INDIRA SECURITIES ORDER - Securities and Exchange Board of ... · inter alia observed in its...
Transcript of INDIRA SECURITIES ORDER - Securities and Exchange Board of ... · inter alia observed in its...
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BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AK/AO- 171/2013]
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UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ
WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES
BY ADJUDICATING OFFICER) RULES, 1995
In respect of
Indira Securities Pvt. Ltd.
(PAN: AABCI2772F)
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FACTS OF THE CASE
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted
an inspection of books of accounts and other records of Indira Securities Pvt. Ltd.
(hereinafter referred to as ‘the Noticee' / 'Indira Securities') on March 18, 2013 to
examine whether the Noticee has complied with the provisions of SEBI circular
dated December 03, 2009 with respect to the running account settlement
mechanism.
2. During the inspection, on random sample checking of the books of accounts,
documents and records of the Noticee, the following irregularities/deficiencies were
inter alia observed in its functioning as a stock broker:
a. That the Noticee had not complied with the requirement of running account
settlement at all before January 2013;
b. That as on the date of inspection, Noticee had not started settlement of
running account for all clients, even subsequent to January 2013.
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Therefore, it was alleged that by the above acts, the Noticee had repeatedly violated
the provisions of SEBI Circular no. MIRSD/SE/Cir/19/2009 dated December 03, 2009.
3. It was, however, observed that the Noticee vide its earlier letter dated August 17,
2012 and email dated August 11, 2012 had submitted as follows:
a. That they had implemented the provisions regarding running account settlement
of its clients with effect from July 01, 2010;
b. That the Authorizations regarding running account settlement were taken from
the clients;
c. That statements sent to clients also explain the retention of funds/securities
regarding settlements;
d. That payment for funds/ securities is done within the prescribed time and
settlement of funds on monthly/ quarterly basis.
4. It was further observed that when details regarding settlement on the running
account were sought, the broker vide its email dated September 21, 2012 submitted
that they were not settling the running accounts of their clients on quarterly basis.
This was, thus, found to be in clear contradiction to their letter dated August 17,
2012 and email dated August 11, 2012. In view of this repeated wrong submission of
facts to SEBI, it was also alleged that the Noticee has violated Clause C (6) of the
code of conduct specified under Schedule II read with Regulation 7 of the SEBI (Stock
Brokers & Sub brokers) Regulations, 1992.
5. Further it was alleged that, by the above repeated act, the Noticee failed to adhere
to the prescribed code of conduct in respect of high standard of integrity,
promptitude, fairness, due skill, care and diligent, and did not abide by the SEBI Act,
1992 and rules and regulations made thereunder, in term of Regulation 7 read with
clauses A (1), (2) and (5) of code of conduct for stock brokers specified under
Schedule II of SEBI (Stock Brokers & sub Brokers) Regulation, 1992. The alleged
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violations by the Noticee, if established, make it liable for penalty under sections
15A and 15HB of the SEBI Act, 1992.
APPOINTMENT OF ADJUDICATION OFFICER
6. I was appointed as Adjudicating Officer vide order dated August 13, 2013 under
Section 15 I of the SEBI Act, 1992 read with rule 3 of the SEBI (Procedure for Holding
Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter
referred to as ‘Rules’) to inquire into and adjudge under Sections 15A and 15HB of
the SEBI Act, 1992.
SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING
7. Show Cause Notice dated November 28, 2013 (hereinafter referred to as ‘SCN’) was
issued to the Noticee under rule 4 of the Rules read with Sub-section (2) of Section
15I of SEBI Act to show cause as to why an inquiry should not be held and penalty be
not imposed under sections 15A and 15HB of the SEBI Act for the alleged violation
specified in the said SCN.
8. The Noticee vide letter dated December 10, 2013 submitted its reply to the SCN
stating inter-alia the following:
a. That they had explained their position clearly vide their letter dated July 30, 2013,
which need to be taken into consideration;
b. That the Noticee tried its level best to make quarterly settlements; still the
requirements of the SEBI Circular were not achieved;
c. That the communication dated August 11, 2012 and August 17, 2012 sent by the
Noticee to SEBI was an error and a mistake on their part and that the Noticee
had no intention of mislead the regulatory authorities at any point of time. The
Noticee has requested that it be pardoned for such mistake on their part which
was unintentional;
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d. That the Noticee had over 10,000 active clients who virtually traded on a daily
basis and since generally the clients tend to take a position beyond their
permissible limit, it created a situation not acceptable to the risk management
system, thus, resulting in debit balance in the clients account on a daily basis.
