SEBI Vs. MATHRAN SECURITIES LIMITED MEMBER CALCUTTA STOCK EXCHANGE
SECURITIES APPELLATE TRIBUNAL
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(1.) MATHRAN Securities Limited (hereinafter referred to as "the Member"), is Member of Calcutta Stock Exchange (CSE), with office at 506, Vaishno Chambers, 6, Brabourne Road, Kolkatta - 700 001, holds a SEBI Regn No. INB 03070936.
1.1 Based on inspection report dated 11th July 2002 submitted to the Board by the inspection authority, vide order dated 16th September 2002 an Enquiry Officer was appointed to enquire into the following violations by the Member:
a) CSE's notice dated 16th September 1999 and CSE's Bye-laws 332 and 334 (iii)
b) Regulation 4 (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and unfair trade practices) Regulations 1995 (hereinafter referred to as "FUTP Regulations").
c) Rule 4 (b) of Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Rules, 1992 (hereinafter referred to as "Broker Rules") and regulation 7 of Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as "Broker Regulations") read with Clauses A (1, 4 and 5) of Code of conduct stipulated in Schedule II of Broker Regulations.
d) Rule 8 (1) (f) of Securities Contracts (Regulation) Rules, 1957
(2.) The Enquiry Officer issued a notice of enquiry under regulation 6 (1) of Securities and Exchange Board of India (Procedure for holding enquiry by enquiry officer and imposing penalty) Regulations, 2002 (hereinafter referred to as "the said Regulation") dated 23rd September 2002 to the Member, for above-mentioned alleged violations.
2.1 The member vide its letter dated 21st October 2002 submitted its reply to the above mentioned show cause notice inter alia stating as follows. Member submitted that violation of CSE Byelaws & Notice dated 16th September 1999, if any, was due to non-awareness of the relevant regulations and was purely unintentional. Also that Off-the-floor transactions were normally reported to the exchange but due to some administrative lapse, some such transaction might have remained unreported to CSE.
2.2 Member further submitted that CSE has imposed a penalty including other charges amounting to Rs. 5.80 lacs which has been duly paid by them in conformity with the above bye laws of the CSE.
2.3 With regard to violation of FUTP Regulations, the Member submitted that most of the transactions were done on the floor of the exchange, during the relevant period. Off-the-floor transactions as pointed out by enquiry officer, vis-a-vis floor transactions of the firm in CSE is as follows:
2.4 Member claimed that the percentage of such transactions as compared to their total business volume is very small and a negligible fraction. Adding that the transactions were carried out as a business necessities for trade commitments and all the deals have been liquidated with the financial payments which show that no fraudulent practices were practices against the counter party and that all these deals are also recorded by the counter parties.
2.5 With regard to violation of Rule 4 (b) of Brokers Rules read with Code of Conduct of Broker Regulations, member submitted that they had not done any transaction with the object of generating brokerage or commission and that the total volume was insignificant and there was no misleading quotation or information.
2.6 With regard to violation of Rule 8(1)(f) of Securities Contracts (Regulation) Rules 1957, member submitted that they had entered into all the transactions with counterparty in connection with or incidental to or consequential upon the securities business in terms of SEBI Circular No. SMD/Policy/Cir-6/1997 dated 7th May 1997.
2.7 Member prayed that unintentional violations if any to be condoned and assured non recurrence of the violations in future and requested SEBI to drop the proceeding initiated against them.
2.8 A hearing was conducted by the enquiry officer on 3rd March 2002 during which Shri Atamaram Mathran, Director, Mathran Securities Ltd., appeared before the enquiry officer. When questioned about the monetary penalty that the member claimed to have paid to CSE, member stated that CSE imposed fine of Rs. 5000/- vide its letter dated 17th April 2002 for failure to report off-the-floor transactions pursuant to the inspection held on 24th July 2001. CSE also collected Rs. 75, 000/- towards settlement guarantee fund and Rs. 5, 00, 000/- interest free non refundable deposit to be adjusted over a period of time against 50% of turnover charges payable to CSE. Member admitted during the enquiry that there was delay in delivering securities while answering a question on delay in delivering the securities. When questioned about loan transactions, the member admitted that some money was taken and some money was given by them.
