ORDER
UNDER RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING
ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/s INFIMAGE SHARES AND STOCK, SUB BROKER (SEBI REGISTRATION NO. INS 231153318)
1.0 BACKGROUND
1.1 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had conducted an inspection of M/s Infimage Shares and Stock, proprietor, Shri Jayakant K. Diwan, sub broker (SEBI Registration No. INS 231153318) of M/s Growth Avenues Ltd., trading member, National Stock Exchange of India Ltd. (hereinafter referred to as “NSE”). M/s Infimage Shares and Stock (hereinafter referred to as “ISS”) has an office at 2nd Floor, Tara Building, Bhagatalao, Pani ni Bhint, Surat – 395 003. The inspection of books of accounts, documents and other records of ISS was conducted on October 25-26, 2004 by a team of SEBI and NSE officials.
1.2 The findings of inspection alleged that ISS had committed violation of SEBI circulars, provisions of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and of SEBI Act, 1992. The inspection report containing the findings / observations of the inspection was forwarded to ISS on February 07, 2005 with a request that ISS may submit its reply / comments on the findings. As no reply was received from ISS, a reminder dated May 12, 2005 was also sent. As no reply was furnished by ISS despite reminder having been given, SEBI decided to institute adjudication proceedings against ISS. Accordingly, vide SEBI Order dated November 02, 2005, I have been appointed as adjudicating officer under Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to enquire into and adjudge under Sections 15B, 15F(a), 15F(b) and 15HB of SEBI Act, 1992, the alleged violation of various SEBI stipulations and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”).
2.0 NOTICE / REPLY / PERSONAL HEARING
2.1 A show cause notice dated December 07, 2005 was sent to ISS asking them to show cause as to why action should not be taken against them for alleged violations of SEBI directions & various regulations of Broker Regulations and penalty be not imposed on them under sections 15B, 15F(a), 15F(b) and 15HB of SEBI Act, 1992. A copy of the inspection report detailing the various violations was also enclosed. ISS was asked to submit their reply within 21 days of receipt of the show cause notice (hereinafter referred to as “SCN”). As appropriate proof of delivery of the show cause notice was not received, a fresh show cause notice was sent on February 21, 2006 on the above lines. The notice stipulated that ISS should reply to the charges made in the SCN within the stipulated time. It was also mentioned that in case ISS failed to submit a reply within the stipulated time, it would be presumed that ISS had no reply to submit and the matter would be further proceeded with on the basis of the evidence available on record. A duly signed acknowledgement card dated February 25, 2006 was received in my office as proof of delivery. However, no reply was received within the stipulated time.
2.2 As no reply to SCN was received, I decided to conduct an inquiry in the matter and accordingly issued notice dated May 12, 2006 fixing May 25, 2006 as date of hearing. This notice was duly delivered to ISS as per the signed A.D. card received back at my office on May 16, 2006. Although adequate notice had been given, neither Shri Jayakant Diwan nor any authorized representative appeared for the hearing. With a view to ensure that natural justice is provided to the charged entity, I decided to offer another opportunity of personal hearing to ISS. Accordingly vide notice dated May 25, 2006, another hearing was scheduled for June 09, 2006. This notice was also duly delivered on May 29, 2006 as per signed A.D. card available on record. On June 09, 2006, a fax was received from Shri Jayakant Diwan, proprietor, ISS stating that he could not attend the hearing due to unavoidable circumstances and sought 15 days time for the same. Although more than adequate time and opportunities had already been provided to ISS, I was of the view that we may provide another opportunity to ISS to put forth its submissions in the matter. Accordingly, vide notice dated June 09, 2006, another hearing was scheduled for June 27, 2006. As per A.D. card received, this notice was delivered on June 14, 2006.
