IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.102/2003
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Date of Hearing
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13.9.2004
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Date of Decision
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29.10.2004
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In the matter of:
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Prakash K. Shah Shares &
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Appellant – Represented by
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Securities Pvt. Ltd.
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Mr. Pravin Samdani, 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. Kumar Desai, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
N.L. Lakhanpal, Member
Per: Dr. B. Samal, Member
1. Appeal is taken up for disposal with consent of both parties.
2. The appellant is a member of the Stock Exchange, Mumbai (BSE). The appellant holds a certificate of registration granted by the respondent (SEBI) entitling it to carry on the activities of sub broker. The respondent caused inspection of the books of accounts, documents and other records of the appellant in the second week of November 2000, pertaining to the period 1999-2000 & 2000-2001 till the date of inspection in the specified format. The inspection revealed some irregularities on the part of the appellant. The respondent forwarded a copy of the inspection report to the appellant seeking its explanation. The appellant submitted its reply vide its letter dated 17.5.2001 and specified that the clarification to the explanations the respondent appointed out an enquiry officer on 14.3.2002 to enquire into the irregularities alleged to have been committed by the appellant.
3. The enquiry officer after enquiry concluded that the appellant had failed
(1) to obtain concent from the clients for principal to principal transactions
(2) to issue contract notes for Vyaj Badla transactions and for transactions done by jobber with whom the broking entity shares profit and losses
(3) to report cross deal transactions to stock exchanges
(4) to issue contract notes in Form B for the transactions done on principal to principal basis
(5) to ensure full particulars on the acknowledgements of the duplicate of the issue contract notes
The enquiry officer also held that the appellant had transacted with unregistered brokers and that it had issued the contract notes not bearing pre-printed serial numbers. The enquiry officer recommended that the registration of the appellant be suspended for a period of 4 months.
4. The respondent issued a notice to the appellant on 11.2.2003 forwarding therewith a copy of the enquiry report asking to show cause in the matter. The appellant filed its reply on 15.3.2003. The appellant was also heard on 31.4.2003. Thereafter the respondent concluded that the appellant was guilty of violating the following:
a) Section 12 of Securities & Exchange Board of India Act, 1992
b) Clause (c) of sub-rule (2) of rule 15 of Securities Contract (Regulation) Rules, 1957
c) The provisions of clause A(5) and B(2) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
d) The conditions of registration specified in Rule 4(b) of the SEBI (Stock Brokers & Sub-brokers) Rules, 1992
e) SEBI’s directives contained in the circulars as mentioned hereinabove.
f) Bye-Law no. 247A(4) of the Bye-Laws of BSE.
5. In exercise of the powers conferred on the respondent by virtue of sub-section (3) of Section 4 of the Securities & Exchange Board of India Act, 1992 read with Regulation 13(4) and 13(6) of SEBI (Procedure for Holding Enquiry by Enquiry officer and Imposing Penalty) Regulations, 2002, the Chairman of SEBI had ordered that the certificate of registration no. INB 010997333 of the appellant be suspended for a period of four months with effect from 3 weeks from the date of issue of the order i.e. 29.7.2003.
6. Aggrieved with the above impugned order of the respondent the appellant has filed this appeal and had requested for an interim order restraining the operation of the stay order. The said appeal was heard. This Tribunal vide its order dated 18.8.2003 had stayed operation of the impugned order.
7. The learned counsel for the appellant Shri Samdani submitted that the appellant is a broker at the Bombay Stock Exchange from May 1982. His individual membership was corporatised with effect from 31st December, 1997. The entire shareholding of the appellant is held by his family i.e. himself, his wife and his son. There are no outsiders who are the shareholders. The appellant has 52 BSE terminals. Of these 52 terminals 3 are out of Bombay. The appellant has six sub brokers who are also registered with the Respondent. The appellant has on its own about 500 clients. Besides the appellants’ sub brokers have also equal number of clients. Thus total number of clients whose business being handled through the appellant is around 1000. In the course of inspection the Respondent found some irregularities in the methodology of usage of forms, maintenance of client agreement and recording of transactions. These irregularities are only technical in their view and only minor in the nature and effect. The alleged irregularities are not such for which punishment in the nature of suspension is warranted. The appellant in his letter dated 15th March, 2003 addressed to SEBI has said that the inspection was for the financial year 1999-2000 and 2000-2001 and the lapses were found in the first year i.e. 1999-2000. No lapses were found in the second year 2000-2001. The appellant has not derived any disproportionate gain or unfair advantage as a result of the default. The lapses if any, were not of repetitive nature. Appellant has appointed compliance officer to ensure that the provisions of each and every regulation of SEBI and the rules, regulations and Bye-laws of the BSE is complied in totality. The appellant assures that such lapses will not recur.
