(1.) THE Appellant is a member of Saurashtra Kutch Stock Exchange (the Exchange). He was granted a certificate of registration by the Respondent in terms of section 12 of the Securities and Exchange Board of India Act (the SEBI Act) read with Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992(the Stock Broker Regulations) to carry on the activities of Stock Broker and as such he is amenable to the regulations governing the Stock Brokers. Inspection of the books of account of the Appellant was ordered by the Respondent on 17.6.1997 and in that context he was advised by the Respondent vide letter dated 22.12.1997 to make available the books of account etc. specified in the letter, for the years 1996-97 and 1997-98, ready for inspection at the Exchange premises on 13.2.1998. THE Appellant appeared before the inspection team but did not produce all the books as called for, for inspection. According to the Respondent since the Appellant failed to produce the requisite books for inspection, the Exchange was advised vide letter dated 1.12.1998 (not 10.10.2000 as stated in the impugned order) not to permit the Appellant to trade on the floor of the Exchange or off the floor of the Exchange till he got the books inspected by the Respondent. THE Exchange vide its letter dated 10.12.1998 informed the Appellant that as advised by the Respondent his trading right has been suspended with immediate effect. He was informed that his trading right will be restored only after he got the books inspected by the Respondent at Mumbai. THE Appellant on 10.10.2000 produced the books/records viz. (i) Bills (ii) Client ledgers (iii) Scrip ledgers (iv) Stock registers (v) Balance sheet (vi) Audit report (vii) Bank Statement and (viii) Cash Book as called for by the Respondent. But Sauda Book and Client Contract notes, required by the Respondent were not produced. THEse two records were offered for inspection on 2.12.2002. In the said context, the Respondent holding that the Appellant had failed to co-operate with the inspection team and viewing the same as a violation of sub regulation (1) and (2) of Regulation 21 of the Stock Broker Regulations and clause A(5) of the Code of Conduct for Stock Brokers an inquiry was initiated. THE Inquiry Officer appointed for the purpose on 19.7.2002 issued a notice to the Appellant on 3.10.2002. THE Appellant responded to the notice by sending written reply dated 15.11.2002 and also by making oral submissions before the Inquiry Officer on 2.12.2002. THE Inquiry Officer submitted his report on 27.12.2002 holding that the Appellant had made available certain books for inspection after a delay of over 4 years and recommended suspension of his certificate of registration for a period of six months. THE Respondent issued a notice to the Appellant on 5.3.2003 forwarding therewith a copy of the inquiry report, asking him to show cause as to why penalty as recommended by the Inquiry Officer should not be imposed. Appellant responded to the notice vide his letter dated 19.3.2003 and thereafter again on 2.4.2003. THE Respondent, thereafter passed an order on 25.4.2003 holding the Appellant guilty of violating the provisions of sub regulation (1) and (2) of regulation 21 of the Stock Broker Regulations and clause A(5) of the Code of Conduct applicable to the Stock Brokers and suspended the certificate of registration granted to the Appellant for a period of six months. THE suspension came into effect on 17.5.2003 i.e. on the expiry of three weeks from the date of the order as indicated in the order.
(2.) The Appellant claiming to be aggrieved by the Respondent's order dated 25.4.2003 filed the present appeal praying that:
(1) the order dated 25.4.2003 passed by the Respondent be quashed.
(2) the finding that the Appellant violated regulations 21(1) and (2) of the Stock Broker Regulations and clause A(5) of the Code of Conduct be deleted;
(3) the trading rights and registration of the Appellant be restored with immediate effect.
(4) the Appellant's trading rights being under suspension for over 4 years he has suffered enough punishment for technical or venial breach of not been able to produce some documents on the stipulated date for inspection.
(5) the operation of the impugned order dated 25.4.2003 be stayed till the appeal is decided.
The Appellant vide his communication dated 25.6.2003, in reply to the Tribunal's notice posting the matter on 1.7.2003 for considering the prayer for interim order informed the Tribunal of his inability to personally represent his case before the Tribunal and requested to decide the matter based on the submissions made in the appeal memorandum and in the said letter. On 1.7.2003 when the matter came up for consideration the Respondent's representative submitted that he would be filing the reply and in view of the fact that the Appellant has decided not to represent his case either in person or through any representative, the Tribunal may, if so desires, dispose of the appeal on the basis of the submissions made in the appeal and in the reply affidavit made by the Respondent. The reply affidavit was filed by the Respondent on 2.7.2003. In the said circumstances it was decided to dispose of the matter based on the pleadings.
The Appellant has challenged the finding arrived at by the Respondent and also the spread of the penalty inflicted on him. In this context it is considered necessary to peruse the order made by the Respondent. For quick reference the core portion of the impugned order is extracted below:
"3.0 Consideration of issues:
3.1 I have taken into consideration the Enquiry Report, the reply filed by the said broker and other material on record. I now proceed to deal with the issues as under.
