ORDER
UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES,1995, READ WITH SECTION 15HB OF SEBI ACT 1992 AND REGULATION 26 (iii), (vi) AND (xvi) OF SECURITIES AND EXCHANGE BOARD OF INDIA (STOCK BROKERS & SUB-BROKERS) REGULATIONS,1992 AGAINST M/s. Y.SATEESH KUMAR (SEBI REGISTRATION NO. INS 230881117).
1.0 BACKGROUND:
1.1 Shri Y. Sateesh Kumar, (hereinafter referred to as “YSK”) having Securities and Exchange Board of India (SEBI) registration no. INS 230881117 is a sub broker affiliated to HSE Securities Ltd. (SEBI Regn. No. INB231103038) member of National Stock Exchange (NSE). The registered office of YSK is situated at Flat no. 505, Sanali Heaven’s, Ameerpet, Hyderabad.
1.2 An inspection of the books of accounts, documents and other records of YSK was conducted between June 10, 2003 and June 24, 2003 covering the operations of YSK in the capital market segment of National Stock Exchange for the years 2001-02 and 2002-03. During the said inspection, certain irregularities and violations of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as Broker Regulations) and SEBI Circulars by YSK were observed.
1.3 The findings of inspection were communicated to YSK vide letter dated September 29, 2003. Vide letter dated October 28, 2003 YSK submitted its comments on the findings of the aforesaid inspection report and also submitted clarification / explanation on the alleged non-compliances pointed out in the inspection report.
1.4 SEBI after examining the comments offered by the sub-broker, being not satisfied with the same, decided to initiate Adjudicating Proceedings under section 15HA of SEBI Act, 1992 and accordingly vide order dated March 04, 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 sub-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 YSK mentioning the findings of the inspection report and advising him to show cause as to why penalty cannot be imposed on him in terms of section 15HB of SEBI Act, read with regulation 26 (iii) (vi) (xv) and (xvi) of Broker Regulations. No reply to the said show cause notice was however received by the then Adjudicating Officer.
2.2 In the meanwhile, the erstwhile Adjudicating Officer proceeded on study leave. Consequently, 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 be 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 records and adopting the charges levied in show cause notice dated April 28, 2004 issued by erstwhile Adjudicating Officer and treating said show cause notice as part and parcel of the present proceedings, a fresh show cause notice dated September 30th, 2005 was issued by me to YSK, giving him a last opportunity to show cause within 15 days from the date of receipt of the notice as to why enquiry should not be held against him. Vide said show cause notice he was also informed that after considering his reply, if necessary, he would be required to appear in person or through duly authorized advocate or other representative before me on October 27, 2005.
2.4 YSK vide his letter dated October 19, 2005 submitted his reply to the charges levied in the notices. In view of the explanations furnished by him, he requested to view the deficiencies, if any, leniently and condone the lapses. YSK also submitted that since he was recovering from Jaundice he would not be able to attend the personal hearing scheduled on October 27, 2005 and conveyed his thanks for giving him the opportunity to be heard.
2.5 In order to keep the record straight and also to avoid any misunderstanding in future, vide another letter dated October 28, 2005, YSK was advised to clarify his stand on personal hearing within 7 days of receipt of the letter. He was also informed that if no response was received within the prescribed period, it would be presumed that he did not wish to avail the opportunity of personal hearing and the matter shall be proceeded with on the basis of the records and replies submitted by him. Since no reply was received by me, I was compelled to proceed in the matter on the basis of the records and replies submitted by the said sub-broker.
3.0 CONSIDERATION OF ISSUES AND FINDINGS
3.1 I have carefully considered the inspection report, the submission/explanation of the sub-broker, Show cause notices, and the reply filed on behalf of the sub-broker. The summary of the charges alleged and the reply submitted by the sub-broker are as under :
Charge 1-Indulged in funding activities in violation of Regulation 26 (xv) of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the “said Regulations”) read with circular No.SMD/Policy/Cir-11/97 dated 21.5.97 and Circular SMD/SED/CIR/93/23321 dated 18.11.1993.
Reply of the Sub-broker – In his reply dated October 19, 2005 YSK submitted that many of his clients had defaulted during that period on the commitments made by them as they have lost heavily during the market fall and he had to borrow and fulfill his commitments to the broker HSE securities Limited. He continued executing the orders of the clients with the hope of recovering the outstanding amounts but later when he realized that no recovery was possible he stopped his business altogether. He further submitted that he never charged any interest to the clients and requested the aforesaid activities may not be treated as funding activities and requested to view the same leniently.
Findings - After carefully examining the provisions of regulation 26 (xv) of the said Regulations and explanation given by YSK, I find that the sub-broker (YSK) has categorically admitted the above charge. The Code of Conduct as enumerated in Schedule II of the Broker Regulations, clearly stipulates that sub broker shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his commitments in relation to securities. Not only had the said sub-broker entertained such clients, he had even borrowed funds to fulfill the commitments. Therefore, I hold YSK guilty of violating Clause B (5) and D (1) of Schedule II Under regulation 15 of SEBI (Stock Broker and Sub-broker) rules and regulations, 1992.
Charge 2- Did Not maintain Order Book in violation of Regulation 26 (iii), 26(xv) and 26(xvi) Regulations read with Regulation 17(1).
Reply of the Sub-broker -With regard to the charge of non maintenance of order book, YSK had submitted that order book was not maintained as all the clients used to place the orders over telephone and which were fed immediately into the trading system along with the respective client codes and were confirmed on the telephone itself. The back office order was maintained by HSES.
