Per: Justice Kumar Rajaratnam, Presiding Officer
1. Appeal is taken up with consent of parties. The appellant is a stock broker registered under Securities & Exchange Board of India. The appellant in this appeal challenges the impugned order passed against the appellants which reads as follows:
“I find that the said broker has committed several violations as observed above and has not taken due care and diligence in observance and compliance of the statutory requirements in conduct of its business as a stock broker. I find that the said broker has violated the condition of registration specified in rule 4(b) of SEBI (Stock Brokers and Sub-brokers) Rules, 1992. I find that the penalty as recommended by the enquiry officer may be reasonable in terms of Regulation 13(1)(b)(ii) read with Regulation 13(6)(b) of the Enquiry proceedings Regulations. Looking into the violations committed by the said broker, I am satisfied that to secure the proper management of the stock broker and also in the interest of the securities market a penalty of suspension of certificate of registration for a period of four months be imposed as recommended by the enquiry officer. Therefore, in exercise of the powers conferred upon me by virtue of sub-section (3) of Section 4 of the Securities & Exchange Board of India Act, 1992 read with Regulation 13(4) and 13(6) of SEBI (Procedure for Holding Enquiry by Enquiry officer and Imposing Penalty) Regulations, 2002. I hereby order that the certificate of registration no. INB 231075830 of M/s. Sumedha Fiscal Services Ltd. a member of the National Stock Exchange Ltd., be suspended for a period of four months.”
2. The appellant in this appeal challenges the four months suspension of his Membership in the National Stock Exchange (NSE). The appellant submitted that SEBI conducted an inspection of the books of accounts and records of the appellant between Nov. 7 & 10, 2000. Thereafter the enquiry officer was admittedly appointed about 1 years later vide an order dated 29.4.2002. The enquiry officer issued the first show cause notice over three months thereafter vide a notice dated 17.7.2002 and commenced the enquiry proceedings. Such notice was issued under Regulation 22(2) of the Broker Regulations. The penalty Regulations were notified to take effect on 27.9.2002. The enquiry officer submitted an enquiry report on 25.11.2002, recommending a “major penalty” in terms of Penalty Regulations viz. suspension of registration for a period of four months.
3. A show cause notice dt. 4.12.2002 was issued by the Chairman, SEBI giving the appellant 15 days time to reply in terms of Regulation 13(5) of Penalty Regulations, which was served through NSE, which was received on 13.12.2002 by the appellant. This necessitate the appellant to request for an extension of time to file the reply. A personal hearing before the SEBI Chairman was held o 25.3.2003, during which, a detailed submission was made elaborating on the various written submissions made by the appellant. At the said hearing, a further detailed statement comparing the penalty recommended by the enquiry officer with the penalties imposed by the respondent in various other comparable instances was tabled before the Chairman, SEBI. The said comparison clearly demonstrated that the penalty recommended by the Enquiry officer was out of line with the stand taken by the respondent in various other cases, where similar allegations were involved, and that the imposition of penalty recommended by the Enquiry officer would be discriminatory, arbitrary and contrary to the precedent and the administration of law as laid down by the respondent in the Regulation of the capital market. It was submitted that the impugned order has been passed without even dealing with the submissions made before the Chairman, SEBI and without explaining how the appellant’s case was different from those of the various other intermediaries where similar charges culminated with warnings to the brokers concerned. It is submitted that such discrimination on the part of SEBI and failure to deal with the comparison of penalties set out before the respondent, demonstrates the bias of SEBI in dealing with the appellant’s case. The impugned order, in part, selectively quotes from the submissions made by the appellant and in part, records and misquotes submissions that were never made. The appellant has dealt with each instance thereof in the grounds of appeal.
4. The finding in the impugned order relates to (a) Alleged non-maintenance of an “Order Book”, (b) Alleged non-issuance of Contract Notes to Alok Ketan and Surekha Investments (c) Alleged non-maintenance of Margin Deposit Book (d) Alleged Non-maintenance of distinctive numbers in the Document Register (e) Client Agreement Form allegedly not properly filed (f) Alleged dealings with unregistered broker (g) Alleged non-segregation of clients funds to own funds (h) Alleged non-collection of margins
5. With regard to alleged non-maintenance of order book, it was submitted that maintenance of order book has recently been made optional by NSE. It was further submitted that these orders are promptly executed on the screen based trading system. It is no doubt true that the maintenance of order book has been done away with recently.
