ORDER OF ADJUDICATING OFFICER

UNDER

SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

IN THE MATTER OF M/s. C & S SECURITIES (P) LTD.

 1. BACKGROUND

 Securities and Exchange Board of India (SEBI) had conducted inspection of the books of accounts and other documents of M/s. C & S Securities (P) Ltd., sub-broker holding SEBI Registration Number INS010762438, affiliated to MSE Financial Services Ltd., member of The Stock Exchange, Mumbai (BSE), (hereinafter referred to as “M/s C & S Securities (P) Ltd.” or the “sub-broker” or the “noticee”)., and pursuant to this appointed me as adjudicating officer vide order dated March 22, 2004 under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to inquire into and adjudge under sections 15A(c), 15 HB of the SEBI Act. The alleged violations are as given below:

a.      Acted as unregistered sub-broker in violation of section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “Act”) read with Regulation 26(xiv of the SEBI (Stock –Brokers and Sub-Brokers Regulations, 1992 (hereinafter referred to as the “Regulations”);

b.      Indulged in off the floor transactions in violation of Section HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;

c.       Not maintained order book, margin deposit book in violation of Section 15 A(c) of the Act read with Regulation 26(iii), 26(xv) and 26(xvi) of the Regulations;

d.     Failed to maintain minimum margin by clients in violation of section HB of the Act read with Regulation 26 (xv) and 26(xvi) of the Regulations;

e.      Failed to maintain proper segregation of clients funds and own funds in violation of Section 15HB of the Act read with Regulation 26(xiii) of the Regulations

f.        Dealt with sub-brokers with out registration in violation of Section 15HB of the Act read with Regulation 26(xiv) of the Regulations;

g.      Indulged in direct client matching transaction (off the floor transactions/cross deal) in violation of Section 15 HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;

h.      Aided and abetted in evasion of margins in violation of section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations;

i.        Failed to comply with directions issued by the board in violation of section 15 HB read with Regulation 26(xv) of the Regulations;

j.        Not exercised due care, skill and diligence in violation of section 15 HB read with Regulation 26(xvi) of the Regulations;

2. NOTICE

Pursuant to this a notice dated March 26, 2004 under Rule 4 (1) of the said rules was issued to sub-broker communicating the charges levelled against them based on inspection of the books of accounts and other documents conducted by SEBI.  

3. REPLY

Reply to the aforesaid notice was received vide letter dated April 15, 2004 of the sub-broker, in which the sub-broker submitted a detailed reply.

4. PERSONAL HEARING

The personal hearing in the matter was granted on May 28, 2004. Shri A. Chandrashekhar, Director, of the C & S Securities (P) Ltd. appeared before me and made submissions on behalf of the sub-broker.

5. FINDINGS, ANALYSIS AND CONCLUSIONS

The undersigned has taken into consideration the findings of the inspection report, the material available on record, the reply of the sub-broker and the submission made by the sub-broker during personal hearing. The findings in respect of the allegations against the Sub-broker are as follows:

(a)   Acted as unregistered sub-broker

The sub-broker has been alleged to have dealt with the following members of National Stock Exchange:

1.                  M/s Navia Markets Ltd.,

2.                  M/s Anush Shares and Securities pvt. Ltd.,

with out having valid sub-broker affiliation with them.

The sub-broker submitted that they have discontinued trading with M/s Navia Markets Ltd., and M/s Anush Shares and Securities Pvt. Ltd., since July 2001 And June 2002 respectively. They have executed the transactions as members Madras Stock Exchange (MSE) and they  reported their transactions to MSE. The further sub-broker further submitted that they had bought minimal quantities of scrips which were not traded on MSE and they did these transactions only because they did not want to lose out on the business and nothing else.  The undersigned keeping in view that this was first inspection of the sub-broker and the submission that it has stopped dealing with those members inclined to take lenient view of the violations.

(b)    Non reporting of off the floor transactions

It was mentioned in the inspection report that the sub-broker had not reported to MSE as member any of the transactions executed by him through M/s Navia Markets Ltd., and M/s Anush Shares and Securities pvt. Ltd, members of NSE for the perion 2000-01, 2001-02 & 2002-03.

The sub-broker has submitted that they have reported these transactions up to 2000-01 and they have not been doing any dealing at MSE since July 2001. The further sub-broker further submitted that they had bought minimal quantities of scrips which were not traded on MSE and they did these transactions only because they did not want to lose out on the business and nothing else. The undersigned keeping in view that this was first inspection of the sub-broker and the submission that it has stopped dealing with those members inclined to take lenient view of the violations.

(c)     Non-maintenance of books of accounts and records

As per the inspection report sub-broker does not maintain order book and margin deposit book.

The sub-broker submitted that “we are receiving orders directly from clients over phone and the orders are put into the online trading system immediately and we did not get sufficient time to record in the order book. This is being followed as a practice.

