ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE ADJUDICATION PROCEEDINGS AGAINST M/S ROMESH BANSAL & CO.
FACTS OF THE CASE
- SEBI conducted an inspection of the books of accounts and other records of M/s. Romesh Bansal & Co (hereinafter referred to as RBC) a sub-broker affiliated to LSE Securities Ltd. The period covered under the inspection was 01.04.2002 to 31.03.2004 (hereinafter referred to as ‘inspection period’). On the basis of the findings of the inspection it is alleged that certain provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) and the SEBI (Stock Brokers and Sub-Brokers) Regulations 1992 (hereinafter referred to as the Broker Regulations) have been violated by RBC. In respect of the said violations alleged to have been committed by RBC, adjudication proceedings were initiated against it.
SHOW CAUSE NOTICE
- A Show Cause Notice dated June 10, 2005 under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules) was issued to RBC, requiring it to show cause as to why an inquiry should not be held against it for the violations alleged to have been committed by it.
SUBMISSIONS OF M/S. ROMESH BANSAL & CO.
3. RBC did not reply to the show cause notice. However, in the interest of justice, it was felt that an inquiry may be held in the matter. In view of the same, RBC was advised to attend the inquiry on September 5, 2005. Shri. Romesh Bansal, proprietor of RBC attended the inquiry and made the submissions. Further vide letter dated September 19, 2005, further submissions were made by RBC in the matter.
4. The charges leveled against RBC, its submissions and the findings of the inquiry are mentioned below :
CHARGE: NOT MAINTAINING ORDER BOOK AND MARGIN DEPOSIT BOOK
- It is alleged that RBC failed to maintain order book and margin deposit book.
SUBMISSIONS
- RBC has submitted that it is maintaining order book in the computer system itself. Order number and order time is generated by the system. Hence there is no violation such as non maintenance of order book. RBC has not submitted any explanation regarding non maintenance of margin deposit book.
FINDINGS
- Regulation 15 read with Regulation 17 of the Brokers regulations require a sub-broker to maintain the books and documents specified therein. It is noted from the submissions of RBC that it was maintaining order book in the computer system where order number and order time was generated by the system. However, no explanation has been given for non maintenance of margin deposit book. It is noted that by virtue of the said provisions a sub-broker is bound to keep and maintain margin deposit book.
- The requirement for maintaining margin deposit book was inserted by SEBI (Stock Brokers and Sub-brokers) (Amendment) Regulations 2003 with effect from 23.9.2003 In this regard it is pertinent to note that margin deposit books are required to be maintained wherein details of margins deposited, defaults etc are to be recorded. The margin deposit book bears testimony to the fact whether the sub-broker has been implementing the directives of SEBI and the Stock Exchanges with regard to the margin requirements. Regulation 26 (iii) provides that a stock broker or sub-broker shall be liable for monetary penalty for failure to maintain books of account or records as per the SEBI Act, Rules or Regulations framed there under. The failure to maintain margin deposit book has to be viewed seriously though the said requirement has come into effect only on 23.9.2003 in respect of the sub-brokers.
- In view of the failure on the part of RBC to maintain the margin deposit book, it is liable to the penalty prescribed under Section Section 15 A(c) of the SEBI Act provides the following :
“If any person, who is required under this Act or any rules or regulations made there under to maintain books of account or records, fails to maintain the same, 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.”
CHARGE: NOT MAINTAINING PROPER SEGREGATION OF CLIENT’S FUNDS AND OWN FUNDS
- It is alleged that RBC did not segregate clients funds and own funds. It is observed in the inspection report that RBC is not maintaining separate bank account for client’s money. All the amounts received from the clients have been deposited in sub-broker’s own bank account as there is no separate bank account for client’s funds. Further, during the inspection the following instances of cash withdrawal from the said account were noticed.
|
Date
|
Amount (Rs.)