2.3 On June 27, 2006, Shri Deepak Pravinchandra Shah (driving license no. 198186 / 89 / SRT dated November 21, 2005) ex-manager of ISS appeared before me with the authority letter from ISS. During the hearing he submitted that ISS had done business for about 1 ½ years in 2003 & 2004 and that the sub broking activities had been discontinued with effect from December 2004. It was further submitted that they would submit copies of client agreements by June 30, 2006. Vide their letter dated 28.06.2006, ISS has submitted copies of broker-client agreements and a letter dated 15.03.2005 from their main broker M/s Growth Avenues Ltd. mentioning that ISS had surrendered the SEBI registration certificate to them. However, there is nothing on record to prove that ISS has stopped operations as sub broker and that sub broker registration has been cancelled.
The various alleged violations, ISS’s submissions and my findings are discussed in detail hereunder:-
3.0 CONSIDERATION OF ISSUES:
At the outset I observe that ISS have not submitted any point-wise reply to the various allegations made against them despite having got adequate opportunities and time. The only submissions from ISS are a statement of Shri Jayakant Diwan, proprietor recorded on October 26, 2004 during the course of inspection and the submission made on June 27, 2006 before the adjudicating officer.
I now proceed to analyse the various allegations against ISS, their submissions and my findings thereon.
3.1 Charge:
ISS does not have the prescribed information on the confirmation memos and further there is delay / non-delivery of the same to the clients. This is in violation of circular no. SMD/Policy/Circular/11-97 dated May 21, 1997 and regulation 26(v), 26(xv) and 26(xvi) of Brokers Regulations.
Submissions:
No submissions have been made by ISS in this regard.
Findings:
As no submissions have been made by ISS, I agree with the evidence on record and hold that ISS have violated SEBI Circular SMD/Policy/Circular/ 11-97 dated May 21, 1997 and regulation 26(v), 26(xv) and 26(xvi) of Brokers Regulations are hence liable for penalty as prescribed under section 15F(a) and 15HB of SEBI Act, 1992.
3.2 Charge:
ISS has failed to obtain/maintain client registration forms as stipulated vide SEBI Circular SMD/Policy/Circular/ 11-97 dated May 21, 1997 and para 7(D) of Schedule II of the Regulations. This is in violation of regulations 26(xii), 26(xv) and 26(xvi) of Broker Regulations.
Submissions:
During the course of inspection, a statement of Shri Jayakant K. Diwan, proprietor, ISS was recorded wherein it was submitted that ISS had about 100 clients. Out of these about 78 clients were directly registered with their main broker M/s Growth Avenues Ltd. It was further stated that around 20 clients were not registered and ISS was in the process of getting them registered. ISS vide its letter dated June 28, 2006 has submitted photocopies of first page of member-client agreement in respect of 78 clients which appeared to have been directly executed between the main broker (Growth Avenues Ltd.) and the clients. Although only 1st page of agreement has been submitted, I am of the view that we may agree with ISS’s statement that agreements have been executed in respect of these clients. During the hearing held on June 27, 2006, Shri Deepak Pravinchandra Shah, ex-manager of ISS appeared on behalf of ISS and submitted as under:-
“Our role and involvement in the sub broking activity was merely as a facilitator to the clients who were dealing through us. As a matter of practice we had insisted upon to all our clients that they should register with the main broker who will be able to provide proper and necessary records to them. Few persons who were very close friends and relatives preferred that they should maintain account with ourselves. In order to meet with the requirements, we traded on their behalf and provided with the records which were generated from our back office system. We humbly submit and reiterate that those were the persons who were personally known to us and had mutual trust relationship. We had no other intentions to skip over the Regulatory requirements. However, due to the poor and inadequate knowledge, few lapses were committed by us which are probably in the nature of technical and inhouse procedure requirements”.
Indirectly, ISS has admitted that no agreements were entered into in respect of the balance clients.
Findings:
In the statement dated October 26, 2004, it was admitted that agreements had not been executed with some clients and that ISS was in the process of executing the same. However, even with the letter dated June 28, 2006, ISS has not submitted any proof thereof. I am therefore constrained to hold that ISS has failed to execute agreements with some of its clients. ISS has thereby violated SEBI directions issued vide SEBI Circular SMD/Policy/Circular/ 11-97 dated May 21, 1997 and regulation 26(xii), 26(xv) and 26(xvi) of Broker Regulations.
