Order against M/s Mehta Equities Limited - Formerly Renaissance Securities Limited

Sep 06, 2006

Orders : Orders of AO

ORDER

UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995

AGAINST

M/S MEHTA EQUITIES LIMITED

(FORMERLY RENAISSANCE SECURITIES LIMITED)

1. M/s Mehta Equities Limited, formerly known as Renaissance Securities Limited (RSL) is registered with the Securities and Exchange Board of India, 1992 (SEBI) as a broker and is the member of the Stock Exchange, Mumbai (BSE) with Regn No. INB010683856 and OTCEI with Regn. No. INB200683836 and is also registered as a Depository Participant of the Central Depository Services Limited (CDSL) with SEBI Reg. No. IN-DP-CDSL-35-99.

2. The present proceedings detail the impugned activities of M/s Mehta Equities Limited as the broker of BSE and OTCEI and as the DP of CDSL at the time they were registered in the name of RSL and hence for the sake of brevity M/s Mehta Equities Limited is hereinafter referred to as RSL.

3. The genesis of these proceedings are the complaints made by Shri Paras Ram Baheti and Smt Shakuntla Devi Baheti as regards the depository participant operations of RSL during September, 2004. In view thereof, an inspection of the books of account, documents, records, infrastructure, systems and procedures of RSL was undertaken by SEBI during September 2004, under the SEBI (Depositories and Participants) Regulations, 1996 and the SEBI (Stock Broker and Sub broker) Regulations, 1992 (hereinafter referred to as the Broker Regulations and the DP Regulations). A simultaneous inspection of the Head Office at Mumbai for the period from April 2004 till August – September 2004 was also undertaken by SEBI.

4. During the course of the inspection, RSL were inter alia alleged to have violated the provisions of Regulation 20(2)(e) of the DP Regulations and Regulations 21 read with 26(ii) and 26(vi) of the Broker Regulations read with SEBI Circular No. SMD/SED/Cir/93/23321 dated November 18, 1993. SEBI communicated the findings of the inspection to RSL vide letters dated August 4, 2005 and September 28, 2005, with an advise to submit their reply to the same. As the response of RSL made vide letters dated August 10, 2005 and October 13, 2005 were found to be inadequate, adjudicating proceedings were ordered against RSL and in this context, I was appointed as the Adjudicating Officer, vide order of SEBI dated January 23, 2006, to inter alia enquire into the various acts of omissions and commissions alleged to have been committed by RSL. This order was duly communicated to me vide an order dated April 03, 2006.

NOTICE/ REPLY/ PERSONAL HEARING:

5. Accordingly, I issued a notice dated May 18, 2006 to RSL under Rule 4 of the SEBI (Procedure for holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) to show cause as to why enquiry proceedings should not be initiated against them in terms of the said Rules and why the necessary penalty should not be imposed upon them. RSL were advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and were also advised to note that in case they failed to reply within the stipulated period, it would be presumed that they had no adequate explanation to offer.

6. Vide their letter dated June 5, 2006, RSL denied all the charges levied against them and also enclosed copies of several documents to support their contentions.

7. Thereafter in terms of Rule 4(3) of the Rules, a notice of hearing dated June 6, 2006 was sent to RSL advising them to attend the proceedings scheduled on June 22, 2006. The hearing was attended by Shri Ashish Sharma, Director of RSL, who while admitting to all the violations pointed out in the notice dated May 18, 2006 reiterated the contentions earlier advanced on behalf of RSL. and further undertook to submit certain other documents relied upon by RSL.