When the Noticee tried to settle the running accounts on a quarterly basis, it had
no choice, but, to consider such accounts as settled as there was a net debit
balance on the respective date at the end of the quarter;
e. That the ageing analysis taken for arriving at quarterly settlement is not the
correct basis and that the same may not be considered, as it may not show the
correct picture of quarterly settlement;
f. That an analysis of credit balances over all 7 quarters is being submitted which
reveal that number of accounts having credit balances over Rs. 10,000 are less
than 1,000 and the number of clients having credit balances over Rs. 25,000 are
less than 500 in number, hence, ageing analysis may not be considered as a base.
It was further submitted that credit balances may be appearing in many
accounts, but, the corresponding debit balance may be in the relative’s account,
hence, effectively the number of clients having credit balances on continuous
basis will be insignificant in number.
9. In accordance with the principle of natural justice and in order to provide a fair
chance to the Noticee to put forth its case, an opportunity of personal hearing
before me was accorded on December 23, 2013 and the Noticee was duly intimated
for the same vide hearing notice dated December 16, 2013.
10. Mr. Rajiv Desai, Chartered Accountant (CA), Mr. Vishwanath Shinde, Mr. Sanjay
Patangia and Mr. Virendra Tapdiya, the Authorized Representatives (AR) of the
Noticee appeared before the undersigned on December 23, 2013 and reiterated the
submission made in the reply dated December 12, 2013. It was represented that the
Noticee had no intention of submitting incorrect information to the regulator.
Further, it was submitted that this situation had taken place due to the mistake of
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the dealing officer in statement made in the letters dated August 11, 2012 and
August 17, 2012. The AR was also requested to submit the letter dated July 30, 2013
and analysis of credit balances over 7 quarters referred to in its reply dated
December 12, 2013, since these attachments were not submitted along with the
reply. The letter dated July 30, 2013 along with the analysis of credit balances over 7
quarters referred to in the reply dated December 12, 2013 were submitted by the
AR during the course of the hearing.
11. The submissions inter alia made in the letter dated July 30, 2013, which the Noticee
has requested be taken as part of the submissions herein, are as follows:
a. That the Noticee found it difficult to implement quarterly settlement in the
manner in which it was specified in the circular as it was not clear, since the
circular did not specify the details of how to work out future margin. It was
subsequently during inspections i.e. almost after one year, National Stock
Exchange of India Ltd. (herein after referred to as NSE) guided them on how to
work out the requirement of future margin and the turnover of the client on the
settlement date;
b. That at this point of time, four quarters had lapsed and they were unable to carry
out quarterly settlement as specified in the aforesaid circular. However, at this
juncture, they were fully convinced that quarterly settlement is do-able and they
need to do it in their own interest. That thereafter, Noticee started putting in
their efforts to achieve the quarterly settlement of each and every client in each
quarter.
c. That, however, the Noticee found it difficult to address this issue manually as
they had more than 10,000 active clients virtually trading on a daily basis and
took up with their back office vendor to provide them the facility to carry out
quarterly settlements automatically. The back office vendor demanded an
unreasonably high price, which the Noticee took up strongly and resolved the
matter;
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d. That from January 2013 quarter, the Noticee made an attempt to follow the SEBI
circular exactly in letter and in spirit, however, in the meanwhile, Exchange
inspections and internal audit were ongoing and it had reported non-compliance
on their part on quarterly settlement;
e. The Noticee had over 10,000 active clients that traded virtually daily and the
clients were in the habit of taking a position beyond their means as a result most
of the clients had a debit balance on a continuous basis;
f. That more than 35 accounts were having debit balances and less than 15 had
credit balances at the end of the quarter, and, in the interest of risk management
it was necessary to retain the credit balances;
g. That the credit balances may be appearing in many accounts wherein the
corresponding debit balance is in the relative's accounts, and hence the number
of clients having credit balance on a continuous basis would be insignificant in
number.
