SEBI Vs. ENIGMA FINANCIAL SERVICES PVT LTD
SECURITIES APPELLATE TRIBUNAL
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(1.) M/s Enigma Financial Services Pvt. Ltd. is registered with SEBI as a stock broker (hereinafter referred to as 'the member') bearing SEBI registration No. INB 101023233 and is a member of Uttar Pradesh Stock Exchange (UPSE). An inspection of books of accounts, documents and other records of the member was conducted on 15.03.2001. During the inspection, several irregularities were found committed by the member.
(2.) 2. The findings of the inspection were forwarded to the member vide letter dated 04.05.2001 advising the member to give his comments, if any. The member vide letter dated 30.06.01 replied to the said findings of the inspection report. On not being satisfied with the reply filed by the member an Enquiry officer was appointed vide order dated 19.07.2002 to enquire into allegations of violations against the member, inter alia, to the following:
(a) Violation of section 12 of Securities and Exchange Board of India Act, 1992 read with Rule 3 of SEBI (Stock Brokers and Sub-brokers) Rules, 1992.
(b) Violation of Rule 4 (b) & (d) of the SEBI (Stock Brokers and Sub-Brokers) Rules.
(c) Violation of Regulation 10(1) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
(d) Violation of Clause A(5) & B(1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of the said Regulations;
(e) Violation of the Directives issued by SEBI vide circular nos. SMD/MDP/CIR/043/96 dated 05/08/96, SMD-1/23341 dated 18/01/93, SMD/POLICY/IECG/1-97 dated 11/2/97, SMD/POLICY/IECG/5-97 dated 11/04/97, SMD/POLICY/CIR-3/98 dated 16/01/98, SMD/RCG/CIR(BKG)/293/95 dated 14/03/95, SMDRP/POLICY/CIR/32-99 dated 14/09/99, SMD/POLICY/CIRCULAR/3-97 dated 31/3/97, SMD/SED/CIR/93/23321 dated 18/11/93, SMDRP/POLICY/CIR - 35/98 dated 04/12/98, SMDRP/POLICY/CIR-07/2000 dated 10/01/2000 and SMDRP/POLICY/CIR-11/99 dated 07/05/99;
(f) Notification No. SO/2561 June 27, 1969 issued by the Central Government under Sub Section (1) of Section 16 of Securities Contracts (Regulation) Act, 1956 read with the directives issued by SEBI vide its circular No. SMD/SED/93-30727 dated 13/12/93 and SMD/SED/3703/95 dated 16/10/95
(g) Rules, Regulations and Byelaws of UPSE as amended from time to time and directives of UPSE
The Enquiry Officer submitted his report on 28.01.2003. In his report, having regard to the gravity of the irregularities that have been established, the EO recommended suspension of certificate of registration of the member for a period of 4 months. The Enquiry Officer found that the member committed the following violations:
3.1 The member has dealt with the member of other exchanges other than UPSE without seeking registration as a sub-broker.
3.2 The member has dealt with un-registered sub-brokers.
3.3 The member has done unauthorized carryforward transactions.
3.4 Non-Maintenance of member client agreement
3.5 Contract notes were not serial numbered; it doesn't have trade number and time of ordering and execution of trade.
3.6 Conducted off the floor transactions
3.7 Duplicates of the Contract Notes were not acknowledged by the clients.
(3.) CONSEQUENT upon above, in terms of regulation 13(2) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as 'the said regulations') a show cause notice dated 24.03.2003 was issued to the member to show cause as to why the penalty as recommended by the enquiry officer should not be imposed on him. The member was advised to submit his reply, if any, within 15 days of the receipt of the show cause notice failing which it would be presumed that the member has no explanation to offer. The member was also asked to intimate along with the reply whether he desires a personal hearing. The member vide letter dated 07.05.2003 replied to the show cause notice dated 24.03.2003. The member made the following submissions:
a) With reference to delay in payment of Turnover Fee to SEBI, the member stated that the enquiry officer considered their submission and in view of the delay which was not substantial recommended that the matter might be viewed leniently.
b) Regarding dealing as unregistered sub-broker, the member submitted that this was done only as an experiment and the volumes traded were not substantial. The practice was discontinued within a short period of time.
c) Regarding dealing with unregistered sub-broker, the member strongly denied that any of the names mentioned in communication of findings relied upon by the Enquiry Officer were sub-brokers and reconfirmed that all of them were portfolio clients. The member concluded that trading volumes and pattern of trading could not be taken as conclusive evidence.
d) With respect to delay in transfer of shares, the member submitted that being in a small city they worked in an environment which was more friendly than formal and their clients insisted that they should hold payment/deliveries to be adjusted against subsequent sales/debits.
e) With reference to unauthorized carry forward transaction the member submitted that their explanation in the matter was not considered in true light by the Enquiry Officer. The member further submitted that the difference in sale/purchase did not represent carry forward charges. Member contended that In the course of computerized trading countless trades match every minute and that the matching of quantity with the same member might be purely coincidental. It was argued that mostly the trades matched with the members who trade regularly and frequently and that the matching of such trades could only be natural.
f) Regarding delayed payment to the clients, the member made similar submissions made in the matter of delayed deliveries to the clients. Further, the member submitted that they furnished to SEBI several letters from clients approving such trading practice.
g) With reference to non-maintenance of client registration forms and broker client agreements, the member stated that they had already submitted before the Enquiry Officer that these defects had since been rectified.
h) Regarding the irregularity that contract notes do not bear pre-printed serial numbers and no time regarding placement of orders and execution, the member stated that they had already clarified their difficulties before the Enquiry Officer.
i) With respect to off the floor transactions, the member submitted that the lapse on their part was under the mistaken belief that the concerned BSE and NSE brokers reported the transactions and it was not incumbent on them to do the same and the transactions for full year 1999-2000 amounted to only 55 lakhs and no risk or default ever occurred because of this transactions.
j) Regarding duplicate of contract note not acknowledged by clients, the member submitted that most of their clients were based outstation and that they either neglect or return acknowledged copies.;
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