Order in the matter of Hanuman Shares and Stock Brokers Ltd

Sep 29, 2005

Orders : Orders of AO

ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF HANUMAN SHARES AND STOCK BROKERS LTD

1. I was appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to as SEBI) in terms of an order dated February 15, 2005 to inquire into and adjudge under Section 15-I read with Sections 15 A(c), 15B, 15 F(b), 15 F(c) and 15 HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) the violations of various provisions of SEBI (Stock Brokers and Sub-brokers Regulations), 1992 and directions issued by SEBI through various circulars alleged to have been committed by Hanuman Shares and Stock Brokers Ltd. (hereinafter referred to as HSBL).

FACTS OF THE CASE

SEBI conducted an inspection of the books of accounts and other records of HSBL, a sub-broker affiliated to ASE Capital Markets Ltd. The period covered under the inspection was 01.04.2002 to 31.03.2004. During the inspection, various irregularities/ contraventions committed by HSBL were noted such as failure to maintain margin deposit book and document register, deficiencies in client ledger, failure to collect margin, delay in payment of money/delivery of security to the client, charging brokerage higher than the prescribed rate, failure to obtain/ maintain client registration forms, acting as unregistered sub-broker, indulging in off the floor transactions, failure to maintain proper segregation of client funds and own funds and not appointing compliance officer etc. In respect of the said violations alleged to have been committed by HSBL, adjudication proceedings were initiated against it.

SHOW CAUSE NOTICE

A Show Cause Notice dated June 10, 2005 was issued to HSBL in terms of the provisions of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules) requiring it to show cause as to why an inquiry should not be held against it for the violation alleged to have been committed by it.

SUBMISSIONS OF HANUMAN SHARES & STOCK BROKERS LTD

4. HSBL vide letter dated July 18, 2005 submitted its reply to the show cause notice. In its reply, HSBL had raised many objections with regard to the manner in which the inspection was conducted. Further HSBL had also contended that the violations alleged against it are not legally tenable. With regard to the irregularities and violations alleged to have been committed by HSBL, considering the submissions of HSBL, it was felt that an inquiry may be conducted against the entity. Accordingly HSBL was advised to attend the inquiry on September 5, 2005 and Shri Paresh Chimanlal Shah, director of HSBL attended the inquiry and made submissions. Vide letter dated September 11, 2005 HSBL made further submissions.

5. The charges levelled against HSBL its submissions and the findings of the inquiry in respect of each charge is mentioned below

CHARGE: FAILURE TO MAINTAIN MARGIN DEPOSIT BOOK, DOCUMENTS REGISTER AND DEFICIENCIES IN CLIENT LEDGER

It is alleged that HSBL did not maintain margin deposit book. Further, HSBL did not maintain document register containing details of securities delivered / received with other relevant details. Though, HSBL is maintaining client ledger, it does not provide value of scrip received and delivered. Further, the software used by HSBL was not allotting different client ledger code for client, sub-brokers, members of the exchange etc.

SUBMISSIONS

HSBL has submitted that for those clients who were close relatives and friends, it was not insisting on margins, otherwise margins were collected. As HSBL was maintaining the records in computer, it was maintaining margin ledger and a statement of margin payment and receipt, however, no formal register was maintained. Further, till date no action has been initiated against HSBL for shortfall in margin.

FINDINGS

HSBL has admitted that it was not maintaining margin deposit book. Further, no explanation has been provided for non maintenance of document register and deficiency in client ledger. A sub-broker is required to maintain the above books as per Regulation 15 (2) read with Regulation 17(1) of Brokers Regulations. Thus HSBL is liable to penalty under Section 15 A(c) of the SEBI Act which provides the following

If any person, who is required under this Act or any rules or regulations made thereunder 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: FAILURE TO COLLECT MARGIN

It is alleged that HSBL did not collect margins from the clients in the following instances

TABLE 1

Client	Date of transaction	Transaction value (Rs.)	Outstanding Balance (Dr)
Bipinbhai Shah	15-7-2002	211785.55	519668.55
Bipinbhai Shah	16-7-2002	122030.00	641698.55
Shree Mahavir Asso	4-6-2002	652731.30	596561.70
Shree Mahavir Asso	27-6-2002	477768.17	1560366.45
Shree Mahavir Asso	1-7-2002	721145.23	811061.57
Subhash C Aggarwal	1-8-2003	592246.64	791000.00
Subhash C Aggarwal	27-8-2003	929156.85	1304625.79
Subhash C Aggarwal	29-8-2003	1849457.91	2233203.50
Subhash C Aggarwal	2-9-2003	978095.23	3104566.66
Subhash C Aggarwal	15-9-2003	1383369.62	2448779.50
Diren C Contractor	9-12-2003	137212.23	612944.33
Pravin S Shah	9-10-2004	381293.49	1197842.95
Pravin S Shah	2-1-2004	236589.88	849949.41
Rupal V Shah	26-2-2004	559317.06	559317.06

SUBMISSIONS

HSBL has submitted that as the clients were having running account of fund and security with it and further it was holding shares against the purchase made by the client and therefore it had shares towards margin.

