(1.) 0 BACKGROUND OF THE CASE :
1.1 M/s. Intec Share and Stock Brokers Ltd. (hereinafter referred to as 'the broker') is a member of National Stock Exchange of India Ltd. (hereinafter referred to as NSE) and registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) vide registration no. INB 230877337.
1.2 An inspection of books of accounts, documents and other records of the broker was conducted in the year 2001 by JP Kapoor and Uberai, Chartered Accountants on behalf of SEBI. A copy of the inspection report was forwarded to the broker by SEBI vide letter dated 05.05.2001. The broker submitted its reply and on not being satisfied with the reply of the broker vis-a-vis the inspection report, an enquiry officer was appointed vide Order dated 24.06.2002 to conduct an enquiry into the contravention/s alleged to have been committed by the broker.
(2.) 0 ENQUIRY REPORT AND RECOMMENDATION :
2.1 The enquiry officer, after conducting the enquiry as per the prescribed procedure submitted a report dated 20.12.2002. The extract of the findings of the enquiry report are reproduced herein under -
"APPRECIATION OF EVIDENCE AND FINDINGS
As regards the charge that the member has delayed making payments to the clients beyond the permissible period of 48 hours, the show cause notice dated 28th Aug '02 at Annexure F furnishes the details of 55 clients where there is a delay / non payment. The member had submitted that the client have authorized him to retain the proceeds for adjustment against the next settlement and furnished Authorization letter given by the clients in this regard. These letters have been perused. Since it is for the benefit of the client that SEBI has directed that the payments to be made within 2 days and the client by his own request has advised the broker to retain the proceeds for future purchases or margin requirements, the broker's explanation backed by the necessary authorization letters from the client is satisfactory and may be accepted.
However, in the following cases no such Authorization letters were filed :
Therefore, to the extent of above cases, the member has not made the payment to the clients within 2 days which is in violation of SEBI Circular SMD/SED/CIR/93/23321 dated 18.11.93. As can be seen from the above table in some of the cases the payments have not been made.
2) Contract notes not bearing preprinted serial numbers and client acknowledgment in duplicate copy of contract note not maintained.
With reference to the above irregularity, it was replied that the contract notes serial number was on a daily basis due to software limitations which is now rectified. Since the clients do not personally collect the contract note, copies of the courier slips are maintained in lieu of acknowledgement copy. As per rules contract notes serial number should be on a continuous basis annually. Issuance of contract notes without continuous serial number is not in conformity with SEBI Circular No. SMD/MDP/CIR/043/96 dated 05.08.96.
Similarly obtention of the signature of client along with the date on the duplicate copy of the contract note is an essential requirement without which it would not be possible to ascertain whether the contract notes were issued within 24 hours from the date of transaction. The practice of the member of not maintaining the acknowledgement copy of the contract note with clients' signature and date thereon is not in conformity with SEBI circular No. SMD/B/104/22775 dated 29.10.93.
3) Non maintenance of Client registration and Agreement forms
The show cause notice at Annexure C details the nature of deficiencies in the client database. At Annexure D, the notice furnishes a list of active clients where there is no database maintained. It was replied that the deficiencies in the client database in these cases have since been rectified and the member has filed the copies of these documents. From the list it is noticed that in respect of following clients copies of the documents are not filed :
Name of the client Client code
1. Anita Garg CA04
2. Madhu Singla CM06
Mohinder Mangla CM03
Client identification is important since that makes it easier for the audit trail to identify the clients behind the transactions. Details like bank account, PAN number, introducer etc would establish the credentials of the clients and would be relevant to determine whether the member had acted in good faith and without negligence before doing business for a client. Not filing up of the client registration forms properly or non maintenance of the same is in contravention of SEBI Circular SMD/POLICY/Cir/5-97 dated 11th April, 1997.
Therefore in respect of the above cases, it is concluded that client database not maintained in contravention of SEBI Circular No. 11.04.97.
4) Off market transactions and cross deals
The show cause notice cites 6 transactions at Annexure M which are client to client ALBM transactions in settlement number 2001010 and 2001011. It also details a number of client to client transactions at Annexure N in the financial year 2000-01 where the total value of the transaction is R. 1,98,99,465.95. It was replied that there was an error in reporting client to client transactions and that they stopped doing any such transactions now. It was confirmed that these transactions had not taken place on the screen.
