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(xii), (xiii) (xiv) & (xx) of SEBI (STOCK BROKERS AND SUB BROKERS) REGULATIONS, 1992 AND SECTION 15HB OF THE SEBI ACT, 1992 AGAINST M/s MANOG SECURITIES PVT. LTD. (SEBI REGD. NO.- INB230793233)
1.0 BACKGROUND:
1.1 M/s. MANOG SECURITIES PVT. LTD. (hereinafter referred to as “broker”) having Securities and Exchange Board of India (hereinafter referred to as SEBI) registration no. INB230793233 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 30th April, 2003 to 6th May, 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 June 9, 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 July 05, 2003 forwarded 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 28, 2004 to the broker mentioning the findings of the inspection report and advising the sub-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 (xii) (xiii) (xv) and (xx) 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 excepting 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 28, 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 14, 2005 requested for the postponement of the date of personal hearing and accordingly the date of personal hearing was rescheduled to November 17, 2005. Further, vide letter dated November 8, 2005 the broker submitted its additional reply in addition to its reply dated May 11, 2004.
2.5 On November 17, 2005 Shri Vivek Gupta, the director of the broker (representative) appeared before me on behalf of the broker. 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 28, 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 23, 2005.
2.6 During the personal hearing, while referring to their replies dated May 11, 2004 and November 08, 2005, the representative submitted that though it is admitted that there were certain minor irregularities in the conduct of the business as observed in the inspection, there were no major irregularities or deviation from ethical and transparent practices of the stock broking. He further submitted that all their business transactions are conducted keeping in mind client’s interest. It was also submitted that they had never defaulted in any obligation to the exchange or to any client and there are no client complaints pending against them. He further submitted that whatever minor irregularities were pointed out in the inspection for the period 2001-2002, adequate care has been taken that the same are not repeated subsequently.
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: Non maintenance of Order Book and Document Register in violation of Regulation 26(iii), 26(xv) and 26(xvi) of the SEBI (Stock-Brokers and Sub-Brokers)Regulations,1992 read with circular No.SMD/ Policy/ ECG/ 1-97 dated 11.2.1997.
Reply of the broker : “All our clients gave verbal instructions for orders, which had to be fed into the NEAT (NSE) trading software immediately and printouts taken and filed immediately. The backup is also available in soft copy whenever required. The order details alongwith other information like order time, trade time, quantity, price etc. are all printed in the contract notes also which are given to the clients. We now also maintain the physical order book and Trade Report as per the requirements. In addition we also maintain a scripwise demat delivery summary which reflects the movement of deliveries.”
Findings : Broker has admitted that the order book was not being maintained earlier and is being maintained now. SEBI circular No.SMD/POLICY/ECG/1-97/ dated 11.2.1997 requires Brokers to maintain a record of when the clients place the Order and reflect the same in the contract notes. The member has, by not maintaining the Order Book, violated the aforesaid circular. Further I find from the inspection report that the broker was not maintaining other records also as required under Regulation 17 of the SEBI (Stock Brokers and Sub Brokers) Regulations 1992.
Charge 2 : Failure to issue Contract Notes in the form and manner prescribed, in violation of Section 15F(a) of the Act read with Regulation 26 (v), 26(xv) and 26(xvi) of the regulations read with B(2) of Schedule II specified under Regulation 7 and SEBI Circular SMD/MDP/CIR/043/96 dated August 5, 1996.
Reply of the broker : “Our employees did not generate certain contract notes pertaining to Auction settlement due to an oversight. However, the effect for these were given in the client ledger a/c’s as shown to the IO (Inspection Officer) and accounts fully reconciled with all clients. There is no dispute with any client on this a/c. However, the contract notes with new serial nos. and also for Auction settlements are now being generated.”
Findings : As is clear form the above admission of the broker, broker failed to comply with these procedural but mandatory requirements in violation of SEBI circular no. SMD/MDP/CIR/043/96 dated August 5, 1996 and has thus violated the Code of Conduct as mentioned in para A(5) and B(2) of Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
Charge 3: Debited closing position of jobbing account to other party account in violation of Regulation 26(xv) and 26(xvi) of the Regulations read with SEBI Circular No.SMD/SED/CIR/93/23321 dated 18.11.93.
Reply of the broker : “We do not follow a practice of changing Trades from one client to another as a rule. Some Trades were changed after market time due to insistence of 2 sets of Family members, who maintained client accounts of all family members-namely the Mehrotra family and the Pandey family. These people maintained client accounts of most of their family people-father, mother, son, daughter, etc. After market, these clients realized that the shares belonged to different family members, though they had transacted in one name only by mistake and requested us to change the trades to the correct names. A few trades were changed at their insistence, as these were our longstanding clients. Their written letters to the effect were also shown to the IO and attached with our reply. The quantum of such trades is very miniscule compared to the total turnover of these clients, and the practice has been stopped completely. All accounts with all changes have been fully reconciled with these clients. Further, we have asked all our clients to provide the correct name and code before we input the order.”
Findings : From the above admission I conclude that the broker has failed in maintaining the high standards of integrity and fairness in the conduct of his business. He has therefore violated the provisions of Para A (1) of Schedule II specified under Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
Charge 4: Delayed payment of monies/ delivery of securities to clients in violation of Regulation 26(vi) of the Regulations.
