Appeal No. 386 of 2004
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Date of Hearing |
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Date of Decision |
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In the matter of:
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Appellant – Represented by
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Pavak
Securities Limited |
Mr. Joby Mathew,
Advocate |
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Versus |
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Securities & Exchange Board of |
Respondent –Represented by
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Mr. Dipan Merchant, Advocate
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Coram:
Justice Kumar
Rajaratnam, Presiding Officer
1.
The appeal is taken
up with the consent of parties.
2.
The appellant being
aggrieved by the order of the respondent dated
(i)
whether the
appellant adhered to unique client code?
(ii)
whether the
appellant had dealt with unregistered sub-brokers?
(iii)
whether the
appellant received securities from clients DP’s other than that listed with
SEBI?
(iv)
whether the
appellant had granted trading terminals at unauthorised locations?
3.
In all these allegations
show cause notice was issued to the appellant and the appellant has submitted
the following reply:
“ With reference to above, we have
received you letter dated
“ Sir, at the outset, we would like to
emphasise that the violations stated are procedural in nature and they have not
been committed with a wilful intent or an intent to defraud any client, Sir,
you would appreciate that we do not have any investor complaints against us
since we commenced business as stock broker.
“ We have never misused the exchange
system for any advantage. Besides, we have always honoured all the rules and
regulations prescribed by the regulatory authorities. If you refer to the inspection report the
C.A. firm has remarked that we are generally complaint (sic) (compliant)
on majority of the aspects of the inspection process and the regulatory
requirements vide their points Nos. 3.2 to 3.9, coming to the specific queries
referred to in your letter we have to state that.
“a. Unique client code: we have generally adhered to the
unique client code in our office. Only
in some cases due to human errors, some codes might have been erroneously
punched. Even the exchanges allow us to
rectify this mistake in post closing sessions.
We assure you that we will try to bring down such mistakes in future.
“b. Transferred trade
& aided and abetted to evade margins in violation of section 15 HB of the
Act: Sir, we have never transferred trades with a view to evade margins
payable to the exchange. We always have
a comfortable liquidity position and manage our risk properly. This point is also not mentioned in the
“c. Dealing with
unregistered sub-broker: We had
made this application for one sub-broker M/s. Sankalp Shares & Securities.
However, the said application was rejected by SEBI. After that we have stopped business with the
said sub-broker.
“d. Granting of Trading
Terminal at unauthorized locating: Sir, only in one case i.e., the case
of the above sub-broker the terminal was granted & that too after the
application for registration was made to SEBI.
The said terminal was deactivated suo moto by us when the application for
the sub-brokership was rejected.
“e. Failed to collect
upfront margins from all clients: sir, we would like to emphasise that
only in very few instances, the requisite margins could not be collected by
us. In majority of the instances we do
collect margins from clients.
“f. Paid commission to
unregistered Remister: In case
of commencement of business with remisier is concerned, we would like to inform
you that only in two cases this mistake has occurred. Besides, the business was commenced after the
application to the BSE was made for registration. We assure you that such instances will not be
repeated in future.
“Points h & i: Sir, we would like to state that we
exercise due skill, care & diligence in conduct of our business & we
endeavour to comply with directions issued by SEBI from time to time. We, once again would like to state that we
have been in operations since past nine years & there has never been
a single complaint against us.
“Besides, as you can
see that the nature of above violations are procedural & the instances are
very few compared to total business even the C.A. firm has remarked that we are
generally complaint (sic) (compliant) in majority aspects of business
conducted by us.
“Considering the total
level of business, the exceptional nature of procedural violations, we request
your honour to take a lenient view of the matter & accordingly decide the
case in our favour.”
4.
On a perusal of the
reply to the show cause notice and that the appellant has submitted that there
was certain violations and that the appellant has rectified all the defects
pointed out. It was submitted by the
learned counsel for the appellant that in view of the fact that it is for the
first time that the appellant has been found guilty of these minor violations
he should be subject to a warning and be not subject to penalty as it casts
stigma. It was further submitted that
the so called sub-broker, acting as a sub-broker to the appellant, the
appellant immediately stopped treating the sub-broker as a sub-broker since his
application for being a sub-broker was rejected by SEBI. The appellant was under the impression that
the licence for the sub-broker would be granted by SEBI and also got carried
away by the NOC given by the original broker under whom the said sub-broker had
acted. In other words it was submitted by the appellant that they were not
aware that the sub-broker was not a sub-broker on account of the NOC of the
original broker for whom the sub-broker was working.
5.