Cross deals are transactions wherein both the buying and selling client belong to the same broker. The broker in such cases should expose the offer to the screen based system of the exchange and should not execute it at his level. As per SEBI Circular SMDRP/POLICY/CIR-32/99 dated September 14, 1999, all negotiated deals including cross deals shall be executed only on the screens of the exchange in the price and order matching mechanism just like any other normal trade. The above decision was taken as negotiated deals including cross deals do not add to transparency and do not contribute to the price discovery. Some investors do not have benefit of the best possible price. This will militate against the basic concept of stock exchanges which are meant to bring together a large number of buyers and sellers in an open manner.
It is therefore, concluded that the member had conducted a huge number of cross deals as listed out in Annexure M and N of the show cause notice. These deals are not in conformity with the aforesaid SEBI circular SMDRP/POLICY/CIR-32/99 dated September 14, 1999.
5) Non collection of Margins
With regards to the allegation that the margins have not been collected in contravention of the SEBI circular dated 04.12.98, it was submitted that the margins were collected from the clients but were credited in the clients' account instead of the margin's account. It was further submitted that now the margins are credited to the margins account and the auditor's certificate is submitted to the exchange on quarterly basis. The member was having Rs. 6070430 with NSE as on 02.04.2001 but the margin account as on that date showed nil balance. The explanation of the member that margins were collected in the client's account and not in the margins account is not strictly in compliance with SEBI circular dated 04.12.98. Having regard to the submission that the margins were collected from the clients and credited to the clients' account though not to a separate margin's account together with the filing of auditor's certificate on quarterly basis to the exchange, the deviation may be treated as a procedural irregularity.
6) Delay in making delivery of securities to the clients
As regards the delay in delivery of securities to the client, the show cause notice dated 25.10.2002 at Annexure I cites 27 transactions wherein the delay was more than 2 days. The member pointed out that the clients themselves have authorized to retain the securities for future transactions and submitted authorization letters from the clients in this regard. However, it is observed that such authorization letter is not found in case of Global India for 2 transactions on 27.10.2000 where the delay was 7 days each.
Since it is for the benefit of the investor that the securities need to be delivered to him within 2 days of the pay out, it can be concluded that the investor by giving a letter of authorization to the broker to retain the securities for future sale has waived the right to receive the same within 2 days. However, the delay in the case of Global India for 2 transactions on 27.10.2000 where the delay was 7 days each is not satisfactorily explained since the member has not filed any authorization letter in support of his contention. It is, therefore, not established that the member had violated code of conduct B (1) under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and SMDRP/POLICY/CIR/11-99 dated 7th May, 1999 except in the case of Global India for the aforesaid reasons.
7) Non segregation of Clients' funds and Own funds
Annexure II to the show cause notice dated 25.10.2002 cites several instances of misuse of client a/c no. 16858 of Canara Bank. The list mentions many items of cash withdrawals. It was replied that in respect of these cash withdrawals, the money was received earlier as intercorporate deposits and deposited in this account for immediate transfer of margin money to NSE. Later on, the ICDs were repaid. Regarding the other transactions it was submitted that the same have been inadvertently carried out. Vide his letter dated 2nd Dec '2002 the member has submitted a statement as Exhibit I giving details of corresponding credit entries for the cash withdrawals from the client account which has been carefully examined. In view of the earlier corresponding credit entries in respect of certain corporate entities and specific individuals who can be identified. It can reasonably be deduced that the withdrawals may be on account of repayment of ICDs / loans. However, the explanation is not satisfactory with respect to the debits in the clients' account on account of huge and frequent cash withdrawals, purchase of shares, transaction charges paid to NSE and debits of Rs. 35,000 in the case of Siddartha Travels. Details of transaction charges paid to NSE and payments to Siddartha Travels from the clients' account is as under :
It would be difficult to relate these cash debits to any particular cash receipts which could be for any reason. Further, the debits and credits are not matching. The explanation of the member in respect of cash withdrawals is not satisfactory even after factoring for the ICDs as discussed earlier.
It is therefore, established that in respect of the following transactions,, the debits of the clients' account by the member is not justified and against the Principle of segregation of clients' funds and own funds.
The member is not in order in meeting the transaction charges to NSE and meeting the expenditure on account of Siddartha Travels from the clients account. It is also observed that the member had spent the following amount towards advance for computer on the following dates from the clients' account :
It is pertinent to note that vide his letter dated 08.09.01 at point number 7 in Annexure the member has admitted that the clients' account was used for advance for purchase of computers. This is not in order.
Further, the following amounts were debited to the clients' account with the narration of " Purchase of Shares ".
In his reply, dated 08.09.01, at point 7, the member explained that the expenses on account of purchase of shares were met "because of large amounts it was not done through expenses account". This necessarily implies that these share purchases were most possibly on Proprietary account which in the normal course should be met from his expense account. In any case, it was not shown that the cheques were issued in favour of Clearing Corporation which would be the normal practice for settlement of accounts.
