MANSUKH SECURITIES AND FINANCE LTD. Vs. THE ADJUDICATING OFFICER, SECURITIES AND EXCHANGE BOARD OF INDIA
SECURITIES APPELLATE TRIBUNAL
Mansukh Securities And Finance Ltd.
The Adjudicating Officer, Securities And Exchange Board Of India
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P.K. Malhotra, Member -
(1.) THE Appellant before us is a public limited company incorporated under the Companies Act, 1956. It is a member of the National Stock Exchange of India Limited and is registered with the Securities and Exchange Board of India (the Board) as a stock broker as well as participant of National Securities Depository Limited. The Board carried out inspection of books of accounts and records of the Appellant during October 6, 2004 to October 13, 2004 for the financial years 2002 -2003, 2003 -2004 and for 2004 -2005 up to the date of inspection and noticed certain irregularities in the maintenance of books of accounts and compliance with the regulations/circulars issued by the Board from time to time. A copy of the inspection report was made available to the Appellant on January 3, 2005 asking it to submit its comments together with documents, if any, in support of the comments. Thereafter a show cause notice dated September 14, 2007 was issued to the Appellant indicating the irregularities committed by it in the maintenance of records and asking it to show cause as to why an enquiry should not be held against it in terms of Rule 4 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 and why penalty should not be imposed under Section 15HB of the Securities and Exchange Board of India Act, 1992. The Appellant filed a reply dated November 12, 2007 denying the allegations of irregularities and denying that it had violated any of the regulations/guidelines of the Board with regard to maintenance of its books of accounts. An opportunity of hearing was also provided to the Appellant after which the adjudicating officer of the Board passed the impugned order dated February 14, 2011 holding the Appellant guilty of the following irregularities:
(i) Paying and receiving cash to/from clients in lieu of securities thereby violating regulation 26(xv) of the Securities and Exchange Board of India (Stock brokers and Sub -Brokers) Regulations, 1992 (for short the stock brokers regulations) read with Board's Circulars dated November 18, 1993 and August 27, 2003.
(ii) Allowing unauthorized persons to carry out proprietary account trading besides client based trading thereby violating regulation 26(xv) of the stock brokers regulations.
(iii) Failing to segregate client's funds with its own thus violating regulation 26(xiii) of stock brokers regulations and Board's circular dated November 18, 2003; and
(iv) Not mentioning the settlement number in contract notes issued by it thereby violating regulation 26(xvi) of stock brokers regulations.
By the impugned order, the adjudicating officer imposed a penalty of Rs. 5 lacs on the Appellant for the aforesaid violations. Hence this appeal.
(2.) WE have heard the learned Counsel for the parties who have taken us through the record. It is argued by learned Counsel for the Appellant that it has furnished satisfactory explanation which has not been accepted by the adjudicating officer. The alleged irregularities are procedural in nature and following the dictum of earlier orders of this Tribunal, no penalty can be imposed on the Appellant for the alleged irregularities. Our attention was also drawn to an order of this Tribunal passed on June 16, 2011 in Appeal No. 23 of 2011 (Religare Securities Limited v. Securities and Exchange Board of India) wherein the Tribunal has observed as under:
It must be remembered that the purpose of carrying out inspection is not punitive and the object is to make the intermediary comply with the procedural requirements in regard to the maintenance of records. We also cannot lose sight of the fact that every minor discrepancy/irregularity found during the course of inspection is not culpable and the object of the inspection could well be achieved by pointing out the irregularities/deficiencies to the intermediary at the time of inspection and making it compliant. This will, of course, depend on the nature of the irregularity noticed and we hasten to add a caveat that it is not being suggested that if any serious lapse is found during the course of the inspection, the Board should not proceed against the delinquent.
Learned Counsel for the Appellant has also drawn our attention to this Tribunal's order dated May 2, 2008 in Appeal No. 27 of 2008 (SMC Global Securities Limited v. Securities and Exchange Board of India) where observations made in an earlier case of Harinarayan G. Bajaj (Appeal No. 117 of 2003 dated 10.10. 2007) were relied upon and submitted that procedural precautions prescribed in Board's circular are only guidelines and not mandatory and hence penal provisions are not attracted. This is what the Tribunal has held:
8....The learned senior counsel for the Appellants referred to the Board circular No. SMD I / 23341 dated 18.11.1993 listing the precautions to be exercised by member -brokers of recognized stock exchanges while trading on behalf of their clients and entertaining new clients. The Board in its wisdom considered it necessary to list these precautions so that they were uniformly followed by the member -brokers as this would protect the interests of member -brokers, instill transparency and discipline in the deal between clients and brokers and would contribute to the healthy working of the secondary capital market. The precautions to be exercised by the member -brokers have been classified into two categories - (a) mandatory; and (b) precautions by way of a guideline. The Board wants member -brokers of the exchanges to compulsorily follow the precautions suggested in part (a) of their operating system, whereas those suggested in part (b) may be treated as guidelines to be followed as and when circumstances warrant. We have gone through the mandatory precautions laid down by the board and find that there is no requirement of any broker to know from his client the names of other brokers through whom he may be dealing with....In view of the aforesaid circular issued by the Board, we have no hesitation in holding that it was not a mandatory requirement for a trader to inform his broker about other brokers through whom he was dealing in the scrip though the form contains a clause requiring a trader to furnish such information....
