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Chona Financial Services Pvt. Ltd. versus Securities & Exchange Board of India.

    Appeal No. 95/2003

    Decided On, 23 August 2004

    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal

    By, CORAM: JUSTICE KUMAR RAJARATNAM
    By, PRESIDING OFFICER
    By, DR. B. SAMAL
    By, MEMBER
    By, N.L. LAKHANPAL
    By, MEMBER

    Appellant – Represented by Mr. A.C.C. Unni, Advocate. Respondent – Represented by Mr. Kumar Desai, Advocate



Judgment Text

Per: Dr. B. Samal, Member


1. The appeal is taken up with the consent of both the parties.


2. The appeal is against the SEBI Chairman’s order dated 14.7.2003 suspending the certificate of registration no. INB 230754330 granted to the appellant, member of NSE for a period of four months after three weeks from the date of the order.


3. The appellant is a member of NSE. The respondent has granted a certificate of registration to the appellant as its trading member in the capital market segment with no. INB 230754330. The appellant has also been registered under the Futures & Option Segment as a trading member with the certificate of registration no. INF 230754330. The appellant submitted that vide the impugned order its certificate of registration no. INB 230754330 has been suspended but as per the letter from SEBI dated 22.7.2003 forwarding the impugned order the appellant was informed that it would cease to carry on any activity as an intermediary during the period of suspension. The appellant feels that by the said forwarding letter, the reach and scope of the order has been stretched. The impugned order of the SEBI chairman dated 24.7.2003 has been passed on the basis of the report of the enquiry officer. The enquiry was conducted on the basis of the inspection conducted in January 2000 for the period 1998-99. The appellant submitted that enquiry has been opened at this late stage i.e. 31.7.2002 on the inspection conducted in 2000. The appellant further submitted that all the inspections conducted in the year 2000 or thereabouts have not been opened/reopened at this juncture. Only a few selective ones have been opened/reopened for various reasons. According to the appellant no broker has been suspended for the same purpose until 2002.


4. The impugned order of the respondent was passed on the basis of the findings of the inspection of the books of accounts records and other documents of the appellant undertaken by SEBI from April 1998 to December 1999 conducted in January 2000 under Regulation 28(1) of the SEBI (Stock Brokers & Sub-brokers) Regulations, 1992. The irregularities which were considered for issuance of impugned order as observed are as under:-


a) Delay in both making payments and making deliveries to clients which is in violation of B(1) of the code of conduct of schedule read with Regulation 7 of SEBI (Stock Brokers & Sub-brokers) Regulations, 1992


b) Dealing with unregistered stock brokers which is in violation of circular SMD/POLICY/CIR/3097 of 31.3.1997.


c) Irregularities in maintenance of contract notes


i) Time stamping of orders not done


ii) Delay in issue of contract notes


iii) Duplicate contract notes did not bear client acknowledgement


iv) Stamp duty has not been affixed as ordered


d) Non segregation of client’s fund and own fund and misutilisation of client account


5. SEBI appointed an enquiry officer who issued a show cause notice dated 31.7.2002 and 25.10.2002 to the appellant. After considering the reply of the appellant and submissions made on its behalf during the personal hearing before him, the enquiry officer submitted an enquiry report dated 28.2.2003. The enquiry officer in terms of Regulation 13(1)(b) of the Enquiry Proceedings Regulations recommended that the certificate of the registration of the said broker be suspended for a period of four months


