adjudication order in respect of intime equities ltd (formerly known as fortune equity brokers...

8/11/2019 Adjudication Order in respect of Intime Equities Ltd (formerly known as Fortune Equity Brokers (India) Ltd

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AdjudicationOrderinthematterofM/s.IntimeEquitiesLtd.(M/s.FortuneEquityBrokers(India)Ltd) Page1of25

BEFORETHEADJUDICATINGOFFICER

SECURITIESANDEXCHANGEBOARDOFINDIA

[ADJUDICATIONORDERNO.AK/AO202/2014]

________________________________________________________________________

UNDERSECTION15IOFSECURITIESANDEXCHANGEBOARDOFINDIAACT,1992READ

WITHRULE5OFSEBI(PROCEDUREFORHOLDINGINQUIRYANDIMPOSINGPENALTIES

BYADJUDICATINGOFFICER)RULES,1995

Inrespectof

M/s.IntimeEquitiesLimited

(FormerlyknownasM/s.FortuneEquityBrokers(India)Limited)(PAN: AAACG2063L)

Inrespectof

M/s.IntimeEquitiesLimited

________________________________________________________________________

FACTSOFTHECASE

1. Securities and Exchange Board of India (hereinafter referred to as SEBI)

conducted an inspection of books of accounts and other records of Intime

Equities Limited (Formerly known as Fortune Equity Brokers (India) Limited.)

(hereinafter referred to as theNoticee') for the period from April 1, 2011 to

August30,2012(hereinafterreferredtoasthe InspectionPeriod)toexamine

whether the Noticee has complied with the provisions of SEBI Circular no.

MIRSD/SE/Cir/19/2009 dated December 3, 2009 and Circular no.

SEBI/MIRSD/Cir/01/2011 dated May 13, 2011 with respect to the quarterly/

monthlysettlementoffundsandsecuritiesoftheclients.

2. Thefollowingirregularities/deficiencieswereinteraliaobserved:

2.1. Noticeehadadmittedthatnoactualsettlementoffundsandsecurities,

eithermonthlyorquarterly,wascarriedoutbytheNoticee,therebynot

complying with Point no. 12 of the SEBI Circular No. MIRSD/SE/Cir

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19/2009 dated December 03, 2009 with respect to quarterly/ monthly

settlementoffundsandsecuritiesofclients;

2.2. Those clients who had not opted for running accounts had substantial

creditbalancesformorethan180days,therebynotcomplyingwithPoint

no. 12 of the SEBI Circular No. MIRSD/SE/Cir19/2009 dated December

03, 2009, which states that unless otherwise specifically agreed to by a

Client,thesettlementoffunds/securitiesshallbedonewithin24hours

ofthepayout;

2.3. That the Noticee was giving further exposure despite the clients having

debitbalancesbeyond180days,therebynotcomplyingwithPointno.12

oftheSEBICircularNo.MIRSD/SE/Cir19/2009datedDecember03,2009,

which states that the actual settlement of funds and securities shall be

done by the broker at least once in a calendar quarter or month,

depending on the preference of the clients who have consented for

maintainingarunningaccount.

Therefore, it was alleged that by the above acts, the Noticee had repeatedly

violated the provisions of SEBI Circular no. MIRSD/SE/Cir/19/2009 dated

December 3, 2009 and Circular no. SEBI/MIRSD/Cir/01/2011 dated May 13,

2011.

3. It was further observed that National Stock Exchange of India Ltd. (hereinafter

referredtoasNSE)hadconducted inspectionoftheNoticeeduringDecember

2011 and had pointed out to the Noticee that they had charged delayed

payment charges to the clients and had given further exposure. NSE had

imposed Rs 40,000/ as penalty and other disciplinary actions were taken.

However it was alleged that despite assuring to NSE, the Noticee did not take

corrective steps with regard to the inspection findings of NSE even for the

quarterendedMarch2012andJune2012.Itwas,hence,furtherallegedthatby

theaboverepeatedact,theNoticeefailedtoadheretotheprescribedcodeof



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conductinrespectofhighstandardofintegrity,promptitude,fairness,dueskill,

care and diligence, and did not abide by the SEBI Act, 1992 and rules and

regulationsmadethereunder,intermsofRegulation7readwithclausesA(1),(2)

and(5)ofcodeofconductforstockbrokersspecifiedunderScheduleIIofSEBI

(Stock Brokers & sub Brokers) Regulation, 1992. The alleged violations by the

Noticee,ifestablished,makeitliableforpenaltyundersections15HBoftheSEBI

Act,1992.

APPOINTMENTOFADJUDICATIONOFFICER

4. I was appointed as the Adjudicating Officer vide order dated August 06, 2013

underSection15IoftheSEBIAct,1992readwithrule3oftheSEBI(Procedure

forHolding Inquiryand Imposing PenaltiesbyAdjudicatingOfficer)Rules,1995

(hereinafter referred to as Rules) to inquire into and adjudge under Section

15HB of the SEBI Act, 1992. The Proceedings of appointment of Adjudicating

OfficerwascommunicatedtomeonSeptember04,2013.