3.3 Charge:
It is alleged that ISS has delayed the payment of monies / delivery of securities to clients in violation of SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993 and SEBI/MRD/SE/Cir33/2003/27/08 dated August 27, 2003. ISS is hence liable for penalty under regulation 26(vi) and section 15F(b) of SEBI Act, 1992.
Submissions:
No submissions have been made in this regard by ISS.
Findings:
The inspection report mentions a list of 11 accounts where running accounts were being maintained and no client consent for the same was produced. The list of accounts is as under:-
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S. No.
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Name of the Client
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1.
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ASHISH S CHOKSHI
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2.
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B. K. SHAH
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3.
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DIPAK P. SHAH
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4.
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MINU KUNDRA
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5.
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NARENDRABHAI
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6.
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NAVINCHANDRA THAKORLAL DALAL
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7.
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M. TALATI
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8.
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RAJNIBHAI PARIKH
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9.
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RAMESHBHAI PACHIGHAR
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10.
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SATISH JHAVERI
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11.
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VIMAL SUKHADIA
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A perusal of the copy of ledger accounts available as annexure to inspection report reveals that there are many instances of delay in payment to the clients. I am therefore convinced that ISS has violated SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993, circular no. SEBI/MRD/SE/Cir33/2003/27/08 dated August 27, 2003 and regulation 26(vi) of Broker Regulations and is thus liable for penalty under section 15F(b) of the SEBI Act, 1992.
3.4 Charge:
It is alleged that ISS has not segregated the client funds in a separate account and has also misused the same for office expenses and investments which is in violation of SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993 and regulation 26(xiii), 26(xv) and 26(xvi) of Broker Regulations.
Submissions:
Despite adequate opportunity having been provided, no submissions have been made by ISS regarding this allegation.
Findings:
The inspection report mentions that ISS is maintaining a current account no. 30067 with the Surat People’s Co-operative Bank Ltd. and Shri Jayakant Diwan, proprietor of ISS has a savings account no. 60777 with the same bank which is a personal account. The inspection report has further mentioned that ISS has not maintained a separate account for clients funds and client funds have been routed through the proprietor’s personal savings account. As no explanation has been given by ISS, it is evident that they have no suitable explanation to offer. In fact, ISS has not even cared to open a clients’ account. Therefore, I am of the view that by not segregating the clients’ funds in a separate account, ISS has violated SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993 and regulations 26(xiii), 26(xv) and 26(xvi) of Broker Regulations and are liable for penalty under section 15HB of SEBI Act, 1992.
3.5 Charge:
ISS has accepted / made payment from / to clients in cash in violation of SEBI circular No. 23341/93 dated November 18, 1993, circular no. SEBI/MRD/SE/Cir33/2003/27/08 dated August 27, 2003 and regulation 26 (xv) and 26(xvi) of the Broker Regulations.
Submissions:
In the statement recorded during the course of inspection, Shri Jayakant Diwan, proprietor of ISS stated that he would examine the entries in cash book and submit his reply in each transaction on or before November 10, 2004. It was further stated that they would discontinue this practice with immediate effect. In the submission dated June 27, 2006 before the adjudicating officer, it was submitted that certain lapses were committed by them due to poor and inadequate knowledge.
Findings:
The available records reveal that no reply in this regard was submitted to ISS by November 10, 2004 as promised. ISS has admitted that it accepted / made payment from / to clients in cash. In absence of any submission / explanation from ISS, I hold that ISS has violated SEBI circular No. 23341/93 dated 18.11.1993 and SEBI / MRD / SE / Cir33/ 2003/27/08 dated August 27, 2003 and regulations 26 (xv) and 26(xvi) of Broker Regulations and are thus liable for penalty under section 15HB of SEBI Act, 1992.
