ADJUDICATION ORDER AGAINST M/s. RAJKUMAR CHAINRAI BASANTANI, MEMBER, NSE, UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
AO/BR/02/2005
1.0 BACKGROUND
1.1 SEBI initiated investigations into the case of M/s.Soundcraft Industries Ltd., triggered by a sharp rise in price and volumes of the scrip during the period December 1998 to July 1999. Shri Rajkumar C Basantani is the promoter of the abovementioned company and the sole proprietor of M/s.Rajkumar Chainrai Basantani(RCB), member, National Stock Exchange of India(NSE). Investigations revealed that M/s.RCB had indulged in rampant ‘circular trading’ in the scrip along with other members. Investigations also revealed that the abnormal trading practices followed by M/s.RCB were instrumental in creating a false/artificial market for the scrip of SIL and that the act of M/s.RCB is not in the interest of securities market. SEBI vide order No. CO/87/IES/08/2002 dated August 22, 2002 suspended the registration of the stock broker M/s.RCB (SEBI Registration No. INB230649415) for a period of six months with effect from September 02, 2002. M/s.RCB had filed an appeal (Appeal No. 62/2002) against the said order before the Securities Appellate Tribunal(SAT). Since the Tribunal was not sitting from August 28, 2002 to September 03, 2002, M/s.RCB approached the Hon’ble Bombay High Court for the stay of said SEBI order. The Hon’ble High Court vide order dated August 30, 2002 stayed the impugned SEBI order dated August 22, 2002 till September 10, 2002. On admitting the appeal filed by M/s.RCB, the Hon’ble SAT vide an interim order dated September 09, 2002 suspended the operational portion of the SEBI order dated August 22, 2002 for a period of 10 weeks from September 10, 2002 and thereby stayed the SEBI order for the said period. The stay was further extended up to the pronouncement of the order disposing of the appeal vide SAT order dated November 14, 2002. Subsequently the appeal filed by M/s.RCB was dismissed by Hon’ble SAT vide order dated May 21, 2004.
1.2 On learning that M/s.RCB had continued its trading activities despite its appeal against SEBI’s order of suspension was dismissed by the Hon’ble SAT, SEBI vide letter dated September 14, 2004 advised NSE to take immediate action to deactivate the trading terminal of M/s.RCB.
1.3 As the alleged trading of M/s.RCB during the suspension period is in violation of SEBI Act, 1992 and rules and regulations made there under, adjudication proceedings were initiated against M/s.RCB and vide Chairman’s order dated September 20, 2004 the undersigned has been appointed as the Adjudication Officer to inquire into and adjudge u/s 15HB of the SEBI Act, 1992.
2.0 SHOW CAUSE NOTICE
2.1 Pursuant to Chairman’s Order dated September 20, 2004, a Show Cause Notice No.ISD/ADJ/BR/32495/2004 dated February 01, 2005 containing the facts / allegations of violations, as brought out above, was issued against M/s.RCB asking them to show cause why an inquiry against them should not be held for alleged contravention of the SEBI directions and as to why monetary penalty u/s 15HB of the SEBI Act, 1992 should not be imposed on them. The said Show Cause Notice dated February 01, 2005 was sent to NSE vide letter No. ISD/BM/32494/2005 dated February 01, 2005 for delivering the same to M/s.RCB.
2.2 NSE vide letter dated February 21, 2005 informed that the said show cause notice was despatched by them by hand delivery at the last known correspondence office address of M/s.RCB but it had returned undelivered and the sealed envelope was returned by NSE. As per the details sent by NSE it was observed that the show cause notice was sent to the following address -
7, Cosmos Commercial Centre, 2nd Floor,
3rd Road, Khar (W), Mumbai-400052.