|
Bank Account
|
|
28.5.2002
|
100,000
|
30365 (SBI)
|
|
18.6.2002
|
120,000
|
30365 (SBI)
|
|
22.8.2002
|
100,000
|
|
|
9.9.2002
|
100,000
|
30365 (SBI)
|
|
21.9.2002
|
100,000
|
30365 (SBI)
|
|
1.10.2002
|
100,000
|
30365 (SBI)
|
|
28.10.2002
|
100,000
|
30365 (SBI)
|
|
2.7.2003
|
200,000
|
30365 (SBI)
|
|
18.7.2003
|
120,000
|
30365 (SBI)
|
|
23.7.2003
|
140,000
|
30365 (SBI)
|
|
5.8.2003
|
210,000
|
30365 (SBI)
|
|
16.9.2003
|
200,000
|
30365 (SBI)
|
|
19.9.2003
|
150,000
|
30365 (SBI)
|
|
15.10.2003
|
110,000
|
30365 (SBI)
|
|
22.10.2003
|
210,000
|
30365 (SBI)
|
|
7.1.2004
|
250,000
|
30365 (SBI)
|
|
16.1.2004
|
155,000
|
30365 (SBI)
|
|
19.3.2004
|
200,000
|
30365 (SBI)
|
|
2.5.2002
|
140,000
|
0340140000051(HDFC)
|
|
27.6.2002
|
130,000
|
0340140000051(HDFC)
|
|
8.7.2002
|
130,000
|
0340140000051(HDFC)
|
|
13.8.2002
|
140,000
|
0340140000051(HDFC)
|
|
25.11.2002
|
200,000
|
0340140000051(HDFC)
|
|
12.2.2004
|
150,000
|
0340140000051(HDFC)
|
|
1.3.2004
|
100,000
|
0340140000051(HDFC)
|
|
27.3.2004
|
140,000
|
0340140000051(HDFC)
|
SUBMISSIONS
- RBC has submitted that it was maintaining separate client account with SBI, LSE building, Ludhiana. However with practical difficulty of transferring of funds to SBI and HDFC and vice versa, it was discontinued. It is further submitted that RBC has opened client account with HDFC from 1.6.2004 and the account number is 340340001646. Now all transactions with the clients are through this account.
FINDINGS
- It is noted from the submissions of RBC that it was not maintaining separate client account prior to 1.6.2004. It is further noted from the table 1 that RBC was withdrawing substantial amount of cash from the account where client money was being deposited. As no segregation of clients’ funds from the sub-brokers funds is made the sub-broker has violated the directive contained in SEBI circular no: SMD/SED/Cir/93/23321 dated 18.11.93, which requires maintaining a separate client accounts. Regulation 26 (xiii) of the Brokers Regulations state that a sub-broker shall be liable to monetary penalty for failure to segregate his own funds from clients funds. In view of the above violation committed by RBC, it is liable to the penalty under the provisions of Section 15 HB of the SEBI Act which provides the following
“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 “
CHARGE: INDULGING IN OFF THE FLOOR TRANSACTIONS
It is alleged that RBC indulged in off the floor transactions. Inspection report cites the following instances of such transactions
Table – 2
|
S/N
|
Name of the party
|
Rate difference bill (Amount in Rs.)
|
Cash (Amount in Rs.)
|
Debit
|
Credit
|
Debit
|
Credit
|
-
|
Rajan Mohindra
|
52335
|
-
|
-
|
52335
|
-
|
Nidhi Bansal
|
-
|
64620
|
-
|
|
-
|
Rajesh
|
63100
|
-
|
-
|
63100
|
-
|
Roop Raj
|
61400
|
-
|
-
|
61400
|
-
|
Raman Kumar
|
93975
|
-
|
-
|
93975
|
SUBMISSIONS
- RBC has submitted that there was a problem with the computer system on that day and for clients who were at the office that time, off the floor trades were executed. Further, that day RBC did not execute any transaction on the stock exchange.
FINDINGS
- RBC has admitted that off the floor transactions were executed. By comparing daily transaction register of LSE Securities Ltd, and RBC, it was noted in the inspection that these transactions were not reported to the exchange. In view of the same, it is concluded that RBC executed off the floor transactions in violation of circular SMDRP/POLICY/CIR-32/99 dated September 14, 1999 which stipulates all the trades to be executed only on the screens of the exchange. Regulation 26 (xv) of the Brokers Regulations state that a sub-broker shall be liable to monetary penalty for failure to comply with the directions issued by the board under the SEBI Act or rules or regulations framed there under. By executing off the floor transactions RBC is liable to the penalty prescribed under Section 15 HB of the SEBI Act.
CHARGE: ACCEPTING CASH FROM THE CLIENTS
- It is alleged that RBC has accepted payments from clients in cash in the instances provided in table 2 in page no.7.
SUBMISSIONS
- RBC has submitted that in some cases it becomes necessary to accept cash from the client so as to meet its obligations towards pay-in on time. Further all cash received from clients had been deposited in the bank only.