Reply of the broker : “There has never been any intentional delay in transfer of Funds and Securities to our clients. Any delays in transfer of securities to client a/c’s were due to delay in receipt of payments from clients, delay in receiving client demat details or instructions from clients in writing to hold such securities in our a/c pending their sale by the clients. Such delays were explained to the IO and written instructions shown. Similarly, some clients had given us written instructions to hold funds for further purchases (Copies of such instructions attached) and these instructions were shown to the Inspecting Officer. There were very few instances of such delay and most of share/funds transfers were on the specified time. All such accounts are fully reconciled and there are no complaints from any client regarding any delay/non-receipt in transfer of either funds or securities. In few cases the delay occurred for the clients whose families also had accounts with us and one family member had a debit in the a/c and the other a credit in the a/c. This was only done after we received written instructions from these clients and the clients insisted we do this as they were not in a position to issue cheques from a/c’s which had a debit balance (copies of such instructions enclosed). Such transfers were not done for any other clients and we have taken steps not to encourage such transfers any more.”
Findings : From the above I have no option but to conclude that the member has violated provisions of SEBI circular no. SMD/SED/CIR/93/23321 dated 18.11.93 Thus, the firm has violated Rule 4(b) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992 and the provisions of para A (5) of Code of Conduct specified under Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
Charge 5: Failed to maintain client database in violation of Regulation 26(xv) of the Regulation;
Reply of the broker : “Certain client’s forms had minor deficiencies like-one residence proof (instead of two), one photograph (instead of two), signature missing on client form etc. In the case of few clients’ forms, there was some date mismatches between the form and the agreement, as pointed out. This was because new agreement forms were filled with these clients with the new clause additions (as per Exchange Rules). This was shown to the IO also. Such deficiencies have been rectified and for all regular and new clients, we have instituted stricter controls for Client registration forms/agreements. Any pending information for working clients has been updated.”
Findings : From the aforesaid submissions of the broker I have to conclude that the broker has admitted its failure to maintain the client database as per the requirements.
Charge 6 : Acted as unregistered sub-broker in violation of Regulation 26(xiv) of the Regulation;
Reply of the broker : “For the year 2001-02, a very small number of shares were traded on the BSE, through a BSE broker, without sub-broker registration, purely due to an oversight. These trades were done for only six clients-Mr.R.K.Biswas, Mr.I.N.Malik, Mr.K.G.Ahluwalia, Jaipuria International, Mr.B.L.Wadhera and Mr.T.P.Singh. These clients wanted to trade on some shares listed on the BSE and insisted that we only do these trades for them, as they did not want to go to any other broker. The total value of all the trades was about Rs.2.25 lacs (approx). However, this practice was also stopped completely and as pointed out even by the IO, there were no trades for the year 2002-03 and onwards on any other Exchange. Accounts for all such clients were fully reconciled.”
Findings : In light of the above admission, I hold that the broker had indeed acted as unregistered sub-broker which is a very serious misconduct and is also in violation of Section 12 (1) of SEBI Act.
Charge 6 : Indulged in off the floor/market transactions and not reported the same to the exchange in violation of Regulation 26 (xv) and 26(xvi) of the Regulations;
Reply of the broker : “For the year, 2001-2002 there were some off market transactions for value Rs.2,10,092.75 for which contract notes were issued but the trades were not reported to the exchange due to an oversight on part of our employees. We have ensured that there are no more off-market transactions and instituted controls for the same.”
Finding: The aforesaid conduct of the broker is in violation of SEBI Circular No. SMD/RCG/CIR/(BKG)/293/95 dated March 14, 1995 which makes it mandatory for all the members to report all transactions executed off the floor to the exchange on the same day.
3.2 From the aforesaid submissions advanced on behalf of the broker, it is quite clear that the broker has not only violated but also admitted the lapses on its part in complying with regulatory requirements/instructions/circulars issued by SEBI from time to time. I also note that the broker has submitted that most of the deviations pointed out were due to certain practical operational problems, oversight and were not intentional. They further claimed to have taken necessary corrective measures viz- a- viz the deficiencies/ shortcomings pointed out/discovered/observed during the inspection and has claimed that now its business is being conducted in accordance with the applicable laws. They have also stated that their dealings with all their clients had been totally transparent with the highest standards of integrity and promptitude and requested for taking a lenient view in the matter on our report.
3.3 Upon cumulative analysis of the facts, I am of the view that whatsoever may be the reason, the fact remains that the broker has admittedly failed to comply with the statutory requirements in the conduct of its business and thereby violated the provisions of Regulation 26(iii),(v) (vi) (xiv) (xv) and (xvi) of the Broker Regulations read with relevant circulars issues by SEBI. These undisputed 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.
3.4 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.
3.5 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.
3.6 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.
3.7 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.
3.8 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.
3.9 So far as repeated nature of defaults, nothing has been brought to my notice that the broker has repeated those faults/violations subsequently.
3.10 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. Manog Securities Ltd. member NSE having SEBI Regn. no.INB 230793233.
4.2 The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross 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 : September 20, 2006 |
PRAVEEN TRIVEDI |
| Mumbai |
ADJUDICATING OFFICER
|