CONSIDERATION OF ISSUES AND FINDINGS
12. I have carefully perused the written and oral submissions of the Noticee, copy of
documents submitted by the Noticee and the other material available on record.
The allegations against the Noticee is that:
a. The Noticee has repeatedly violated/not complied the provisions of SEBI
Circular no. MIRSD/SE/Cir/19/2009 dated December 03, 2009;
b. That further, in view of repeated wrong submission of facts to SEBI, the Noticee
has violated Clause C(6) of the code of conduct specified under Schedule II read
with Regulation 7 of the SEBI (Stock Brokers & Sub brokers) Regulations, 1992.
c. Also, it is further alleged that by the above repeated acts of the Noticee, the
Noticee has failed to adhere the prescribed code of conduct in respect of high
standard of integrity, promptitude, fairness, due skill, care and diligence, and
thereby did not abide by the Act, rules and regulations in term of Regulation 7
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read with clauses A (1), (2) and (5) of code of conduct for stock brokers specified
under Schedule II of SEBI (Stock Brokers & sub Brokers) Regulation, 1992.
13. The issues that arise for consideration in the present case therefore are:
a) Whether the Noticee has repeatedly violated/not complied the provisions of
SEBI Circular no. MIRSD/SE/Cir/19/2009 dated December 03, 2009?
b) Whether the Noticee has repeatedly made wrong submission of facts to SEBI in
violation of Clause C(6) of the code of conduct specified under Schedule II read
with Regulation 7 of the SEBI (Stock Brokers & Sub brokers) Regulations, 1992?
c) In view of the aforesaid, whether the Noticee has failed to adhere the prescribed
code of conduct in respect of high standard of integrity, promptitude, fairness,
due skill, care and diligence, and thereby did not abide by the Act, rules and
regulations in term of Regulation 7 read with clauses A (1), (2) and (5) of code of
conduct for stock brokers specified under Schedule II of SEBI (Stock Brokers &
sub Brokers) Regulation, 1992?
d) Does the violation, if any, on the part of the Noticee attract monetary penalty
under sections 15 A and 15HB of the SEBI Act?
e) If so, what would be the monetary penalty that can be imposed against the
Noticee taking into consideration the factors mentioned in section 15J of the
SEBI Act?
14. Before moving forward, it will be appropriate to refer to the relevant provisions of
SEBI Circular no. MIRSD/SE/Cir/19/2009 dated 03.12.2009 and SEBI (Stock Brokers &
sub Brokers) Regulation, 1992 which reads as under:
Provisions of SEBI Circular no. MIRSD/SE/Cir/19/2009 dated 03.12.2009
Running Account Authorization
12. Unless otherwise specifically agreed to by a Client, the settlement of
funds/securities shall be done within 24 hours of the payout. However, a client
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may specifically authorize the stock broker to maintain a running account
subject to the following conditions:
a. The authorization shall be renewed at least once a year and shall be dated.
b. The authorization shall be signed by the client only and not by any authorised
person on his behalf or any holder of the Power of Attorney.
c. The authorization shall contain a clause that the Client may revoke the
authorization at any time.
d. For the clients having outstanding obligations on the settlement date, the
stock broker may retain the requisite securities/funds towards such
obligations and may also retain the funds expected to be required to meet
margin obligations for next 5 trading days, calculated in the manner
specified by the exchanges.
e. The actual settlement of funds and securities shall be done by the broker, at
least once in a calendar quarter or month, depending on the preference of
the client. While settling the account, the broker shall send to the client a
‘statement of accounts’ containing an extract from the client ledger for
funds and an extract from the register of securities displaying all
receipts/deliveries of funds/securities. The statement shall also explain the
retention of funds/securities and the details of the pledge, if any.
f. The client shall bring any dispute arising from the statement of account or
settlement so made to the notice of the broker preferably within 7 working
days from the date of receipt of funds/securities or statement, as the case
may be.
g. Such periodic settlement of running account may not be necessary:
i. for clients availing margin trading facility as per SEBI circular
ii. for funds received from the clients towards collaterals/margin in the form
of bank guarantee (BG)/Fixed Deposit receipts (FDR).
h. The stock broker shall transfer the funds / securities lying in the credit of the
client within one working day of the request if the same are lying with him
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and within three working days from the request if the same are lying with
the Clearing Member/Clearing Corporation.
i. There shall be no inter-client adjustments for the purpose of settlement of the
‘running account’.
j. These conditions shall not apply to institutional clients settling trades through
custodians. The existing practice may continue for them.