SHOWCAUSENOTICE,REPLYANDPERSONALHEARING

5. ShowCauseNoticedatedSeptember17,2013(hereinafterreferredtoasSCN)

wasissuedtotheNoticeeunderrule4oftheRulesreadwithSubsection(2)of

Section15IofSEBIActto showcauseasto whyan inquiryshouldnotbeheld

andpenaltybenot imposedundersection15HBoftheSEBIActforthealleged

violationsspecifiedinthesaidSCN.

6. TheNoticeevideitsapplicationdatedOctober17,2013hadappliedforconsent

in terms of SEBI Consent Circular: CIR/EFD/1/2012 pursuant to issue of Show

CauseNoticedatedSeptember17,2013.Subsequenttothesame,theNoticee

vide letter dated December 09, 2013 stated that they were not interested in

pursuingtheconsentapplicationandhencewishtowithdraw.Accordingly,the

consentapplicationbearingno:2767/2013wasdisposedofaswithdrawn.



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7. Pursuanttothesame, inaccordancewiththeprincipleofnaturaljusticeandin

ordertoprovideafairchancetotheNoticeetoputforth itscase,videhearing

notice dated January 20, 2014, the Noticee was granted an opportunity of

hearingonFebruary04,2014andwasadvisedtofiletheirreplyonorbeforethe

said date. In response, the Noticee vide letter dated February 01, 2014

requestedforgrantoftwoweekstimeforfilingofreplyaswellasforpersonal

hearing.Thesamewasaccededto.Accordinglyanotheropportunityofhearing

wasgrantedonFebruary28,2014videhearingnoticedatedFebruary03,2014.

8. Mr. Jaikishan Lakhwani (Advocate),Mr. B B Tantri, Chief Operating Officer and

Mr. P Balakrishnan Iyer from Compliance Department, Authorized

Representatives(hereinafterreferredtoasthe ARs)appearedonbehalfofthe

Noticee.Duringthecourseofhearing,theARssubmittedreplydatedFebruary

27,2014totheshowcausenoticeandreiteratedthesubmissionsmadetherein.

TheARssubmittedthatthe increase intheoutstandingbalanceofmostclients

having debit balance was due to delayed payment charges. The ARs were

advised to provide the breakup of the delayed payment charges in respect of

instancesbroughtoutintheSCNvidepara11.Furtheronaperusalofthereply

submitted by the Noticee, it wasnoted that theNoticees had stated that they

had a robust risk management system which is based on past performance,

turnover, payment pattern, brokerage earned. On enquiring as to whether the

same was documented, the ARs stated that the said risk management system

has not been documented. ARs were interalia further advised to provide the

actualstatusofcomplianceofNSEInspectionfindingsaswellasSEBIInspection

findings.

9. VidereplyletterdatedFebruary27,2014totheSCN,theNoticeehas interalia

submittedasfollows:

9.1 Thattheobservations inthe inspectionreportareverysmall intermsof

percentagesofthetotalnumberofclientsthatareregisteredwiththem;



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9.2 Thattherearenocomplaints/grievancependingagainstthem;

9.3 Thattheactualsettlementoffunds&securitieswerenotdoneonlyinthe

caseswheretheyhadbeenspecifically instructedbyclientstonotdoso,

or, in theaccountswherecontinuous tradingactivitieswereundertaken

bytheclients;

9.4 That they had taken due care and precaution & ensured that the

quarterly/monthly settlement of funds & securities had already been

commencedandcompletedforallclientspossible;

9.5 Thatthoseclientswhohadoutstandingsettlementoffunds&securities

werenotallowedtotakeanyfurtherexposure,excepttoenablethemto

reduceorsquareofftheiroutstandingfunds.Thatalthoughtheseclients

did not trade, their outstanding balance had increased because of the

DelayedPaymentChargesbeingleviedbythemonaccountofthedelay;

9.6 That in theoverall scenario,during theperiodof inspection theyhada

total turnover of approximately Rs.34,400 crore and the total credit

balance during the same period was approximately Rs.3.5 crore, i.e.

0.01%ofthetotalexposure;

9.7 Thattheyhavearobustriskmanagementsystemwhichisbasedonpast

performance,turnover,paymentpattern,brokerageearnedandbasedon

theanalysisoftheriskmanagementteam,itcategorizesclients.Itisthe

riskmanagementsystemwhichhasensuredthattheydidnotsufferany

significantlossduetoclientdebitbalance;

9.8 That in theoverallscenario,during theperiodof inspection theyhada

totalturnoverofapproximatelyRs.34,400croreandthedebtoutstanding

duringthesameperiodwasapproximatelyRs.11.17crorei.e.0.033%;

9.9 That such clientswere not allowed to takefreshpositions unless their

previousdueswerecleared.The increase in theclientdebtbalancewas

duetotheDelayedpaymentChargeschargedtotheirrespectiveaccounts

fornonclearanceof theoutstandingdebtandnofurtherexposurewas



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providedtosuchclients,theyareonlyallowedtocleartheiroutstanding

payment;

9.10 Thatinthiscompetitivemarketwheretheclientistheking,ithasbecome

veryimportanttobeabletotakebusinesscall.Aslargenumberofclients

tendtopayafterthepayiniscomplete,hence,howmuchexposureisto

beallowed/grantedtoclientsdependsontheirpastconductlikebusiness

generated by the client i.e. brokerage earned over theperiodfor their

transactions;

9.11 That as regards the observation ofNSEwith respect to the inspection

conductedbyNSEduringDecember2011,theobservationshighlightedby

theNSEinspectionofficialshavebeencompliedwith.

