IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 114 of 2003
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Date of Hearing
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13/10/2005
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Date of Decision
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25/10/2005
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Appellant – Represented by:
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Sushilabai Rungta
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Mr. J.J. Bhatt, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Mr. Kumar Desai along with Ms. Daya Gupta, Advocates
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CORAM
C. Bhattacharya, Member
R.N. Bhardwaj, Member
Per: R.N. Bhardwaj, Member
1. The appeal is taken up for disposal with the consent of both parties.
2. The appeal has been filed against the order of Chairman, Securities and Exchange Board of India (SEBI), dated 25/08/2003, the operative portion of which reads as under:
“I find that the said broker has committed several violations as observed above and has not taken due care and diligence in observance and compliance of the statutory requirement in conduct of its business as a stock broker. Looking into the violations committed by the said broker, I am satisfied that it is necessary to secure the proper management of the stock broker and also in the interest of the securities market that a penalty of suspension of certificate of registration for a period of twelve months as recommended by the enquiry officer is reasonable. Therefore, in exercise of the powers conferred upon me by virtue of sub section (3) of section 4 of the Securities Exchange Board of India Act, 1992 read with regulations 13(4) and 13(6) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 I hereby order that the certificate of registration No. INB010026717 of Smt. Sushilabai Rungta, a member of the Stock Exchange, Mumbai be suspended for a period of twelve months.”
3. The appellant had filed the appeal before the Presiding Officer, SAT, and after hearing the appellant and the respondent the Presiding Officer had restrained the operation of the impugned order. The appeal is now being taken up for final disposal with the consent of both the parties.
4. The appellant is a Member of Stock Exchange, Mumbai. The Executive Director, SEBI vide his order dated October 20, 2000 directed inspection of Books of Accounts, documents and other records of Smt. Sushilabai N Rungta, Member of Stock Exchange, Mumbai. The inspection of books of accounts was conducted during the first week of December, 2000 by a team of SEBI officials. M/s. Sushilabai Rungta being a proprietorship firm has been a member of BSE since 30/07/1986. The member is mainly involved in secondary market activities. During the course of inspection it was found that most of the trades were done at own accounts and almost all the active clients were either friends or relatives of the appellant. A copy of the inspection report was forwarded to the appellant by SEBI vide their letter dated 09/03/2001. The broker submitted its reply which was not found satisfactory by SEBI. An Enquiry Officer was therefore appointed vide order dated 25/10/2002. The Enquiry Officer after conducting the enquiry submitted a report dated 31/01/2003. The Enquiry Report listed a number of deviations and shortcomings in the operation of business of the appellant. A show cause notice dated 07/02/2003 was issued to the broker along with the copy of the enquiry report. The appellant submitted its reply vide letter dated 28/02/2003 and 21/03/2003. An opportunity of personal hearing was also granted on 30/04/2003. The appellant also submitted written submissions on 30/05/2003. The enquiry report contained twelve charges which are given as under:
(i) Acceptance of Deposits and paying fixed interest rate: The appellant had raised deposits from constituents by paying interest which was in violation of Rule 8(3)(f) of SCR Rules, 1957. The appellant accepted that these were taken as deposits at the time of inspection and thereafter they were rectified and placed in Vyaj Badla transactions. These explanations were not acceptable to SEBI because in badla transactions the rate and carry forward charges are determined by the market during the badla sessions whereas these were fixed interest rate deposits. The total amount of deposits raised as per the details of show cause notice is Rs. 1,55,25,950/-. It was replied by the appellant that close friends and relatives only had contributed to these deposits excepting in case of Vinikja Share Trades Pvt. Ltd., which was an associate company of the appellant. It was further stated by the appellant in the reply to SEBI that all the loans excepting Rs. 17,87,210/- from Vinikja Share Traders Pvt. Ltd., which was an associate company of the appellant, had been repaid.
(ii) Non maintenance of document register: It was submitted by the appellant in its reply that the appellant was maintaining a book in which delivery and receipt of shares were being recorded. The Peon. Book maintained by the appellant was not a sufficient compliance. As a matter of fact every member of a recognised stock exchange is required to preserve documents and register showing full particulars of shares and securities received and delivered which is to be preserved for a period of 5 years.
(iii) Non-maintenance of Margin Deposit Book: Margin deposit books are required to be maintained by every broker and non-maintaining the same would be viewed as a breach of Regulation 17(1)(k) of SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992.
(iv) Gala Transactions: Shreeji Associates, a client of the broker had placed an order for purchase of 5000 shares of HDFC on 01/03/2000. This order was not exposed to the market in the open order electronic system. The appellant earned an undue profit of Rs. 71,832/-. The appellant did not adhere to the professional conduct in the discharge of her duty as a Member of Stock Exchange. The appellant has charged brokerage to the clientele and it did not issue a contract note on principal to principal basis in Form B. The appellant thus violated Clause A(3) and B(1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992.