8. The list of the documents forwarded under cover of their letters dated August 10, 2005, June 5, 2006 and June 29, 2006 are as follows :

- Reply of RSL dated August 10, 2005 to the broker inspection report
- Letter of RSL dated December 11, 2002 informing SEBI about the resignation of their director; Rakesh Mehta
- Letter of RSL dated December 11, 2002 to the BSE
- Letter of RSL dated November 24, 2004 to SEBI
- Shareholding patterns of Jai Gurudev Consultancy Services (JGCS) and Renaissance Share & Stock Brokers Ltd. (RSSB) as on March 31, 2005
- List of Directors of RSSB as on March 31, 2005
- Contract notes issued by RSL as a broker
- The letter of RSL to BSE seeking prior permission for change of name from RSL to Mehta Equities Ltd.
- Letter from BSE as regards approval for change of name
- SEBI certificate modified after the change of name.
- Specimen of KYC and member client agreement form of Mehta Equities Ltd.
- SEBI order dated October 25, 2005 in favour of Shri Rakesh Mehta
- The dates of delivery of shares in all 17 instances pointed in the notice dated May 18, 2006 where RSL was found to have failed to deliver the shares exceeding 20,000 in number
- Statement of accounts of various dates.

CONSIDERATION OF ISSUES:

9. I have carefully examined the oral and documentary evidence available on record and the other facts and circumstances relevant to this case. To appreciate the issues involved in these proceedings, it would be necessary to recapitulate certain other related events relevant to these proceedings.

10. Prior to the inspection initiated by SEBI against RSL, CDSL had also conducted the inspection of the Depository Participant (DP) activities of RSL through the CA firm; M/s D R Mohnot & Co for the period January 2003 to September 2003. The inspection report dated September 29, 2003 of CDSL was forwarded by CDSL to RSL vide their letter dated October 8, 2003. Subsequent to the communication of the findings of inspection carried out by the CDSL, an internal audit of the Udaipur office of RSL was undertaken by CA firm; M/s Sagar Golcha & Co.

11. All these inspections were carried out upon receipt of complaints of several irregularities that had taken place in the Mumbai branch and particularly in the Udaipur branch of RSL.

12. A brief outline of the fraud that had taken place at the Udaipur branch is brought out below.

i Shri Paras Ram Baheti and Shri Shakuntla Devi Baheti having BO account numbers 12013700002726 and 1201370300002707 respectively with the DP branch of RSL at Udaipur had forwarded complaints to the CDSL and SEBI during June and July 2004, as regards the non receipt of dividends in respect of 3190 shares of Ranbaxy Laboratories Ltd (RLL) held by them in the BO accounts.

(ii) These complaints to SEBI, were also forwarded by CDSL vide their letter dated July 1, 2004. The said complaint letters (addressed to SEBI with cc to CDSL) bears the seal of SEBI dated June 30, 2004. In two other letters bearing the seal of SEBI dated July 1, 2004, the complainants had enclosed the summary statement of accounts of both the complainants as on June 5, 2004 and statement of accounts as on June 18, 2004. The said statements show that as on June 5, 2004, they held the shares of Ranbaxy Laboratories Limited in their account but that there was no mention of these shares as on June 18, 2004 (though they had not sold the same).

(iii) Incidentally the complainants had first approached RSL regarding the matter but were falsely assured by one of the employees of RSL; Nikhil Arya regarding the redressal of their grievances. In fact the complainants received a letter from Ranbaxy Laboratories Limited that they did not hold any shares in their account. It appears that Nikhil Arya had access to all the BO accounts held at Udaipur and later admitted that the holdings of Mr. and Mrs Baheti alongwith the holdings of other 26 BOs have been withdrawn by him by forging the signatures of the BOs and then providing false and fabricated statements to the beneficial owners that they continued to hold the shares in their respective BO accounts. This was also corroborated by the letter of RSL dated June 30, 2004 which states that he had forged the signatures of various other BOs and had withdrawn the securities from their accounts.

(iv) Vide letter dated July 15, 2004, CDSL had informed SEBI about them being informed by RSL vide letter dated June 30, 2004 about this act of one of their employee. RSL stated that the probable loss appeared to be around Rs.62.54 lakhs and that in this regard they had filed an FIR at the Udaipur Police station on July 2, 2004. RSL had since then suspended Nikhil Arya.

(v) In the letter dated May 4, 2005 issued by CDSL to SEBI, securities valued at Rs.66,25,002 (out of the total value to be replenished being Rs.70.35 lakhs belonging to 31 BOs out of 35 BOs) were stated to have been replenished. I have also noted on record, a letter dated November 5, 2004 addressed by CDSL to RSL regarding the procedure of replenishment of securities to the affected BOs.

