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(vi), (xiii), (xiv),(xv) and (xvi) of SEBI (STOCK BROKERS AND SUB BROKERS) REGULATIONS, 1992 AND SECTION 15HB OF THE SEBI ACT, 1992 AGAINST M/s MERFIN (INDIA) LTD. (SEBI REGD. NO.- INB230907033).
1.0 BACKGROUND:
1.1 M/s MERFIN (INDIA) LTD. (hereinafter referred to as “broker”) having Securities and Exchange Board of India (hereinafter referred to as SEBI) registration no. INB230907033 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 April 25, 2003 to July 15, 2003. The period covered under the inspection was April 1, 2001 to March 3, 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 3, 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 25, 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 (herinafter referred to as “ The erstwhile Adjudicating Officer”) to enquire into and adjudicate upon the alleged violations by the broker.
2.0 SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2.1 The erstwhile Adjudicating Officer issued a show cause notice dated April 30, 2004 to the broker mentioning the charges extracted on the basis of the inspection and advising the broker to show cause as to why penalty cannot be imposed on it in terms of section 15HB of SEBI Act, read with regulation 26(vi), (xiii), (xiv),(xv) and (xvi) of Broker Regulations. The broker replied to the said show cause notice vide its letter dated May 11, 2004.
2.2 In the meanwhile, 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 order, 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 order 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 30, 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 dt. 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 25, 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 17, 2005 replied to the said notice dated September 30, 2005 and while confirming the appearance of its authorised representative on the date fixed, submitted that one of its director Shri P.S.R. Nagabhushana Rao, who used to look after the day to day activities and compliances, met an accident on April 26, 2003 and was operated twice for Brain Surgery in the year 2003. In his absence the total work was handled by Shri T Krishna Mohan, another director. Therefore, considering the illness of the director and the lack of experience of the other director, the irregularities may be seen in lighter way and the proceedings may be dropped. It was also stated that most of the irregularities found by SEBI inspection team were found by NSE also in its inspection and NSE has already imposed penalty for the same. Broker also promised not to repeat any of the irregularities pointed out by SEBI inspection and requested that no penalty be imposed in the matter.
2.5 On November 17, 2005 Shri P.S.R. Nagabhushana Rao, the director (representative), along with Shri Vara Prasad, the Chartered Accountant appeared before me for personal hearing 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 30, 2004 and September 30, 2004 were explained to its representative. The provisions of the Act, Rules or Regulations alleged to have been violated were also explained and the representative submitted that he had understood the charges levied. As the representative did not bring his authorization letter, on an undertaking, he was allowed to make submissions and as per the undertaking given, he submitted the authorization vide his letter dated November 18, 2005. He also submitted a letter dated November 16, 2005 during the personal hearing.
2.6 During the personal hearing, while referring to their replies dated May 25, 2004 and November 16, 2005, the representative submitted that though there were minor irregularities in the conduct of the business as observed in the inspection, NSE has already penalised the broker for the said violations and therefore present proceedings may be dropped.
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- Indulged in funding activities in violation of Regulation 26(xv) of the (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “Regulations”); read with A(5) of Schedule II under Regulation 7.
Reply of the broker : In its reply dated May 25, 2004 the broker stated that it had not done any funding activity for any of its clients. While referring to the instances cited in SEBI’s inspection report, it was submitted that with respect to Shri Sanka Bhaskar Rao (client code C 005), the client had margin money deposit of Rs. 11,38,871/- towards client margin money on various dates according to his obligations as per SEBI Rules, before July, 2002 and the same was not clubbed with his regular account and was kept separately.
They had allowed the client to do trading taking this amount in to consideration. Payments to the client were made only after taking into account his balance in the client account and also that of the client money account. This being a running account the client on some occasions may end up in debit without considering the client margin money account which is always kept separately in client margin money account. Whenever the client account shows debit balance, they took into consideration the credit in the client margin money account. The payments to the client were released only if the client accounts shows credit after taking the consolidation of both the accounts. While verifying the clients account, the audit team have not considered this client margin money account simultaneously.