2.3 Subsequently, another letter No. ISD/BM/34869/2005 dated March 01, 2005 was sent to NSE requesting them to ensure the delivery of the said notice. NSE vide letter dated March 15, 2005 informed that the said notice was forwarded to the member on March 04, 2005 by speed post and registered post but the same had returned undelivered. The exchange also informed that they had received a notice No.GBCB/REC/SRO/St/3978/2004 dated September 09, 2004 issued by the Executive Authority of the Special recovery and Sales Office, Mumbai requesting the exchange to freeze the membership deposit standing in the name of Shri Rajkumar Chainrai Basantani with all other rights, interest subsisting thereon. In view of above, the deposits of M/s.RCB’s with NSE remained frozen and therefore, NSE has not activated the trading terminal of M/s.RCB despite the completion of SEBI suspension period of six months.
2.4 Further, another letter No. ISD/BR/BM/37158/2005 dated March 29, 2005 enclosing the show cause notice was sent to the following address obtained from the NSE website was also returned undelivered:
337, Hind Rajasthan Building,
3rd Floor, Dadasaheb Phalke Road, Dadar (E),
Mumbai-400014
2.5 Finally, as per the general procedure, a letter No.ISD/ADJ/BR/BM/39469/2005 dated May 02, 2005 was sent to NSE requesting the exchange to have the notice pasted on the premises as substituted delivery with the signatures of two witnesses. NSE sent a report of the pasting of the said notice along with the signature of the two witnesses vide letter No.NSEIL/MEM/13142-5 dated May 13, 2005.
2.6 As the show cause notice delivered as substituted delivery to M/s.RCB and in the absence of any reply to show cause notice from M/s.RCB, the issue was considered based on the materials available on records.
3.0 ISSUES FOR CONSIDERATION
3.1 The issue for consideration is whether M/s.RCB carried out its activities as a stock broker during the period of its registration as a stock broker was suspended by SEBI and thereby violated the Section 12 (1) of SEBI Act, 1992 and Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules 1992, read with Regulation 19(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, and Regulation 7 read with clause A(5) of Code of Conduct specified under Schedule II of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and thereby liable for monetary penalty under Section 15HB of SEBI Act, 1992 read with Regulation 26(xx) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
4.0 FINDINGS
4.1 I find that the registration of M/s.RCB as a stockbroker was suspended by SEBI for six months vide order dated August 22, 2002. The suspension order was stayed by Hon’ble SAT up to the pronouncement of the order disposing of the appeal and the appeal filed by M/s.RCB against the suspension order was dismissed on May 21, 2004. As the appeal against the suspension order was dismissed by the Hon’ble SAT, the order of suspension of registration as a stockbroker against M/s.RCB was came in to force immediately on May 21, 2004. However, as per the NSE data, M/s.RCB continued its trading activities until its trading terminals were deactivated by NSE on September 15, 2004. The daily trading turnover detail of M/s.RCB during the period May 22, 2004 to September 15, 2004 is given below:
(Rs. in Crore)
|
Trade Date
|
Total Traded Value
|
|
24-May-04
|
1.40
|
|
25-May-04
|
1.70
|
|
26-May-04
|
1.91
|
|
27-May-04
|
1.65
|
|
28-May-04
|
1.66
|
|
31-May-04
|
2.10
|
|
01-Jun-04
|
1.30
|
|
02-Jun-04
|
1.00
|
|
03-Jun-04
|
1.45
|
|
04-Jun-04
|
1.46
|
|
07-Jun-04
|
1.31
|
|
08-Jun-04
|
1.30
|
|
09-Jun-04
|
1.29
|
|
10-Jun-04
|
1.35
|
|
11-Jun-04
|
1.28
|
|
14-Jun-04
|
1.12
|
|
15-Jun-04
|
1.25
|
|
16-Jun-04
|
0.94
|
|
17-Jun-04
|
1.36
|
|