(vi) From the letters of RSL, all dated November 24, 2004 sent to CDSL, SEBI, NSDL and NSE, I have noted that the market value of securities as on the date of discovery of the theft of shares of different companies was about 70 lakhs. I have also perused the list forwarded by RSL vide their letter dated September 3, 2004 (which mentions the FIR dated July 2, 2004) to the Police station, Udaipur furnishing the names of 41 such BOs from whose accounts, the shares were withdrawn.

(v) In the context of these facts, both enquiry and adjudicating proceedings have been ordered against RSL.

13. I now propose to discuss in detail, the various charges that have been leveled against RSL for being adjudicated in the present proceedings, the submissions, if any, made by them in this regard to counter the same and my findings on the same.

I . Failure to transfer shares to the client’s beneficiary account within the stipulated time

14. RSL were found to have failed to transfer the shares to their clients’ beneficiary account within the stipulated time which amounted to a violation of Regulation 26(vi) of the Broker Regulations read with the SEBI Circular No. SMD/SED/Cir/93/23321 dated November 18, 1993. The detailed list of shares stated to be pending in their various demat accounts running into 47 pages and annexed as Annexure I to the notice dated May 18, 2006 issued to RSL in the present proceedings has not been reproduced below to avoid reiteration. However the few instances, where the total quantity of shares (above 20,000) were found to be pending in the demat account of the broker operations of RSL as on November 17, 2004, which were also quoted in the notice issued to RSL have been reproduced below

Table ‘A’

*Sl. No.*	*Name of the DP account*	*Name of the scrip*	*No of shares*
1	Renaissance securities Ltd., Bhayandar (12013700020022619)	Wellworth	12,07,866
2	Renaissance securities Ltd., - Ulhasnagar Br. (1201370000011900)	Shalimar Prod.	21,525
3	Renaissance securities Ltd., - Vashi Br. (1201370000011894)	Kolar Biotech	55,750
4	Renaissance securities Ltd., - Masjid Br. (1201370000011875)	Moh Limited	50,000
5	Renaissance securities Ltd., - Pali Br. (1201370000015491)	Apple Finance Equity	20,505
6	-do-	Stocknet Intl Ltd.	33,000
7	-do-	Twinstar S/W Exp.	3,00,000
8	Renaissance securities Ltd., - Andheri Br. (1201370000015506)	Brijlaxmi Leas &Fin	35,052
9	-do-	Dynacons syst	27,000
10	-do-	Eltrol Ltd.	32,000
11	-do-	Global Films and Broad	2,17,924
12	Renaissance securities Ltd., - Jodhpur Br. (1201370000015510)	Goyal Associate	1,50,000
13	-do-	Ispat Idus Ltd.	35,663
14	Renaissance securities Ltd., - Sikar Br. (1201370000015544)	Kolar Biotech	63,700
15	Renaissance securities Ltd., -A/c 1900/2100. (1201370000017142)	Himachal Fut Comm	21,150
16	Renaissance securities Ltd., -A/c 1900/2100. (1201370000017142)	Royal Ariways	24,000
17	Renaissance securities Ltd., - Zaveri Bazar. (1201370000017157)	Avinash Info Tech	60,000

15. While denying this charge, RSL submitted that even if it was presumed that they had failed to deliver the shares into the clients’ beneficiary accounts within the stipulated date, the circular under discussion was issued well before the introduction of the depository system and hence any violation in this regard could not be construed. It was contended that by keeping the shares in a separate account, they had in fact complied with the instructions of the said circular as also the Regulation which permitted them to settle the trades after 48 hours with the clients, who had agreed to the same in writing. In this connection, they quoted clauses 30 and 32 of the KYC and a declaration filed by the clients, giving them the authority to withhold the securities in certain circumstances.

16. RSL further stated that only those securities remained with them where either they had not received the consideration or where the client had sold the shares the very next day and had requested them to utilize the said securities, to meet their pay in obligations and that based on these instructions, instead of delivering the securities directly from the pool account, they had first taken delivery of the securities in a separate account and then made a pay-in from that account.