With respect to another client Shri G.Venkateshwar Reddy (client code. Z 238) it was submitted that the client had a margin money credit of Rs. 2,50,000/- on various dates before February 22, 2002. The said client had a debit in his client account and credit in client money account and that is why his client account shows debit balance.
As regards its client Shri P.Amba Prasad – JMD Securities (client code Z 403) it was submitted that the client had a margin money credit of Rs. 3,00,000/- before July 10, 2002 towards margin amount. On the request of the said client they had made few payments considering the credit in the client’s margin account.
As regards Ms. G.Usha (client code RAU), it was submitted that the client had deposited Rs.1,00,000/- before April 27, 2002 towards client margin money account. The client had requested them to transfer certain money from her margin account to F&O account. However, they paid through client account instead of client margin account inadvertently and therefore the client account had shown debit balance at that particular time. Due to non-simultaneous verification of both the client account and client margin accounts, the auditors have made the above observations.
While enclosing copies of margin money deposit account of the clients, it was stated that they had never done any fund based activities either directly or indirectly.
Findings: As regards the charges of fund based activities, I note that apart from the instances referred to by the SEBI Inspection Report, NSE in its report for the inspection conducted for the year 2001-02 had also mentioned, though without giving the details, that fund based activities were undertaken by the broker. However, from the SEBI Inspection Report I observed that no categorical finding was made in this regard and report only stated that there were no direct instances of receipt/payment to /from clients, indicating fund based activities and whatever instances were noted, they all indicated indirect fund based activities. In view of the above, considering the documents submitted by broker vide its reply dated May 25, 2004 I am of the view that benefit of doubt can be given to the broker in this regard.
Charge 2 : Dealt with unregistered sub-brokers in violation of Regulation 26(xiv) of the Regulations read with SEBI Circular SMD/Policy/circular/3-97 dated 31.3.1997 and Circular 02/2001 dated 15.1.2001.
Reply of the broker : It was submitted that all the sub-brokers in question were registered with them as constituents and had dealt with their own business. Later on they had applied for sub-broker registration and after the receipt of the sub-broker certificates they had started business as registered sub-brokers at their premises.
It was further stated that the unique client code allotted at the time of client registration was continued by the sub-brokers after getting the sub-broker registrations. Hence the Inspection Team presumed that these entities are unregistered sub-brokers even though they have not done any client business prior to their sub-broker registrations.
It was also submitted that these facts were explained to NSE team also at the time of their inspection, however, NSE levied and collected penalty. They had explained the same to the SEBI Inspecting Team as well but still the Inspecting Team concluded otherwise. Broker requested that the same may be considered favourably and fault if any may be condoned.
Findings : Having considered the material before me including the Inspection Report, I find that the broker allowed 07 entities to act as its sub-broker after executing agreements with them but prior to their getting SEBI registration and those entities acted as sub-broker when their application for registration with SEBI was under consideration. Therefore, I hold the broker responsible for the alleged violation in this regard which is very serious in nature.
Charge 3: Misutilised clients monies in violation of Regulation 26(xiii) of the Regulations read with SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993.
Reply of the broker : Broker submitted that in compliance with the Rules & Regulations of the National Stock Exchange of India (NSE) and SEBI, they opened two separate accounts Viz: CLIENTS ACCOUNT & OWN ACCOUNT with Canara Bank, Narayanguda Branch Hyderabad. The Client Account No: is 2606 & Current Account No.2280 being their own account. All the monies received from the clients are deposited directly in the client account no. 2606 which is inclusive of their brokerage. Their own monies are deposited in account no.2280, thereby clearly distinguishing the client monies and own monies and they had never misused the client monies for any of their requirements. Further it was submitted that they had not followed the regular practice of transferring brokerage earned by them from the client accounts. In support of this claim the broker submitted the statement of detailed monthly brokerage earned by them which was lying in the client account at that time and instances reported by SEBI Inspection Team.
