Judgment:
1.1 DRB Securities Pvt. Ltd. (hereinafter referred as "the said broker") is a member of The Uttar Pradesh Stock Exchange Association Ltd. (hereinafter referred to as "UPSE") and is registered with the Securities and Exchange Board of India (hereinafter referred to as "SEBI") under certificate of registration no. INB100965933.
1.2 An Inspection of the books of accounts of the said broker was conducted by SEBI on March 12, 2001, for the period April 01, 1999 to February 28, 2001. In the course of the inspection, the following violations were observed: - Contract notes did not bear the time of placement of order and time of execution of order - Copies of contract notes acknowledged by clients were not maintained.
- Terms and conditions of the contract were not mentioned on the reverse of the contract notes - Contract notes for principal to principal trades were not issued in the proper format.
(b) Dealing as sub-broker of members of other stock exchanges, without obtaining registration as sub-broker from SEBI. (g) Non maintenance of segregation between clients account and own account.
1.3 The findings of the inspection were communicated to the said broker for soliciting their comments. Since the said comments were found to be unsatisfactory, an Enquiry Officer was appointed, to enquire into the alleged irregularities and violations committed by the said broker, vide order dated July 19, 2002, under Regulation 28(1) of the SEBI (Stock Broker and Sub Broker) Regulations, 1992 (hereinafter referred to as "the Broker Regulations).
2.1 The Enquiry Officer issued a show cause notice to the said broker on 26.12.2002, under Regulation 6(1) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the "Enquiry Regulations").
2.2 The said broker submitted a reply to the notice, vide their letter dated 13.1.2003. However, they did not appear before the Enquiry Officer for the personal hearing, despite four opportunities being given to them by the Enquiry Officer. In view of the failure of the said broker to appear before the Enquiry Officer, the proceedings were concluded ex-parte'.
2.3 The Enquiry Officer submitted his report dated May 30, 2004 to SEBI, with the recommendation that a penalty of suspension of the certificate of registration of the broker, for a period of four months, may be imposed on the said broker.
3.1 A show cause notice dated December 12, 2003 was issued to the said broker, under Regulation 13(2) of the Enquiry Regulations. They were advised to show cause as to why an appropriate penalty should not be imposed on them. The said broker was also advised that in terms of the provision contained in Regulation 13(2) ibid, Chairman or Member of SEBI Board was not bound by the recommendation of the Enquiry Officer and he may enhance the penalty, if so warranted. Considering the seriousness of violations found by the Enquiry Officer, the said broker was also called upon to show cause as to why the certificate of registration granted to him should not be suspended for a period of one year.
3.2 The said broker made his submissions in response to the said show cause notice, vide his letter dated 27.12.03.
3.3 The said broker was also offered an opportunity to be heard in person, on January 23, 2004 and again on February 12, 2004. The said broker failed to appear for personal hearing on both the dates and also did not submit any reasons for non appearance. In view of the same, I find that a reasonable opportunity to make submissions in respect of the charges against him has been given to the said broker, but he has failed to utilize the same; hence I proceed in the matter, based on his reply to the show cause notice.
4.1 I have considered the inspection report, enquiry report, the reply of the said broker, and other material on record. My findings on the allegations made against the member-broker are as follows : 4.2.1 Regarding the absence of pre-printed serial numbers on the contract notes, the said broker has stated that although there were no pre-printed serial numbers, they did bear clearing-wise serial numbers. They also submitted that it was not practicable to have pre-printed serial numbers on continuous computer stationery. I find the reply of the said broker to be unsatisfactory; it is definitely possible to have pre-printed serial numbers on any kind of stationery and as far as clearing-wise serial numbers are concerned, they are not a substitute for pre-printed serial numbers running on annual basis. The directive of SEBI to have pre-printed serial numbers on contract notes was issued with the objective of preventing brokers from issuing back-dated contract notes. In view of the above, I find that the said broker has violated the provisions of SEBI circular dated 5.8.1996 and thereby violated Clause A (5) of the Code of Conduct for Stock Brokers.
