SEBI in this regard when the inspection report was forwarded to it seeking explanation/comments. It is only during the personal hearing before me, the representatives of broker claimed that the document register was being maintained and even submitted some copies of the bills containing details of the certificate nos. and the distinctive nos. of the shares being received and delivered to the client. In this regard, I fail to understand that what stopped the broker to produce these evidences before the inspection team and thereafter to SEBI between September 2003, when the inspection report with its findings was forwarded to it for comments and November 18, 2005, the date of personal hearing.
In the circumstances of the case, I am not satisfied with the contention of the broker and hold that the records were not maintained as per the requirements. The documents claimed to have been maintained by the broker do not adequately satisfy the requirement of law and therefore this omission is in violation of Regulation 17(1) read with Regulations 26 (iii), 26(xv) and 26 (xvi) of the broker Regulations.
CHARGE 2 :
Failure to collect margins in violation of Regulation 26(xv) and 26 (xvi) of the Regulations;
Reply of the Broker :
Though no reply to this charge was furnished after receipt of the inspection report from SEBI, I note that the broker submitted its reply pursuant to the show cause notice dated April 23, 2004 and during personal hearing before me by saying that it has retail investors and transactions normally resulted in delivery. As the settlement cycle during the period of inspection was rolling settlement, no separate margin account was maintained by it.
Findings :
I do not find above reply as satisfactory by any standard. Margins are directed to be collected in order to minimise the risk in case of default. The inspection report has observed the instances of non collection of margins from the clients on settlement basis. It has also noted that in some cases, the transactions were backed partly by credit available in the clients account and partly by securities held on hand on the transaction date. I note from the reply of the broker dated September 13, 2003 that while admitting the shortfall in the margin amount the broker attributed the same to pending clearance of the cheques in banks. In any view of the matter, non collection of adequate margins is a serious violation of the SEBI directions on risk containment measures.
CHARGE 3 :
Delay in payment of monies/delivery of securities to clients in violation of Regulation 26(vi) of the Regulations;
Reply of the Broker :
Clients were maintaining running account wherein the clients were buying/selling shares under their standing instructions by way of letters, not to transfer the shares/make payments unless specifically asked for. It was also submitted that these letters were produced at the time of inspection and in the present proceedings. It was also stated that all shares/funds not collected by the clients were retained by the broker to be adjusted against shares sold/bought by them. Shares/funds are kept separately and not utilised either by itself or for any of its clients and the same are released as and when instructed by the clients.
Findings :
Several instances of delay in transfer have been reported and the contention of the member that he has authorisation letters from the clients for retention of scrips/money of the clients and therefore there was delay in transfer cannot be accepted because first of all, mere possession of consent letters does not authorize a member to delay in transfer of such scrips. The member should have put forth some evidence to indicate that he had been transferring the scrips to client account without delay and within the mandatory period as and when required by the clients.
Further, all the ‘authorisation letters’ subsequent to the inspection, were dated almost same day i.e. May 04/05, 2004 and were typed in the same font giving rise to a suspicion regarding their genuineness. I also note from the purported ‘authorisation letters’, submitted vide letter dated November 30, 2005 pursuant to the personal hearing wherein the broker was advised to submit the said letters issued by the clients prior to the date of the inspection, that none of the said letter contained date.
In these circumstances, even assuming that the broker has received authorisation from the clients to retain money/securities, such authorisation was obtained subsequent to the inspection and not prior thereto and therefore though this may be taken as a mitigating factor in deciding the amount of penalty, the lack of proof regarding delay in making payment/delivering securities was in violation of Regulation 26(vi) of the Broker Regulations.
CHARGE 4:
Failure to maintain client database in violation of Regulation 26(xv) of the Regulations;
Reply of the Broker :
Client broker agreement has been entered with all the clients. In respect of the clients pointed out by the Auditors in the report, broker submitted copies of client agreements. Further, it was submitted that the deficiencies noticed in the client agreement during inspection, have been obtained/corrected/complied with.
Findings:
It is reported in the inspection report that the member does not maintain the client registration forms for few of his clients and in some of the cases, the details furnished are inadequate in as much as not containing the photo or proof of identity. This lapse was admitted by the broker in its reply when it stated that deficiencies noticed in this regard have now been corrected.
CHARGE 5 :
Extension of the use of Trading Terminal to unauthorised person and place by its Sub-Broker in violation of Regulation 26(xix) of Broker Regulations, and non reporting of the same by broker to NSE.