3.2 It is evident from the records that the said broker has not produced all the books before the inspection team of SEBI. It is admitted that it was after an elapse of more than 4 years from the inspection that on 2.12.2002 he offered the Sauda book and the client contract notes for inspection by SEBI. Due to the elapse of such a lengthy period of time any inspection to be conducted for the years 1996-97 and 1997-98 now is meaningless. Time is of the key essence in any regulatory inspection.
3.3 The explanation of the said broker that he could not produce them because they were in the forcible possession of "some one who was only assisting (the said broker) in business" is far fetched. There is no explanation as to why he did not take action against the said person for 4 years and how suddenly after the enquiry was initiated, he could gain possession of the records. No reason is given for why he did not honour the undertaking he gave to the inspection team that he would produce all the remaining books by 25.10.2000. He has also not made any communication to SEBI expressing his inability to honour his undertaking. Even the name or other particulars of the said other person have not been disclosed by him or reported to SEBI or any other authority even now.
3.4 It is also clarified that he was not suspended earlier. SKSE was only advised by SEBI by a letter dated 10.10.2000 not to allow the said broker to trade on the floor or off the floor of the exchange till he gets books inspected by SEBI at Mambai.
3.5 As noted by the Enquiry Officer, it is of utmost importance that the broker who is to be inspected by regulatory authorities shall render necessary co-operation and produce all the required books and documents so that the inspection takes place smoothly. The conduct of the said broker in the instant case shows a deliberate defiance of the law. It is evidently clear that if SEBI is obstructed in its inspections without sufficient cause, it would not be able to fulfill its duties of protection of interests of investors and regulation of the securities market in a timely and efficient manner.
3.6 A stock broker is expected to maintain high standards of integrity, diligence and fairness in the conduct of his business. He is the primary conduct through which investors' savings can be chanellised into the securities market. Non-compliance by a broker with important regulatory measures would lead to erosion of investor confidence in the market.
3.7 In view of all the above factors, I hold that the said broker has violated regulation 21(1) and (2) of the said Regulations and clause A(5) of the Code of Conduct for Stock Brokers laid down in Schedule II read with regulation 7 of the said Regulations.
(3.) 0 Order
4.1 In the light of all the above factors, I consider it necessary that the registration of the said broker should be suspended for a period of six months, as recommended by the Enquiry Officer. Therefore, in exercise of the powers conferred upon me by regulation 13(4) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby impose a major penalty of suspension for a period of six months on the said broker.
4.2 This order shall come into effect on the expiry of three weeks from today."
According to the Appellant's version he produced all the records called by the Respondent for inspection viz. (1) Order Book (2) Bills (3) Client's ledger (4) Cumulative Statements (5) Delivery in/out (6) Scrip ledger (7) Stock register (8) BMC statement (9) Margin statement (10) Balance Sheet & Profit & Loss Account with Schedules and (11) Bank statements; that Sauda Book and Contract Notes could not be produced at that time of the inspection as the same was in the possession of another person viz. Jagdish Jadavbhai Parsana (cousin) who was not co-operating with the Appellant because of certain personal grievances. The Appellant has referred to the affidavits filed by him and the said Jagdish Jadavbhai Parsana in support of the said contention and submitted that on 2.12.2002 the said two records were also produced for inspection, that no irregularity was noticed on inspection of the records produced by the Appellant. According to the Appellant the failure to produce those 2 records were not intentional, but it was due to non co-operation of his cousin, that he had acted in a bona fide manner, that though he had made substantial compliance of the requirements he was punished by suspending his certificate of registration for six months. The Appellant has submitted that the Respondent vide its letter dated 1.12.1998 addressed to the Stock Exchange had advised the Exchange not to permit him to trade on the floor of the Exchange or off the floor of the Exchange till he gets his books of account inspected by SEBI and heeding the said advice the Exchange, with effect from 10.12.1998, suspended the trading rights of the Appellant, and the said suspension was not lifted even after production of the records on 2.12.2002, though the Exchange had written to the Respondent seeking permission for the same on 3.4.2003. It has been submitted that the Respondent has ensured that the Appellant's trading activities remained suspended since 10.12.1998 and having penalized that way there is no justification for suspending the certificate of registration for 6 months again. According to the Appellant the order is not to be sustained in view of this Tribunal's decision in Atul Kanodia v. SEBI (2002) 36 SCL 121), as it is time barred in terms of regulation 29(3).
4. The basis on which the Respondent ordered suspension of the certificate of registration granted to the Appellant has been briefly explained in the order itself, the text of which has been extracted in the earlier part of this order. In the reply to the appeal filed by the Respondent factual position as revealed in the inquiry report has been narrated. Gist of the Respondent's submission is as follows:
The Appellant failed to produce all the books before the inspection team of the Respondent. As the Appellant failed to co-operate with the Respondent in its statutory regulatory function, SKSE was advised not to permit the Appellant to trade on the floor of the exchange or off the floor of the exchange till he got his books and account inspected by the Respondent. Even after this, the Appellant failed to produce complete books of account before the Respondent. Even though the Appellant vide letter dated 10.10.2000 had stated that he would be producing Sauda book and Client Contract notes before 25.10.2000, which the Appellant had earlier failed to produce before the inspection authorities, he failed to produce the same as assured. The Sauda book and the Client Contract notes were offered for inspection only on 2.12.2002 i.e. after 4 years from the date on which the same were originally required to be produced for inspection. The inspection of the Appellant's records for the years 1996-97 and 1997-98 after 4 years was meaningless, as the same would not serve any purpose and no corrective measure was also possible.
