Decided on July 29,2003



G.N.Bajpai, - (1.) SEBI had conducted an inspection of the books of account of Prakash Chand Baid ( hereinafter referred to as "the stock broker"), in view of the alleged involvement of the stock broker in off the floor transactions. During the inspection it was found that the stock broker had committed inter alia the violations of the following:- (i) Notice of CSE dated September 16, 1999 and CSE's Bye Laws 332 and 334 (iii); (ii) Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Practices relating to Securities Market) Regulation, 1995; (iii) Rule 4(b) of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 and Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 read with Clauses A (1,4 and 5) of Code of Conduct stipulated in Schedule II of the said regulations; (iv) Rule 8 (1) (f) of Securities Contracts (Regulation) Rules, 1957. 1.1 The findings of inspection had been communicated to the stock broker. However, the broker failed to submit explanation on the findings.
(2.) Subsequently, vide order dated September 16, 2002 under the SEBI(Stock Brokers and Sub-brokers) Regulations, 1992, an enquiry officer was appointed to enquire into the above mentioned contraventions committed by the stock broker. 2.1 Upon consideration of the reply submitted by the stock broker vide letter dated 16.10.2002, and oral submissions made on his behalf during the hearing before him, the Enquiry Officer submitted the enquiry report dated March 27, 2003. In view of the facts and findings recorded during the enquiry proceedings, the Enquiry Officer, having regard to the gravity of the violations, recommended that the certificate of registration be suspended for a period of 4 months. In terms of Regulation 13(2) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, a show cause notice dated April 08, 2003 was issued to the stock broker asking it as to why the appropriate penalty as recommended by the Enquiry officer should not be imposed upon it. It was also advised to reply to the same together with the documents if any, that it may choose to rely upon in support of its reply, within 15 days of the receipt of the same, failing which it would be presumed that it has no explanation to offer. The stock broker was also advised to intimate its desire for personal hearing, along with his reply. The said show cause notice was served through the Calcutta Stock Exchange on the stock broker. The stock broker had neither replied nor availed opportunity of oral hearing. 3.1 Therefore, I proceed in the matter, taking into account the findings and recommendations of Enquiry officer and submissions of the stock broker made during the enquiry proceedings.
(3.) MY findings are as follows:- 4.1 It was found that the stock broker had indulged in off the floor transactions in the scrip of Himachal Futuristic with other brokers, namely with A.K. Poddar and Sanjay Khemani. The details of the off the floor transactions entered into by the stock broker with A. K. Poddar in the scrip of Himachal Futuristic are given below : JUDGEMENT_441_TLSB0_20030.htm It may be noted that the delivery of the above shares was made on 28/4/00, i.e. after about 8 days. 4.2 The stock broker was found to have entered into off the floor transactions with Sanjay Khemani also, the details of which are given below : HIMACHAL FUTURISTICS JUDGEMENT_441_TLSB0_20031.htm JUDGEMENT_441_TLSB0_20032.htm 4.3 In addition to above transactions, it is also found from the client ledger of A. K. Poddar that the stock broker had the following off-the-floor transactions. HIMACHAL FUTURISTICS JUDGEMENT_441_TLSB0_20033.htm JUDGEMENT_441_TLSB0_20034.htm Therefore, I find that the member had entered into large off the floor transactions in the scrip of Himachal Futuristic with brokers, Sanjay Khemani and A. K. Poddar. The member has not disputed the findings. 4.5 In response to the show cause notice sent by the Enquiry Officer, a reply was sent vide letter dated 16.10.2002 in which the Stock Broker had stated that the alleged transactions had been negotiated deals entered into with his clients and these deals were of squaring off nature, and hence there was no delivery of shares. He also stated that the transactions had not been reported to the Exchange for the reason that he was not aware of the guidelines. The stock broker also pleaded ignorance of SEBI Circular no. SMDRP/Policy/CIR-32/99 dated 14.09.99. As regards the financial transactions made with a member broker of the Calcutta Stock Exchange, they also stated that these transactions were in the nature of temporary accommodation. He also stated that such transactions were frequently done in order to meet some urgent needs of finance for payment of margin etc. from time to time. Therefore, he submitted that the violations made were not intentional and the same had occurred due to the non-awareness of guidelines, rules and regulations. He apologized for the violations and requested that the proceedings against him be dropped. 4.6 SEBI vide circular no. SMDRP/Policy/Cir-32/1999 dated 14.9.1999 had banned negotiated deals, cross deals which also includes off the floor transactions. SEBI vide the said circular has notified that all negotiated deals shall be permitted only if these are executed on the screens of the exchange in the prices and order matching mechanism of the exchange like any other normal trade. It was stated that the said decision was taken as negotiated deals avoid transparency requirement, do not contribute to price discovery and investor do not have benefit of best prices. Therefore such deals militate against basic concept of stock exchange which are meant to bring large number of buyers and sellers in transparent manner. Thus off the floor transactions as mentioned above was not put in the system of the exchange by the broker but had been negotiated or dealt privately with other brokers namely A. K. Poddar and Sanjay Khemani. I find that the above mentioned transactions were violative of SEBI circular dated 14.9.1999. Such off the floor transactions also tamper with price discovery mechanism of the exchange. Trading by the stock broker in the manner described above has led to interference with the fair and smooth functioning of the market which is in violation of item 4 of clause A of Schedule 2 of Code of Conduct read with regulation 7. 4.7 It was also found that the date of transaction entered into by the Stock Broker with A. K. Poddar, was 20.4.2000 for 2000 securities of Himachal Futuristic. However, delivery was found to have been made on 28.4.2000, i.e. after more than 8 days. SEBI had vide its notification no. S.O. 184(E) dated 1.3.2000 issued under section 16 of SC(R) Act banned all the transactions which were not as per the byelaws of the stock exchange and also SC(R) Act. In case of spot delivery contracts, payment and delivery has to be made within 48 hours. However, delivery was found to have been made beyond 48 hours which was in violation of the above notification dated 1.3.2000. Thus the broker is guilty of violation of item 5 of clause A of regulation 7 of Code of Conduct for Stock Brokers read with regulation 7. 4.8 It was also found from the client ledger that the stock broker had made payments and received funds from the other members of the exchange. The Stock broker was found to have indulged in fund transfer with other brokers, which were not backed by any transaction. Few instances are as given below. JUDGEMENT_441_TLSB0_20035.htm The practice of giving loan to brokers from the fund of the client is in violation of the bye-laws of the exchange and SEBI circular no. SMD/SED/Cir/93/23321 dated 18.11.1993 by which it has been mandated that a broker cannot use money of the client for any other purpose and his money is to be kept segregated only for his transactions. The stock broker, in view of the above transaction is thus found to have violated the circular dated 18.11.1993 and also violated items (6) of clause B of Schedule II read with regulation 7 of Stock Brokers Regulation. The above transactions also show that the member had entered into regular lending transactions which is in violation of rule 8(1)(f) of SC(R). Such lending transactions that too from the monies of the client are in violation of rule 8(1)(f) of SC(R) Rules and SEBI circular dated 18.11.1993.;

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