17. RSL also stated that in case of non transfer of securities due to non receipt of funds, members were permitted to sell such securities to realize their dues, which could happen only when the securities remained in the possession of the broker as had happened in their case. As such RSL stated that this retention of the securities to meet the clients’ pay in obligations, had to be treated as the deemed delivery to the client, as the securities were first shifted out of the regular pool account in compliance with the client’s instruction.

18. I have considered the submissions of RSL and have also perused the client agreement forms containing clauses 30 and 32 of the KYC.

19. Clause 30 deals with the payment of margins by the client while clause 32 deals with the exercise of the lien for discharging the client obligations in terms of monies, securities and other property. I have also examined the letter of authority stated to have been issued by the clients that was forwarded by RSL. This is more like an undertaking given by the client to RSL entitling them to set off and adjust the moneys and or securities owed by the said person to RSL against the money(s) and or securities owed to the client by RSL.

20. As regards the 17 instances brought out in the aforesaid table, the shares which were more than 20,000 in number were delivered only on the dates as mentioned in the table below i.e., Table ‘B’. To prove the same, RSL had also forwarded a statement of account whereby the shares were shown as delivered (sold) to the concerned BOs on the said dates of delivery as has been mentioned in the table below. But these are only those 17 instances for which they have provided proof of having delivered the shares, that too belatedly. For these 17 instances, even if I were to consider November 17, 2004 as the date of transaction and the pay out date as November 19, 2004 ( i.e. 48 hours later) the number of days of delay involved would be as follows:-

‘Table B’

*Sl. No.*	*Name of the scrip*	*No of shares*	*Date of delivery of shares*	*No. of days of delay*
1	Wellworth	12,07,866	23.11.04	4
2	Shalimar Prod.	21,525	13.04.05	145
3	Kolar Biotech	55,750	31.03.06	497
4	Moh Limited	50,000	24.03.05	125
5	Apple Finance Equity	20,505	10.01.05	52
6	Stocknet Intl Ltd.	33,000	07.01.05	49
7	Twinstar S/W Exp.	3,00,000	27.05.05	189
8	Brijlaxmi Leas &Fin	35,052	18.08.05	272
9	Dynacons syst	27,000	08.02.05	81
10	Eltrol Ltd.	32,000	23.08.05	277
11	Global Films and Broad	2,17,924	31.03.06	497
12	Goyal Associate	1,50,000	01.12.05	377
13	Ispat Idus Ltd.	35,663	01.12.05	377
14	Kolar Biotech	63,700	01.12.05	377
15	Himachal Fut Comm	21,150	28.10.05	343
16	Royal Ariways	24,000	24.03.05	125
17	Avinash Info Tech	60,000	07.11.05	353

As observed from the table above, in five such instances, the pay out of securities was after more than one year, without providing any reasons for the delay.

21. Apart from the above, 47 pages have been enclosed with the notice to show cause issued to RSL, which highlight those instances where RSL had not transferred the securities into the respective clients’ account, RSL have not issued any explanation for these instances except attributing the same to the debit balance of the clients in their account or to cases where the clients having sold the shares, had requested them through a undertaking, to utilize the said shares towards pay-in obligations, because of which instead of receiving the delivery in their pool account, they had first taken delivery in a separate account and then made a payout from that account.

22 Considering that the instances where RSL have failed to transfer the securities in the clients account are numerous and that different types of securities were held in 12-14 different accounts of RSL, maintained with their own DP i.e. RSL, as were highlighted in the statement of holdings, which run to 47 pages, specific reasons for the same ought to have been advanced by RSL. In fact RSL have not even provided the details of delivery of shares on these instances.

23. In view of the same, I am not inclined to accept the generalized submissions advanced on their behalf especially when I have noted that RSL have failed to provide even the consent letters of the clients seeking retention of these securities at RSL’s end.