18-Jun-04
|
1.40
|
|
21-Jun-04
|
0.84
|
|
22-Jun-04
|
0.88
|
|
23-Jun-04
|
0.90
|
|
24-Jun-04
|
1.32
|
|
25-Jun-04
|
1.06
|
|
28-Jun-04
|
1.54
|
|
29-Jun-04
|
1.52
|
|
30-Jun-04
|
1.24
|
|
01-Jul-04
|
1.18
|
|
02-Jul-04
|
1.07
|
|
05-Jul-04
|
1.40
|
|
06-Jul-04
|
1.12
|
|
07-Jul-04
|
1.49
|
|
08-Jul-04
|
3.12
|
|
09-Jul-04
|
2.81
|
|
12-Jul-04
|
2.60
|
|
13-Jul-04
|
2.39
|
|
14-Jul-04
|
1.42
|
|
15-Jul-04
|
1.98
|
|
16-Jul-04
|
1.55
|
|
19-Jul-04
|
1.83
|
|
20-Jul-04
|
1.48
|
|
21-Jul-04
|
1.34
|
|
22-Jul-04
|
1.75
|
|
23-Jul-04
|
1.35
|
|
26-Jul-04
|
1.49
|
|
27-Jul-04
|
1.81
|
|
28-Jul-04
|
1.24
|
|
29-Jul-04
|
1.19
|
|
30-Jul-04
|
1.60
|
|
02-Aug-04
|
1.04
|
|
03-Aug-04
|
1.14
|
|
04-Aug-04
|
1.02
|
|
05-Aug-04
|
1.55
|
|
06-Aug-04
|
0.03
|
|
09-Aug-04
|
1.29
|
|
10-Aug-04
|
1.54
|
|
11-Aug-04
|
1.96
|
|
12-Aug-04
|
1.81
|
|
13-Aug-04
|
1.68
|
|
16-Aug-04
|
1.60
|
|
17-Aug-04
|
1.94
|
|
18-Aug-04
|
2.28
|
|
19-Aug-04
|
1.83
|
|
20-Aug-04
|
1.29
|
|
23-Aug-04
|
1.15
|
|
24-Aug-04
|
1.46
|
|
25-Aug-04
|
1.56
|
|
26-Aug-04
|
1.58
|
|
27-Aug-04
|
1.47
|
|
30-Aug-04
|
1.14
|
|
31-Aug-04
|
1.20
|
|
01-Sep-04
|
1.26
|
|
02-Sep-04
|
0.00
|
|
TOTAL
|
107.53
|
(Source: NSE)
I find that M/s.RCB had traded for Rs.107.53 crore during May 22, 2004 to September 15, 2004 i.e. after the suspension period came in to force.
4.2 The specific provisions of the SEBI Act, 1992 and the Regulations relevant for this case are enumerated below:
Section 12 (1) SEBI Act, 1992, “No stock broker, ….. and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act”
Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, “No stock broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the Regulations”
Regulation 19(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, “On and from the date of debarment or suspension of the certificate, the intermediary shall not undertake any new assignment or contract or launch any new scheme and shall cease to carry on any activity as an intermediary during the period of such debarment or suspension and shall be subject to such other directions of the Board including directions relating to any records, documents or securities or money of the investors that may be in the custody or the control of such intermediary.”
Clause A(5) of Code of Conduct specified under Schedule II of the Regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, “A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.”
4.3 By indulging in trading activities during the period under suspension of Registration as a stockbroker, M/s.RCB has violated the Section 12 (1) of SEBI Act, 1992 and Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules 1992, read with Regulation 19(1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 and thereby also violated Regulation 7 read with clause A(5) of Code of Conduct specified under Schedule II of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
4.4 As per Section 15HB of SEBI Act, 1992, “Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees” and as per Regulation 26(xx) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a stock broker or a sub-broker shall be liable for monetary penalty for the violations for which no separate penalty has been provided under these regulations.
4.5 There is no separate penalty provided in the SEBI Act 1992, the rules or the regulations made there under against the intermediary for buying, selling, or dealing in securities during the period under suspension. Therefore, the indulgence in trading activities during the period under suspension of Registration as a stockbroker by M/s.RCB will attract monetary penalty as provided under Regulation 26(xx) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and Section 15HB of the SEBI Act 1992.
