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]

__________________________________________________________

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)

_____________________________________________________________

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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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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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

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