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IN THE SECURITIES APPELLATE TRIBUNAL MUMBAI Appeal
No: 34 of 2005
CORAM ��������� Justice
Kumar Rajaratnam, Presiding Officer ��������� C.
Bhattacharya, Member ��������� R.N.
Bhardwaj, Member ����������� Per:��� Justice Kumar Rajaratnam, Presiding Officer 1.
The
appeal is taken up for final disposal with the consent of both the parties. 2.
The
appeal is against the order of the respondent, SEBI, passed on �In view of the above, I in exercise
of powers conferred upon me under section 4(3) of SEBI, Act, 1992 read with
SEBI (Stock Broker and Sub-broker) Regulations, 1992 and Regulation 13(4) of
SEBI (Procedure For Holding Enquiry By Enquiry Officer And Imposing Penalty)
Regulations, 2002 direct that certification of registration bearing SEBI
Registration no. INB 0230759932 be suspended for a period of two months.� 3.
The
Tribunal vide its order dated 14/02/2005 on finding the balance convenience
would be to stay the impugned order pending appeal, granted interim order by
staying the impugned order pending appeal. 4.
The
brief facts of the case is as follows: 5.
SEBI
had conducted an investigation into the dealings in the scrip of Moschip
Semiconductors Limited (�Moschip� for short) for the period 6.
On
the basis of the investigation report SEBI conducted an enquiry under
Regulation 4(a) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and
Imposing Penalty) Regulations, 2002 vide its order dated 24/09/2003 who
enquired into the alleged violations committed by the appellant, who is a
member of Stock Exchange, Mumbai in respect of their dealing in Moschip. The
Enquiry Officer in his findings stated: �(a)����� Cholamandalam accepted
cheques issued by M/s. Vijay Growth�
Financial Services Ltd., for purchase of shares by Mr. B. Jayaprakash; ��(b)���� Cholamandalam
accepted Mr. B. Jayaprakash as a client without proper verification about his
employer; �(c)����� Cholamandalam executed orders on behalf of
Shri Jayaprakash for Rs. 6.19 lakhs in the scrip of Moschip whereas his annual
income was Rs. 3 lakhs only�. 7.
A
show cause notice dated 8.
An
opportunity of personal hearing was granted by SEBI to the appellant on (i)
Impeccable
track record; (j)
No
action taken by any regulatory body including SEBI and NSE till date. (k)
No
funding or financing done by them for alleged manipulation by Mr. Jayaprakash. (l)
No
prejudice has been caused to any investors in the market; and (m)
The
transactions done by Mr. Jayaprakash through them constituted only 0.01% of the
total turnover of the company that year. 9.
While
passing the order dated 10.
As
per the statement of Mr. D.B. Reddy, Director of VGFL, the appellant approached
VGFL for trading in securities. Shri Jayaprakash who was an employee of VGFL
and who was also handling securities on behalf of VGFL, purchased securities in
his name and the appellant started dealing with him. It was mentioned by Mr.
Reddy that Jayaprakash had bought these shares in his
own name and the payments were made by VGFL for about Rs. 8,95,000/-
for these transactions. Mr. Reddy, Director of VGFL, also agreed in this
statement that it was an irregular transaction and requested that it could be
treated as a procedural lapse. The above findings were corroborated even by Mr.
R. Pandiyan, Senior Manager of the appellant, in his statement dated �In view of the huge outstandings we
have taken these cheques initially and as a matter of business prudence we have
refused to accept third party cheques for future transactions.�� 11.
It
has been mentioned in the impugned order that the appellant accepted cheques
issued by VGFL for the payment that Mr. Jayaprakash had to make for his
purchases of the scrip.� It is also
mentioned in the impugned order that the appellant was the one who approached
VGFL for trading in the scrip and this fact has not been denied by the
appellant anywhere in the proceedings.� In
the impugned order it was mentioned that the appellant while conducting his
business has not exercised due caution, care and diligence. Shri Jayaprakash
who was a client of the appellant from May, 2001 had only an annual income of
Rs. 3 lakhs in the client registration form but he was allowed to trade in the
scrip of Moschip to the tune of Rs. 6.75 lakhs in a single month. The impugned
order further mentioned that a broker was an important intermediary in the
capital market who had an obligation to carry out the business in such a manner
that safety and integrity of the market could be maintained. It was not the
charge that the appellant had violated any of the SEBI circular, but the
conduct expected from it as a registered intermediary was not being delivered.