With respect to the period prior to the NSE inspection, it was admitted that they had made some payments from clients accounts inadvertently. In this regard it was submitted by the broker that the payments made from the clients accounts as mentioned in the findings are small amounts and are less than the amounts of brokerage earned by them during that period. As such they had kept the brokerage earned in the client account itself at that period.
It was also stated that the findings as reported by the SEBI Inspection Report were for the earlier period 2001-2002, which was already covered by the NSE inspection for which NSE had already imposed penalty. These errors have since been rectified and to support this contention, it was submitted that auditors did not report any further irregularities of client monies for the subsequent years.
Findings : From the above it can be seen that the broker has tactfully admitted the lapse in this regard and tried to take shield of the penalty already imposed by NSE for the said violations. I find that several instances have been reported at page 25 of the Inspection Report which include huge withdrawals for personal use, telephone and bank charges, computer purchase, loan payments, salaries etc., which is in violation of clause A (5) of Schedule II read with regulation 7 of Broker Regulations further read with SEBI circular SMD/SED/CIR/93/23321 dated November 18, 1993.
Charge 4: Failed to collect margins in violation of Regulation 26(xv) and 26 (xvi) of the Regulations read with circular SMDRP/POLICY/Cir. 33/2000 dated 27.7.2000.
Reply of the Broker : It was submitted on behalf of the broker that most of their clients were retail clients and are interested to close their positions towards the end of the trading session. The clients at the time of registration deposited some amount towards margin amount. These amounts are recorded in the client margin money account. The clients are allowed to do trading depending on their margin money amount. Broker further submitted that sometimes, the clients have also given them shares towards margin and securities against their dealings.
The broker however admitted that once for the quarter ended 31.3.2001 – 30.6.2001, it had reported non-collection of margin money to the National Stock Exchange of India in their audit certificate issued for compliance purpose. The Disciplinary Action Committee of NSE had imposed and collected penalty for the said non compliance and subsequently, the mistake was rectified and there are no further violations in this regard.
Findings : The reply of the broker is not acceptable as the same is not supported by any documentary evidence even though some specific instanes were mentioned in the inspection report. Therefore, I conclude that by the aforesaid acts of omission the broker has violated clause A(5) of Schedule II read with Regulation 7 of Broker Regulations, further read with SEBI Circular SMDRP/Policy/Cir 33/2000 dated July 27, 2000 read with Cir 6/2000 dated February 1, 2001.
Charge 5: Delayed payment of monies / delivery of securities to clients in violation of Regulation 26(vi) of the Regulations read with SEBI Circular SMD/SED/CIR/93/23321 dated November 18, 1993.
Reply of the Broker : Broker submitted that in absolute compliance of the SEBI Rules & Regulations and also that of NSE, it always made regular payments to clients against their sales as per the settlement. It was further submitted that most of its clients do regular business and maintain running accounts and have authorised the broker to retain their payout of funds/securities, against their sale/purchase of securities for future buying/selling of shares to avoid delay in delivery of securities/funds for the subsequent pay-in/pay-outs. Accordingly such clients had also authorised the broker to retain their shares in the account of the broker so as to enable them to sell the stock in the subsequent settlements to avoid time delay and also the transaction charges at their own interest. Broker also enclosed some of the copies of such authorisation letters in support of the said claim.
It was further submitted that due to the changes in the Settlement Cycle system, most of its clients were insisting the broker to keep their pay-out of deliveries in broker’s de-mat accounts and not to transfer the shares to their respective beneficiary accounts, so as to enable them to sell their holding in the subsequent settlements and it is only on the request and authorisation of the client that the shares are kept in our account.