Let us now examine the irregularities which have been pointed out by the Board in the impugned order. The Appellant is alleged to have paid and received cash to/from clients in lieu of securities which is alleged to be in violation of Regulation 26(xv) of the stock brokers regulations read with Board's circular dated November 18, 1993 and August 27, 2003. The Appellant submitted before the Board that the transactions were made against trading obligation of clients in exceptional circumstances and in the interest of commercial prudence. It was further submitted by it that the number of such transactions is negligible when compared to the total transactions during the period covered by the inspection report. All such cash transactions were of small amount and were not volatile of even the requirements of the Income Tax Act. Under the Board's circular dated November 18, 1993, these instructions are only guidelines and not mandatory requirements. It is only under the circular dated August 27, 2003 that the instructions were reiterated that brokers and sub -brokers should not accept cash from the client. The Board has not accepted the reply of the Appellant on the ground that the notice failed to give strict proof of the exceptional circumstances that led notice to accept or pay to the clients in cash. Learned Counsel for the Board submitted before us that even if the cash transactions entered into by the Appellant may not be large as compared to the total transactions and irrespective of the fact that these transactions are for an amount of Rs. 20,000/ - and less, it will not make any difference as the circular issued by the Board specifically mandates that all payments shall be received/made by the brokers from/to the clients strictly by account payee crossed cheques/ demand drafts or by way of direct credit into the bank account or any other mode allowed by the Reserve Bank of India. It is only in exceptional circumstances that a broker or sub broker may receive the amount in cash to the extent not in violation of income tax requirements as may be enforced from time to time. Even this requirement of making payment in cash in exceptional circumstances was introduced only by the Board's circular dated August 27, 2003. The earlier circular dated November 18, 1993 did not permit even such concession.
Regulation 26 of the stock brokers regulations makes a stock broker or a sub broker liable to monetary penalties in respect of the violations mentioned there under. Clause (xv) of the said regulation makes failure to comply with the directions issued by the Board under the Act or the Regulations framed there under liable to monetary penalty. The violation in the case in hand is neither of the Act nor of the Regulations framed there under but of the two circulars mentioned above. Perusal of the record made available to us shows that the number of transactions which were entered into by the Appellant in cash to/from clients in lieu of securities is small as compared to the total number of transactions entered into by the Appellant during the inspection report and all such transactions are of amounts less than Rs. 20,000/ -. As observed in the earlier decisions of this Tribunal referred to above, the purpose of carrying out inspection is not punitive and every minor discrepancy/ irregularity found during the course of inspection is not culpable and the object of the inspection could well be achieved by pointing out the irregularities/deficiencies to the intermediary at the time of inspection and making it compliant. We also notice that while holding the Appellant guilty of this irregularity, the adjudicating officer has stated that the notice failed to give strict proof of what were the exceptional circumstances that led notice to accept or pay to the client in cash. If that was so, the adjudicating officer could have sought further clarification from the Appellant which was not done. We are inclined to agree with the learned Counsel for the Appellant that in the facts and circumstances of this case the irregularity is not culpable enough calling for monetary penalty.
(3.) THE other irregularity for which the Appellant has been held guilty by the adjudicating officer is that the Appellant allowed unauthorized persons i.e. the employees of its group company M/s. Uttam Financial Services Limited to carry out proprietary account trading besides client based trading. The Appellant had admitted that some persons who operated the proprietary account trading enabled terminals were employees of its group company and those employees were seconded to it by the said group company and were working under the direct control and supervision of the Appellant. The proof of secondment of the persons by the group company was also submitted by the Appellant which was not accepted by the adjudicating officer on the ground that it is not ascertainable whether the persons who were deputed to the notice carried out the proprietary trading besides client based trading. The other ground for not accepting the Appellant's reply was that the memos of secondment are blanket agreement entered into with a group company. We are unable to accept the logic given by the adjudicating officer of the Board. In the absence of any bar in the rules or regulations on this subject, we do not find any illegality or irregularity in the procedure adopted by the Appellant in this regard. Further the Appellant has been held guilty of violating regulation 26(xv) of the stock brokers regulations. The said Regulation makes a stock -broker or sub -broker liable to monetary penalty if he fails to comply with directions issued by the Board under the Act or Regulations framed there under. No provisions of the Act or Regulations have been pointed out which have been violated by the Appellant in this case. We are, therefore, unable to agree with the findings arrived at by the adjudicating officer in this regard.;
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