10. TheNoticeevideletterdatedMarch10,2014madefurthersubmissions/

provideddocumentsasmentionedbelow:

10.1 The list of active client with continuous credit balance of more than

Rs.10,000/ as onDecember 31, 2011. TheNoticee has submitted that

mostoftheclientscreditbalanceshavebeensettled.Ithasbeenpointed

outthatthelistaspertheSCNstated352clients,but,thatactualnumber

ofclientsare347andnot352,astherehasbeenhumanerrorintermsof

numberingandthefollowingnos.2,3,4,334and338weremissing inthe

list;

10.2 ThatasregardstheallegationsintheSCNthatclientsweregivenfurther

exposures despite having debit balance beyond 180 days andpenalty

being charged,forwhich details in respect of 10 such instanceswere

provided in the SCN, it has been submitted that looking at thepast

performance of the said clients, itwasmanagements decision to give

exposureinspiteofhavingdebits.Furtherithasbeensubmittedthat7out

of10 clientshadnot increased theirdebitsafterDecember2011and2

out10clientshadnotincreasedtheirdebitsafterOctober2012.Secondly



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that they had also received chequesfrom certain clients against their

debits;

10.3 CopyofNoticeesletterdatedAugust02,2013providingpointwisereply

toNSEindicatingthestatusofcompliancetoNSEsInspectionfindingsof

December2012;

10.4 Thatthereisnopending/NonComplianceofSEBIActRegulationagainst

the Company, however a Copy of Consent Order No.1993/2010 dated

September06,2010wherebywithoutadmittingordenying thecharges

theNoticeehadremittedasumofRs.1lactowardssettlementchargesto

disposeof theenquiryproceedingspendingagainst theapplicant in the

matterofM/s.MircElectronicsLtd.

CONSIDERATIONOFISSUESANDFINDINGS

11. IhavecarefullyperusedthewrittenandoralsubmissionsoftheNoticee,copyof

documentssubmittedbytheNoticeeandtheothermaterialavailableonrecord.

TheallegationsagainsttheNoticeeisthat:

11.1.

TheNoticeehasrepeatedlyviolated/notcompliedwiththeprovisionsof

SEBI

Circular

no.

MIRSD/SE/Cir/19/2009

dated

December

03,

2009

and

Circularno.SEBI/MIRSD/Cir/01/2011datedMay13,2011;

11.2. FurtherthatbytheaboverepeatedactsoftheNoticee,theNoticeehas

failed to adhere to the prescribed code of conduct in respect of high

standardofintegrity,promptitude,fairness,dueskill,careanddiligence,

and thereby did not abide by the Act, Rules and Regulations in term of

Regulation 7 read with clausesA (1), (2) and (5) of code of conduct for

stock

brokers

specified

under

Schedule

II

of

SEBI

(Stock

Brokers

&

sub

Brokers)Regulation,1992.

12.

Theissuesthatariseforconsiderationinthepresentcasethereforeare:

12.1. Whether the Noticee has violated/ notcomplied with the provisions of

SEBI Circular no. MIRSD/SE/Cir/19/2009 dated December 03, 2009 and



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Circularno.SEBI/MIRSD/Cir/01/2011datedMay13,2011?Ifso,whether

suchviolation/noncomplianceshaveoccurredrepeatedly?

12.2. In view of the aforesaid, whether the Noticee has failed to adhere the

prescribed code of conduct in respect of high standard of integrity,

promptitude, fairness,dueskill,careanddiligence,andthereby didnot

abidebytheAct,RulesandRegulationsintermofRegulation7readwith

clauses A (1), (2) and (5) of code of conduct for stock brokers specified

underScheduleIIofSEBI(StockBrokers&subBrokers)Regulation,1992?

12.3. Does the violation, if any, on the part of the Noticee attract monetary

penaltyundersections15HBoftheSEBIAct?

12.4. Ifso,whatwouldbethemonetarypenaltythatcanbe imposedagainst

the Noticee taking into consideration the factors mentioned in section

15JoftheSEBIAct?

13. Beforemovingforward,itwillbeappropriatetorefertotherelevantprovisions

ofSEBICircularno.MIRSD/SE/Cir/19/2009datedDecember3,2009andCircular

no.SEBI/MIRSD/Cir/01/2011datedMay13,2011 whichreadsasunder:

ProvisionsofSEBICircularno.MIRSD/SE/Cir/19/2009dated03.12.2009

MandatoryDocuments

RunningAccountAuthorization

12. Unless otherwise specifically agreed to by a Client, the settlement of

funds/securitiesshallbedonewithin24hoursof thepayout.However,aclient

mayspecificallyauthorizethestockbrokertomaintainarunningaccountsubject

tothefollowingconditions:

a.Theauthorizationshallberenewedatleastonceayearandshallbedated.

b.Theauthorizationshallbesignedbytheclientonlyandnotbyanyauthorised

personon

his

behalf

or

any

holder

of

the

Power

of

Attorney.

c. The authorization shall contain a clause that the Client may revoke the

authorizationatanytime.

d. For the clients having outstanding obligations on the settlement date, the

stockbrokermay retain the requisite securities/funds towards suchobligations

and may also retain the funds expected to be required to meet margin



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obligationsfor next 5 trading days, calculated in themanner specified by the

exchanges.

e.Theactualsettlementoffundsandsecuritiesshallbedonebythebroker,at

leastonce inacalendarquarterormonth,dependingon thepreferenceof the

client.Whilesettlingtheaccount,thebrokershallsendtotheclientastatement

ofaccountscontaininganextractfromtheclientledgerforfundsandanextract

fromtheregisterofsecuritiesdisplayingallreceipts/deliveriesoffunds/securities.