8. The learned counsel for the appellant further submitted that the appellant has a large turn over in respect of the transactions taken place at BSE. The turn over of the appellant during the relevant year viz. 2000-2001 was about Rs.5263.94 crores. The transactions as alleged cross deals are of an aggregate amount of less than Rs.1 crore which is about 0.00019% of the total turn over of the appellant. The brokerage of these deals does not exceed Rs.25,000/-. The learned counsel for the appellant also submitted that the Respondent itself in the case of ( i) Bama Securities, (ii) J. M. Morgan Stanley Retail Services (iii) Maganlal Keshav Share and Stock Brokers Ltd., has issued only warnings for similar nature of irregularities. He submitted a chart as shown below where the respondent has issued warnings for similar type of irregularities.
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Irregularities
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Warning by SEBI
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Warning by SAT
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Irregularities in issuance of contract notes. Contract notes are not issued for transactions done on principal to principal basis
The contract notes does not bear pre printed serial number on the contract notes generated on daily basis through computer software.
The broker is obtaining the acknowledgement of the client on the duplicate of the contract. The acknowledgement does not contain the date.
Written consent not taken for transaction executed on principal to principal basis.
Contract notes not issued for Vyaj Badla Transactions.
Contract notes not issued for transactions done by ‘jobber’ with whom the broking entity shares profit & losses.
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J. M. Morgan order dated 2/6/2004 Ref.MO/14/MIRSD/06/2004
J. M. Morgan order dated 2/6/2004 Ref.MO/14/MIRSD/06/2004
J. M. Morgan order dated 2/6/2004 Ref.MO/14/MIRSD/06/2004
J. M. Morgan order dated 2/6/2004 Ref.MO/14/MIRSD/06/2004
J. M. Morgan order dated 2/6/2004 Ref.MO/14/MIRSD/06/2004
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Of the floor transaction not reported to the Stock Exchange.
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Mahesh Kothari Ref.No.PR35/2003 dated 19/2/2003 Mukesh Sawhney Ref.No. PR34/02 dated 19/2/02
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J
ayasukhlal Jagjivan
Appeal No.48/03 dated 29/6/2004.
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Following types of transactions executed which are prohibited by SEBI Cross deals.
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Mahesh Kothari Ref.No.PR35/2003 dated 19/2/2003
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Jayasukhlal Jagjivan
Appeal No.48/03 dated 29/6/2004.
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Transactions executed on principal to principal basis
Dealing with unregistered sub Broker
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Mukesh Sawhney Ref.No. PR34/02 dated 19/2/02
M/s. 8 Brokers of ASC Cap Mkt L Ref No/PR36/2002 dated 20/3/2002
Sanjay C Bakshi Ref No.PR68/2002 dated 28/3/2002
Bama Securities Ltd.,Ref.No.CO/02/MRD/06/2004
Mahesh Kothari Ref No.PR/2003 dated 19/2/2002
Mukesh SawhneyRef No.PR34/2002 dated 19/2/2002
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Samkit Share & Stock Broker P L
Appeal No.53/03 Order dated 31/8/2004
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9. The learned senior counsel for the Respondent Shri Kumar Desai submitted that the appellant has committed several violations as observed in the impugned order and has not taken due care and diligence in the observance and compliance of the statutory requirement in conducting its business as a stock broker. Looking to the nature of violations committed by the appellant broker and also in the interest of the securities market that a penalty of suspension of certificate of registration for a period of 4 months has been imposed.
10. After hearing both the parties, we observe that the irregularities can not be treated as a very serious irregularity. Moreover, this was done for the first time. It can not also be said that the nature of punishment should be so harsh that the appellant would have to cease work for a period of four months. The consequences are far reaching not only to the appellant but also to his clients and employees. The appellant has put up in place the appropriate back up system to adhere to the various regulations of the said rules.
11. We have no doubt that the Respondent was justified in finding that the appellant was in violation of the SEBI (Stock Brokers and sub broker) Rules, 1992. The learned counsel for the Respondent was not able to bring to our notice any further lapses after this inspection. However, we feel that every opportunity should be given to the broker appellant to rehabilitate itself.
12. In the facts and circumstances of the case we modify the impugned order and substitute by imposing a minor penalty under Regulation 13 (1) (a) (i) and hereby give a strong warning to the appellant. The impugned order is modified accordingly.
No order as to costs.
Sd/-
Justice Kumar Rajaratnam
Presiding Officer
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Sd/-
N.L. Lakhanpal
Member
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Sd/-
Dr. B. Samal
Member
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Place: Mumbai
Date: 29/10/2004
//smn/28/10