(v) Issuance of fictitious contract notes: The show cause notice cites four instances of issuances of contract notes wherein the appellant has either sold or bought EIH Limited shares. The appellant stated in the reply that these transactions were due to error in the punching. These were in fact non-existent transactions and the contract notes were issued only to facilitate the borrowings by the appellant. The fictitious contract notes were issued in the nature of a guarantee to the lender so that in the case of a default in payment of a loan by the appellant the lender would enforce its guarantee under the bilateral contract through the Stock Exchange mechanism. This is a very serious irregularity having potential risk to the Stock Exchange. A perusal of the above contract notes reveals that trade time, trade number, etc., were not reflected in any of these contracts which gives strength to the conclusion that these were fictitious contracts.
(vi) Contract Notes do not bear pre-printed serial numbers: It was admitted by the appellant that due to computer snag at the relevant time certain details were not mentioned in the contract notes and since then these have been rectified.
(vii) Contract Notes in Form A for Contracts on principal-to-principal basis: The appellant replied to SEBI that such contract notes in Form A were issued because the appellant was not aware of issuing contract notes in Form B. This shows lack of knowledge and professionalism on the part of the broker.
(vii) Broker Note Stamps not affixed on the Contract Notes.
(viii) Time stamping of orders: Due to non-stamping of time of order certain details were not reflected as per SEBI circular dated 11/02/1997 as per which the contract note has to reflect the time of placement of order by the clients.
(ix) Non-maintenance of client agreements: Client identification is important since it makes easier for audit. Details like bank accounts, PAN number, introducer, etc., are important to establish the credentials of the client. The appellant had replied to SEBI that majority of the parties were friends and relatives and that was the reason that the file was incomplete. She stated in her reply that later on the file was completed.
(x) Non-segregation of bank account for clients and own transactions: As per inspection report the Bank of India account was used for making Exchange settlements and receipt to clients as well as for office administrative expenses which was not proper. The appellant had replied that due to staff negligence the client account was not utilized but the same is rectified. She confirmed that brokerage and profit is correctly credited to the client account.
(xi) Off-the-floor transactions: It was stated in the report that there were a number of transactions which were off-the-floor transactions which were not reported to the Exchange. The appellant had submitted in the reply that this non-reporting to Exchange had occurred due to inadvertence.
5. It was concluded by the Chairman, SEBI in his order that broker had committed serious irregularities such as failure to maintain record of time of placing and executing of orders, failure to maintain client registration agreement, failure to ensure continuous pre-printed serial numbers on issue of contract notes, failure to report off-the-floor transactions to the Stock Exchange, indulging in gala transactions, accepting deposits on fixed interest from constituents non-maintenance of document register and margin deposit book, non-segregation of accounts of clients, issuance of fictitious contract notes, etc. It was also mentioned that there was a violation of Regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992 which provided complying with the Code of Conduct specified in Schedule II. He found the appellant guilty of violating:
(i) the provisions of clauses A(1), A(3), A(5) and B(1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992;
(ii) the condition of registration specified in Rule 4(b) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992;
(iii) SEBI directives contained in the circulars as found in the order;
(iv) Rule 8(3) of SC (R) Rules, 1957;
(v) Rule 15(1)(g) of SC (R) Rules, 1957.
(vi) Regulations 17(1)(k) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
In view of the above the appellant was liable for action under Regulation 13(1)(b) of SEBI (Procedure of Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.
6. The learned counsel for the appellant submitted a chronology of important dates and events pertaining to this order. He pointed out that SEBI conducted inspection of books of accounts and related document on 20/10/2000 for the year 1999-2000 and 2000-2001 till the date of inspection. SEBI forwarded a copy of inspection report on 09/03/2001 and the appellant replied to it on 10/05/2001. It was only after 17 months i.e., on 25/10/2002 that an enquiry officer was appointed for holding an enquiry. The impugned order is dated 25/08/2003. He also pointed out that the appellant was a sole proprietorship firm. It was operating since 30/07/1986 without any complaint from any of its client. In the course of inspection it had been confirmed that the trades were done on own account and almost all the active clients were either friends or relative of the appellant. The operations of the appellant were not having any wide ranging impact in the market. Its operations were very limited and small.
7. The learned counsel for the appellant also submitted that deposits were accepted only from friends and relatives which were invested in vyaj badla shares only. Interest was also paid regularly and in time. These deposits had been returned to the clients. There is no charge of mis-utilisation of funds, neither was there any grievance from anyone of her clients. An affidavit to this effect was also been submitted.
8. As regards non-segregation of clients account from broker’s funds is concerned, the learned counsel submitted that separate bank account No. 19537 was opened on 17/01/1995 for clients but in view of few transactions it was not used very frequently. It was due to staff negligence that this irregularity has happened and it has since been rectified and another bank account No. 27229 for office expenses has been opened on 01/11/2002. He reiterated that there was no complaint from the clients that their funds were misused or mis-utilised by the appellant.
