Securities Appellate Tribunal
Mani And Company vs Securities And Exchange Board Of India on 26 April, 2005
Equivalent citations: (2005)6COMPLJ56(SAT), [2005]64SCL421(SAT)
JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up for disposal with the consent of both parties.
2. The appeal has been filed against the impugned order of the respondent dated 2/11/2004 which reads as under:
"5. IMPOSITION OF PENALTY "Keeping all above in view, the undersigned finds that there were certain deficiencies in the systems and procedures of the member broker who has failed to strictly comply with the provisions of SEBI Act and rules and regulations made thereunder and directions issued by SEBI and has not exercised adequate due skill, care and diligence in their operations. However, the member broker also reported that they initiated corrective steps after the inspection.
"Considering all above facts and circumstances, the undersigned is of the view that the member broker has become liable to penalty and some amount of penalty should be imposed upon them so that they comply with all the regulatory requirements in the future strictly. This is also necessary to maintain the integrity of the securities market and to protect the interests of investors. While deciding the quantum of the penalty, the undersigned has taken into account the factors under Section 15J SEBI Act, 1992, 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.
"In accordance with the provisions of Section 15HB and 15F(a) of the SEBI Act, 1992 read with Rule 5 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, the undersigned hereby imposes a penalty of Rs. 1,00,000 (Rs. One Lakh only) upon the member broker, M/s. Mani & Co. "The penalty amount is to be paid within 45 days of receipt of this order."
3. The appellant had prayed for an interim order staying the operation of the order which was to come into force within 45 days of the receipt of this order dated 2nd November, 2004. The appellant's prayer for interim order was heard by the Tribunal and after hearing both the parties, this Tribunal vide its order dated 21st February, 2005 directed the respondent not to take coercive steps against the appellant pending appeal on the condition that the appellant deposits a sum of Rs. 50,000/- with the respondent within six weeks from the receipt of the order and subsequently it was extended till the disposal of the case finally.
4. The brief facts of the case is that the appellant is a Member of Madras Stock Exchange having SEBI registration No. INS 010699317 and sub-broker affiliated to MSE Financial Services Limited (INB 011116931) and member of the Mumbai Stock Exchange. During the inspection carried out by the respondent of the books of accounts and documents and other records maintained by the appellant for the period 2001-2002, 2002-2003 and for a short period after April, 2003 certain irregularities were pointed out which are as under:
a) Acted as unregistered sub-broker in violation of Section 15HB of the Securities and Exchange 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) Dealt with clients who in turn act as sub-brokers without registration in violation of Section 15HB of the 'Act' read with Regulations 26(xiv) of the Regulations.
c) Indulged in off the floor transactions in violation of Section 15HB of the 'Act' read with Regulations 26(xv) and (xvi) of the Regulations.
d) Not maintained Order Book in violation of Section 15 HB of the 'Act' read with Regulation 26(iii), 26(xv) and 26(xvi) of the Regulations.
e) Failed to maintain deposit of minimum margin by clients in violation of Section 15HB of the 'Act' read with Regulation 26(xv) and 26(xvi) of the Regulations.
f) Delayed payment of monies/deliveries of securities to clients in violations of Section 15HB of the 'Act' read with Regulation 26(vi) of the Regulations.
g) Delayed / not paid margins / pay-in dues in violation of Section 15HB 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 15HB of the 'Act' read with Regulation 26(xv) of the Regulations.
j) Not exercised due skill, care and diligence in violation of Section 15 HB of the 'Act' read with Regulation 26(xvi) of the Regulations."
According to the Appellant the Adjudication Officer appointed by the respondent found the broker guilty of Items (a), (c), (g) and expressed in findings in respect of Items (b), (d), (f), (i) and (j) the Adjudicating Officer has given the appellant the benefit of doubt as far Item (b) is concerned.
5. The appellant submitted that as far as Item (a) is concerned the transactions in MSE were practically nil beginning in the year 2000-2001 and hence they had no alternative but to carry out the business in the interest of their survival and that of their clients. The appellant reduced their volumes which came down to Rs. 980 in the year 2003 and have subsequently stopped sub-broking. The appellant stated that there was no willful default of Section 15HB read with Regulation 26(xiv) of the SEBI (Brokers and Sub-Brokers) Regulation 1992.