4.2.2 The broker has submitted that the time of receipt of order and time of execution was not mentioned on the contract note, as the software used by the exchange was not compatible with the one used by him during the relevant period. Moreover, as per the practice prevalent at that time, the time of receipt of order and its execution, were not being mentioned on the contract notes. I note that SEBI had, vide circular dated 11.2.1997, directed that the time of placement of order and time of execution of order should be reflected on contract notes. This was done so as to enable the clients to ascertain whether the rate charged to him was the same as the rates prevalent on the exchange at the time of the trade. I further note that UPSE, vide its circular dated 1.12.1997, had advised all its members (including the said broker) that the exchange software has been modified to provide for time of placement of order and time of execution of order, on contract notes. In view of the above, I find the explanations of the said broker to be unsatisfactory. Therefore, I find that the said broker has violated the provisions of the aforesaid SEBI circular and thereby violated Clause A (5) of the Code of Conduct for Stock Brokers.
4.2.3 I note that the said broker has not maintained duplicates of contract notes, bearing acknowledgements from clients. In his reply, the said broker has blamed carelessness and oversight on the part of his clients in returning the acknowledged copies, for the absence of these contract notes. I find the reply of the said broker to be unsatisfactory because it was the responsibility of the said broker to have obtained acknowledgements from clients and not vice versa.
Therefore, in the absence of any proof regarding timely issuance of contract notes, I find that there is a possibility that the said broker may have failed to issue contract notes within 24 hours from the date of execution of the contract, in violation of SEBI circulars dated 18.11.1993 and 5.8.1996.
4.2.4 I note that the said broker has failed to print the terms and conditions of the contract on the reverse of the contract note. In response to the said allegation, the said broker has stated that they have not printed the terms on the reverse of the contract note, but have brought the same to the notice of their clients through an annexure to the Client Registration Form. The Enquiry Officer had held that the said broker had not produced any proof to substantiate his claim of having conveyed the terms of the contract to his clients. In any case, SEBI's circular dated October 29, 1993 had clearly stipulated that the terms and conditions of the contract are to be printed on the reverse of the contract note. Thus, I find that the said broker has failed to comply with the provisions of SEBI circular dated 29.10.1993 and has thereby violated clause A (5) of the code of conduct for Stock Brokers.
4.2.5 I note that the said broker has issued contract notes in Form A instead of in Form B, for trades done on principal to principal basis. The said broker has mentioned in his reply that the same was due to clerical error and that revised contract notes in the proper format have since been issued. In view of the submissions made by the broker, as also the fact that only one instance of this kind has been pointed out by the inspection team, I would like to grant the benefit of doubt to the said broker.
4.3 Dealing as sub-broker, without obtaining registration as such I note the allegation against the said broker that they had dealt with the members of other stock exchanges, without obtaining registration as sub broker. In his reply the said broker submitted that his trades with 8 members of other stock exchanges were on his own account and that he had not dealt as a sub broker, on behalf of clients. I note that the Enquiry Officer has held that the volume of trades of the said broker, with members of other exchanges, is substantially high and hence suggests that the said broker has been acting as an unregistered broker. However, in the absence of any documents/material to confirm that the said broker has indeed acted as a sub-broker, I find that the charge has not been conclusively established.
4.4 Dealing with unregistered sub-brokers It has been alleged the said broker has dealt with entities such as Universal Subscription Pvt.
Ltd., Samridhi Stock Broker Pvt. Ltd., Naman Securities etc., which are entities that have acted as sub brokers without obtaining registration from SEBI as such. In their reply to the notice issued by the Enquiry officer, the said broker had claimed that these entities were portfolio based investors and not sub brokers. They have also submitted that they can provide confirmation from any of the entities mentioned above, to show that they were only clients and not unregistered sub brokers. In this regard, I note that the said broker has not produced any documentary evidence to prove that the entities mentioned above were not acting as sub brokers, either before the Enquiry Officer or along with his reply to the show cause notice. However, I also find that the allegation regarding the member having traded with unregistered sub-brokers is based merely on the volumes and trading pattern of the transactions with these entities, as also that fact that some of these entities were among the top 20 clients of the member. Hence, in view of the lack of evidence to conclusively state that the member has dealt with unregistered subbrokers, I am inclined to disregard this allegation.