24. Delivery of securities to the clients on time is the duty of the broker as the same, if not done would lead to situations where the investors are prevented from exercising their options at the opportune time when the client actually would like to exercise his or her rights to sell the same, but is deprived of the said opportunity. I am not agreeable with the practice of RSL seeking a general undertaking for convenience being taken from the clients, since there is a danger of the same being made a general practice which would amount to a violation of Regulation 26(vi) of the Broker Regulations. As specific written consents were not taken from the different clients in the instant case, for all the instances highlighted in the 47 pages, RSL would be liable under the provisions of Regulation 26(vi) of the Broker Regulations which inter alia renders a stock broker or a sub-broker liable for monetary penalty for failure to deliver any security or make payment of the amount due to the investor within 48 hours of the settlement of the trade unless the client has agreed in writing otherwise. This mandate to deliver any security or make payment of the amount due to the investor within the stipulated period of the settlement of trade unless the client has agreed in writing otherwise is also provided for in terms of SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993.

25. In fact, in the present day scenario, all brokers are mandated to transfer the funds and securities from their respective pool accounts to the respective beneficiary accounts of the clients within one working day after the payout. Further more one of the conditions for grant of certificate of registration to a broker is that the said entity should abide by the requirements of the SEBI Act and the rules and regulations framed there under. In terms of clause B (1) of the Code of Conduct of the Broker Regulations, a stock broker/sub-broker is required to make prompt payment in respect of securities sold and also arrange for the prompt delivery of securities purchased by the clients.

In view of the above, the violation of Regulation 26(vi) of the Broker Regulations stands established.

(II) Failure to furnish information

26. RSL was found to have failed to furnish information to the SEBI Officials at the time of the inspection resulting in the violation of Regulations 21 read with 26(ii) of the Broker Regulations. The information sought for is as follows:-

a) Details of the broker directors and shareholders of JGCS operating from the same premises as that of the broker operations.

b) Contract notes issued by RSL as broker to RSSB during the period of April, May, July and August 2004 and the pending demat details as on that date.

c) Reasons for holding shares in various beneficiary accounts of RSL

27. RSL advanced the following submissions as regards the three instances pointed out above.

(i) As regards the information related to the details of the broker directors and shareholders of JGCS stated to be operating from the same premises as that of the broker operations, it was submitted that JGCS and RSSB were distinct entities promoted by the directors of RSL. They had produced all the records as called for by the inspection team as also information in the form of emails from whom they were received. Despite the same, RSL had once again furnished the names of the directors vide their letter dated August 10, 2005 the details of which are as under:

The list of directors of JGCS, as on the date of inspection :-

Shri L N Vyas

Shri Ghanshyam Dadhich

Shri Ashish Sharma

List of shareholders as on the date of inspection:

Shri Ashish Sharma 7500

Shri Ghanshyam Dadhich 2500

List of Directors as on June 5, 2006:

L N Vyas

Pankaj Jain

Narendra Sharma

List of shareholders as on June 5, 2006

Shri Ashish Sharma 7500

Shri Ghanshyam Dadhich 2500

I have perused the contents of the letter dated August 10, 2005, whereby RSL had forwarded the details of the shareholding and the directors of Jaigurudev and RSSB which were enclosed as Annexure III to their reply. RSL have stated that the transaction of 1,50,000 shares of Deccan Gold Mine on April 7, 2004 was a private/ off market transaction between Jaigurudev and RSSB and that RSL had nothing to do with that transaction and hence the question of issuing any contract note to any of them would not arise. It was also stated that subsequently, when sold through them, RSSB had issued regular contract notes in their favor. Copies of various contract notes were enclosed as Annexure IV to the said reply.

It is thus true that RSL did not provide the information when called upon by the inspecting officials. However, the underlying importance of the said information sought for by SEBI has not been pointed out. I am also not aware as to how this information would have helped in building up the case of any other association/connection between the entities in question, although the possibility cannot be ruled out of some link being established by knowing the list of directors and promoters of Jaigurudev and RSSB. However, since a lot of questions have been left unanswered as to the importance/ relevance of the said information in the present case, I am not inclined to give too much importance to this issue especially since the information was anyway provided later on.

ii. As regards the contract notes issued by RSL to RSSB during the period of April, May, July and August 2004 and the pending demat details as on that date, it was stated that RSL had forwarded the copies of the contract notes issued to RSSB vide their reply dated August 10, 2005.