6. In respect of charge of violation of Section 15HB read with Regulation 26(xiv) the appellant had submitted that the clients of Sri Vari Consultants placed orders directly with the appellant and Sri Vari Consultants did not in turn issue any reconfirmation memos. Hence according to the appellant there is no violation of any violation.
7. The appellant further submitted that the alleged violation under Section 15HB read with Regulation 26(xv) is not willful and only due to oversight. Further all the transactions were reflected in profit and loss account submitted to statutory auditors. Service Tax has always been paid. Such transactions had come down to virtually nil from the year 2002-2003. It is therefore submitted by the appellant that non-reporting of these transactions is neither willful nor wanton but only due to oversight and no one was prejudiced or incurred any loss by such omission.
8. Violation of Section 15HB of the Act read with Regulation 26(xiv), 26(xv), 26(xvi) maintenance of order book had become redundant with onset of online trading system. However, the appellant submitted that since requirement to maintain order book was there, the appellant started maintaining order book. On this account, according to the appellant, there is no discrepancies and hence no loss was incurred by any person.
9. The appellant further submitted that the alleged violation of Section 15HB read with Regulation 26(xv) and 26(xvi) is not willful. It is submitted by the appellant that during the previous year no net positions of the transactions of any client during a single day has exceeded Rs. 5 lakhs and therefore no margin was collected from any client. The non submission of the auditor's certificate for confirmation is only an oversight.
10. In respect of violation of Section 15HB of the Act read with Regulation 26(vi) it is submitted by the appellant that delayed payment of the monies of clients have been done in all cases on the oral instructions of the client themselves and there was no violation of the said regulations. The appellant has submitted that confirmation letter in this regard. It is also submitted no complaints were received from any investor and the number of instances was small and the period of delay was also minor.
11. With regard to delay in payment of dues in violation of Section 15HB read with Regulations 26(xv) and 26(xvi) the appellant had submitted that there are only few instances where the margin money could not be paid immediately to the exchange due to shortage of funds. However, there was no failure to pay the same and the same was not willful. The appellant submitted that all the violations referred to by the Adjudicating Officer are minor and not willful and not repetitive in nature. It was also submitted by the appellant that there was no disproportionate gain or any advantage to the appellant, nor any loss was caused to any investor or group of investors as a result of alleged default and were not repetitive in nature and therefore no penalty should be imposed on the appellant. It was also submitted by the appellant that the appellant did not commit any charges willfully and therefore submitted that the penalty of Rs. 1,00,000/- should not be imposed. In any event, the penalty is excessive having regard to the facts that no loss has been caused to anyone as a result of such alleged violations.
12. The respondent had appointed an Adjudicating Officer by order dated March 22, 2004 to enquire into and adjudge the alleged violations committed by the appellant. A show cause notice date April 16, 2004 was issued to the appellant to show cause as to why penalty under the provisions of the Act read with Rule 5 of SEBI (Procedure for Holding Enquiry and Imposing Penalty by Adjudication Officer) Rules, 1995 should not be imposed upon him in view of alleged violations. The appellant replied to the show cause notice vide its letter dated May 3, 2004. Opportunity of personal hearing was also granted on September 21, 2004. However, the appellant vide their letter dated September 14, 2004 requested for considering the case with the material facts already submitted by them.
13. I have carefully considered the pleadings and submissions made by the counsel for both the parties.
14. There is no denying the fact that the violations were indeed there which should not have been there and SEBI being mandated to ensure transparency, it is in order for them to impose penalties wherever any violations are noticed.
15. More than anything else it is felt that opportunity should be given to the broker to rehabilitate himself.
16. The learned counsel for the appellant relied on a judgement in Chona Financial Services Pvt. Ltd., in appeal No. 95 of 2003. In the case of Chona Financial Services Pvt. Ltd., the Tribunal has extracted the orders rendered by SEBI and SAT and the nature of penalty which are extracted below:
"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 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.
d) 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
e) 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
f) 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
g) 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
h) 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"
17. Taking all the relevant documents and facts into account and the admission of the appellant that the irregularities are not willful, I therefore uphold the impugned order. However, looking to the case laws and Section 15J of the said Act, I am inclined to reduce the penalties from Rs. 1,00,000/- to Rs. 25,000/- which should be paid within a period of 6 weeks from the receipt of the order. The impugned order is therefore modified to the above extent and the appeal is disposed of accordingly. Any excess amount paid be refunded to the appellant expeditiously.
18. No order as to costs.