The Respondent as an interim measure advised SKSE not to permit the Appellant to trade on the floor of the Exchange or off the floor of the Exchange till he gets his books and accounts inspected by the Respondent. This step was taken on the ground that non-cooperation by any intermediary should not be viewed lightly, more so, in case of the Appellant where he failed to produce Sauda book and also copies of the Contract notes issued to his clients. Sauda book is an important and basic record which the Appellant is supposed to maintain on a day-to-day basis, that the Contract notes are the mandatory documents which stand as basic evidence for a transaction undertaken by the Appellant on behalf of his clients.
In terms of Regulation 17(1) of the Stock Brokers Regulations every Stock Broker is required to maintain, interalia, Sauda book and also copies of the Contract notes issued to its clients. Further in terms of Regulation 21(1), the Broker is required to produce such books, accounts or other documents as inspecting officer requires. As the Appellant had failed to comply with the said requirements he cannot claim now that the requirements of the inspection team were substantially complied with. Further in the absence of these main documents, it was not possible for the inspecting team to verify the entries recorded in the client ledger, bills, deliveries etc. Due to non production of these main records, the inspection team could not carry out the inspection to its conclusion and submit the inspection report. Hence the Appellant's contention that the inspection team did not find any irregularities is not correct. The Appellant had been informed well in advance of the schedule of inspection and he had the opportunity to keep the documents ready and produce the same before the inspection team. The submission of the Appellant that the Sauda book and the Contract notes were in illegal possession of "someone" who was assisting him in the business cannot be accepted as there was no explanation as to why he did not take any action against that person for four years. The identity of the said person too was never disclosed. The Appellant could have moved the appropriate authorities for directions compelling return of the said documents. It was only when faced with a show cause notice from the Enquiry Officer and inevitable action against him, the Appellant had claimed to have produced these documents. Producing these documents after a gap of 4 years ceases to have any relevance as it is possible that the Appellant may have tampered with the documents in the meantime. It is incorrect to state that the Appellant's trading rights have been suspended since December 1998. Disabling trading from terminal is often resorted to even by the exchanges to get the Brokers to comply with various requirements. For example trading from terminals of Brokers is disabled when they exceed gross exposure limits, have not met with margin requirements etc. and such rights are resorted upon compliance of relevant requirements. So also in the instant case, had the Appellant produced the required documents, the trading rights would have been restored in the year 1998 itself and this was indicated in the Exchange's letter dated 10.12.98. It is only because of inaction on the part of the Appellant that trading rights were not restored to him by the Exchange. The Appellant cannot complain against the Respondent for his own inaction and non-cooperation with the regulatory action. The contention that the order imposing major penalty of suspension for a period of 6 months on the Appellant is bad in law and facts of the case is baseless. The Appellant failed to produce important books of accounts viz. Sauda book and Clients Contract notes. The Enquiry Officer in his report had noted that, it is of utmost importance that the broker who is to be inspected by regulatory authorities shall render necessary co-operation and produce all the required books of accounts so that the inspection takes place smoothly. The conduct of the Appellant in the instant case shows deliberate defiance of the law. It is evidently clear that if the Respondent was obstructed in its inspections without sufficient cause, it would not be able to fulfill its duties of protection of the interests of investors and regulation of the securities market in a timely and efficient manner. Therefore, the major penalty of suspension for a period of 6 months against the Appellant is appropriate and reasonable both in law and on facts of the case. The Appellant is expected to maintain high standards of integrity, diligence and fairness in the conduct of his business. He is the primary conduit through which investors savings can be channelised into the securities market. Non-compliance of important regulatory measures by the persons concerned would lead to erosion to investor confidence in the market. Therefore, it was held that the Appellant violated sub regulation (1) and (2) of Regulation 21 and Clause A(5) of the Code of Conduct for Stock Brokers as laid down in Schedule II read with regulation 7 of the said Regulations. Further, the Appellant was given enough opportunity for producing books of account before the inspection team, but he did not produce the same. He can not escape the consequences for the failure, The Appellant was not suspended earlier, that the Exchange was only advised by the Respondent not to allow him to trade on the floor or off the Exchange under its bye-laws till he got his books of account inspected by the Respondent. Non-maintenance of records is a violation of exchange bye-laws also. This was solely done as an interim measure until the Appellant comes forward with all the books and accounts as required to be produced by him under regulation 21. The advice given to SKSE can not be equated with suspension of registration which is done as a penal action. The Appellant had every opportunity during the period to produce the books of accounts before the Respondent. The failure of the Appellant is inaction on his part and non-cooperation with the Respondent, which is a serious offence thwarting the regulatory function of the Respondent. Therefore, the penalty imposed against the Appellant is reasonable and in consonance with law and facts of the case.;