FINDINGS

Margin has to be collected in the manner specified in SEBI circular SMDRP/policy/cir-07/2000 dated 4-2-2000 and SMD/policy/cir-12/2002 dated May 17, 2002 which stipulates that the client shall maintain a deposit with the broker in the form of cash, bank guarantees, FDRs or approved securities which shall not be less than 10% of the net open positions of the client at any point of time. Collection of margins is a very necessary risk management tool and its avoidance by HSBL can not be overlooked. Non collection of margins makes HSBL liable for penalty under Section 15HB of the SEBI Act which provides that

“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: DELAY IN PAYMENT OF MONEY AND DELIVERY OF SECURITIES TO CLIENTS

It is alleged that HSBL did not make payment of fund to clients within 48 hours of payout in the following instances

TABLE 2

Name of the client	Amount (Rs.)	Settlement date	Payment date
Bipinbhai Shah	38954.80	7-4-02	15-4-02
Bharatbhai Patel	7969.42	2-4-02	15-4-02
Bharatbhai Jajal	872.27	29-1-03	17-2-03
Dilipbhai Patel	15480.51	18-2-03	26-2-03
Devki D Patel	8328.10	26-6-02	9-7-02
Hiral A Shah	2083.00	17-7-02	4-9-02
K M Bhurawala	85347.00	14-5-02	29-5-02
Nilesh M Parikh	13284.10	12-4-02	23-4-02
Ramesh S Shah	18619.08	6-4-02	6-6-02
Ramesh S Shah	2878.60	13-4-02	6-6-02
Ashwin C Parikh	28038.85	5-6-03	18-6-03
Bhupendra R Chowatia	23957.04	28-1-04	14-2-04
Dipak N Shah	34292.91	6-1-04	17-1-04
Dineshbhai M Patel	140806.59	1-1-04	17-1-04
Hansaben Patel	6948.68	2-4-03	11-4-03
Indiara R Rathi	51702.38	3-9-03	13-9-03
Janakbhai Babriya	13897.66	30-12-03	10-1-04
Jitendar Jain	9400.45	29-8-03	7-9-03
K T Shah	6662.86	9-1-04	16-2-04
K M Bhurawala	268243.28	22-10-03	3-11-03

It is further alleged that HSBL did not deliver securities to clients within 48 hours of payout in the following instances

TABLE 3

Name of Security	Quantity	Pay out date	Delivery date
Burroughs	10	1-1-04	17-1-04
Burroughs	20	2-1-04	17-10-4
Burroughs	20	9-1-04	17-1-04
Burroughs	10	12-1-04	17-1-04
Gujarat Siddhi Cement	1000	1-1-04	20-1-04
Aegis Logistics	500	7-1-04	18-2-04
Balaji Tele Ltd	200	12-1-04	10-2-04
BDH Industries	500	7-1-04	18-2-04
BPL	200	11-2-04	18-2-04
MRPL	500	12-2-04	26-2-04
Zee Telefilms	100	18-2-04	26-2-04
BPCL	40	12-3-04	24-3-04
Centurion Bank	300	16-3-04	24-3-04
JCT Electronics	5	17-3-04	24-3-04

SUBMISSIONS

HSBL has submitted that these were running account and it had clients authority letters for retaining the funds and security.

FINDINGS

In view of the submissions made by HSBL that these were running accounts and HSBL had authority letters from the clients, it can not be concluded that HSBL delayed payment and delivery of funds and securities to the clients.

CHARGE: BROKERAGE HIGHER THAN THE PRESCRIBED RATE

It is alleged that HSBL charged brokerage higher than the prescribed rate of 2.5% in the following instances

TABLE 4

Name of client	Security	Rate	Brokerage	%
Bela D Rajdev	Mount Everset	5.50	0.15	2.72
Bela D Rajdev	Nahar Sugar	3.25	0.15	4.61
Diren C Contractor	Scanpoint Graphic	0.90	0.10	11.11

SUBMISSIONS

HSBL has submitted that it was to discourage small stocks of value less than Rs. 10. There are only three instances and it was never the practice of HSBL to charge brokerage higher than specified rate.