Thestatementshallalsoexplaintheretentionoffunds/securitiesandthedetails

ofthepledge,ifany.

f. The client shall bring any dispute arisingfrom the statement of account or

settlementsomadetothenoticeofthebrokerpreferablywithin7workingdays

fromthedateofreceiptoffunds/securitiesorstatement,asthecasemaybe.

g.Suchperiodicsettlementofrunningaccountmaynotbenecessary:

i.for

clients

availing

margin

trading

facility

as

per

SEBI

circular

ii.forfundsreceivedfrom theclientstowardscollaterals/margin intheformof

bankguarantee(BG)/FixedDepositreceipts(FDR).

h.Thestockbrokershalltransferthefunds/securities lying inthecreditofthe

clientwithinoneworkingdayoftherequest ifthesameare lyingwithhimand

within three working days from the request if the same are lying with the

ClearingMember/Clearing Corporation.

i.Thereshallbenointerclientadjustmentsforthepurposeofsettlementofthe

running

account.

j.Theseconditionsshallnotapplyto institutionalclientssettlingtradesthrough

custodians.Theexistingpracticemaycontinueforthem.

ProvisionsofSEBICircularno.SEBI/MIRSD/Cir/01/2011dated13.05.2011.

ClarificationoncirculardatedDecember03,2009onDealingsbetweenaClient

andaStockbroker

1. This is with reference to SEBI circular No. MIRSD/SE/Cir19/2009 dated

December03,

2009

wherein

the

stock

brokers

were

directed

to

comply

with

the

requirementsasannexedtotheaforesaidcircular.

2. Subsequent to the issuance of the aforesaid circular, SEBI has received

representations from market participants expressing difficulties in

implementationof the requirementspertaining to renewalofRunningAccount

Authorisationonceinayearasprescribedinclause12(a)readwithclause12(c)

oftheAnnexuretotheaforesaidcircular.



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3. Hence, in consultation with the major stock exchanges, the above

requirementshavenowbeenmodifiedasfollows:

i.Clause12(a)oftheaforesaidannexurepertainingtorenewalofauthorisation

standsdeleted.

ii.Clause12(c)oftheaforesaidannexureisrevisedandshallread,asunder:

Theauthorisationshallbedatedandshallcontainaclausethattheclientsmay

revoketheauthorisationatanytime.Thestockbrokers,whilesendingperiodical

statement of accounts to the clients, shallmention therein that their running

account authorisation would continue until it is revoked by the clients. The

above modifications would simplify and rationalize the requirements while

protectingtheinterestofinvestors.

StockbrokerstoabidebyCodeofConduct

7.Thestockbrokerholdingacertificateshallatall timesabideby theCodeof

ConductasspecifiedinScheduleII.

SCHEDULE

II

SecuritiesandExchangeBoardofIndia(StockBrokersandSubbrokers)

Regulations,1992

CODEOFCONDUCTFORSTOCKBROKERS

[Regulation7]

A.General.

(1) Integrity: A stockbroker, shall maintain high standards of integrity,

promptitudeandfairnessintheconductofallhisbusiness.

(2)Exerciseofdueskillandcare:Astockbrokershallactwithdueskill,careand

diligencein

the

conduct

of

all

his

business.

(3).

(4).

(5)Compliancewithstatutoryrequirements:Astockbrokershallabidebyallthe

provisionsof theActand the rules, regulations issuedby theGovernment, the

BoardandtheStockExchangefromtimetotimeasmaybeapplicabletohim.

14. Now the first issue for consideration is whether the Noticeehasviolated/ not

complied with the provisions of SEBI Circular no. MIRSD/SE/Cir/19/2009 dated

December 03, 2009 and Circular no. SEBI/MIRSD/Cir/01/2011 dated May 13,

2011.



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Sr.

No.

Client

CodeName

ContinuousCredit

balance>180days

(inRs.)ason

December31,

2011

CommentsoftheNoticeevide

emaildated

October10,2012

1 1320141 Mr.GovindModi 10,000.00Credit

amount

repaid

on

September26,2012

2 4050393Mr.PremParkash

Gupta75,828.18

Creditamountrepaidon

September26,2012

3 3710096Mr.NandKishore

Nambiar100,375.00

Creditamountrepaidon

September26,2012

4 2510029M/s.Rampur

InternationalLtd.1,381,922.67

Creditamountkeptformargin

purpose

5 2050051Mr.VijayaKumar

Svurna5,000.00

Creditamountalreadyrepaidand

nownilbalance

17.

