Inspections and Inquiries

Stock Exchanges, Stock Brokers and Sub Brokers

Section 11(2) of Securities and Exchange Board of India Act 1992 provides that SEBI shall register and regulate the working of stock brokers and sub brokers. Inspections were carried out of the books and records of stock brokers to verify whether:

• books of accounts and other documents are being maintained by the stock brokers in the manner specified by the Securities Contracts (Regulation) Rules, 1957, and the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992
• the provisions of SEBI Act, the Securities Contracts (Regulation)Act, 1956, and the provisions made thereunder are complied with by the Stock Brokers
• adequate steps for redressal of grievances of the investors and the conditions of registration as a stock broker are complied with

Table 30 : Action taken against Stock Brokers

During 1996-97, 157 brokers were inspected by SEBI across the 22 exchanges. A comparative statement of inspections carried out during the year, inquiries ordered and penalties imposed for the years 1995-96 and 1996-97 is given in Table 30.

Some of the observations of the inspections were the following :

• Because of poor market condition, client business had shrunk. Coupled with the fact that the brokerage rates have decreased substantially in the recent past, small brokers were finding it difficult to sustain their business profitably.
• A substantial chunk of the business was on account of trading of the brokers on their own account. Positions were taken on short term basis and generally squared off within the settlement resulting in a very low delivery percentage.
• In general brokers of the major stock exchanges were maintaining the books of accounts and issuing contract notes as prescribed under various regulations and bye laws. However in the case of brokers of smaller stock exchanges, certain common irregularities were observed, namely the following:

   

  1. Non issuance of contract notes in the proper format and non fixing of brokers note/stamps on contract notes
  2. Non reporting of `off the market' transactions to the exchange
  3. Evasion of margin
  4. Non segregation of clients' funds from proprietors' funds
  5. Dealings with sub brokers who are not registered with SEBI

Merchant Bankers

During the year 1996-97, SEBI has inspected 24 merchant bankers with reference to due diligence exercised by them in preparing the offer documents while lead managing the issues of capital. In respect of one merchant banker an enquiry has been instituted with regard to suspension /cancellation of SEBI registration. In case of 7 merchant bankers, it has been decided to issue a show cause notice for initiating penal action. Remaining 4 merchant bankers have been given a time bound opportunity to upgrade their systems and remove the deficiencies noticed during the course of inspection. In respect of remaining 12 merchant bankers the inspection reports are at the various stages of processing.

Registrars to an Issue and Share Transfer Agents

For effective monitoring and control over their operations, inspection of 39 Registrars and/or Share Transfer Agents was carried out during the year. Further, Registrars to an Issue and/or Share Transfer Agents are required to submit quarterly reports in prescribed formats to SEBI, containing details of their activities. On the basis of the quarterly reports as well as the inspection reports, SEBI takes up issues such as delays on the part of the Registrars and Share Transfer Agents and action was taken wherever the Registrars and Share Transfer Agents were found to have been at fault.

Mutual Funds

During 1996-97 SEBI has ordered inspections of all 28 mutual funds who have launched schemes as compared to 21 mutual funds which were inspected in 1995-96. Inspections have been carried out by independent Chartered Accountants selected from the RBI panel of approved Auditors for inspection of banks and financial institutions. Inspections have been completed by the Auditors.

Other Actions

Besides the actions mentioned in the foregoing paragraphs, SEBI also took the following actions for violations of relevant regulations and provisions of the SEBI Act, 1992.

Action against issuer companies under section 11(B) of the SEBI Act, 1992

In 1996-97, in respect of 5 issuer companies show cause notices were issued as to why directions under section 11(B) of the SEBI Act should not be issued debarring these companies /their associates from accessing the capital market for certain irregularities.

In one case, an order was issued under section 11(B) of SEBI Act to refund subscription money to the investors since the promoter had resorted to unfair practices in getting the issue subscribed.

In case of M/s. Jenson and Nicholson, the company has been debarred from accessing the capital market for a period of 2 years, since it tampered with the issue process by cancelling its rights issue after allotment and despatch of share certificates. The matter, however, is sub judice.