FINDINGS

HSBL has admitted the violations. Though there are only three instances where brokerage has been charged in excess of the prescribed rate 2.5% and in one instance it is as high as 11.11%. , the said violations attract a penalty under Section 15 F(c) of SEBI Act which provides that

If any person, who is registered as a stock broker under this Act, charges an amount of brokerage which is in excess of the brokerage specified in the regulations, he shall be liable to a penalty of one lakh rupees or five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.

However considering the submissions of HSBL that in respect of the said instance the value of transaction was negligible; it is felt that no penalty needs to be imposed on HSBL in respect of the said violation.

CHARGE: FAILURE TO OBTAIN/MAINTAIN CLIENT AGREEMENT FORM

It is alleged that client registration form of the following clients were not available with HSBL

I. Aniruddha B Jhajal HUF

II. Ajay Rameshbhai Dariya

III. BD Kalyani

IV. Bhavna Atul Shah

V. Chetan Joshi

VI. Favorite Sec (P) Ltd

VII. Ghanshyam B Zazal HUF

VIII. Gopal N Shah

IX. Hiral A Shah

X. Hansaben B Patel

XI. I.K. Shah

XII. Kunjalbhai A Dalal

XIII. K.T. Shah

XIV. Mihir I Joshi

XV. Megha J Shah

XVI. Nirav A Shah

XVII. Nikunj A Patel

XVIII. Praksh Rawal

XIX. Shree Hanuman Prasad

XX. Sureshbhai J Shah

SUBMISSIONS

HSBL has submitted that it had submitted copies of the above client registration form.

FINDINGS

Regulation 26 (xii) of Brokers Regulations stipulates that a sub-broker shall be liable for monetary penalty for execution of trade without entering into agreement with the client under the SEBI Act, rules or regulations made thereunder or failure to maintain client registration form or commission of any irregularities in maintaining client agreement. Non maintenance of client agreement form makes HSBL liable for penalty under Section 15B of the SEBI Act provides that

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.

However, as HSBL has submitted copies of client agreement form though subsequent to the inspection, it cannot be concluded that HSBL failed to maintain the client registration forms..

CHARGE: ACTING AS UNREGISTERED SUBBROKER

It is alleged that HSBL acted as unregistered sub-broker as detailed

below

TABLE 5

Sr No.	Broker	Period
1	V&U Securities	1-4-2002 to 14-11-2002
2	Ashwin Chinubhai	25-5-2003 to 23-7-2003

SUBMISSIONS

HSBL has submitted that it had obtained the terminal from other brokers for a very limited period as its terminal was deactivated by the Ahmedabad Stock Exchange. During the said period, HSBL acted only for friends and close relatives.

FINDINGS

HSBL has admitted the violation. By acting as unregistered sub-broker of other members of ASE, HSBL is liable to monetary penalty under Regulation 26 (xiv) of Brokers Regulations which stipulates that a sub-broker shall be liable to monetary penalty for acting as unregistered sub broker or dealing with unregistered sub broker. The above contravention attracts penalty under Section 15 HB of SEBI Act.

CHARGE: INDULGED IN OFF MARKET TRANSACTIONS

It is alleged that HSBL indulged in off market transactions on the following occasions

TABLE 6

Settlement Number	Security	No. of shares	Bought From	Sold To
W/2003004	Union Bank	1300	Bipinbhai Shah	Kamlesh Shakerlal
W/2003004	Zee TV	100	Bipinbhai Shah	Kamlesh Shakerlal
W/2003126	Aztec Software	1000	R.S.Shah	Praveen S.Shah
W/2003127	ONGC	200	R.S.Shah	Dhiren Contractor
W/2003140	SAIL	1000	Dhiren Contractor	Subash Agarwal
W/2003140	SAIL	1000	Subash Agarwal	Dhiren Contractor
W/2003142	TISCO	1000	Subash Agarwal	Dhiren Contractor
W/2003142	Neyveli Lig	1000	Dhiren Contractor	Subash Agarwal

SUBMISSIONS

HSBL has submitted that the cases referred by the inspection team are only related to error in client code during the trading time and the same could not be rectified during the post closing session. Therefore to rectify the mistake HSBL was required to enter the general voucher for correct client and it had received brokerage and paid service tax as per rules.

FINDINGS

It is noted from the submissions of HSBL that the instances referred above are not off market trading cases. The same are cases where in order to rectify a mistake in the client code, HSBL entered the data on the general voucher. Considering the said submissions, it is felt that no monetary penalty is attracted in respect of the said violation.