In view of the above, it is mentioned in the impugned order that the appellant
thus violated Clause A(2) of Schedule II of SEBI
(Stock Broker and Sub-Broker) Regulations, 1992. 12.
The
learned Senior Counsel for the appellant submitted that the impugned order
deserved to be set aside in view of the fact that by accepting three cheques
from third parties in May/June, 2001 there was no violation by the appellant of
the laws or circulars of the respondent.�
SEBI circular prohibiting the acceptance of third party cheque is of
August, 2003 whereas these transactions took place in the month of May/June,
2001. 13.
The
impugned order mentioned that Mr. Jayaprakash was
accepted as a client without proper verification about his employer. The
learned senior counsel for the appellant submitted that the client registration
form as prescribed by� SEBI was correctly
filled in by Mr. Jayaprakash for column for
occupation has been mentioned as �service� and the client registration form does
not require the details of the employer to be filled in by the client.� The client registration form as prescribed by
SEBI was fully complied with. The appellant had obtained the details of the
occupation of the client which was indicated by �service�.� Moreover the form contains a declaration by
the client stating that the information given therein was true to the best of
his knowledge and belief. 14.
It
is mentioned in the impugned order that the orders were executed on behalf of Mr.
Jayaprakash by the appellant for Rs. 6.19 lakhs in
the scrip of Moschip whereas his annual income as mentioned in the Client
Registration Form was Rs. 3 lakhs only. The learned Senior Counsel pointed out
that this finding was not included in the enquiry report on the basis of
investigating officer�s report. The Investigating Officer had not come to this
finding from his investigations whereas this point was included in the enquiry
report and also in the impugned order. He argued, without prejudice to his contention, that Regulations or Rules framed by SEBI did not
stipulate that a broker should not execute orders from a client for value which
was more than the annual income or the credit worthiness of the client. In the
absence of such a specific requirement the Enquiry Officer had no authority to
hold it as an alleged violation of non-existent regulatory provision. He went
on to argue that the client registration form was basically a self declaration.
It was operationally not possible to check each and every transaction of a
large number of clients about the annual income declared in the client
registration form. Moreover, in this case the client had been introduced by an
institutional client APIDC Venture Capital. He also argued that the income was
not static, it could vary over a period of time and there may be various
sources of income. He further argued that Mr. Jayaprakash did not default in
the transactions entered through the appellant. Finally he submitted that the
appellant was a part of well reputed financial group of South and its record had
been impeccable so far and it would damage its reputation if such an order was
passed against it. He therefore submitted hat the impugned order should be set
aside. 15.
The
learned counsel for the respondent argued that the impugned order had been
passed after conducting an investigation and also an enquiry by the Enquiry
Officer. The appellant was given full opportunity to place his view point. He argued
that it was agreed by all that there was an initial price rise in the scrip of
Moschip during 16.