9. With regard to off-floor transactions, it was submitted by the learned counsel that the transactions were carried out on market rates only and the parties were known parties of the appellant. There was no complaint from clients. It has since been discontinued after being pointed out. These transactions could not be reported to the Exchange due to inadvertence.
10. With regard to charge of issue of fictitious contract notes, the learned counsel submitted that only on few occasions due to punching error two contract notes got generated and the principal sum involved was only Rs. 2 lakhs. To this effect he also submitted the extract of the ledger. He further argued that no benefit or any advantage was derived by the appellant.
11. As regards charge of gala transactions, it was submitted by the learned counsel that this was a solitary transaction in which case the client has confirmed in writing that he was aware of the transaction and he has no grievance. The learned counsel submitted that non-maintaining of document, register for shares received or delivered and non-maintenance of margin deposit book were technical charges only. Even the Enquiry Officer had admitted that the register maintained by the appellant had some semblance of complying with the rule, but it was not strictly in the form in which it should have been maintained. He further submitted that the appellant did not have many clients and he further submitted that there was not a single compliant from any of the client against the appellant.
12. As regards the charge of non-maintenance of client agreement, the learned counsel submitted that at the time of inspection the file containing the information was misplaced though the same were made available lateron and subsequently submitted a sample copy.
13. The learned counsel submitted, with regard to the charge of contract notes not bearing the printed serial numbers, that it was a case of computer snag. It has since been rectified and there are no complaints received in this respect.
14. With respect to the charge of time stamping of order, the learned counsel submitted, orders received were punched instantaneously and it was merely a minor technical point.
15. The learned counsel for the appellant cited number of cases where SEBI had issued only warning after finding irregularities in its inspection. He cited cases of M/s. Ratanbali Capital Markets Ltd., M/s. Twenty First Century Shares & Securities Limited, M/s. 8 Brokers of ASC Capital Market Ltd., M/s. Sanjay C. Bakshi, M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd., M/s. Mukesh Sawhany and M/s. IFB Securities Limited where SEBI has issued warning. He also cited the order of this Tribunal in Appeal No. 93 of 2003 in the case of Betala Stock Broking Ltd. Vs. SEBI wherein the Tribunal modified the impugned order by reducing the suspension from three months to seven days. He concluded his argument by submitting that the appellant is a small broker who is mainly working for limited clients of family members and friends. The shortcomings pointed out have since been rectified and he prayed that only warning may be given because irreparable harm will be caused to the appellant if the operations were barred for one year. He prayed that the appellant may be let off by giving only a warning for the lapses which took place in the year 2000.
16. The learned counsel for the respondent pointed out that the appellant had accepted all the deviations as pointed out in the enquiry report and the charges leveled in the show cause notice. He submitted that some of the charges were of very serious nature which could not be condoned for the integrity and security of investors and of the security market. The acceptance of deposits on fixed interest rate was clearly in violation of Rule 8(3)(f) of SCR Rules. Receipt of deposits with commitment to pay fixed interest rates impose huge financial burden and in case of default in the payment of interest or principal would have serious effect on the net worth of the broker and also on its operations in the securities market. It was informed that later on they were rectified and placed in Vyat Badla transactions. It, however, could not be ascertained that while doing so, the appellant followed the SEBI guidelines in this behalf. He argued that out of 12 charges 8 charges were of very serious nature which required imposition of major penalty.
17. The learned counsel for the respondent submitted, the failure to report off-floor transactions to the Exchange was quite serious as many as 130 transactions were not reported to the Exchange. All transactions have to be executed on the screen of the Exchange at the price and order mechanism of the Exchanges. Such transactions do not contribute to transparency and price discovery and they are not to the benefit of the investors. There was also non-maintenance of pre-printed serial number on the contract notes. The system of continuous pre-printed serial number is meant to prevent the possible misuse of contract notes such as pre-dating of a contract. It is a clear violation of provisions of Clause A(5) of Code of Conduct as contained in Schedule II of Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992. Similarly the segregation of clients’ accounts from his own account is absolutely mandatory. It was admitted by the appellant that there was mixing up of the accounts of clients and of the office expenses of the broker. As per SEBI guidelines the segregation of cleints’ funds is essential to avoid the possibility of any mis-use. This was clearly in violation of SEBI circulars.
18. The learned counsel for the respondent further submitted that issuance of fictitious contract notes by the broker for transactions which were non-existing was a serious matter. The reply of the appellant that it was due to punching mistake was not convincing. The broker member is required to maintain high standard of integrity as per the Code of Conduct. The issuance of fictitious contract notes is a clear cut violation of the Code of Conduct.