FINDINGS
- It is noted from the submissions of RBC that it has been accepting cash from the clients in few cases. Accepting cash or making payments in cash results in lack of proper audit trial and can be used for settling fictitious / dummy transactions or can be used for illegal trading purpose. In view of the same it is concluded that by accepting cash or making payment in cash RBC violated the directions contained in SEBI circular No. SMD-1/23341 dated 18.11.93 and SEBI/MRD/SE/Cir-33/2003/27/08 dated 27.8.03 which specifically prohibits acceptance / payment of cash to the clients in respect of trading obligations. Regulation 26 (xv) of the Brokers Regulations state that a sub-broker shall be liable to monetary penalty for failure to comply with the directions issued by the board under the SEBI Act or rules or regulations framed there under. In view of the same, RBC is liable to the penalty under Section 15 HB of the SEBI Act.
CHARGE: NOT OBTAINING / MAINTAINING CLIENT AGREEMENT FORM
It is alleged that RBC did not maintain client agreement form for all the clients. The inspection report cited that client agreement was not maintained for the following clients:
I. Roop Raj
II. Rupinder
III. Ravinder Singh
IV. Joshi Sahib
V. Mulakh Raj
VI. Santosh Rani
VII. Sharda Devi
VIII. Balwant Singh
IX. Ramesh Aggarwal
X. Asha Aggarwal
XI. Harpal Singh
XII. Seema Gupta
SUBMISSIONS
- RBC has submitted that client agreements were maintained and the copies of the same were sent earlier vide letter dated August 30, 2004.
FINDINGS
- It is noted from the submissions of RBC that it has submitted the copies of client agreement form in the above cases. In view of the facts of the case and the submissions of RBC, it can not be concluded that RBC failed to maintain client registration form.
- It is alleged that by committing violations as given in the preceding paragraphs, RBC failed to exercise due skill care and diligence as mandated under the provisions of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.
21. It is noted from the above that the violations such as not maintaining margin deposit book, non segregation of client fund and own fund, not reporting off the floor transactions to the exchange and accepting cash from the clients levelled against RBC are established. As discussed above, the said violations attract a penalty prescribed under Section 15 A(c) and 15 HB of the SEBI Act.
22. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, 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
23. It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage made as a result of the default. Further, the amount of loss caused to an investor or group of investors also cannot be quantified on the basis of the available facts and data.
24. It is pertinent to note that as per inspection report, no investor complaints have been cited against RBC. Further, vide letter dated September 19, 2005, RBC has submitted a letter dated September 16, 2005 by LSE, confirming the following:
I. As per records of the Exchange, there is no investor complaint pending against RBC
II. There is no case pending before arbitration committee against RBC
III. There is no default on behalf of RBC in meeting pay-in obligation and payment of margins during last two years
25. Though it is felt that in view of the violations such as non-maintenance of margin deposit book, non segregation of client’s funds from own funds, transactions in cash with the clients and indulging in off the floor transactions, have to be viewed seriously and penalty needs to be imposed on RBC so that it acts as a deterrent for RBC and other brokers to be more vigilant in complying with the norms prescribed by SEBI and Stock Exchanges, however, considering the submissions of RBC that subsequent to the inspection by SEBI, it had taken measures for following the rules, I am of the view that a lenient view may be taken with regard to the penalty.
ORDER
- Considering the facts and circumstances of the case though it is established that M/s Romesh Bansal & Co failed to maintain margin deposit book and separate bank account for clients and indulged in off the floor transactions and accepted cash from the clients, thereby violating directions issued by SEBI vide its circulars, however as the instance of off the market transaction was only on a day and further subsequent to the inspection, M/s. Romesh Bansal & Co had taken remedial measures like opened separate client account etc., a lenient view is taken with regard to the penalty. For the violations stated as above committed by M/s.Romesh Bansal & Co. in terms of the provisions of Section 15 A(c) and 15HB of the SEBI Act, I, hereby impose a penalty of Rs.20,000/ (Twenty Thousand) on M/s.Romesh Bansal & Co.
- The penalty shall be paid by way of demand draft drawn 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 shall be forwarded to Chief General Manager, Market Intermediaries Regulation and Supervision Department, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai – 400 005.
- 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 Romesh Bansal & Co. and to Securities and Exchange Board of India.
PLACE: MUMBAI BIJU. S
SEPTEMBER 29, 2005 ADJUDICATING OFFICER