We
have perused the impugned order, documents submitted before us, the enquiry
report, the grounds of appeal by the appellant and the submissions made by both
the counsels.� Having heard the
submissions of both the parties we find that in the impugned order only a minor
penalty has been imposed. Both, the recommendation by the enquiry officer and also
in the impugned order only a minor penalty of two months suspension has been
imposed. The learned senior counsel for the appellant relied on a number of
pronouncements of SEBI as well as by the Tribunal where, in similar
circumstances, a stock broker has been absolved of the alleged misconduct,
including the judgment in Chona Financial
Services Pvt. Ltd., in appeal No. 95 of 2003. In the case of Chona Financial Services Pvt. Ltd., the
Tribunal has extracted the orders rendered by SEBI and SAT and the nature of
penalty which are extracted below: �The appellant submitted a few cases namely M/s. Bakliwala Investment,
J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which
have been found to contain by and large similar irregularities and have been
only served with a letter of warning by SEBI.��
a)
M/s. Bakliwala
Investment Irregularities �
Provision for Tax
for the interim period from April 1 to �
Confirmations
have not been obtained from Banks, Creditors and debtors by the broker. �
Broker had not
time stamped the order slip/records �
Contract notes
not serially numbered except for computer generated numbers on day-to-day basis
which have no control. �
Contract notes
not issued within the specified time. �
Consolidated
stamp duty not paid. �
Client
Registration forms were not completed �
Order book was
not maintained. �
Delay in payment
of funds �
Delay in delivery
of securities �
One client
account being adjusted against another client without any authorization �
Transactions with
associate firms/companies separate set of ledger accounts as clients and others
not maintained. �
Compliant
register not maintained. �
Client account
were used for other purposes �
Margin money not
collected �
In 10 cases,
deals were done outside the NEAT System Order �
Irregularities
are basically technical lapses and do not deserve a substantive punishment. � Minor Penalty � Warning b)
M/s. J.M. Morgan
Stanley Retail Services Pvt. Ltd. Irregularities �
Failure to obtain
client registration forms and agreement �
Failed to
maintain separate client account. ����������� Order ����������������������� Warning c)
M/s. Bama
Securities ����������� Irregularities �
Contract notes
were missing �
Acknowledgement
from the clients not obtained �
Not maintaining
client registration forms Order ����������� Warning Reliance has
been placed on a few other judgments as under in which similar irregularities
were found and were served with a letter of warning. d)
M/s. Ratanbali
Capital Markets Ltd. ����������� Irregularities �
Non-maintenance
of books of accounts �
Contract notes �
Non-collection of
margins from clients �
Misuse of
client�s funds �
Share
lending/borrowing �
Non-segregation
of clients accounts with own account and for not reporting off-the-floor
transactions to Stock Exchange Order Warning e)
M/s. Twenty First
Century Shares & Securities Ltd. Irregularities �
Non-maintenance
of books of accounts �
Delay in payment
to clients �
Misuse of
client�s funds �
Non-segregation
of clients accounts with own account and for not reporting off-the floor
transactions to Stock Exchange �
Booking payment
in different clients account. �
Loan against
shares of holding company and loan transaction in clients account. ����������� Order ����������� Warning f)
M/s. Sanjay� C. Bakshi ����� Irregularities �
Not maintaining
margin registers �
Dealing with
unregistered sub-brokers �
Not entering into
agreement with few clients �
Non-segregation
of clients funds with own funds �
Dealing with
broker of other Stock exchange without getting registered as a sub-broker �
Irregularities in
respect of contract notes �
Delay in
payment/delivery of funds/shares to clients ��������� Order ����������� Warning g)
M/s. Mahesh
Kothari Share & Stock Brokers Pvt. Ltd. Irregularities �
Non-maintenance
of books of accounts �
Dealing with
unregistered sub-brokers �
Irregularities in
issuance of contract notes �
Non-segregation
of clients account with own account, misuse of client�s fund �
Delay on delivery
of securities and not reporting off the floor transactions Order ����������� Warning h)
M/s.� Mukesh Sawhany Irregularities �
Non-maintenance
of document registers �
Irregularities in
issuance of contract notes �
Non-maintenance
of separate client account �
Non-segregation
of separate client account with own account �
Not reporting off
the floor transactions �
Non redressal of
investor complaints Order Warning� 17.
However,
this is a case where the appellant ought to have made due verification with
regard to the client Jayaprakash, whose only income admittedly known to the
appellant was only Rs. 3 lakhs and that Jayaprakash who was trading in a scrip
which was under investigation. The appellant ought to have been diligent and
careful. Therefore, having regard to the facts and circumstances of this case,
the order of the respondent is modified to that of mere warning to enable the
appellant to be more vigilant in future. 18.
Taking
into account the good track record of the appellant and the appellant�s
reputation in the securities market as a broker it is our desire that this
order should not be treated as a stigma to impede growth of the appellant. 19.
No
order as to costs.
Place: Mumbai Date:�� */as |
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