Findings : The inspection report has noted several instances of delay in transfer and the contention of the broker that he had got authorisation letter from the client for retention of the scrips of the clients and therefore there was a delay is not acceptable because first of all, mere possession of consent letters does not authorise a member to delay the transfer of securities /monies. Secondly, it can’t be established beyond doubt that such letters were not obtained subsequent to the inspection to cover up the lapse, as most of the letters do not mention the date of the letter. Thus, I hold member responsible for violation of clause A(5) of Schedule II read with Regulation 7 of Broker Regulations further read with SEBI Circular SMD/SED/Cir/93/23321 dated November 18, 1993.
Charge 6 : Failed to comply with directions issued by the Board vide circular Nos. SMD/Policy/ circular/3-97 dated 31.3.1997 and Circular No. 02/2001 dated 15.1.2001 and SMD/SED/CIR/93/23321 dated 18.11.1993, SMDRP/ POLICY/ Cir.33/2000 dated 27.7.2000, in violation of Regulation 26(xv) of the Regulations;
Reply of the broker : broker in its reply tried to explain the charge of clients transiting on behalf of other clients and submitted that all these payments are made by its own clients from their own bank accounts and they are not dealing with any unauthorised sub-broker and they all were its own constituents only.
Finding. From the Inspection Report I find that this charge was levied on a cumulative analysis of the findings. I also, on the overall analysis of the findings and the reply submitted by the broker hold that the aforesaid conclusion was not unfounded as the broker was seen on many count that he did not strictly comply with the directions issued by SEBI from time to time by way of the aforesaid circulars.
Charge 7: Not exercised due skill, care and diligence by dealing with unregistered sub brokers, by misutilising client’s monies, by not collecting margins, by delaying payment of monies / delivery of securities to clients, in violation of Regulation 26(xvi) of the Regulations.
Reply of the Broker : It was submitted on behalf of the broker that it abided in full conformity and compliance to the Rules, Regulations, Guidelines, Notices, Circulars issued by SEBI and NSE. Broker further stated that it had been its earnest endeavour to give 100% to the clients/constituents and it is exercising due skill, care and diligence in dealing with the investors/constituents and sub-brokers in all aspects beginning with its Notice Board wherein all the particulars of its company and the names and telephones numbers of its Directors are mentioned alongwith the important points to be noted by the clients/investors.
Broker further stated that the client registration is done by using the Individual Client Registration Forms, Member Constituent Agreement and the Risk Disclosure Document as issued by the Exchange is also enclosed with the Client Registration Form. All the particulars of the client as required in the KYC are duly filled up. After the client is registered with it, his orders for buying/selling of securities is executed at the best available market price. Broker further stated that it also informs to the client about the execution and non-execution of orders promptly to enable the constituent to make payment for the shares purchased by him and to arrange for the transfer of shares sold by him.
Broker further stated that the contract notes for the transactions done by the client are issued to them at the end of the day. The various circulars issued by SEBI and NSE about the investor education are aptly displayed at their office premises. They had never given any investment advise or in any manner induced their clients for buying/selling of shares. No advertisement of any kind has been issued by them.
Broker also stated that they had rectified the irregularities as mentioned by the NSE during the inspection. NSE has already penalised them for the irregularities and hence they requested that the deficiencies noted may be condoned and the proceedings may be dropped.
Findings : On the cumulative analysis of the charges, explanation offered and other attendant circumstances including near fatal accident of its main director who was looking after day to day management of the broker at the time of inspection, I am of the view that it has been established beyond doubt that the conduct of the broker was found wanting on many counts. This finding is duly supported by the fact that even NSE also which is the first level regulator for the broker, found similar violations and imposed the penalty as per its own bye-laws, rules and regulations. The payment of said penalty by the broker without resistance, establishes that the broker admitted such flaws. It may be clarified here that imposition of penalty by NSE and its payment by the broker would not absolve the broker if similar violations were found by SEBI also, as the requirements under the laws administered by SEBI and NSE are different and SEBI has power to take independent appropriate disciplinary action even for the violations for which the exchange has already punished the broker in terms of its rules, regulations and bye-laws.