Inwas

observed

that

the

Noticee

vide

letter

dated

May

13,

2013,

in

response

to

SEBI letterNo.MIRSD1/IR/ASM/9880/2013datedApril25,2013,had interalia

submitted to inspection that the primary reason for noncompliance on their

part was due to continuous trading activities being undertaken/ executed by

theirclients,thereforesettlingoffundsandsecuritiesforsuchclientswouldget

reallycumbersomefortheNoticee.Thus, itwasobservedthattheNoticeehad

admitted that no actual settlement of funds and securities, either monthly or

quarterlywas

being

carried

out,

thereby

not

complying

with

Point

no.

12

of

the

SEBICircularNo.MIRSD/SE/Cir19/2009,datedDecember03,2009withrespect

to quarterly/ monthly settlement of funds and securities of clients. The reply

inter alia also stated that quarterly settlement of funds and securities had

commencedanddoneforthequarterendingSeptember2012.

18. IfindthattheNoticeehasinteraliafurthersubmittedinitsreplydatedFebruary

27,2014

to

the

SCN

that

during

the

period

of

inspection,

the

total

turnover

of

the Noticee was approximately Rs.34,400 crore and the total credit balance

during the same period was approximately Rs.3.5 crore i.e. 0.01% of the total

exposure. I note here that the Noticee has tried to compare Noticees total

turnover across all clients during the period of inspection with the total credit

balanceoftheclientsduringtheinspectiontoportraythatthecreditbalanceis



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negligibleascomparedtotheturnover.This,Ifind,islikecomparingappleswith

oranges to completely distort the facts. Before comparing the two, it was

importantfortheNoticeetoatleastconsiderwhetheritwaspossibletocompare

thecreditbalanceslyingtothecreditoftheclientsaccounts,withtheNoticees

overallturnover inthefirstplace.TheNoticeesoverallturnoverfortheperiod

would include turnover of all clients irrespective of whether their accounts

showed credit balances, debit balances or Nil balance and would also include

trades of the Noticee on his proprietary account, if any. However, from the

same, I note that the Noticee has, thus, admitted the fact pointed out by

inspection that the total credit balance of clients with the Noticee which were

not settled for more than 180 days as on quarter ended December 2011 was

approx.Rs.3.5crore.

19. TheNoticeevidethesaidreplyhasfurthersubmittedthattheactualsettlement

offunds&securitieshadnotbeendoneonlyinthecaseswheretheyhavebeen

specifically instructed by clients to not do so, or, in the accounts where

continuoustradingactivitieswereundertakenbytheclients.However,Ifindthat

the Noticee has neither submitted any written instructions/ authorization

obtainedfrom itsclientstotheeffect,nor,settledthefunds inthetimeframe

prescribed as per clause 12 of SEBI Circular No. MIRSD/SE/Cir19/2009 dated

December03,2009,whichstatesthatunlessotherwisespecificallyagreedtoby

theclients,thesettlementoffunds/securitiesshallbedonewithinoneworking

dayofthepayout.

20. The Noticee vide its reply dated March 10, 2014, pursuant to hearing, has

pointedoutthatthoughthe listofactiveclientswithcontinuouscreditbalance

of more than Rs 10,000/ as on December 31, 2011 annexed with the SCN

indicatedatotalof352suchclients,theactualnumberofclientswere347and

not352,astheserialnumbers2,3,4,334and338weremissinginthelist.The

same has been taken note of. Further, vide the said reply, the Noticee has



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annexed an updated status of the said clients. The said updated statement, I

find,hasnotbeensupportedbyanysupportingdocumentation.Evenpresuming

thesametobetrue,onperusalofthesaidupdatedstatus, it isnotedthatthe

accounts of most of the clients were settled as late as in September, 2012 or

eventhereafter.

21. Even in cases where clients would have specifically authorized the Noticee to

maintainarunningaccount,Ifindthataspersubclause(e)ofclause12ofSEBI

Circularno. MIRSD/SE/Cir/19/2009 dated December3, 2009,actual settlement

of funds and securities was required to be done by the stock broker, at least

once in a calendar quarter or a month, depending on the preference of the

client.From

all

of

the

above,

Ifind

that

out

of

the

347

clients

with

continuous

creditbalanceofmorethanRs10,000/ asonDecember31,2011aggregatingto

Rs.2,79,24,052.27,theNoticeehadsettledveryfewclientsduringthemonthsof

January to August 2012 and most of the clients accounts were settled from

September,2012onwards.

22.

I findthat theSCN furtherallegesthat some of the clients of the Noticee who

had

substantial

debit

balances

for

more

than

180

days

were

given

further

exposure.ThedetailsofsuchinstancesbroughtoutintheSCNareasfollows:

Sr.

No.

ClientCode Name DebitBalance

91days180days

(quarterending

Dec2011)(Rs.)

DebitBalance

morethan180days

(quarterending

Dec2011)(Rs.)

1 1170467 Ms.BhavnaBhatnagar 1,54,612.70 40,97,347.84

2 1040034 Mr.ShaileshShantilal

Shah

15,229.72 1,98,053.37

3

1110290

Mr.Gorrepati

RamakrishnaReddy13,693.54

98,174.55

4 2760294 Mr.TousifBashirDar 15,444.26 28,763.96

5 2760300 Mr.WasimRajaBalla 12,976.91 2,15,344.30

6 1070077 M/s.StreconFinancial

ServicesPvt.Ltd.