4.6 I find that since M/s.RCB had continued its trading activities despite its appeal against SEBI’s order of suspension was dismissed by the Hon’ble SAT, SEBI vide letter dated September 14, 2004 advised NSE to take immediate action to deactivate the trading terminal of M/s.RCB. I also find that SEBI vide letter dated September 20, 2004 intimated NSE that the period of suspension of six months would commence from the date of deactivation of the terminals of M/s.RCB. NSE vide letter dated October 27, 2004 confirmed that they had withdrawn the trading facility of M/s.RCB with effect from September 15, 2004 to March 14, 2005. I am of the view that penalty of the suspension became effective from May 21, 2004, the day, stay on operation portion of SEBI order, granted by Hon’ble SAT, got vacated by pronouncement of the order disposing of the appeal but not from September 15, 2004 as mentioned in SEBI’s letter dated September 20, 2004 since the SEBI Order and SAT Order prevails over the SEBI’s letter to NSE. Therefore, I am not tanking any cognizance of the said SEBI’s letter dated September 20, 2004 addressed to NSE as the said letter cannot alter the tenor of SEBI Order and SAT order. I also find that M/s.RCB’s deposits with NSE are remain frozen by NSE since September 14, 2004 as requested by Executive Authority of the Special recovery and Sales Office, Mumbai which rendered M/s.RCB unable to trade since September 14,2004. In effect M/s.RCB could not trade at NSE since September 14, 2004 i.e., prior to deactivation of their trading terminal by NSE on September 15, 2004. In view of above, M/s.RCB has not suffered any penalty of suspension since the deactivation of the trading terminal took place after M/s.RCB become unable to trade. Whereas, M/s.RCB had continued to trade for more than three months in defiance of SEBI suspension order despite its appeal against SEBI suspension order was dismissed by Hon’ble SAT on May 21, 2004 until M/s.RCB’s deposits were frozen by NSE.
4.7 I find that M/s.RCB’s conduct was not in conformity with the SEBI Act, Rules and Regulations made there under which led them to the suspension of their registration as a stockbroker. The said suspension order issued against M/s.RCB is in the interests of the investors and the securities market. The activity of M/s.RCB portrays its utter disregard for Regulatory Bodies and endangers the interests of the investors and securities market. This shows blatant disregard of law and justice. Therefore I find merit in imposing monetary penalty on M/s.RCB.
4.8 To determine the quantum of penalty under Section 15HB, I considered the following factors as provided in the section 15J of SEBI Act, 1992 viz.(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.
4.9 With respect to the amount of loss caused to an investor or group of investors as a result of the default, there are no quantifiable figures available on record and also there is no information on record which proves that M/s.RCB committed similar violations in the past.
4.10 As regards the disproportionate gain or unfair advantage with respect to the default committed by M/s.RCB, in the absence of any quantifiable figures available on record, the turnover value of M/s.RCB was considered. M/s.RCB had traded on the NSE in defiance of the SEBI order for a period of 74 days and their total turnover during the said period was Rs.107.53 crore. The monetary penalty to be levied on M/s.RCB for the above said violations is in commensurate with the trading activity of the stockbroker.
5.0 ORDER
5.1 In view of the above findings, though the maximum brokerage that can be charged by M/s.RCB as a NSE stockbroker is 2.5% of the turnover, I impose a penalty of Rs.53 lakh (Rupees fifty three lakh only) on M/s.Rajkumar Chainrai Basantani, i.e. around 0.5% of the total turnover of Rs.107.53 crore.
5.2 M/s. Rajkumar Chainrai Basantani shall pay the amount of penalty imposed 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 Shri P. K. Bindlish, General Manager, Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, 1st Floor, 224, Nariman Point, Mumbai – 400 021.
5.3 In terms of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, copies of this order are sent to M/s. Rajkumar Chainrai Basantani and also to Securities and Exchange Board of India.
DATE: October 28, 2005 B. RAJENDRAN
PLACE: MUMBAI ADJUDICATING OFFICER