Apart from the above, it may not be out of context to mention that the broker in response to the charge of third party payments had admitted the same but stated that the same was done after obtaining the consent from the clients. Broker stated that the observations of Inspection Report of SEBI have been taken seriously and it has resolved not to make any such payments to any third party under any circumstances in future. In any case, I note that the Inspection Report mentions 11 instances of third party payments in violation of Clause A(5) of Schedule II of Broker Regulations.
3.2 In view of the aforesaid findings, I hold that the broker has violated the provisions of Regulation 26(vi),(xiii), (xiv) and (xvi) read with regulation 7 further read with Schedule II of the Broker Regulations read with relevant circulars issues by SEBI. These acts of omission and commission of the broker, undoubtedly make the broker liable to be penalized in terms of section 15HB and 15F(a) of SEBI Act.
3.3 So far as the amount of penalty, it would be pertinent to refer to the relevant provisions of the SEBI Act as under:
(a) 15HB - Penalty for contravention where no separate penalty has been provided.
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) 15J - Factors to be taken into account by the adjudicating officer
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.
3.4 Though there is nothing on record to suggest that the broker extracted any disproportionate gain or unfair advantage as a result of its default, but obviously while acting as unregistered sub-broker as well as other avoidance of the statutory requirements as admitted by the broker itself hereinabove, whether intentional or unintentional, broker must have got benefited by way of brokerage and avoidance of other administrative expenditure, though the same could not be quantified in terms of money.
3.5 Even otherwise, disproportionate gain, unfair advantage or intention are not sine quo none for imposing a penalty for the otherwise established violations of the statutory requirements and the noticee is liable for the penalty the moment the violation is established. The Hon’ble Supreme Court of India also in the matter of SEBI Vs. Shri Ram Mutual Fund [2006]68SCL216(SC) has held that once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant.
3.6 So far as the amount of loss caused to an investor or group of investors as a result of the default, even though difficult to be quantified in the absence of any material and investor complaints available on record, it can not be denied that any non compliance of the statutory/regulatory requirements/provisions made for the protection of the investors in securities and to promote the development of and to regulate securities market, for whatsoever reason, is bound to affect the interest of such investors and deprive them of a fair and well regulated market.
3.7 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, procedures to be followed by the persons concerned, is to ensure the sound and smooth functioning of the market. Therefore, even if the record has nothing to suggest that any specific or identifiable loss is caused to any investor, the cognizance has to be taken for every breach of the legal provisions and the violator has to be punished, failing which the whole purpose of not only incorporating the regulations but also the regulatory jurisdiction would get defeated. Such a penalty shall act a deterrent not only for the entity concerned but also for the others.
3.8 So far as repeated nature of defaults, nothing has been brought to my notice that the broker has repeated those faults/violations subsequently. Thus keeping in mind the facts and circumstances of the above case, as also the factors enumerated in section 15J of SEBI Act, on a careful consideration of the case and the discretion entrusted upon, I am of the view that even though there is no finding of the inspection indicating any substantial loss to any investor or the market system, the acts of omission and commission were potentially serious and were against the fairness of the securities market. In view of this the ends of justice would meet if a token penalty be imposed upon the broker which would act as deterrent for future, specially in view of the submissions of the broker that it has since taken all corrective measures is doing its business strictly in accordance with law.
4.0 ORDER
4.1 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. 1,50,000/- (Rupees One lacs fifty thousand only) as penalty on M/s. Merfin (India) Limited Securities Ltd. member NSE having SEBI Regn. no.INB 230907033.
4.2 The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a crossed 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. Kuriachen, General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400005.
| Dated : October 3, 2006 |
PRAVEEN TRIVEDI |
| Mumbai |
ADJUDICATING OFFICER |