Clause A(1), A(2), A(5) and C(6) of the Code of Conduct specified under Schedule
II read with Regulation 7 of the SEBI (Stock Brokers & Sub brokers) Regulations,
1992, read as under:
Stock brokers to abide by Code of Conduct.
7. The stock broker holding a certificate shall at all times abide by the Code of
Conduct as specified in Schedule II.
SCHEDULE II
CODE OF CONDUCT FOR STOCK BROKERS
[Regulation 7]
A. General.
(1) Integrity: A stock-broker, shall maintain high standards of integrity,
promptitude and fairness in the conduct of all his business.
(2) Exercise of due skill and care : A stock-broker shall act with due skill, care
and diligence in the conduct of all his business.
(3)….
(4)….
(5) Compliance with statutory requirements: A stock-broker shall abide by all
the provisions of the Act and the rules, regulations issued by the Government,
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the Board and the Stock Exchange from time to time as may be applicable to
him.
…
C. Stock-Brokers vis-a-vis Other Stock-Brokers.
…
(6) False or Misleading Returns: A stock-broker shall not neglect or fail or refuse
to submit the required returns and not make any false or misleading statement
on any returns required to be submitted to the Board and the stock exchange.
15. I note from the sequence of events that in view of the impending inspection of the
Noticee by SEBI, evidenced in the documents forming Annexure 3 to the SCN, an
email dated September 05, 2013 was sent by SEBI to the Noticee advising to submit
the information for 100 clients by September 07, 2013. This was in furtherance to
the Noticee’s earlier submissions vide letter dated August 17, 2012 and email dated
August 11, 2012 to the effect that they had implemented the provisions regarding
running account settlement of its clients with effect from July 01, 2010. I find that
the Noticee, even at this stage, did not immediately admit that they were not
settling the running accounts of their clients on quarterly basis. On the contrary, I
note that the Noticee vide its email dated September 07, 2012, in response to SEBI’s
email dated September 05, 2013 advising to submit the information for 100 clients
by September 07, 2013, had sought extension of time by one week to augment the
details. It was only after repeated reminder from SEBI regarding non-furnishing of
information that the Noticee vide its email dated September 21, 2013 finally
admitted that they were not settling client accounts on quarterly basis, and, hence
were not in a position to submit the data as required by SEBI. I find that the earlier
letter/ email to the effect that they had implemented the provisions regarding
running account settlement of its clients with effect from July 01, 2010 has been
sent by the Compliance Officer appointed by the Noticee. The Noticee vide its
aforesaid reply has now submitted that the statement was a mistake on its part and
that it did not mean to mislead SEBI. The error has been stated by the Noticee to be
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inadvertent. It is difficult to believe that anybody can commit an inadvertent mistake
repeatedly, not once, not twice, but, three times in a row. In the instant case, I find
that it is not just anybody, but, a compliance officer appointed by the Noticee, who
intimated SEBI contrary to the factual position on two immediate occasions and
subsequently sought time to augment the information sought by SEBI on the third
occasion. A compliance officer is responsible for monitoring the compliance of the
Act, rules and regulations, notifications, guidelines, instructions, etc. issued by the
SEBI and is required to immediately and independently report to SEBI any non-
compliance observed by him. In view of all of the above, I conclude that the Noticee
intentionally submitted false information to SEBI to mislead SEBI into believing that
the Noticee had complied with the circular dated December 03, 2009 regarding
running account settlement mechanism, to prevent the non-compliance of the
Noticee from getting detected, to avoid consequent regulatory enforcement action
and subsequent reputational damage. Thus, I note that there was an incentive for
the Noticee to provide false and misleading information to SEBI and the same has to
be viewed seriously.