The enquiry officer submitted his report to the Board on 27th March 2003 and had recommended a penalty of suspension of registration of the member for four months.
3.1 After considering the enquiry report, a show cause notice under regulation 13 (2) of the said Regulations dated 8th April 2003 was issued to the Member informing him of the enquiry officer's finding and requiring him to show cause as to why action should not be taken against him as recommended by enquiry officer. A copy of enquiry report was also annexed to this. It was also stated in the said show cause notice that if the member desired a personal hearing before the Chairman the same should be intimated in the reply.
3.2 The Member vide his letter dated 24th April 2003 replied to the show cause notice stating that he did not wish to add anything to what he had already submitted. He also did not express any desire for a personal hearing. However, he pleaded not to impose a major penalty of suspension of registration for four months and that the mistakes would not be repeated in future.
(3.) I have carefully, considered the findings of the enquiry officer and the submissions made by the member. I find that
4.1 The member has done off-the-floor transactions as established by the enquiry. The member has not disputed the same. The member had indulged in off the floor transactions in the scrips of DSQ, HFCL, Global Tele, Zee, etc. with other brokers of CSE. The details of which are as follows
4.2 However, the member submitted that the volume of off-the-floor transactions was of very small and a negligible fraction compared to their total business and that these transactions were done out of business necessities but not with any malafide intention. In its submission before the enquiry officer the member had stated that the same had occurred as they were not aware of SEBI circular No. SMDRP\Policy\Cir-32\1999 dated 16th September 1999 which includes Off-the-floor transactions. Off-the-floor transactions tamper with price discovery mechanism of the exchange and such trading leads to interference with the fair and smooth functioning of the market. Non-reporting is in violation of item 4 of clause A of Code of Conduct read with regulation 7 of Broker Regulations. The volume of off-the-floor even though very small or negligible would not make the violation any less. Not being aware of SEBI circular is no excuse as a market intermediary has the responsibility to keep himself abreast of law. Member's submission that he had done off-the-floor transactions out of business necessity and not with a malafide intention is devoid of any force and not acceptable.
4.3 The member had submitted that CSE had already imposed a fine of Rs.5.8 lacs in connection with the off-the-floor transactions. CSE imposed penalty of Rs. 5000/- for the member's failure to report the off-the-floor transactions. CSE collected Rs. 75, 000/- towards settlement guarantee fund and Rs. 5, 00, 000/- interest free non refundable deposit to be adjusted over a period of time against 50% of turnover charges payable to CSE. It is clear that CSE had imposed a penalty of only Rs. 5, 000/- and not Rs.5.8 lacs as wrongly contended by the member. In fact The balance money collected by CSE was towards trade settlement guarantee fund and interest from non-refundable deposit and not toward fine or penalty. Therefore, the member tried to mislead the enquiry.
4.4 The member had delayed in deliveries and admitted the same in his reply to the enquiry officer. The following are the instances where the delivery was delayed
SEBI vide its notification No. S.O. 184(E) dated 1st March 2000 issued under section 16 of SC(R) Act banned all the transactions which is not as per the byelaws of the stock exchange and also SC(R) Act. In case of spot delivery, payment and delivery has to be made within 48 hours. Thus the broker is guilty of violation of item 5 of clause A of Code of Conduct read with regulation 7 of Broker Regulations.
4.5 The enquiry report had also brought out the instances were the member had made payments from client ledger and received funds from the other members of CSE but were not backed by transactions. The member during the hearing before the enquiry admitted having lent money and borrowed money. The details of which are as follows
Giving money as loan to other broker from the account of the client is in violation of byelaws of the exchange and SEBI circular No. SMD\SED\Cir\93\23321 dated 18th November 1993. It has been mandated in the said circular that a broker cannot use money of the client for any other purpose and the same has to be kept segregated only for his transactions. The member has thus violated the above mentioned circular and failed to be fair to his clients as required under items (6) of clause B of Schedule II read with regulation 7 of the Broker Regulations. The member has also entered into money lending transactions which is in violation of rule 8(1)(f) of SC(R) Rules of loan transactions like a professional lender of money.;
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