Securities Appellate Tribunal
Atul Kanodia And Co. vs Securities And Exchange Board Of India on 11 May, 2005
Equivalent citations: [2005]61SCL189(SAT)
JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. Appeal is taken up with consent of parties.
2. The appellant is a sub-broker registered with SEBI and affiliated to UPSE Securities Ltd. and is a member of the Stock Exchange, Mumbai. An enquiry was conducted by a chartered accountant on behalf of SEBI into the accounts of the appellant for the financial year 2000-2001 to 2002-2003. The report of the chartered accountant observed the following defects in the working of the appellant.
1. Failed to maintain books of account
2. Failed to appoint compliance officer
3. Delayed payment of monies/deliveries of securities to clients
4. Failed to maintain client database
5. Failed to issue confirmation memos in the form and manner prescribed
6. Failed to maintain proper segregation of client funds and own funds
7. Associated with other business
8. Not adhered to the unique client code
9. Failed to comply with directions issued by the Board
10. Not exercised due skill, care and diligence
3. On the basis of the report of the chartered accountant an enquiry was commenced under the provisions of SEBI (Procedure for Holding Enquiry and imposing Penalty by Adjudicating officer) Rules, 1995. The adjudicating officer ultimately confined his finding to three defects which are extracted from the impugned order and reads as follows:
"1. Failed to maintain books of account Inspection Report - The Member did not produce Margin Register, Order Book and Dak Register Reply of M/s. Atul Kanodia:- We maintained the Margin Register. With regard to Order book they replied "As per practice in the Stock market, orders are generally received over telephone and the same is punched simultaneously on the Trading terminal and executed transactions are reflected on Confirmation Memos and delivered to the clients. Order records are maintained on the Computer Terminal and is accessible to the Stock Exchange and sub-broker, sample copy of record of Order Book in hard copy is annexed herewith (Annexure-B). Hence you will appreciate there is no violation of any Regulation on our part."
With regard to Dak Register they replied "Since all statutory requirements have been timely submitted before the appropriate authority and there is no compliant on account of non submission by any authority, charge of non maintenance of Dak Register is baseless. Hence you will appreciate that there is no violation of any Regulation on our part.:
Non-maintenance of Order Book and Dak Register is violation of Section 15A(c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the "Act") read with Regulation 26 (iii) of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the "Regulations")
2. Confirmation notes Inspection Report - the confirmation report, issued by the sub-broker were not having pre-printed serial No. , order placement time/time stamping.
Reply of M/s. Atul Kanodia: - Maintenance of confirmation notes is mandatory for a broker, not for a sub-broker the said is not applicable to us. Non-maintenance of confirmation notes in the form and manner prescribed is violation of Section 15F(a) and 15HB of the Act read with Regulation 26(v), 26(xv) and 26(xvi) of the Regulations:
3. Unique Client Code Inspection Report - Unique client codes have not been recorded Reply M/s. Atul Kanodia - No specific observation had been made by the Inspecting Authority Non-maintenance of unique client codes is violation of Section 15HB of the Act read with Regulation 26(xv) and 26(xvi) of the Regulations."
4. Ultimately the adjudicating officer imposed a penalty of Rs. 40,000 which is under challenge before us.
5. Mr. Merchant, the learned counsel for the appellant in his elaborate arguments submitted on the three charges as follows.
6. As far as maintenance of books of accounts is concerned, it was submitted that the finding that the appellant was in violation of 15AC read with Regulation 26(2) of the 1992 Regulation, it was submitted that although Section 15AC was on the statute book during the inspection period, Regulation 26(3) was not in existence on 30.9.02 i.e. at the end of the inspection period. It was submitted that the Regulation was introduced on 20.11.03 and the cause of action ended on 30.9.02.
7. It was also submitted that there is no definition of dak register and therefore question of levelling a charge of dak register does not arise. With respect to charge No. 2 regarding confirmation notice, it was submitted that Section 15FA refers to contract notes whereas charge refers to confirmation notice. It was further submitted that 15HB was introduced on 29.10.2002 after the alleged occurrence and therefore no reliance can be placed on 15HB.