CHARGE: FAILURE TO MAINTAIN PROPER SEGREGATION OF CLIENT FUNDS AND OWN FUNDS

It is alleged HSBL failed to maintain proper segregation of client funds and own funds and incurred expenses from the client account as provided in table 7.

Date	Amount	Nature of Transactions
04-04-2002	16750	Computer Purchase
24-06-2002	4329	Telephone Purchase
08-07-2002	2161	Electricity Expenses
20-12-2002	7500	Traveling Expenses
04-04-2003	400000	Loan / Advance given
10-04-2003	300000	Loan recovery
22-04-2003	5547	Telephone Expenses
22-04-2003	3000	Software Maintenance
03-06-2003	123282	Business Development Expenses
26-06-2003	4725	Computer repairing expenses
26-06-2003	50000	Loan / advance given
23-07-2003	5000	Audit fees
18-11-2003	200000	Loan / advance given
28-11-2003	350000	Loan / advance given
05-03-2004	612000	Application in public issue

SUBMISSIONS

HSBL has submitted that sometimes the cheques were issued from the client account in view of its own fund and brokerage lying in the client account. HSBL has never defaulted with ACML for any fund shortage.

FINDINGS

Though HSBL has submitted that it never defaulted with ACML, however the fact remains that it had issued cheques from the client accounts in respect of the expenses/ purposes stated above. Hence, it is concluded that HSBL failed to segregate its own account from clients accounts. Regulation 26 (xiii) provides that a sub-broker shall be liable to monetary penalty for failure to segregate his own funds or securities from the client’s funds or securities or using the funds or securities of the client for his own purpose or for the purpose of any other client. The above said violation makes HSBL liable for penalty under Section 15 HB of the SEBI Act.

CHARGE: NOT APPOINTING COMPLIANCE OFFICER

It is alleged that HSBL did not appoint compliance officer.

SUBMISSIONS

HSBL has submitted that its directors had qualification to be compliance officer. However, it was never insisted for appointing compliance officer by broker or exchange. Now, HSBL has appointed Shri P C Shah as compliance officer.

FINDINGS

As HSBL has appointed compliance officer, a lenient view is taken in respect of the said violation.

FAILURE TO EXERCISE DUE SKILL, CARE AND DILIGENCE AND COMPLY WITH DIRECTION ISSUED BY BOARD

It is alleged that by committing violations as given in the preceding paragraphs, HSBL failed to comply with directions issued by Board and failed to exercise due skill care and diligence.

SUBMISSIONS

HSBL has further submitted that no investor complaints or arbitration proceedings are pending against it. It had never created any false market in securities and it had always taken care to comply with rule and regulation. Therefore minor mistake in its operation should not be considered as failure to exercise due skill, care and diligence.

35. It is noted from the above that the violation of failure to maintain margin deposit book, document register and deficiencies in client ledger, failure to collect margin, acting as unregistered sub-broker and failure to maintain proper segregation of client funds and own funds leveled against HSBL are established. As discussed above, the said violation attract a penalty under Sections 15 A(c) and 15 HB of the SEBI Act.

36. 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

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. It is also noted that as per the submissions of HSBL, no investor complaint or arbitration proceedings are pending against HSBL. With regard to the repetitive nature of the default, it is noted that some of the violations such as failure to collect margins, non segregation of clients funds etc., were committed on many occasions as detailed above. Hence some of the violations committed by HSBL are repetitive in nature.

ORDER

Considering the facts and circumstances of the case, it is established that Hanuman Shares and Stock Brokers Ltd. failed to maintain margin deposit book, document register, failed to collect margin, acted as unregistered sub-broker and failed to maintain proper segregation of client funds and own funds. Though there are no investor complaints are pending against the sub-broker, the violations like non collection of margin increase the risk of defaults in the market and violations like acting as unregistered sub-broker and non segregation of client fund from own fund are detrimental to the interests of the investors. For the above violations committed by Hanuman Shares and Stock Brokers Ltd, in terms of the provisions of Section 15 A(c) and 15 HB of the SEBI Act, I, hereby impose a penalty of Rs.20,000/-(Rupees Twenty Thousand) on Hanuman Shares and Stock Brokers Ltd.

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, 29^th 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 Hanuman Share and Stock Brokers Ltd. and to Securities and Exchange Board of India.

Place : MUMBAI BIJU S

SEPTEMBER 29, 2005 ADJUDICATING OFFICER