I have noted that various contract notes issued by RSL to RSSB, with the dates ranging from April 4, 2004 to March 29, 2005 were indeed forwarded, though, the pending details were not forwarded to SEBI. Since it is once again not clear as to why the said contract notes were sought for, I fail to understand the significance of the information sought to be obtained from these documents. Suffice however to state that when a directive is issued by the regulator, the same has to be complied with immediately especially when that information is in the context of or pursuant to an inspection conducted by SEBI. Moreover RSL have not advanced any reasons for not furnishing the said information on time, when actually sought for by SEBI.

At the same, I have however noted that although RSL did not furnish the information when sought for, the same was furnished, belatedly. In view thereof, I am not inclined to view this issue too harshly.

iii. As regards the reasons for holding shares in the various beneficiary accounts of RSL, the same has already been discussed earlier in the first charge leveled against RSL and hence requires no further elaboration.

(III) Failure to redress investor grievances

RSL were alleged to have failed to redress the grievances of the investors within 30 days of receipt of the same from the investors amounting to a violation of Regulation 20(2)(e) of the DP Regulations.

To counter this charge, RSL submitted as follows:

(ii) In the year 2004, letters from sub brokers’ clients at Udaipur were received in the context of fraud taking place there.

(iii) All the letters were promptly replied to by them. As the matter was subject to the investigation by the Police, CDSL scrutiny, Arbitration and relevant processes and procedures, the final redressal had taken its own course. They had not received any written investor complaint and hence, did not feel the need to maintain the same.

(iv) In their reply dated October 13, 2005 to SEBI, RSL had confirmed that the complaint of Paras Ram Baheti and Shakuntla Devi Baheti had not come to them directly but received from CDSL.

(v) RSL did not lose a single minute in restoring the securities to the BOs who were victims of fraud committed by Nikhil Arya, their employee at the Udaipur branch.

(vi) RSL lodged an FIR against Arya who was taken into police custody for further investigation.

(vii) RSL had subsequently made good all the securities stolen by Arya from the BOs’ to CDSL who have since then credited the same to the respective BOs account.

(viii) On account of the same, RSL had in fact suffered a loss of over Rs.70 lakhs and had since then maintained a complaints register.

28. I have considered at length the submissions advanced on behalf of RSL. The aspects of the investor grievances, which form the genesis of the various proceedings initiated against RSL have already been highlighted by me in the earlier portion of this order. In this regard I have studied the provisions of Regulation 20(2)(e) of the DP Regulations, which interalia provide that the participant shall redress the grievance of the beneficial owners within 30 days of the date of receipt of the complaint and keep the depository informed about the number and nature of redressal.

29. It is a fact that most of the irregularities alleged to have been committed by RSL which germinated into these investor complaints, were indeed the handiwork of one of their former employee, who had since been imprisoned for a period of 90 days, pursuant to the FIR filed by RSL. But it is also a fact that the large scale fraud that occurred, could have been avoided but was not, by reasons of their own neglect. The enquiry proceedings have highlighted the failure on the part of RSL to have built appropriate systems even when there was clear evidence of a tremendous lack of internal control/ deficiencies in the back office / systems which impaired their efficiency.

30. In the present proceedings, although RSL have emphasized upon them, redressing the grievances of all their investors by making good most of the losses suffered by them, it is a fact, further corroborated from the evidence on record that the act of replenishing of most of the securities was done, albeit, on account of orders issued to RSL and not at their own behest. Furthermore, the same was done, but not within the stipulated period of 30 days.

31. However, considering that a considerable number of the complaints /grievances of the investors stand redressed as on date, I am of the opinion that no purpose would be achieved upon a strict interpretation of the provisions of the above cited Regulation. Moreover a fine reading of the provisions of Section 15 C of the SEBI Act, 1992 inter alia provides that these penal provisions for the non resolution of investor grievances can be invoked and any penalty can be levied there under against the person registered as an intermediary or any listed company, only in those cases where SEBI directs them in writing to resolve the same and there is a failure on the part of such an entity to redress the grievances of the investors within the time specified in the communication entered into with the said entity. .