Finding – From the above, it is crystal clear that it is an admitted position that YSK had violated regulation 17 (1) of Broker Regulations.
Charge 3- Failed to collect margins in violations of Regulation 26(xv) and 26 (xvi) of the Regulations;
Reply of the sub-broker – YSK submitted that most of his clients had running accounts and had given a mandate to retain securities/ monies. The same was treated as margin collection and on this ground requested to drop this charge.
Findings – From the aforesaid submission, it is clear that the sub-broker has categorically admitted the fact that he was not collecting the necessary margins. The reasoning given by YSK for the same is unacceptable as non collection of margins puts the market as a whole at risk. This lapse must have contributed in default of many of its clients as mentioned by YSK himself in reply to the Charge-1 above. This non collection of necessary margin is in violation of Clause D (1) of Schedule II read with Regulation 15 of Broker Regulations further read with SEBI circular SMDRP/POLICY/Cir. 33/2000 dated 27.7.2000,read with Cir.6/2001 dated 1.2.2001.
Charge 4- Failed to maintain client database in violation of Regulation 26(xv) of the Regulations read with circular No. SMD/Policy/Cir-11/97 dated 21.5.97, Circular No.SMD/Policy/OECG/1-97 dated 11.2.1997 and Circular dated 11.4.97.
Reply of the sub-broker- YSK submitted that he had maintained the database of the clients as required by SEBI. However, the clients did not fill few of the fields in the forms properly which were rectified subsequently. He, therefore, requested that the lapse may be condoned.
Findings - YSK has accepted the fact of improper maintenance of client data. The submission that the data has been ratified cannot be accepted as the same are not supported by any documentary evidence. Even otherwise, the fact remains that at the relevant time, YSK was found wanting in this regard and thus I conclude that YSK has violated regulation 15(1) (c) of Broker Regulations read with Circular SMD/Policy/cir.-11/97 dated 21.5.97, circular No.SMD/Policy/OECG/1-97 dated 11.2.1997 and circular dated 11.4.97.
Charge 5- Delayed payment of monies/ delivery of securities to clients in violation of Regulation 26(vi) of the Regulations.
Reply of the sub-broker - YSK submitted that his clients had given a mandate to retain the shares and monies with him for their day to day trading and margin obligations. Moreover, they (clients) had authorized him in writing to withhold their shares and monies for their margin obligations and immediate disposal etc. Therefore, he had to retain their shares to honour their sale commitments and monies for their margin obligations and further commitments. He transferred the shares to them and paid the monies immediately whenever they requested. Hence, there was no intentional delay in transferring the shares and payment of monies to the clients. In view of the above, YSK requested to condone this lapse.
Findings – From the above submissions, it can be seen that YSK has admitted the delay but tried to cover up this lapse on the ground that he had consent letters from the clients for such retention of monies/shares. This act of omission was again in violation of the code of conduct prescribed for a sub-broker.
At the end of his reply YSK stated that since he has discontinued the broking business for personal reasons from July 2002 onwards and surrendered the SEBI registration certificate to HSE Securities Limited (to be submitted to SEBI for cancellation) and since there were no investor complaint ever filed against him, a lenient view may be taken of the deficiencies if any. He also requested that SEBI may cancel his sub-broker registration as he had no intentions to do brokerage business in future.
4.0 FINDINGS
4.1 From the aforesaid submissions advanced by the YSK, it is quite clear that the sub-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.
4.2 Upon cumulative analysis of the facts, I am of the view that whatsoever may be the reason, the fact remains that the sub-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), (vi) (xv) and (xvi) of the Broker Regulations read with relevant circulars issued by SEBI. These undisputed acts of omission and commission of the sub-broker, no doubt make the sub-broker liable to be penalized in terms of section 15HB of SEBI Act.
4.3 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.
4.4 There is nothing on record to suggest that the sub-broker extracted any disproportionate gain or unfair advantage as a result of its default. Also nothing has been brought to my notice that the sub-broker has repeated those faults/violations subsequently. In fact, as the record suggests, there is no investor complaint against YSK and as such YSK has already discontinued his business as sub-broker and has even surrendered his registration with HSE Securities Ltd., its broker.
4.5 However, it cannot be denied that any non compliance of the statutory/regulatory requirements/provisions made for the protection of the investors in securities market for whatsoever reason is bound to affect the interest of investors and deprive them of a fair and well regulated market. 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 by the persons concerned, is to ensure the sound and smooth functioning of the system. Therefore, even if no 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 face the consequences for such violations. The plea that he has since discontinued his business would also not help him so far as the charges established against him.
Thus, keeping in mind the facts and circumstances of the above case, as also the factors enumerated in section 15J of SEBI Act, I am of the view that since the charges levied against the sub-broker are not very serious as the same have not resulted in any direct loss to the investors, though some of them were potentially serious and were against the fairness of the securities market, the penalty to be imposed on the sub-broker need not be strictly as per the quantum specified in section 15HB and the ends of justice would be met by imposing a token penalty on the sub-broker which would act as deterrent on others.
5.0 ORDER
5.1 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. 75,000/- (Rupees seventy five thousand only) as penalty on Y. Sateesh Kumar bearing SEBI Regn. No. INS 230881117.
5.2 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.
| September 21, 2006 |
PRAVEEN TRIVEDI |
| Mumbai |
ADJUDICATING OFFICER |