4.5.1 The said broker is alleged to have entered into carry forward transactions. In his reply, the said broker has stated that these transactions were done in the normal course of business and were not carry forward transactions. I find that the said broker had entered into transactions wherein they had closed outstanding positions in certain scrips on the last day of one settlement and re-opened the positions in the next settlement, by entering into reverse transactions in the same scrips, with the same counter parties. I have also noted that the price differential in the two transactions is in the range of carry forward charges prevalent in the market.
Details of the said transactions are as under:---------------------------------------------------------------------------Sr. Qty Date Rate Scrip Contract Broker Qty Date RateNo.---------------------------------------------------------------------------1 -6300 19.02.01 187 ACC JV Stock Broker 6300 20.02.01 187.502 -2800 19.02.01 187 ACC Mehra Broker 2800 20.02.01 192.803 -6000 19.02.01 187 ACC Shreeya Stock 6000 20.02.01 187.504 2800 31.10.00 178 HIND Vinod Kumar -2800 01.01.01 178.755 1000 31.10.00 178 HIND Praveen Kumar -1000 01.01.01 178.756 1800 31.10.00 178 HIND Anand Inestors -1800 01.01.00 178.757 -500 31.10.00 756 ITC Lakshmi & Sons 500 01.01.00 758.508 -500 31.10.00 756 ITC Pareek & Co.
500 01.01.00 758.509 -1500 31.10.00 756 ITC Astha Securities 1500 01.01.00 758.5010 -2600 21.06.99 183 ACC AG Shares 2600 22.06.99 189.0011 100 21.06.99 1091 ITC R K Rastogi -100 22.06.99 1108.7012 -800 21.06.99 1090 ITC Suman Investors 800 22.06.99 1094.5013 -300 21.06.99 425 CAST Mohan & Co.
300 22.06.99 425.0014 -500 21.06.99 1090 ITC Sanjeev Bansal 500 22.06.99 1095.0015 7000 04.10.99 194 ACC V Vishnoi & Co. -7000 05.10.00 196.0016 800 04.10.00 194 ACC Sahoo Investors -800 05.10.99 196.0017 -2100 04.10.99 49 JAIN Sangam & CO. 2100 05.10.99 49.5018 -1100 04.10.99 366 L&T PR Securities 1100 05.10.99 366.7519 -400 04.10.99 366 L&T Arora & Co.
400 05.10.99 375.0020 900 04.10.99 245 HIFU Samridhi -900 05.10.99 242.00--------------------------------------------------------------------------- 4.5.2 Clearly, the above transactions are in the nature of carry forward transactions. Hence, I am unable to accept the explanation of the said broker. In this regard I note that Bye law 20 of UPSE prohibits any dealings in securities, other then those expressly permitted by the Exchange. In this regard, SEBI had also, vide letter dated 13.12.93, directed all stock exchanges that there shall be no carry forward of transactions from then on. Subsequently, a revised form of carry forward of transactions was allowed on certain exchanges, but UPSE was not included among them. Thus, I find that the said broker has entered into transactions that were prohibited.
In doing so, he has violated the provisions of Section 16(2) of the SC( R) Act, 1956, circulars of SEBI dated 13.12.1993 and 16.10.1995, and bye law 20 of UPSE. The said broker has also violated Rule 4(b) of the broker rules and clause A(5) of the Code of Conduct of the Stock Brokers.
I note that the said broker has not reported transactions done by him through members of other stock exchanges, to UPSE. In this regard, the said broker has submitted that they failed to report the transactions to UPSE, on account of wrong interpretation of the relevant SEBI circulars. A broker is required to report transactions undertaken on other stock exchanges, to the stock exchange of which he is a member, so that the latter would have a true and fair estimate of the total exposure of the member, which would in turn allow the exchange to implement suitable risk containment measures. I find that the said broker, having failed to report off the floor transactions to UPSE, has violated the provisions of the SEBI Circular dated March 14, 1995. In addition, he has also violated the provisions of SEBI circular dated September 14, 1999, which specifically prohibited off the floor transactions.