6. Regarding non-issuance of contract notes to Alok Ketan & Surekha Investments, it was submitted that this client of the appellant, Alok Ketan had expressly requested the appellant not to issue contract notes in the prescribed form of the stock exchange, but to issue a consolidated report of all the transactions done in the form of a daily report. The said client was a regular trader in the arbitrage business and therefore, had a large volume of transactions and wished to avoid generation of huge volumes of paper. It was only this client who expressly requested the contract notes need not be issued and the daily net report may be issued instead. It was submitted that another client, Surekha Investments was regularly issued contract notes from time to time on the same lines as standard contract notes were always issued to all clients.
7. The appellant has filed an affidavit as follows:-
“I, Mr. Bhawani Shankar Raut, being the Director of Sumedha Fiscal Services Ltd., the appellant above named do hereby solemnly affirm as follows:-
1. I am conversant with the facts and circumstances relating to the captioned proceedings and able to depose in relation to the same.
2. The appellant is a professionally managed Company promoted by professionals with the basic objectives of providing highest quality financial services to clients, in conformity with the highest standard of integrity, honesty and maintaining professional standards. I say that the impugned order casts a severe setback and a blot on the stellar track record of the appellant and would cause the appellant grave harm, besmirching their spotless track record assiduously built up till date.
3. I say that despite the injunction from the Hon’ble Securities Appellate Tribunal, the fact of the impugned order having been passed has led to the appellant suffering in his business, with financial institutions ceasing to deal with the appellant.
4. I say that regardless of interpretational differences with the respondent over certain provisions of SEBI Guidelines, NSE Bye Laws and SEBI Regulations, out of abundant caution, the appellant has now started following the same interpretation that SEBI has set out in the instant proceedings. The appellant also expressed sincere and honest apology for minor and insignificant lapses, such as the technical deficiencies in client registration forms, which have occurred inadvertently, and undertakes solemnly that no such deficiencies shall occur again.
5. I say that the appellant has put in place checks and balances to ensure that even inadvertent technical lapses of this nature do not recur. The appellant have also put in place robust back office system which will withstand the scrutiny of any future inspection or investigation whether by SEBI or by NSE.
Solemnly Affirmed at Mumbai )
Dated this 20 day of September, 2004)
MR. BHAWANI SHANKAR RATHI
(Authorized Representative for the Appellant)
J. Sagar Associates
Advocates for the Appellants”
8. Counsel for the appellant also relied on number of orders passed by SEBI. In the matter of GCM Securities Ltd., SEBI by order dated 17.1.2002 has given only a warning to GCM Securities Ltd. In the Morgan Stanley case which was cited before us, SEBI in its order dated 2.6.2004 in similar circumstances has directed Morgan Stanley to be more diligent regarding their activity in capital market. This Tribunal in Chona Financial Services has extracted a number of instances where in similar circumstances a strict warning was given. Taking into account that there was an interim order and the alleged inspection relates to a period in the year 2000, it would be appropriate to take a lenient view. It cannot be forgotten that the enquiry officer was appointed one and half years later after the inspection of books by an order dated 29.4.2002. Show cause notice was also issued after three months on 17.7.2002 and after the enquiry the respondent imposed a penalty of 4 months. The main contention of the appellant was that he should not be throttled out of business and should be permitted to rehabilitate himself. By suspending the registration for a period of
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4 months would literally bring the business of the appellant to a stand still. Regulation 13 of the SEBI (Procedure for Holding Enquiry) Regulation, 2002 speaks about major penalties and minor penalties. One of the minor penalties as per 13(1)(a)(i) is warning or censure. We feel that as in more or less similar cases, the respondent was issued a strict warning. 9. We have no doubt that the respondent was justified in finding that the appellant was in violation of the SEBI (Stock Brokers & Sub-Brokers) Rules, 1992. However, it would be appropriate to rehabilitate the appellant who is a broker considering the fact that he has put in place robust back office system which will withstand the scrutiny of any future inspection or investigation whether by SEBI or by NSE. 10. In the facts and circumstances of the case, we modify the impugned order and substitute it by imposing a minor penalty under 13(1)(a)(i) and hereby give a strong warning to the appellant. The impugned order is modified accordingly. The appeal is disposed of. No order as to costs.