16. I also note that making false or misleading statement is in violation of Clause C6 of
Code of conduct for stock brokers specified in Schedule II read with Regulation 7
SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992, which inter alia requires that
a stock broker shall not make any false or misleading statement on any returns
required to be submitted to SEBI.
17. Further, on March 18, 2013 during the course of inspection, the Noticee, through its
letter submitted that they have not started quarterly/monthly settlement of funds
and securities till January 2013. The reason for non-settlement of running accounts,
as stated by the Noticee is given below:
“We have several retail clients who have offered us huge collaterals/funds. In the
previous year, we were not having the automated back office software for quarterly
settlement, hence, it was difficult for us to carry out the quarterly settlement for
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each and every client, who in fact, had already offered us collaterals, and, we were
not running the risk on risk management system. Now we have installed automated
back office software for this. Therefore we have no difficulty now in carrying out
quarterly settlement every quarter and we shall be executing the quarterly
settlement exactly as per SEBI and exchanges circulars.”
18. In view of all of the above, I note that the Noticee has thereby admitted that they
had not started quarterly/monthly settlement of funds and securities till January
2013. I further note that the explanation given by the Noticee vide letter dated July
30, 2013 for not complying with SEBI circular dated December 03, 2009 with respect
to the running account settlement mechanism is that the circular did not specify the
details of how to work out future margin and it was only during inspection by NSE
i.e. almost after one year, that they came to know how to work out the requirement
of future margin and the turnover of the client on the settlement date for starting
settling of the running accounts. Thereafter too, I note that the Noticee has cited
lack of back office software as a reason for the non settlement even upto January
2013 i.e. nearly two and half years after the Circular came into effect. I am of the
view that even presuming that the operational and administrative difficulties
brought out by the Noticee were to be true, then too, I do not see any reason why it
should have been impracticable for the Noticee to start with settling out at least the
accounts lying dormant for more than 6 months with credit balances. From the
same, I find that there has been a general lackadaisical attitude on the part of the
Noticee in complying with the aforesaid circular for putting in place a running
account settlement mechanism.
19. Since the Noticee had not settled the running accounts of clients prior to January
2013, the Noticee could not provide any data/ information regarding settlement of
running accounts. Hence, ageing analysis was carried out for credit balance of the
clients who opted for running account settlement. The ageing analysis details given
below also indicate that no settlement has been done by the Noticee:
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As on
Quarter
ended
No. of
credit
balance
client
Total
credit
balance
(in Rs.
crore)
Credit
balance
outstanding
for less than
90 days
(in Rs. crore)
Credit
balance
outstanding
for more than
90 days but
less than 180
days
(in Rs. crore)
Credit
balance
outstanding
for more than
181 days
(in Rs. crore)
Jun-11 5,628 12.85 10.83 2.02 0.00
Sep-11 6,104 11.26 9.20 0.64 1.42
Dec-11 5,591 8.81 6.26 1.05 1.50
Mar-12 4,788 8.13 7.36 0.37 0.40
Jun-12 4,390 8.15 1.70 6.00 0.46
Sep-12 5,874 13.26 11.18 0.34 1.74
Dec-12 5,076 14.33 12.25 0.76 1.32
20. The Noticee also submitted their analysis of the credit balances for seven quarters,
which is reproduced below:
Amt in Rs. Amt in Rs. Crore
Jun 11 Sept 11 Dec. 11 March 12 June 12 Sept 12 Dec. 12
Amount
Range
No . of
client
Amt. No. of
client
Amt No. of
client
Amt No. of
Client
Amt No. of
client
Amt No. of
client
Amt No. of
client
Amt.