40,000 3,15,555.99



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_____________________________________________________________________________________


Sr.

No.

ClientCode Name DebitBalance

91days180days

(quarterending

Dec2011)(Rs.)

DebitBalance

morethan180days

(quarterending

Dec2011)(Rs.)

7 G014 M/s.GeeBeeInvestments 28,669.33 1,58,881.38

8 HYR336 Ms.RajshriKarwa 39,415.94 3,05,245.60

9

3010570

Ms.Harshada

H

Kulaye

17,03,679.75

1,74,79,487.86

10 3010585 M/s.AnuvaSecuritiesPvt.

Ltd.

7,02,968.08 67,61,628.57

InotefromtheSCNthattheNoticeehadsubmittedtoinspectionthattheremay

perhaps have been situations where trading activities may have been

undertaken/executedbytheclient inordertoregularizetheaccount,anddue

to lowvolumeandtorecovertheirdebit,additionalexposuresmayhavebeen

provided

to

the

clients.

Vide

letter

dated

February

27,

2014,

the

Noticee

has

reiterated that those clients who had outstanding settlement of funds &

securitieswerenotallowedtotakeanyfurtherexposure,excepttoenablethem

toreduceorsquare offtheiroutstanding funds. I further findthattheNoticee

hasinteraliaadmittedthatactualsettlementoffunds&Securitieshadnotbeen

done only in the cases where the Noticee had been specifically instructed by

clientstonotdoso,or,intheaccountswheretherehadbeencontinuoustrading

activitiesundertaken

by

such

clients.

However,

as

mentioned

earlier,

Ifind

that

the Noticee has neither submitted any written instructions/ authorization

obtainedfrom itsclientstotheeffect,nor,settledthefunds inthetimeframe

prescribed as per clause 12 of SEBI Circular No. MIRSD/SE/Cir19/2009 dated

December 03, 2009, which required that even if a client had given running

accountauthorization,theactualsettlementoffundsandsecuritiesbedoneby

the broker at least once in a calendar quarter or month, depending on the

preferenceoftheclient.

23. I further find that the SCN alleged that the clients of the Noticee were given

further exposure despite having debit balance beyond 180 days and penalty

beingcharged,thedetailsofsuchfewinstancesaregivenbelow:



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Sr Code Name Closing

balanceason

June30,2011

(Rs.)

Closing

balanceason

Sept30,2011

(Rs.)

Increasein

debitbalance

(Rs.)

Noticees

comments*on

increasein

debitbalance

1 2510105 M/s.

Passion

System

Solutions

Pvt.Ltd.

9,60,33,119.72 106,132,060.17 10,098,940.45 Delayed

payment

charges&

further

exposuregiven

2 V154 M/s.

Vector

Financial&

Manageme

nt

Consultant

1,81,56,141.38 36,207,059.05 18,050,917.67 Delayed

payment

charges&

further

exposuregiven

3 1179631 Mr.Vishal

Harishchan

draTrehan

HUF

2,54,69,771.26 34,825,060.80 9,355,289.54 Delayed

payment

charges&

further

exposuregiven

4 1170363 Mr.JigarP

Ghoghari

4,57,483.17 6,099,898.52 5,642,415.35 Delayed

payment

charges&

further

exposuregiven


balanceason

Sept30,2011

(Rs.)

Closing

balanceason

Dec30,2011

(Rs.)

Increasein

debitbalance

(Rs.)

Noticees

comments*on

increasein

debitbalance

1

1C023 M/s.

Cartier

LeafinPvt.

Ltd.

2,41,73,417.93 34,581,837.12 10,408,419.19

Further

exposuregiven

2 1100166 M/s.Kay

PeeShares

&Stocks

Pvt.Ltd.

2,51,48,064.53 113,513,703.25 88,365,638.72 Further

exposuregiven

3 1100167 M/s.Pee

KayShares

&Stocks

3,25,09,915.59 91,838,117.41 59,328,201.82 Further

exposuregiven

Sr

Code

Name

Closing

balanceason

Dec31,2011

(Rs.)

Closingbalanceason

March31,2012

(Rs.)

Increasein

debitbalance

(Rs.)

Noticees

comments*on

increasein

debitbalance

1 N122 Mr.NanjiV

Shah

379,515.59 802,603.27 423,087.68 Further

exposuregiven

2 1560043 Mr.Arikatla

Srinivasa

Reddy

12,46,813.83 2,032,359.27 785,545.44 Further

exposuregiven



17/25

_____________________________________________________________________________________



balanceason

June30,2012

(Rs.)

Closing

balanceason

Sept29,2012

(Rs.)

Increasein

debitbalance

(Rs.)