I note that the said broker has failed to obtain / maintain client registration forms in respect of several clients. In this regard, the said broker has submitted that they have not obtained client registration forms only in few instances where clients were known to them or were not available. They have further submitted that in all such cases the registration forms have since been obtained. In this regard, I find that the said broker has not submitted any documents to either the Enquiry Officer or along with his reply to the show cause notice, so as to substantiate his claim of having obtained the client registration forms for all his clients. Moreover, as submitted by the broker himself, he had not obtained the client registration forms from some of his clients. In view of the above, I find that the said broker has violated the directives of SEBI circulars dated 11.02.1997 and 11.04.1997, vide which all brokers were directed to obtain client registration forms from all their clients.
4.8.1 I also find that the said broker has credited substantial sums of money received from clients into his own account. In this regard the said broker has submitted that transactions with some of the clients were "non business transactions" e.g. the receipt of Rs.51 lakhs from Shri B N Shukla was in the nature of an unsecured loan and not in the nature of trading transaction.
4.8.2 I find that two of the three instances of this kind, reported in the inspection report, were pertaining to Shri B N Shukla. Even if I were to agree with the contention of the broker that these transactions were unrelated to securities business, I find that the said broker has entered into business other than that of dealing in securities with their clients. As stated by the said broker, a sum of Rs.51 lakhs was advanced to Shri B M Shukla as an unsecured loan.
This is in violation of Rule 8(3)(f) of the SC ( R ) Rules, 1957 which stipulates that a member of stock exchange shall not engage in any business other than that of securities.
4.9.1 I note from the inspection report that there have been several instances of delay in making payments to clients. The following are some of the instances pointed out in the inspection report:----------------------------------------------------------------Name of Client Delay in Payment (in days) Amount----------------------------------------------------------------Anju Bansal 35 1,20,374.00Accurate Sales Promotion 281 1,15,000.00Amit Agarwal 86 51,267.00Anjula Jain 163 9,547.50Arvind Tandon 79 50,000.00Arvind Tandon (HUF) 79 50,000.00Dharmendra P Singh 37 33,968.50Dinesh Lata Mudit 332 53,432.00Dinesh Lata Mayank 332 49,790.00Goodmark Trading Pvt. Ltd. 86 1,20,000.00Shanti Gandhi Not paid Not paidSunil Kr. Rastogi 220 1,24,000.00Sharad Tandon HUF 87 1,00,000.00Shakar Parvati Deal 91 1,27,000.00Siddharth Rastogi 220 1,00,155.00Neelam Rastogi 175 1,01,004.00Panchratan Traders 261 1,30,000.00Pinki Gupta 102 23,765.00Pradeep Kr.Aggarwal 173 1,25,265.00Safar Sales Pvt. Ltd. 212 1,24,000.00---------------------------------------------------------------- 4.9.2 In their reply, the said broker submitted that many of the clients mentioned above had given an undertaking to keep the amounts in their account, as margin money for future transactions. However, I find that the said broker has not produced any document/undertaking from any of the above clients, to support his claim of having retained the monies at the clients' behest. Hence, I am unable to accept the submission of the said broker in this regard. In view of the above, I find that the said broker has delayed payments to clients and has therefore violated Clause B(1) Of the Code of Conduct as well as the provisions of SEBI circular dated November 18, 1993, which specified that the broker has to make payments to his clients within 48 hours.
I note that the said broker entered into transactions without collecting margins from some clients. In this regard, the said broker submitted that only in exceptional circumstances, where alternate arrangements for covering risk were available, they did not collect margin from clients. They further submitted that the exceptions were based on commercial considerations and having regard to the goodwill and standing of the clients. I find that bye law 230 of UPSE bye laws requires the said broker to collect margin from clients. No exception as been provided for, in the bye laws. Further, SEBI had, vide circular dated 04.02.2000, directed that margins should be mandatorily collected from all clients. I find that the said broker, in failing to collect margins from clients, has violated bye law 230 of UPSE and also the provisions of SEBI circular dated February 04, 2000.