Upto
10,000
4297 0.82 4818 0.83 4507 0.8 3698 0.82 3435 0.7 4424 0.82 3725 0.78
10,001 to
25,000
563 0.91 555 0.91 483 0.77 486 0.8 427 0.68 569 0.93 542 0.88
25,001 to
50,000
325 1.18 299 1.06 271 0.99 267 0.94 232 0.81 337 1.21 341 1.2
50,001 to
1,00,000
210 1.43 213 1.5 147 1.03 185 1.28 136 0.97 278 1.95 224 1.59
Above
1,00,000
233 8.51 218 6.96 183 5.22 151 5.13 160 5.26 266 8.35 244 9.88
Total 5628 12.85 6103 11.26 5591 8.81 4787 8.97 4390 8.42 5874 13.26 5076 14.33
21. The Noticee has stated, on the basis of the above analysis, that most of the client
accounts had a credit balance of less than Rs.10,000. The accounts having a credit
balance of Rs. 10,001- 25,000 were less than 1000 in number, and for accounts
having a credit balance of Rs. 25,001 to 50,000, Rs. 25,001 to 50,000 and above
1,00,000, was less than 500 for each range, across the seven quarters. However, this
re-grouping of credit balances to reflect that clients having credit balances of less
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than or equal to Rs. 10,000 were more in number than in the higher balance
categories, does not in any way undermine the basic fact that no settlement has
been done by the Noticee. Also, SEBI Circular dated December 03, 2009 does not
grant any exemption from settlement of accounts having small credit balances, on
the contrary obligates brokers to settle all running accounts, regardless of the
balances lying therein. Moreover, as noted earlier, the Noticee did not even settle
the credit balance running accounts that were lying dormant for more than 6
months. In such a scenario, this explanation seems to be nothing more than an
afterthought. Furthermore, the Noticee has stated in its reply dated December 10,
2013 that the ageing analysis that forms part of the SCN is not correct. I note that
the total amounts outstanding per quarter as per the ageing analysis is identical to
the amounts submitted by the Noticee for all the quarters, other than March 2012
and June 2012, and there too the amounts outstanding as per the details provided
by the Noticee are greater.
22. The Noticee has submitted that credit balances may be appearing in many
accounts, but, the corresponding debit balance may be in the relative’s account,
hence, effectively the number of clients having credit balances on continuous basis
will be insignificant in number, hence, the ageing analysis taken for arriving at
quarterly settlement is not the correct basis, and that, the same may not be
considered. I note that SEBI circular dated December 03, 2009 prohibits inter client
adjustments for the purpose of settlement of the 'running account'. In view of the
same, there does not arise any question of inter family settlement of debit balance
of one family member with the credit balance of another family member as argued
by the Noticee. Hence, I do not see any merit in this argument either. Besides, the
argument put forth by the Noticee vide its letter dated July 30, 2013 that when more
than 35 accounts were having debit balance and less than 15 accounts had credit
balance at the end of the quarter, hence, in the interest of risk management it was
necessary to retain the credit balance, again does not hold good for the same reason
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that circular dated December 09, 2013 prohibits inter client adjustments for the
purpose of settlement of the 'running account'.
23. I find from the Inspection Report and Annexure 8 to the SCN that as on quarter
ended December 31, 2012, there were 5,076 credit balance clients, out of which for
2,253 clients the credit balance did not change for nine months. I am of the view
that at least these could have been settled. The aforesaid amounts lying with the
Noticee on account of non-settlement of running account indicate the gravity of
non-settlement of client funds. From the same, it is observed that the Noticee has
not even made an attempt to comply with SEBI circular dated December 03, 2009
with respect to running account settlement before January 2013.
24. I find that SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009 inter
alia stipulates that where a client specifically authorizes the stock broker to maintain
a running account, the actual settlement of funds and securities shall be done by the
broker, at least once in a calendar quarter or month, depending on the preference
of the client. Further, as per the aforesaid circular, stock brokers were required to
ensure its full compliance in respect of all clients (existing as well as new), latest by
31st
March 2010 (later extended to June 30, 2010). Hence, I conclude that the
Noticee has admittedly violated SEBI Circular dated December 03, 2009 prior to
January 2013. In fact, I find that the Noticee has not made even the preliminary
basic efforts in that direction.
25. Besides, I find that NSE had clarified as early as February 3, 2010, that for
calculation of “funds expected to be required to meet margin obligation for next 5
trading days” in respect of derivative market transactions, apart from margin liability
as on the date of settlement, trading member may retain additional margins
(maximum up-to 75% of margin requirement on the day of settlement) to take care
of any margin obligation arising in next 5 days, and in respect of cash market
transactions, trading member may retain entire pay-in obligation of funds &
securities due from clients as on date of settlement. Hence, I find, the claim made by
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the Noticee that it was only during inspection i.e. almost after one year, that NSE
guided them on how to work out the requirement of future margin and the turnover
of the client on the settlement date, is also an incorrect presentation of facts.