3.6 Charge :
ISS has been dealing as sub broker for clients with broker/s of other stock exchanges without obtaining registration as sub broker which is in violation of SEBI Circular No. SMD/Policy/CIR-3/98 dated January 16, 1998, Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, Regulation 26(xiv) of Broker Regulations and Section 12 of SEBI Act, 1992.
Submissions:
In the statement recorded on October 26, 2004, Shri Jayakant Diwan, proprietor of ISS mentioned that they were dealing for last 3 years as a client with M/s Netgain, BSE sub broker (Regn No INS 011248825) of M/s Growth Avenues Ltd. Shri Diwan specifically submitted as under :-
“All the trades executed through Netgain are on my own account on behalf of the clients”
It was also mentioned that ISS was also registered as a client (client code JC-36) with M/s Angel Broking Ltd., member, BSE (SEBI Registration No. INB 010996539) and was dealing with them since September 21, 2004 for BSE trades. In this regard too, ISS has submitted as under :
“All the trades executed through Angel are on my own account on behalf of the clients”
Regarding the methodology, it was stated that all the orders received from clients were executed in the client code of Jayakant Diwan. The funds and shares were routed through his bank account (account no. 30067 with Surat People’s Bank and demat account (account no. 10001035 and 10070183 in the name of Shri Jayakant Kantilal Diwan and Deepak Pravinchandra Shah with M/s Growth Avenues Ltd.). It was also stated that the same procedure was followed while dealing through M/s Netgain.
Findings:
The findings of the inspection team have been corroborated by the submissions made by the proprietor, Shri Jayakant Kantilal Diwan who explicitly admitted that even though ISS was a registered sub broker with Growth Avenues Ltd, he was still dealing on behalf of clients through his personal account with other brokers. It is thus proved that ISS has been dealing as sub broker for clients with broker/s of other stock exchanges without obtaining registration as sub broker which is in violation of SEBI Circular No. SMD/Policy/CIR-3/98 dated January 16, 1998, Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, Regulation 26(xiv) of Broker Regulations and Section 12 of SEBI Act, 1992.
3.7 Charge :
ISS has failed to comply with directions issued by the Board and has thus violated regulation 26(xv) of Brokers Regulations, and;
ISS has not exercised due skill, care and diligence in conduct of the business which is in violation of regulation 15(1) (b) and 26 (xvi) of Broker Regulations.
Submissions:
As already mentioned, despite adequate opportunity, ISS did not submit a specific reply to the inspection report or to the show cause notice. In their submission dated June 27, 2006 made before the adjudicating officer, they stated as under :
“ Our role and involvement in the sub broking activity was merely as a facilitator to the clients who were dealing through us. As a matter of practice we had insisted upon to all our clients that they should register with the main broker who will be able to provide proper and necessary records to them. Few persons who were very close friends and relatives preferred that they should maintain account with ourselves. In order to meet with the requirements, we traded on their behalf and provided with the records which were generated from our back office system. We humbly submit and reiterate that those were the persons who were personally known to us and had mutual trust relationship. We had no other intentions to skip over the Regulatory requirements. However, due to the poor and inadequate knowledge, few lapses were committed by us which are probably in the nature of technical and inhouse procedure requirements. The moment we were informed about the same we have taken necessary steps to regularise those lapses and have not repeated the same at any time subsequently. We have met with all our financial and delivery commitments to our market and clients and there has never been default of any nature in this regard.”