Noticees

comments*on

increasein

debitbalance

1 N122 Mr.NanjiV

Shah

527,526.93 720,859.15 193,332.22 Further

exposuregiven

24. I find that the Noticee vide email dated September 13, 2012 had informed to

inspectionthataspertheirpolicytheywerechargingupto3%permonthonthe

dailyoutstandingvalueoratsuchratesasmaybedeterminedfromtimetotime

by them. The Noticee had further submitted to inspection that the Delayed

Payment Charges (DPC) were levied to the clients Trading Accounts as agreed

uponbythematthetimeofsigning/executingKnowYourClient(KYC)Formand

MemberClientAgreement.Further,ontheremarkofadditionalexposurebeing

provided to their clients, the Noticee had stated that owing to their stringent

Risk Management Policy, such instances are generally avoided as their Risk

Management Team shall at no cost allow any further trading activities to be

undertaken by that particular client in case of debit balance existing in his

account. It was also stated that till funds or collateral in the form of shares/

securitieswerenotreceived,clientswerenotallowedtocreate/takeanyfresh

positions.TheNoticee,Ifind,however,hadfurtherstatedthatsinceithadbeen

highlightedbythe InspectingOfficials, itshallhelpthembridgethegap intheir

systemsandduecareshallbeexercisedbythemhenceforth.

25. Thus, I find from all of the above that the inspection had revealed that the

Noticee was giving further exposure despite having debit balance beyond 180

days and thereby not complying with Point no. 12 of the SEBI Circular No.

MIRSD/SE/Cir19/2009datedDecember03,2009whichstatesthatevenincases

of clients who have consented for maintaining a running account, the actual

settlementoffundsandsecuritieshavetobedonebythebrokeratleastoncein

acalendarquarterormonth,dependingonthepreferenceoftheclient. Ifind

that the Noticee has inter alia admitted that actual settlement of funds &



18/25

_____________________________________________________________________________________


securities was not done only in the cases where they had been specifically

instructed by clients to not do so, or, in the accounts where there had been

continuoustradingactivitiesundertakenbysuchclients.TheNoticee,however,

could not produce any written instructions/ authorization obtained from its

clientstothateffect.

26. TheNoticeehasinteraliafurtherstatedthatthoseclientswhohadoutstanding

settlementoffunds&securitieswerenotallowedtotakeanyfurtherexposure,

except to enable them to reduce or square off their outstanding funds. The

Noticee has further also stated that although these clients did not trade, their

outstanding balance had increased because of the Delayed Payment Charges

being

levied

by

them

on

account

of

the

delay.

The

ARs

reiterated

the

said

submissionatthetimeofhearing.TheARswereadvisedtoprovidethebreakup

ofthedelayedpaymentcharges inrespectof instancesbroughtout intheSCN

for10clients.Thestatementofdelayedpaymentchargesleviedonthe10clients

visvistheirclosingbalancesprovidedbytheNoticeevide letterdatedMarch

10,2014 indicatethatfurtherexposurewasallowed inallthesaid10accounts

despite the clients having large debit balances, and it was not as if their

outstanding

balances

had

increased

only

because

of

delayed

payment

charges

charged,asclaimedbytheNoticee.Furtheronaperusalofthereplysubmitted

bytheNoticee,itwasnotedthattheNoticeeshadstatedthattheyhadarobust

risk management system which is based on past performance, turnover,

paymentpattern,brokerageearned.Onenquiringastowhetherthesamewas

documented,theARssubmittedthatthesaidriskmanagementsystemhadnot

beendocumented.Thus,itappearsfromthesamethattheNoticeedidnothave

any

laid

down

risk

management

policy

in

place

with

respect

to

settlement

of

fundsandsecuritiesofitsclients.

27.

TheNoticeevideitreplydatedMarch10,2014hasinteraliasubmittedthatwith

respecttoinstancesof10clientsbroughtoutintheSCN,7outof10clientshad

not increased their debits after December 2011 and 2 out 10 clients had not



19/25

_____________________________________________________________________________________


increasedtheirdebitsafterOctober2012.Alsothattheyhadreceivedcheques

fromcertainclientsagainsttheirdebits.Ithasinteraliafurtherbeensubmitted

that it was managements decision to give exposure inspite of having debits.

Thus, I find that the Noticee has inter alia admitted to willfully giving further

exposuretoitsclientsdespitehavingdebitbalancesinviolationwithclause12of

SEBI Circular No. MIRSD/SE/Cir19/2009 dated December 03, 2009, which

requiredthatevenifaclienthadgivenrunningaccountauthorization,theactual

settlement of funds and securities be done by the broker at least once in a

calendarquarterormonth,dependingonthepreferenceoftheclient.Infact,it

is observed from a perusal of statement provided by the Noticee vide letter

datedMarch10,2014that incaseof3outofthe10clientsbroughtout inthe

SCN, the collateral available with the Noticee on behalf of the client was not

evenenoughtocoverthedebitbalance intheclientsaccount.Forexample, in

caseofM/s.VectorFinancialandManagementConsultant,thedebitbalanceas

on June 30, 2011 and September 30, 2011 was Rs. 1,81,56,141.38 and Rs.

3,62,07,059.05,whereascollateralofthesaidclientavailablewiththeNoticeeas

on June 30, 2011 and September 30, 2011 was only Rs. 11,07,320/ and Rs.

1,44,34,280/ respectively, despite the same, fresh debit was allowed in the

clientaccounttillSeptember30,2011.