Further, I am of the view that the Noticee, being a stock broker registered with SEBI,
should have operational capabilities and systems in place that are reasonably
designed to achieve compliance by modifying policies and procedures as regulatory
changes dictate. By pleading non-competence and misleading the regulator, I find
that the Noticee has consequently failed to adhere to the prescribed code of
conduct in respect of high standard of integrity, promptitude, fairness, due skill,
care and diligence as well.
26. Further, it was observed that the Noticee had submitted that they had started
settlement of running accounts of their clients from January 2013. However,
contrary to the same, an analysis of accounts from January 2013 revealed that the
running account settlement of the clients on quarterly basis had been started for the
dormant accounts only and where the credit balance was lying continuously for
more than 180 days. Some of the dormant accounts were verified and it was
observed that the Noticee had remitted funds to the clients account on March 15,
2013 for settlement i.e. just a couple of days prior to the date of inspection.
However, as on the date of inspection, the Noticee had not started settlement of
running account for all clients.
27. Since, it has been observed during inspection that as on the date of inspection, the
Noticee had not started the settlement of running account for all clients, hence, it
has come to notice that the Noticee has not complied with SEBI Circular dated
December 03, 2009 even subsequent to January 2013, that is, even after two and a
half years from the date when the provisions regarding the settlement of running
accounts came into effect. Thus, I find that the submission made by the Noticee to
the inspection team that they had started settlement of running accounts of their
clients for the period subsequent to January 2013 was again found to be false and
misleading.
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28. The Inspection report of NSE for the period December 01, 2011 to October 31, 2012
had also pointed out that the Noticee had not done actual settlement of funds &
securities as consented by the client (monthly/quarterly). I find that though the
Noticee had assured NSE that they would ensure compliance with the circular in
future, the Noticee had not taken corrective steps with regard to the inspection
findings of NSE, even as on the date of SEBI inspection i.e. March 18, 2013.
29. In light of the above, following allegations of the violations stands established:
a. By failing to settle the running accounts of its clients even as on March 18, 2013,
i.e. the date of the inspection, the Noticee has violated the provisions of SEBI
Circular no. MIRSD/SE/Cir/19/2009 dated December 03, 2009, even after two
and a half years from the date when the provisions regarding the settlement of
running accounts came into effect.
b. In view of the repeated false and misleading submission of facts before SEBI, the
Noticee has violated Clause C(6) of the code of conduct specified under Schedule
II read with Regulation 7 of the SEBI (Stock Brokers & Sub brokers) Regulations,
1992.
c. Further, by not complying with SEBI’s circular dated December 03, 2009 and
instead pleading non-competence and making repetitive false and misleading
submissions, the Noticee has failed to adhere to the prescribed code of conduct
in respect of high standard of integrity, promptitude, fairness, due skill, care and
diligence, and did not abide by the SEBI Act, 1992 and rules and regulations
made thereunder, in term of Regulation 7 read with clauses A (1), (2) and (5) of
code of conduct for stock brokers specified under Schedule II of SEBI (Stock
Brokers & sub Brokers) Regulation, 1992.
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30. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund
[2006] 68 SCL 216(SC) held that “In our considered opinion, penalty is attracted as
soon as the contravention of the statutory obligation as contemplated by the Act and
the Regulations is established and hence the intention of the parties committing such
violation becomes wholly irrelevant.”.
31. In view of the foregoing, I am convinced that it is a fit case to impose monetary
penalty under section 15A and 15HB of the SEBI Act, 1992 of the SEBI Act, which
reads as under :
Penalty for failure to furnish information, return, etc.
15A. If any person, who is required under this Act or any rules or regulations
made thereunder,—
(a) to furnish any document, return or report to the Board, fails to furnish the
same, he shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less;
(b) to file any return or furnish any information, books or other documents within
the time specified therefor in the regulations, fails to file return or furnish the same
within the time specified therefor in the regulations, he shall be liable to a penalty
of one lakh rupees for each day during which such failure continues or one crore
rupees, whichever is less;
(c) to maintain books of account or records, fails to maintain the same, he shall be
liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less.