I do not think that
the appellant can be absolved of the responsibility in determining whether the
sub-broker was really a registered sub-broker or not. It would have been very easy for the
appellant as a broker to have found out from SEBI whether the sub-broker was
recognised as a sub-broker. The law does
not give the appellant the right to continue with the sub-broker merely on the
ground that an application has been made to the SEBI. Till the application is
accepted and the sub-broker is registered as such there can be no basis for the
appellant to treat the sub-broker as such. In other words there has been
certain amount of negligence on the part of the appellant in dealing with the
person as a sub-broker who was not a sub-broker. In that view of the, I am of the view, that
the appellant was rightly found guilty of the violation of the Code of Conduct.
6.
In similar cases SEBI has taken a practical and
lenient view in awarding mere warning for first time offenders. This Tribunal
has also made a reference to those cases in Chona Financial Services Pvt.
Ltd. in appeal 95/2003 dated 23.8.2004. 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 and I feel it appropriate to extract the same
from the judgement.
“a)
M/s. Bakliwala Investment
Irregularities
Ø
Provision for Tax for the
interim period from April 1 to
Ø
Confirmations have not
been obtained from Banks, Creditors and debtors by the broker.
Ø
Broker had not time
stamped the order slip/records
Ø
Contract notes not
serially numbered except for computer generated numbers on day-to-day basis
which have no control.
Ø
Contract notes not issued
within the specified time.
Ø
Consolidated stamp duty
not paid.
Ø
Client Registration forms
were not completed
Ø
Order book was not
maintained.
Ø
Delay in payment of funds
Ø
Delay in delivery of
securities
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One client account being
adjusted against another client without any authorization
Ø
Transactions with
associate firms/companies separate set of ledger accounts as clients and others
not maintained.
Ø
Compliant register not
maintained.
Ø
Client account were used
for other purposes
Ø
Margin money not
collected
Ø
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
Ø
Failure to obtain client
registration forms and agreement
Ø
Failed to maintain
separate client account.
“Order
Warning
“(c)
M/s. Bama Securities
Irregularities
Ø
Contract notes were
missing
Ø
Acknowledgement from the
clients not obtained
Ø
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.
“1. M/s.
Ratanbali Capital Markets Ltd.
Irregularities
Ø
Non-maintenance of books
of accounts
Ø
Contract notes
Ø
Non-collection of margins
from clients
Ø
Misuse of client’s funds
Ø
Share lending/borrowing
Ø
Non-segregation of
clients accounts with own account and for not reporting off-the-floor
transactions to Stock Exchange
“Order
Warning
“2. M/s. Twenty First Century Shares &
Securities Ltd.
Irregularities
Ø
Non-maintenance of books
of accounts
Ø
Delay in payment to
clients
Ø
Misuse of client’s funds
Ø
Non-segregation of
clients accounts with own account and for not reporting off-the floor
transactions to Stock Exchange
Ø
Booking payment in
different clients account.
Ø
Loan against shares of
holding company and loan transaction in clients account.
Order
Warning
“3.
M/s. Sanjay C. Bakshi
“Irregularities
Ø
Not maintaining margin
registers
Ø
Dealing with unregistered
sub-brokers
Ø
Not entering into
agreement with few clients
Ø
Non-segregation of
clients funds with own funds
Ø
Dealing with broker of
other Stock exchange without getting registered as a sub-broker
Ø
Irregularities in respect
of contract notes
Ø
Delay in payment/delivery
of funds/shares to clients
“Order
Warning
4. M/s. Mahesh Kothari Share & Stock Brokers
Pvt. Ltd.
Irregularities
Ø
Non-maintenance of books
of accounts
Ø
Dealing with unregistered
sub-brokers
Ø
Irregularities in
issuance of contract notes
Ø
Non-segregation of
clients account with own account, misuse of client’s fund
Ø
Delay on delivery of
securities and not reporting off the floor transactions
“Order
Warning
“5. M/s.
Mukesh Sawhany
Irregularities
Ø
Non-maintenance of
document registers
Ø
Irregularities in
issuance of contract notes
Ø
Non-maintenance of
separate client account
Ø
Non-segregation of separate
client account with own account
Ø
Not reporting off the
floor transactions
Ø
Non redressal of investor
complaints
Order
Warning”
7.
A broker owes a responsibility
in maintaining high standards and should be role model for sub-broker. In that view of the matter I uphold the fact
that there has been a violation of the Code of Conduct.
8.
However, taking into
account that in similar cases the Court has taken a lenient view and also
taking into account that all defects pointed out by the respondent have been
rectified the appellant would be entitled to relief with regard to the quantum
of penalty.
9.
In the facts and
circumstances I reduce the penalty from Rs. 1,50,000/- to Rs. 50,000/- for the reasons stated above.
The appellant shall pay the amount to the respondent excluding the amount
already paid within four weeks from today.
10.
No order as to
costs.
(Pronounced in Court)
Justice Kumar Rajaratnam
Presiding Officer
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Place: Mumbai
Date:
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