28. IfurtherfindthatNSEhadconductedInspectionduringDecember2011andhad

pointedouttothe Noticee thattheyhadcharged delayedpaymentchargesto

clients and had also given further exposure. In response to the inspection

findingsofNSE,itwasobservedthattheNoticeehadsubmittedtoNSEthatthe

reasonsfordelayedpaymentchargeswere in linewiththeguidelinesandwith

consent of the clients. The Noticee had also assured that various steps were

being initiatedbythem includingeducatingmajorityoftheirclientsabouttheir

payin obligations in line with the regulatory compliances. The Noticee had

further stated that no trades were allowed in such clientele accounts where

debit is more than T+7 trading days. Inspection had observed that despite



20/25

_____________________________________________________________________________________


assuringto NSE,theNoticee hadnottakencorrectivestepswithregardto the

inspection findings of NSE. The SCN, therefore, alleged that though it was

observed that NSE had imposed Rs 40,000/ as penalty and other disciplinary

actionsweretaken,however,theNoticeehadnottaketheinspectionreportof

NSEseriously.

29. IfindthatSEBICircularNo.MIRSD/SE/Cir19/2009datedDecember03,2009inter

alia stipulates that where a client specifically authorizes the stock broker to

maintain a running account, then too, the actual settlement of funds and

securities shall be done by the broker, at least once in a calendar quarter or

month,dependingonthepreferenceoftheclient. Further,aspertheaforesaid

circular,stock

brokers

were

required

to

ensure

its

full

compliance

in

respect

of

allclients(existingaswellasnew),latestby31stMarch2010(laterextendedto

June30,2010).

30. However, from all of the aforesaid, it is observed that the Noticee had not

compliedwithSEBICirculardatedDecember03,2009andcirculardatedMay13,

2011withrespecttosettlementoffundsandsecuritiesoftheclientsevenasat

the

time

of

SEBI

inspection,

i.e.

even

after

two

years

from

the

date

when

the

provisions regarding the settlement of running accounts came into effect.

Besides, I note that this was despite NSE bringing the said irregularities to the

noticeoftheNoticee.Thus,Ifindthattherewasagenerallackadaisicalattitude

onthepartoftheNoticeeincomplyingwiththeaforesaidcircularswithrespect

tosettlementoffundsandsecuritiesoftheclients.Hence,Ifurthernotethatthe

Noticee did not adhere to the prescribed code of conduct in respect of high

standard

of

integrity,

promptitude,

fairness,

due

skill,

care

and

diligence,

and

did

notabidebytheSEBIAct,1992andrulesandregulationsmadethereunder, in

termofRegulation7readwithclausesA(1),(2)and(5)ofcodeofconductfor

stockbrokersspecifiedunderSchedule IIofSEBI(StockBrokers&subBrokers)

Regulation,1992.



21/25


22/25

_____________________________________________________________________________________


34. Whiledeterminingthequantumofmonetarypenaltyundersection15HB,Ihave

considered the factors stipulated in section 15J of SEBI Act, which reads as

under:

15J Factorstobetakenintoaccountbytheadjudicatingofficer

Whileadjudgingquantumofpenaltyundersection15I,theadjudicatingofficer

shallhavedueregardtothefollowingfactors,namely:

(a) The amount of disproportionate gain or unfair advantage, wherever

quantifiable,madeasaresultofthedefault;

(b) Theamountoflosscausedtoaninvestororgroupofinvestorsasaresultof

thedefault;

(c)Therepetitivenatureofthedefault.

35. Intheinstantcase,itisfoundthatnoquantifiablefiguresareavailabletoassess

thedisproportionategainorunfairadvantagemadeasaresultofsuchdefaultby

the Noticee. Further from the material available on record, it may not be

possible to ascertain the exact monetary loss to the investors on account of

defaultbytheNoticee.

36. I,however,notethetotaldebitbalanceasonDecember31,2011ofthe2,508

activeclientswhohaddebitbalanceswhichwerenotsettledformorethan180

days was Rs 11,17,26,057/. I further note that the total credit balance as on

December31,2011of10,216activeclientswhohadcreditbalances,but,which

were not settled for more than 180 days was Rs 3,48,04,976/. Further, I note

that even as on quarter ended March 2012, there were 2,284 active clients

comprising

16.78%

of

total

number

of

active

clients

of

the

Noticee,

who

had

continuous debit/credit balance of more than Rs. 1,000/ for more than 180

days. This was despite the fact that NSE had conducted an inspection during

December 2011 and pointed out to the Noticee that the Noticee had charged

delayedpaymentchargestotheclientsandhadgivenfurtherexposure.Thus,it

isnotedthattheNoticeehadnottakencorrectivestepsdespitethe Inspection



23/25


24/25


25/25

41. The Noticee shall pay the said amount of penalty by way of demand draft in

favour of SEBI Penalties Remittable to Government of India, payable at

Mumbai,within45daysofreceiptofthisorder.Thesaiddemanddraftshouldbe

forwardedtoShriSujitPrasad,ChiefGeneralManager,MIRSD,SEBIBhavan,Plot

No.C4A,GBlock,BandraKurlaComplex,Bandra(E),Mumbai400051

42. Intermsofrule6oftheRules,copiesofthisorderaresenttotheNoticeeand

alsototheSecuritiesandExchangeBoardofIndia.

Date: September25,2014 AnitaKenkare

Place:Mumbai AdjudicatingOfficer