Findings :
Various shortcomings were observed in the working of ISS such as non-incorporation of full information on confirmation memos, non- execution of agreement with certain clients, delay in payment to clients, non-segregation of client and own funds etc. The aspects such as delay in payment to clients, non-segregation of client funds and own funds etc. are clear evidence of lack of care, skill and due diligence in conduct of business on the part of ISS. SEBI had directed the brokers / sub-brokers to implement these procedures in their working vide numerous circulars viz. circular numbers SMD/Policy/Circular/ 11-97 dated May 21, 1997, SMD/SED/CIR/93/23321 dated November 18, 1993, circular 23341/93 dated 18.11.1993, circular SEBI/MRD/SE/Cir33/2003/27/08 dated August 27, 2003, and circular SMD/Policy/CIR-3/98 dated January 16, 1998 etc. By not complying with directions as above, ISS has not exercised due care, skill and due diligence in their sub-broking activities and have violated Code of Conduct for sub-brokers as given in Schedule II of regulation 15 of Broker Regulations. These shortcomings are also violative of regulations 26(v), 26 (vi), 26(xii),26 (xiii), 26(xiv), 26(xv) and 26(xvi) of Brokers Regulations and ISS is liable for financial penalty under Section 15B, 15F(a), 15F(b) and 15HB of SEBI Act, 1992.
3.8 These provisions of SEBI Act, 1992 quote as under:-
“Penalty for failure by any person to enter into an agreement with clients
15B. If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder, to enter into an agreement with his client, fails to enter into such agreement, he 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.]”
“Penalty for failure in case of stock brokers
15F. If any person, who is registered as a stock broker under this Act, -
(a) fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker;”
(b) fails to deliver any security or fails to make payment of the amount due to the investor in the manner or within the period specified in the regulations, he 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.]”
“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.]”.
Section 15HB is a generalized penal provision and takes into account those acts of an intermediary which have not been separately dealt with.
My findings on the basis of the inspection report and the evidence on record prove that ISS has violated the provisions Broker Regulations and Code of Conduct for sub brokers as stipulated in Broker Regulations.
3.9 However, while considering imposition of penalty, the adjudicating officer is required to give due regard to the following factors mentioned in Section 15J of SEBI Act:-
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
It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage accrued to ISS as a result of the defaults committed by them viz. not having complete particulars on the confirmation memo, not entering into agreements with certain clients, delay in making payments to clients. Further, the amount of exact loss caused to an investor or group of investors also cannot be quantified on the basis of the available facts and data. However, it is pertinent to note that many instances were noticed where the sub-broker failed to make payment within the prescribed time limit to the clients. Therefore, the investors incurred opportunity loss during the delay period. As there were many instances of acting as unregistered sub-broker, non-execution of agreements, issuance of confirmation memos with incomplete particulars and of delay in making payment to clients, I am of the view that the violations committed by the sub-broker, ISS, are repetitive in nature.
3.10 As the violation of statutory obligations has been established, ISS is liable for penalty. Hon’ble Supreme Court of India in its order dated May 23, 2006 in the matter of SEBI Vs. Shriram Mutual Fund (Civil Appeal Nos. 9523 and 9524 of 2003) has held that levy of penalty is attracted once the violation of statutory obligations is established and the intention of parties committing such violation is irrelevant.
4.0 PENALTY
4.1 Therefore in exercise of the powers conferred under section 15 I (2) read with section 15 B, 15F(a), 15 F(b) and 15 HB of Securities and Exchange Board of India Act, 1992 and Rule 5 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs.2,00,000/- (Rupees two lacs only) on M/s Infimage Shares and Stock, Proprietor Mr. Jayakant Kantilal Diwan, sub broker (SEBI Registration No. INS 231153318). In my view, the quantum of the above penalty is proportionate to the default of M/s Infimage Shares & Stock in the facts and circumstances of the case.
4.2 The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI - Penalties remittable to the Government of India” and payable at Mumbai within a period of 45 days from the date of receipt of this order. The draft may be sent to Mr. P.K. Kuriachen, General Manager (MIRSD), Securities and Exchange Board of India, SEBI Bhavan, C-4 A, G- Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400051.
4.3 In terms of the provisions 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 Infimage Shares and Stock and to Securities and Exchange Board of India.
| PLACE: MUMBAI |
PIYOOSH GUPTA |
| DATE: OCTOBER 27, 2006 |
ADJUDICATING OFFICER |