6. The learned counsel Shri Unni for the appellant submitted that the order passed by the respondent is too harsh as orders of these types have not been passed in identical cases. He submitted that delay in making payments to clients has been made as per the provisions laid down by the respondent. He specifically mentioned that the SEBI Circular dated 18.11.1993 indicated that “Member brokers shall make payments with the clients or deliver the securities purchased within two working days of pay out unless the client has requested otherwise.” As regards the dealing with the unregistered sub-brokers, the learned counsel submitted that as soon as the inspecting officers made the appellant aware of such a possibility the appellant immediately contacted Champak & Co. who told the appellant that they were acting on their behalf only (as an end-client). The appellant had no reason to doubt their words and found no reason on their own to assume there may be some wrong. The size of volume traded of such entities or the fact of their being members of the Madras Stock Exchange (MSE)could not in any manner lead to the conclusion that such entities were trading on their own account, but for their clients. It was common for members of other Stock Exchanges to act on their own account in significant volumes for jobbing, arbitrage, investment and trading. There was no way to ensure that clients transact with the appellants only for themselves and not for any other persons. So the appellant was dealing with M/s. Champak & Co. as a client without any doubts or suspicion that he may be acting as a sub-broker particularly when the appellant originally registered as a client, confirming with them that the account was being opened for the firm’s own transactions only. In any case, the appellant took immediate action and terminated the account of Champak & Co. by letter dated 29th April, 2000. Regarding the account of S. Anand, the other client who has been mentioned in the Chairman’s order, the client had informed the appellant in their “Know their client form” about their DP ID No. IAS/10168976 to which demat account only all the shares purchased by the client have been transferred to. Transfer of the shares purchased by them has not been done to any other demat account. In both these accounts, the appellant had trusted the words of the clients that they were acting only as end-clients and did not have any suspicion on its own to doubt them. The appellant pleaded that they have not dealt knowingly or intentionally with unregistered sub-brokers. As soon as their suspicions were alerted by the inspecting officers that the clients may be dealing as an unregistered sub-broker, the clients account was terminated and no more transactions were done with them. Regarding other irregularities like time stamping of orders not done, delay in issue of contract notes, duplicate contract notes not bearing clients’ acknowledgement, the stamp duty not fixed as per requirement, the learned counsel for the appellant submitted that they have taken action as per the requirement. In some cases it has not been practical in online environment. Regarding deficit of stamp duty, the learned counsel submitted that stamps of required value as per the Tamil Nadu State Act had been affixed on a separate seat to avoid defacing the contract making it unreadable. It is not correct to say that the contracts were not properly stamped by looking at just 35 out of 350 contract issued for one day. With regard to non-segregation of client account and own fund the appellant vehemently denied the charge. It was submitted by them that in some cases a client account had been debited wrongly which have been rectified subsequently. In fact they used to keep their own money of significant amount in this account.


7. 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 September 30, 2000 not made


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


8. 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.


a) 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


b) 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


c) 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


d) 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


e) 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


9. The learned counsel Mr. Kumar Desai for respondent argued that the appellant had committed various irregularities as referred in the order of the respondent. It is stated that a broker should maintain a high standard of conduct and maintain the account as per the requirement of various orders issued by the respondent. He denied that only few selected inspections done in the year 2000 were reopened. He also denied that in matters involving similar charges, the respondent has not taken any action. It is further submitted by him that the Chairman of the respondent has been conferred with the discretion to take action against a delinquent intermediate based on the facts and circumstances of each case. Each order passed by the respondent is a self-contained one and speaking order setting out detailed findings and reasons for the action taken/penalty imposed. It cannot be contended that the Chairman is bound to impose the same penalty imposed by him in all similar cases. It is incorrect to state that the charge of dealing with unregistered sub-broker is based on preponderance of evidence or on the basis of surmise, conjuncture or suspicion. There were instances where at the instance of the so called clients, the appellant had transferred the securities to third parties. Such instances should have alerted a prudent broker and put him on guard. Therefore the appellant’s submission that the possibility of sub-broker activity never came to the mind of the management who believed that M/s. Champak & Co. was the firms own account only for its own transactions is not acceptable. M/s. Champak & Co. is not a singular instance. In fact SEBI had received complaints from one of the clients M/s. Money Manager Services, another sub-broker acting through the appellant. The appellants have not satisfactorily explained in their replie

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s to the show cause notice, the observation of the enquiry officer that the bank guarantee commission was debited to the client’s account instead of the general account. It is a fact that the bank guarantee commission was debited by the HDFC Bank. 10. We have perused all the facts and documents submitted for the purpose. We have also perused a few orders of warning passed by the respondent as mentioned earlier, which has not been disputed by the respondent. The respondent was of the view that it cannot be contended that the Chairman is bound to impose the same penalty imposed by him in all similar cases. 11. After hearing both the parties, we have to decide on three issues namely whether there were irregularities and if there were irregularities, whether they were merely of technical nature or were serious irregularities. Thirdly, what is the nature of penalty to be imposed. As regards the irregularities, it cannot be treated as a very serious irregularity. Moreover, this was done for the first time. It cannot also be said that the nature of punishment should be so harsh that the appellant would have to cease working for a period of four months. The consequences are far reaching not only to the appellant but also to his clients and the employees. 12. Taking into account more or less similar cases, where SEBI rightly issued a warning rather than close the business, we feel it appropriate to modify the penalty from four months to a warning to the appellant. In that view of the matter the impugned order is modified accordingly. No order as to costs.
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