15HB:- Penalty for contravention where no separate penalty has been provided.
Whoever fails to comply with any provision of this Act, the rules or the
regulations made or directions issued by the Board there under for which no
separate penalty has been provided, shall be liable to a penalty which may extend to
one crore rupees.
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32. While determining the quantum of monetary penalty under section 15HB, I have
considered the factors stipulated in section 15J of SEBI Act, which reads as under:-
“15J - Factors to be taken into account by the adjudicating officer
While adjudging quantum of penalty under section 15-I, the adjudicating
officer shall have due regard to the following factors, namely:-
(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;
(c) The repetitive nature of the default.”
33. In the instant case, it is noted that no quantifiable figures are available to assess the
disproportionate gain or unfair advantage made as a result of such default by the
Noticee. Further from the material available on record, it may not be possible to
ascertain the exact monetary loss to the investors on account of default by the
Noticee.
34. However, I find that the Noticee by not settling the credit balances lying in the
clients account as per the SEBI directive dated December 03, 2009, has caused loss
to the concerned investors, vis-à-vis the other investors whose accounts were
settled by their respective stock brokers in compliance with the SEBI directive. I find
that as on the quarter ended December 2012, i.e. the quarter just prior to the SEBI
inspection dated March 18, 2013, there was credit balance outstanding in the
accounts of 5,076 clients for more than 6 months and the total outstanding credit
balances were to the extent of Rs. 1.32 crore. Out of these, accounts for 2,253
clients with a total balance of Rs. 1.05 crore were dormant for more than 9 months,
when in fact they should have been settled at the end of the quarter (3 months).
Hence, at the minimum, if interest at the rate of 10% p.a. on Rs. 1.05 crore for 6
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Page 20 of 21
months; and on Rs.27 lacs (Rs. 1.32 crore - Rs.1.05 crore) for 3 months is considered,
the said interest amount lost by the concerned investors whose credit balances were
not settled due to the Noticee not adhering to the directive of the regulator works
out to approx. Rs. 5,92,500/-.
35. I also find that by making false submissions to SEBI, the Noticee was deliberately
trying to mislead SEBI into believing that the Noticee had complied with the circular
dated December 03, 2009 regarding running account settlement mechanism, to
prevent the non-compliance of the Noticee from getting detected, to avoid
consequent regulatory enforcement action and subsequent reputational damage.
This is tantamount to non-submission of information resulting in violation of section
15A (a) of the SEBI Act for which monetary penalty can be imposed. This has been
recognised by the Hon'ble Securities Appellate Tribunal in various cases, including
that of Kemefs Specialities Pvt. Ltd. v. SEBI (Appeal No. 54/2011) wherein the
Hon’ble SAT has held if the information furnished is incorrect or misleading, the
aforesaid provisions would come into play and it could be said that the delinquent
had failed to furnish the required information.
36. Further, taking into consideration the degree of non-compliance, that not even an
attempt was made to explore the feasibility of compliance to circular dated
December 03, 2009 with respect to running account settlement as late as January
2013, the falsity of the submissions made by the Noticee before SEBI from time to
time and the tendency of the Noticee’s conduct to mislead and their objective in
making such misleading representations as brought out in the preceding paras, I am
of the opinion that the matter needs to be viewed seriously.
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Page 21 of 21
ORDER
37. After taking into consideration all the facts and circumstances of the case, I impose a
penalty of Rs. 6,00,000 (Rupees Six lacs only) under section 15A and Rs.10,00,000
(Rupees Ten lacs only) 15HB of the SEBI Act on the Noticee which will be
commensurate with the violations committed by it.
38. The Noticee shall pay the said amount of penalty 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 Shri
Krishnanand R., General Manager, MIRSD, SEBI Bhavan, Plot No. C – 4 A, “G” Block,
Bandra Kurla Complex, Bandra (E), Mumbai – 400 051
39. In terms of rule 6 of the Rules, copies of this order are sent to the Noticee and also
to the Securities and Exchange Board of India.
Date: December 31, 2013 Anita Kenkare
Place: Mumbai Adjudicating Officer