32. Upon a detailed examination of the material available on record, I do not find any document on record to support the finding that SEBI called upon RSL, to resolve the various pending investor grievances within a specified period. It is possible that there were some pending complaints against RSL and that in tandem with CDSL, they were resolved. But as far as SEBI is concerned, there is such evidence on record.

33. That being the case, the relevance of initiation of any action under the penal provisions of Section 15 C of the SEBI Act, 1992, would not arise.

34. Upon an analysis of the facts of this case, the charge that stands established is the failure on the part of RSL to transfer the shares to their clients’ beneficiary account within the stipulated time thereby rendering RSL liable under following provisions of the SEBI Act, 1992.

Section 15F(b): Penalty for default in case of stock brokers: If any person who is registered as a stock broker under this Act; fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the Regulations, he shall be liable to a penalty of one lakh rupees for each day during such failure continues or 1 crore rupees, whichever is less.

35. Before fixing the quantum of penalty that is commensurate with the charge established against RSL, it would be necessary to also refer to certain factors as enumerated under Section 15J of the SEBI Act, 1992 that need to be taken into account while adjudging the quantum of penalty. These factors include the amount of disproportionate gain or unfair advantage made as a result of the said default, the amount of loss caused to the investors and the repetitive nature of default. Thus it is clear that the adjudicating officer is required to have due regard to the factors stated in the section. The same is a direction and not an option, which is however to be exercised with due regard to his discretion to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing of all the relevant material available on record especially in the case of failure to perform statutory obligations.

36. Upon an analysis of the facts of the case and the rational behind the incorporation of Regulation 26(vi) of the Broker Regulations, it is apparent that the delayed transfer/non transfer of the securities to the clients’ beneficiary accounts within the specified time would undoubtedly have caused opportunity losses to the clients in that when the market is high and bullish and they wish to take advantage of these trends in the market, they are unable to exercise their options at the opportune time and are thus deprived of the said opportunity. Such losses cannot be quantified. Moreover considering that the instances where RSL failed to transfer the securities into their clients’ account were huge and that different types of securities were held in 12-14 different accounts of RSL, maintained with their own DP i.e. RSL as were highlighted in the statement of holdings, which ran to 47 pages, the losses must have been substantial. RSL have not even issued any explanation for these instances.

37. On the contrary RSL have tried to impress upon the fact that they have suffered substantial losses. I am not in agreement with the stand taken by RSL. The losses allegedly suffered by them while making good the losses suffered by the investors, are but a price that they have to pay for their lapses. To fail to take cognizance of the same would amount to dismissing as a nullity, all the provisions of the relevant regulations, which are issued and are required to be adhered to, keeping in mind the interests of the common man/investors. Any evasion of the same is bound to affect the interest of such investors. Hence cognizance should be taken of the breach of any of these provisions and sufficient liability should be fixed there upon.

38. RSL have submitted that no default of a repetitive nature had been committed by them as they have corrected themselves at the earliest possible time. Although there is no evidence on record to substantiate this plea, keeping in mind the plethora of judgments passed by the Securities Appellate Tribunal to the effect that when the rectification of the deficiencies pointed out in the inspection report are stated to have taken place, the same should be viewed leniently, although Section 15F(b) of the SEBI Act, 1992 calls for the imposition of the penalty up to a maximum of Rs.1 crore for a violation of this nature, I am of the considered opinion that the facts of the instant case do not call for the imposition of penalty to the extent specified in Section 15F(b) of the said Act.

PENALTY

39. Accordingly, on analyzing the facts of this case and the material available on record as also the factors mentioned in Section 15 J of the SEBI Act, 1992, on a judicious 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 consider it appropriate to impose a penalty of Rs.5,00,000/- (Rupees Five Lakhs only) on M/s Mehta Equities Limited for the violation of Regulation 26(vi) of the Broker Regulations.

40. 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, 29^th Floor, Cuffe Parade, Mumbai 400005.

PLACE: MUMBAI	G. BABITA RAYUDU
DATE: SEPTEMBER 6, 2006	ADJUDICATING OFFICER