Reply of the broker :
The trading terminal was extended to unauthorised person and place by M/s. S.G.Securities, one of its sub-broker at Calcutta. The sub-broker’s business was stopped in February, 2004 and sub-broker registration has been submitted for cancellation to the exchange. No investor complaint has been received in the matter and Adjudicating Proceedings have already been completed by SEBI against M/s S.G. Securities imposing a penalty of Rs.40,000/-.
Findings:
I note that NEAT user id 8745 allotted to the broker in the office of its sub broker M/s S G Securities Ltd. was extended to the office of Delta Alliance Financial Services Ltd. without the trading member obtaining authorisation from NSE. I however note that the broker has submitted that NEAT access was given to its sub-broker on November 25, 2003 and the same was withdrawn on December 12, 2003 as the sub-broker had extended the same to unauthorised person and place.
I note the contention of the broker that no loss was caused to the investors and no investor complaint is pending either with SEBI or with NSE. I further note that a penalty of Rs. 40,000/- imposed by SEBI on M/s SG Securities has been paid and the said sub-broker has stopped business and its registration has been submitted to NSE for cancellation. I also note that the broker had issued an advertisement in the newspaper for settling the claims, if any, against the said sub-broker and therefore agree with the contention of the broker that it was the sub-broker and not the broker who was responsible for unauthorised extension of the terminal. Without prejudice to the above, it is well settled that sub broker is an agent of the broker and to that extent broker will have to take the blame for misdeeds of its sub broker.
I also note the contention of the broker that it is a corporate member of the National Stock Exchange since inception of the Exchange ie. 3rd November, 1994. It operates through a Network of its own Branches and Sub-brokers and has over 7000 Clients with combined Turnover in excess of Rs.10,000 crores in the Cash Market and F&O Segment. It is further stated that the lapses noticed if any, were on account of oversight in an insignificant number of transactions as compared to their overall business. Further, no undue advantage nor gain has been made by it by any means and no Client nor Investor has suffered loss.
I however also note that all the deficiencies noted above amount to failure on the part of the broker to comply with relevant regulations and also regulation 26(xv) which deals with failure to comply with the directions issued by the Board and also SEBI circular SMDRP/POLICY/Cir.33/2000 dated 27.7.2000 read with Cir.6/2001 dated 1.2.2001. Further, these omissions show lack of due skill, care and diligence on the part of the broker in violation of Regulation 26(xvi) of the Regulations making the broker liable to be penalized in terms of section 15HB of SEBI Act.
4.0 PENALTY :
4.1 So far as the amount of penalty, it would be pertinent to refer to the relevant provisions of the SEBI Act as under:
(a) Penalty for contravention 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.
(b) Factors to be taken into account by the adjudicating officer
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.
4.2 There is nothing on record to suggest that the broker extracted any disproportionate gain or unfair advantage as a result of its default. Also nothing has been brought to my notice that the broker has repeated those faults/violations subsequently. The record does not indicate even a single investor complaint. So far as the misconduct of its sub-broker, the broker seems to have cleared all the dues.
4.3 It can however not be denied that any non compliance of the statutory/regulatory requirements/provisions made for the protection of the investors in securities and to regulate and promote the development of securities market, for whatsoever reason is bound to affect the interest of such investors and deprive them of a fair and well regulated market. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose and the very purpose of enacting any legislation and requiring some compliances to be observed by the persons concerned, is to ensure the sound and smooth functioning of the market. Therefore, even if no specific or identifiable loss is caused to any investor the cognizance has to be taken for any breach of the legal provisions and the violator has to be made liable for his non compliance.
4.4 Thus, keeping in mind the facts and circumstances of the above case, as also the factors enumerated in section 15J of SEBI Act, I am of the view that since the charges levied against the broker are not very serious as the same have not resulted in any direct loss to the investors, the penalty to be imposed on the broker need not be strictly as per the quantum specified in section 15HB and the ends of justice would meet by imposing a token penalty which would act as deterrent on the broker and others in future and force them to conduct their business activities more diligently in strict compliance with the settled norms.
5.0 ORDER
5.1 Accordingly, in exercise of the powers conferred upon me in terms of Rule 5 of SEBI (Procedure for holding inquiry and Imposing penalties by the Adjudicating Officer ) Rules, 1995, I hereby impose a penalty of Rs. 1,00,000/- (Rupees One lacs) as penalty on M/s CIL Securities Ltd. Bearing SEBI Regn. No. INB 230643037.
4.2 The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India” and payable at Mumbai which may be sent to Shri P. K. Kurichian, General Manager, Securities and Exchange Board of India, “SEBI Bhavan” Bandra Kurla Complex, Bandra (East), Mumbai 400 051.
| Dated : November 27, 2006 |
PRAVEEN TRIVEDI |
| Mumbai |
ADJUDICATING OFFICER |