I note that the said broker had failed to maintain the register of Bad deliveries containing details of rectification of bad deliveries. I further note that there has been a delay beyond 15 days in rectification of bad deliveries by the said broker. In this regard, the said broker has submitted that barring few exceptions where rectification was beyond their control, all bad deliveries have been rectified within the stipulated time limit. In this regard, I note that bye law 158 of UPSE bye laws requires brokers to rectify all bad deliveries within a period of 15 days. I find that the said broker has violated bye law 158 of UPSE and thereby violated Rule 4(b) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.
It has been alleged that the said broker, while submitting his turnover figures to UPSE, for calculation of SEBI registration fees, did not include off the floor transactions carried out by him. Thus, the said broker is alleged to have paid less fees than required to be paid by him. It is also alleged that there has been a delay in payment of registration fees. In his reply to the notice by the enquiry officer, the said broker submitted that off the floor transactions should not be included in their turnover since those transactions would be included in the turnover of their counter party brokers on other stock exchange/s. he has further stated that the matter is sub-judice before the Hon'ble High Court of Calcutta and hence no orders may be passed on the same. In this regard, I agree with the findings of the Enquiry Officer that the delay in submission of fees was nominal and that his transactions with members of other stock exchanges need not be included in his turnover, while calculating the registration fees to be paid, as this turnover would form a part of the other members' turnover.
Moreover, since the matter is sub judice before the High Court of Calcutta, no finding is made on the issue.
4.13.1 I find that the member had received large sums of money from several parties although no securities transactions were done on their behalf. The details of such receipts are as follows :-----------------------------------------------------------------------------Client name Date Paid Date Received Amount Amount-----------------------------------------------------------------------------Leena agarwal 03.04.00 250000 28.11.00 250000Kushang Timber Product Pvt. Ltd. 01.04.00 8165368 23.02.01 1000000K K Chaurasia 10.08.00 24.08.00Prem lata Agarwal 01.04.00 300000 01.11.00 50000Geeta Jajoo 19.04.00 80000 26.05.00 100000 19.04.00 20000Bimal Kumar 07.11.00 250000 24.11.00 250000 23.11.00 250000 09.12.00 250000Babu Lal Agarwal 01.04.00 38703.03 03 11.09 100000 11.09.00 400000Amit Agarwal 01.04.00 280000 01.11.00 30000Alok Agarwal 16.02.00 100000----------------------------------------------------------------------------- 4.13.2 The said broker has submitted that these sums were received from their clients as margin money, for future transactions.
However, I am unable to accept the contention of the broker in this regard, especially in view of the fact that they have failed to produce any documents to show that the monies received from these entities were utilized to purchase securities at a later date or that the amounts paid to these entities were on account of securities transactions. Thus, there is a preponderance of probability that the said broker engaged in business other than securities business, thereby violating the provisions of Rule 8(3)(f) of SC(R) Rules, 1957.
i. failed to issue contract notes in the manner provided for in the bye laws of rules and regulations of the stock exchange and also the Broker Regulations, iii. failed to report off the floor transactions to the stock exchange, v. failed to maintain segregation between their own account and clients' account, 5.2 These acts of omission and commission constitute violations of the bye laws of UPSE, the Broker rules and regulations and also that of the SEBI Act, 1992. Such violations by brokers undermine the efforts of SEBI to ensure an orderly development of the capital markets. In view of the substantial nature of the violations by the said broker I find that the penalty recommended by the enquiry officer is adequate and need not be interfered with.
In view of the above, I, in exercise of powers conferred on me under section 19 of the SEBI Act, 1992, read with Regulation 13(4) of the Enquiry Regulations do hereby suspend the Certificate of Registration No. INB 100965933 granted to M/s DRB Securities Pvt. Ltd. for a period of 4 months. This order shall come into effect on the expiry of 21 days from the date of the order.