Action against issuer companies under guidelines for disclosures and investor protection

As of March 31, 1997, in 14 cases action has been taken against the issuers by withdrawing acknowledgement cards directing them to given option to investors to withdraw their applications, directing them to refund the subscription amount or to postpone the issues. These actions were initiated mainly on account of misleading statements made in the offer documents or non disclosure of material information as required under guidelines.

Merchant bankers and underwriters

During the year 1996-97, notices under Section 11(B) of the SEBI Act were issued to 12 merchant bankers for not meeting their underwriting commitments as to why they should not be debarred from undertaking any activity as intermediaries in securities markets. Also, show cause notices were issued to 78 stock broker underwriters. The stock exchanges were also advised not to permit such stock brokers to undertake further underwriting commitments. In case of 2 merchant bankers, the issue of acknowledgement cards for the offer documents filed with SEBI was withheld for not meeting their underwriting commitments.

Two merchant bankers were suspended during the year. Six merchant bankers were issued warning letters/penalty points for not exercising due diligence as lead managers while managing the issues. Three merchant bankers were advised not to file offer documents with SEBI for varying periods for inadequate disclosures in offer documents. It was decided to initiate enquiry proceedings against 3 merchant bankers and in case of 1 merchant banker investigation proceedings were initiated. Apart from the above, penalty points were issued to various merchant bankers for non-submission of offer documents/post-issue reports to SEBI within the stipulated time period.

Registrar to an issue and share transfer agents

During 1996-97, SEBI took action against 173 Registrars to an Issue and/or Share Transfer Agents for the irregularities committed by them. 155 warning letters were issued to Registrars to an Issue and/or Share Transfer Agents for not effecting transfers within the stipulated time period of 30 days as laid down in the Listing Agreement. In 6 cases, applications for renewal of registration was withheld. Show cause notices were issued to 7 Registrars to an Issue and/or Share Transfer Agents and in one case suspension order was passed. In 6 cases warning letters were issued for other lapses.

Bankers to an issue

7 show cause notices have been served for delay in submission of quarterly reports. 5 show cause notices were issued for irregularities committed by them and 4 Bankers to an Issue (one branch in each case) were suspended for violations of SEBI Rules and Regulations.

Debenture trustees

SEBI monitors the working of Debenture Trustees through the quarterly reports which are to be submitted by them. The format for this report was prescribed by SEBI. The quarterly reports furnish details regarding compliance by issuers of the terms of debenture trust deed, creation of security, redemption of debentures and redressal of complaints of debenture holders. Show-cause notices in the case of 4 Debenture Trustees were issued for violation of regulations.

Action against mutual funds

Based on the findings of the inspections carried out in 1995- 96, adjudication proceedings for violation of regulations were initiated against 4 mutual funds during 1996-97.

Appeals under Section 22 of the Securities Contracts (Regulation) Act, 1956

Since September 1994, SEBI has been given the powers to decide on the appeals filed by the companies, under section 22 of the SC(R) Act, 1956, against the decision of the stock exchanges rejecting the listing application of the company. Tables 31, 32 and 33 give an analysis of appeals under section 22 of the SC(R) Act filed before the Appellate Authority.

SEBI had received 74 cases in the year 1995-96, of which 59 cases were disposed of in that year itself. In comparison to this, SEBI considered 151 cases in the year 1996-97. In addition to the increase in the quantum of appeals filed with SEBI, there has been a change in the profile of the appeals.

In 1995-96, 94.91% of the cases disposed of, pertained to rejection of the listing application by the stock exchanges on account of delay in submission of the documents pertaining to listing. In contrast to this, such cases accounted for only 14.58% in the year 96-97. In addition to this, 55.5% of the cases pertained to non-fulfilment of the minimum shareholders criteria by the companies. In such cases the companies were granted listing subject to the condition that they will fulfil the said criteria within 6 months of listing of the shares.

In 1996-97, 15.97% of the appeals were disposed of as "rejected", on account of various factors given below :

1. The company could not garner the minimum subscription of 90% of the offer to the public, within the stipulated time.
2. The appeal was filed beyond the time period prescribed u/s 22 of the SC(R)A, 1956. SEBI does not have any powers to condone such delay.
3. In a peculiar development, several issues failed on account of fake stock invests submitted by the applicants.

Table 31 : Grounds of appeal for cases disposed under section

Table 32 : Decision of Appellate Authority in respect of section 22 appeals

Table 33 : Rejection of appeals under section 22