It is seen that direct entering of the trades in to the system will provide the necessary information and back up. This has been an industry practice and hence may not be viewed seriously.

(d)    Failed to maintain deposit of minimum margin by clients

As per the inspection report the sub-broker has not ensured the maintenance of the mandatory minimum margins by the clients and have not furnished the requisite auditors certificate on quarterly basis during the period covered under inspection.

The sub-broker submitted that they have collected margins on the stipulated time. For all the instances cited in the inspection report they have either collected margins the very next day or had the documents of the clients with them covering the margin sufficiently prior to the purchase.

 It is felt that the sub-broker should have furnished the records and evidences at the time of inspection itself.

(e)     Failed to maintain proper segregation of clients funds and own funds

As per the inspection report the sub-broker is maintaining only one bank account for receipts and payments pertaining to himself and the clients. Establishment expenses like telephone bill, club charges etc are also been met out of this account.

The sub-broker submitted that they do not indulge in any proprietary trading and therefore, they have routed all the transactions through one account. They had open separate bank account for client dealings after the inspection.

From the examination of the inspection report and from the submission of the sub-broker it is seen that the sub-broker has not segregated his own funds and clients’ funds.

(f)      Dealt with sub-brokers with out registration

As per the inspection report the sub-broker had dealings with three entities viz. M/s. Sree Sarawasti Investments, M/s. D’souza Financial Services Pvt. Ltd. and M/s. Esdeyem & Co. by treating them as clients whereas such entities in turn act as sub-brokers by trading for their own clients.

The sub-broker submitted these entities dealt with them as their clients only. Keeping in view of thee observations in the inspection report and the attendant circumstances led to believe that the sub-broker was fully aware the said entities dealt for their respective clients and there fore the submission of the sub-broker is not acceptable.

(g)    Indulged in direct client matching transaction (off the floor transactions/cross deal)

As per the inspection report the sub-broker has been matching the purchase and sale transactions of his clients directly without routing the same through his affiliated broker viz. MSEFSL.

The sub-broker admitted that they had executed few cross deals prior to March 2002. They have now discontinued the practice.

(h)   Aided and abetted in evasion of margins

As per the inspection report the sub-broker was dealing with another sub-broker of MSE on principal and agent basis thereby death with an unregistered sub-broker and has also aided and abetted evasion of margins.

 The sub-broker admitted that they had dealt on behalf of M/s. Kumar & Co. a dormant member of MSE but only as a client.  They were not operating as a main broker / sub-broker and they have not issued any contracts to any person.

I have considered the explanation given by the sub-broker and the records submitted before me and find that the submission of the sub-broker is satisfactory.

(i)     Failed to comply with directions issued by the board

The inspection report does not cite any instances of such violations and hence are not maintainable against the sub-broker.

(j)     Not exercised due care, skill and diligence

The inspection report does not cite any instances of such violations and hence are not maintainable against the sub-broker.

6. IMPOSITION OF PENALTY

The undersigned has taken into consideration the facts and circumstances of the case, the material available on record and submissions by the sub-broker.

Keeping all above in view, I find that there were certain deficiencies and irregularities in the systems and procedures of the sub-broker and has failed to strictly comply with the provisions of the Act, Regulations and directions issued by the Board from time to time and has not exercised adequate due skill, care and diligence in their operations.

Considering all above facts and circumstances , I am of the view that the sub-broker has become liable to penalty and some amount of penalty need to be imposed upon them for certain violations as described in detail in the earlier paragraphs, so that they comply with all the regulatory requirements in future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interest of investors.

In order to adjudge the quantum of penalty, I have considered the following factors as provided in the Section 15J of Securities and Exchange Board of India Act ,1992:

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 and

c)      the repetitive nature of the default.

 As regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the sub-broker. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. Besides, no investor complaints have been received against the sub-broker. However, as for the reasons stated above the monetary penalty needs to be imposed on the sub-broker.

7. ORDER

In exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the Securities & Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, I hereby impose a penalty of Rs.20,000/- (Rupees Twenty Thousand only) on the sub-broker. The sub-broker shall pay this amount of penalty of Rs.20,000/- by way of demand draft in favour of "SEBI - Penalties Remittable to Government of India"  payable at Mumbai within 45 days of receipt of this order.

 The said demand draft should be forwarded to the Chief General Manager, MIRS Department, at SEBI, World Trade Centre, 29^th Floor, Cuffe Parade, Mumbai 400 005.

 In terms of Regulation 6 of the SEBI ( Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules ,1995 , a copy of this order is served on the sub-broker and a copy is submitted to the Board.

Date : December 31, 2004

Place : Mumbai  

P.K. KURIACHEN

ADJUDICATING OFFICER