8. With regard to charge No. 3, i.e. Unique Client Code it was again suggested that 15HB was enacted on 29.10.02 and therefore is not retrospective.
9. At first blush, the submissions of the learned counsel appears to be attractive. But on a careful reading of the 1992 Regulation would indicate that no distinction can be made between a broker and a sub-broker. Regulation 15 is the relevant Regulation which deals with obligation of the sub-broker which reads as follows:
"15(1) The sub-broker shall -
(a) pay the fees as specified in Schedule III;
(b) abide by the code of conduct specified in Schedule II;
(c) enter into agreement with the stock-broker for specifying the scope of his authority and responsibilities;
(d) comply with the rules, regulations and bye-laws of the stock exchanges;
(e) not be affiliated to more than one stock broker of one stock exchange. (2) The sub-broker shall keep and maintain the books and documents specified in Regulation 17 except for the books and documents referred to in clauses (h), (i), (j), (l) and (m) of sub-regulation (1) of Regulation 17.
10. Regulation 16 clearly stipulates that what applies to brokers will apply to sub-brokers with regard to chapter 4, 5 and 6. A harmonious reading of the 15 and 16 of the 1992 Regulation would clearly indicate that the respondent has every power to deal with the sub-brokers on par with brokers. After all a sub-broker is an entity in the securities market and hyper technical arguments that a sub-broker is immune from action unlike a broker cannot be accepted by the Tribunal.
11. A broker and sub-broker have an important role to play in the securities market and it is the duty and indeed obligation of SEBI to make sure that he maintains proper books during inspection without standing on the hyper-technicality of a distinction between a broker and sub-broker.
12. However, it would not be out of place to maintain that in similar circumstances with respect to inspection brokers have been dealt with leniently in order to enable them to rehabilitate themselves.
13. In appeal 95/03 in Chona Financial Services, 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.
1. M/s. Bakliwala Investment Irregularities i. Provision for Tax for the interim period from April 1 to September 30, 2000 not made ii. Confirmations have not been obtained from Banks, Creditors and debtors by the broker. iii. Broker had not time stamped the order slip/records iv. Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control. v. Contract notes not issued within the specified time.
vi. Consolidated stamp duty not paid.
vii. Client Registration forms were not completed viii. Order book was not maintained.
ix. Delay in payment of funds x. Delay in delivery of securities xi. One client account being adjusted against another client without any authorization xii. Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained. xiii. Compliant register not maintained.
xiv. Client account were used for other purposes xv. Margin money not collected xvi. In 10 cases, deals were done outside the NEAT System Order
1. Irregularities are basically technical lapses and do not deserve a substantive punishment.
2. Minor Penalty - Warning
1. M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities i. Failure to obtain client registration forms and agreement ii. Failed to maintain separate client account.
Order Warning
1. M/s. Bama Securities Irregularities i. Contract notes were missing ii. Acknowledgement from the clients not obtained iii. Not maintaining client registration forms Order Warning 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.
1. 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
1. 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
1. 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
1. 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
1. 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
14. Reference was also made by Mr. Merchant, the learned counsel for the appellant on the judgment of Cabot International Capital Corporation 2004 (51) SCL 307 holding that no penalty should be imposed if action of the appellant is neither wilful nor wanton.
15. While it is possible to hold that the ruling in Cabot International may apply to the facts of this case, we feel it more appropriate to deal with the appellant by imposing a lenient penalty, considering the fact that some of the violations have been admitted by the appellant.
16. Taking the precedents cited above, it would be appropriate to take a lenient view of the matter and reduce the penalty from Rs. 40,000/- to 10,000/-. I accordingly affirm the impugned order, hold that there have been some technical violations which were addressed to by SEBI and SEBI was justified in holding that the appellant was in violation of the 1992 Regulation. However, following the earlier precedents, I reduce the penalty to Rs. 10,000 in the facts and circumstances of this case.
17. The appeal is disposed of accordingly. No order as to costs.