These expenses are not client related and therefore, cannot be said to be in conformity with the SEBI circular SMD/SED/CIR/93/23321 dated 18th November, 1993 which clearly lays down as to what are the expenses that can be met from the client's account. Debiting of clients' account for the transactions which are not client related defeat the very purpose of maintaining clients' account separately. The amounts to the credit of clients' accounts are in the nature of trust and the member is not in order in meeting other expenses which are not client related from such account. The funds in the client's account cannot be applied for any purpose other than what is permissible under SEBI Guidelines. The objective of opening and maintaining a separate account for the client's funds is to segregate and identify them separately and to prevent its misuse so that they are beyond the reach of the broker. This is in violation of SEBI Circular SMD/SED/CIR/93/23321 dated 18th November, 1993.
8) Time Stamping of orders
With regard to the allegation that record of time when the client has placed order is not maintained which is in contravention of SEBI circular 11.02.97 it was submitted that it is practically submitted that it is difficult to have the same recorded as orders are received on telephone. The contract notes reflects the time of execution and not the time of placement of order.
Time of placement of order by the client and time of placement of the order by the broker into the system are two different thins. As per SEBI circular dated 11/2/1997 the broker member should maintain record of time when the client has placed the order and reflect the same in contract notes. The broker informs that it is not possible to implement the same. Non-mentioning of the time of placement of orders in the contract note is therefore not in conformity of the SEBI circular dated 11/2/1997.
9) Cash transactions with clients instead of cheque transactions
As regards the allegation that the member has entered into cash transaction with certain clients instead of cheque in violation of SEBI circular dated 18.11.93 it was submitted that only receipts were in cash and no payments were made in cash to these clients and further that the amounts were within the limits prescribed within the IT Rules.
Vide his letter dated 02.12.2002 the member furnished the details of cash receipts in the case of 10 clients. A perusal of the same reveals that they are all receipts and each transaction is less than Rs. 20000. However, as per SEBI circular dated 18.11.93 no member shall accept cash for purchase of securities or give cash for the sale of securities. All transactions should be through crossed cheques. Therefore, to the extent of these transactions in respect of 10 clients there is noncompliance with the SEBI circular cited.
3.0 SHOW-CAUSE NOTICE AND HEARING :
3.1 Pursuant to the above, a show cause notice dated 07.02.2003 was issued to the broker along with a copy of the enquiry report. The broker submitted a reply vide letter dated 14.03.2003. An opportunity of personal hearing was granted to the broker on 31.05.2003. The representatives of the broker appeared before me and reiterated their earlier submissions made in their letter dated 14.03.2003. The broker also submitted further written submissions vide their letter dated 11.06.2003. The contention of the broker that proceedings of the show cause notice based on the enquiry report are without jurisdiction is devoid of any force as post enquiry proceedings are held in compliance with the principles of natural justice and they offer an opportunity to the accused for giving his explanation. Further, the argument of the broker that they have not violated any of the provisions of regulations mentioned in the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 is also not tenable inasmuch as the broker has violated the provisions of clause A (5) and B (1) as contained in Schedule II read with regulation 7 of the SEBI (Stock Brokers and sub Brokers) Regulations, 1992 (hereinafter referred to as 'the said Regulations') I proceed to examine the said reply dated 11.06.2003 of the broker and also my findings thereof are as under.
(3.) 0 ISSUES FOR CONSIDERATION :
4.1 ALLEGATION AND REPLY :
With regard to the charge of failure to maintain preprinted serial numbers on the contract notes, the broker submitted vide his letter dated 11.06.2003 that earlier computer generated contract notes were being used and because of software limitations, continuous running numbers were not possible. As regards the charge of failure to maintain client acknowledgment in duplicate copy of the contract note, the broker has not made any submissions in the said letter.
4.2 FINDING :
The system of continuous pre-printed serial numbers is to prevent the possible misuse of contract notes such as pre-dating of a contract. It is clear that the broker failed to maintain pre-printed serial numbers on the contract notes and I hold the broker guilty of violating the provisions of clause A (5) of Code of Conduct as contained in Schedule II of the said Regulations read with the circular no. SMD/MDP/CIR/043/96 dated 5.8.96 issued by SEBI. As regards, the charge of failure to maintain client acknowledgment in duplicate copy of the contract note, the same is essential requirement without which it would not be possible to ascertain whether the contract notes were issued within 24 hours from the date of transaction. It is clear that the broker has violated the provisions of circular No. SMD(B)/104/22775 dated 29.10.93 issued by SEBI and I hold the broker guilty on this count.;