19. The inspection report reported gala transaction by the appellant which was denied by the appellant vide its letter dated 21/03/2003. However, from the details in the enquiry report it is clearly noticed that the appellant charged brokerage to the client which shows that contract note on principal to principal in Form B was not issued. The order of the client was not exposed to the market. It was therefore not known whether the client got the best price while it was obligatory on the part of the appellant to offer the best possible price to its client. However, on the same day the appellant had sold these shares on different price and made a profit of Rs. 71,872/- which was not in keeping with the professional conduct expected from a broker. Thus the appellant has violated Clause A(3) and B(1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. He also pointed out that all the other violations mentioned in the inspection report have been admitted by the appellant such as non-maintenance of margin deposit, non-stamping of time of orders, etc.
20. The learned counsel for the respondent concluded that in view of the serious violations noticed in the inspection report and the reply from the appellant and the admission by the appellant of most of these violations would require imposition of major penalty. Therefore the order of SEBI, suspending the certificate of registration of Smt. Sushilabai Rungta needs to be upheld and the appeal should be dismissed.
21. We have heard the counsels for the appellant and the respondent and have gone through the appeal memorandum, the impugned order and other documents. From the perusal of the papers and the submissions we are of the opinion that it is a fact that serious irregularities were noted by the inspection team which conducted the inspection in December, 2000. It is also noticed that many of the violations and deviations as pointed out in the inspection report have been accepted by the appellant in its reply. The appellant has only made a submission that many of these irregularities have since been rectified and we also note that there has been no complaint received from any of its client about the mis-utilisation of the funds or non-receipt of proper service by them. The inspection report itself admits that “almost all the active clients were either friends or relatives of the member”. But we find from the working of the appellant as reported by the inspection team that there was lack of knowledge and professionalism on the part of the appellant. It has been mentioned in the inspection report that the appellant did not attend the office on regular basis and most of the deals were done by the temporary staff. The appellant had only three staff to handle the work relating to trading as well as routine office functions. It is essential that in the current market environment with new regulations and new market sophistications when new products are getting introduced, the market intermediary should be professional and knowledgeable and conversant with all rules and regulations. The quality of service to the clients would be determined by the amount of professionalism acquired by the brokers / market intermediary.
22. Normally the types of irregularities reported by the inspection team would invite a major penalty but in this particular case we need to take into account the following facts before coming to the conclusions about the quantum of penalty.
(a) SEBI had conducted investigation in December, 2000 and had forwarded the copy of the inspection report to the appellant on 09/03/2001 and since then the appellant has been allowed to operate in the market. It has also been submitted in the reply by the appellant that it has taken steps to rectify the mistakes since then. Most of the irregularities are operational and if remedial steps are taken, the purpose is served.
(b) By SEBI’s own admission the clientele of the appellant are its close friends and relatives. The operations of the appellant do not have wider impact in the market. More over there are no complaints received from any of her clients about the mis-utilisation of funds or deficiency of any service to them.
(c) The purpose of suspension of certificate of registration is two fold:
(i) To afford time to the appellant to put the system in place so that recurrence of types of irregularities shown in the show cause notice are not repeated.
(ii) To give a clear cut message in the market that non-adherence of rules and regulations would not be acceptable and it should act as a deterrent.
23. In this particular case we feel that considerable time has already elapsed from inspection of books to show cause notice and the SEBI Chairman’s order to the current date, giving enough time to the appellant to set her house in order which she has also affirmed in the reply to the show cause notice that she has rectified the mistakes.
24. Nevertheless, a message needs to be given that such lapses do not go unpunished. We are of the opinion that suspension of certificate of registration of Smt. Sushilabai Rungta for a period of one month would meet the ends of justice.
25. We have also considered the case laws cited by the learned counsel where lower punishment was given by SEBI itself and also the decision of the Tribunal wherein the order had been modified. We find that the irregularities reported by the inspection team and the Enquiry Officer in this case are of serious nature because in the other cases cited by the counsel for the appellant none of them had irregularity about receipt of deposits on fixed interest rate, gala transaction, failure to issue principal-to-principal contract note on Form B and large number of off-the-floor transactions. Therefore this particular appeal has to be treated on different footing.
26. In view of above, suspension of operation for one month would send a right signal and also give the appellant an opportunity to put the system in place if there are any loose ends. SEBI is free to conduct its inspection whenever it wants and if recurrence of irregularities are reported in the inspection report, they would be dealt with as per the rules and regulations of SEBI.
27. Accordingly we modify the order by reducing the suspension of certificate of registration to one month. The suspension of certificate of registration will come into effect on three weeks from the date of this order. The impugned order is modified to this extent and the appeal is disposed of accordingly.
28. No order as to costs.
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(C. Bhattacharya)
Member
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(R.N.Bhardwaj)
Member
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Place: Mumbai
Date: 25/10/2005
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