BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 68 of 2011
Date of decision: 29.7.2011
M/s. Mansukh Securities and Finance Ltd.
Mansukh House, Plot No. 6,
Opp. Mother Dairy,
Pandav Nagar,
New Delhi- 110 092
……Appellant Versus
The Adjudicating Officer,
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra Kurla Complex,
Mumbai-400 051
…… Respondent Mr. Prakash Shah, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Ms. Harshada Nagare, Advocate for the Respondent.
CORAM : P.K. Malhotra, Member
S.S.N. Moorthy, Member
Per : P.K. Malhotra, Member
The appellant before us is a public limited company inco rporated under the
Companies Act, 1956. It is a member of the National Stock Exchange of India Limited
and is registered with the Securities and Exch ange Board of India (the Board) as a stock
broker as well as participant of Nationa l Securities Depository Limited. The Board
carried out inspection of books of accounts a nd records of the appellant during
October 6, 2004 to October 13, 2004 for th e financial years 2002-2003, 2003-2004 and
for 2004-2005 up to the date of inspection and noticed certain i rregularities in the
maintenance of books of accounts and complianc e with the regulations/circulars issued
by the Board from time to time. A copy of the inspection report was made available to the
appellant on January 3, 2005 asking it to submit its comments together with documents, if
any, in support of the comments. Thereafter a show cause notice dated
September 14, 2007 was issued to the appellant indicating the irregularities committed by
it in the maintenance of records and asking it to show cause as to why an enquiry should
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not be held against it in term s of Rule 4 of the Securities and Exchange Board of India
(Procedure for Holding Inquiry and Imposing Penalty by the Adjudicating Officer) Rules,
1995 and why penalty should not be imposed under Section 15H B of the Securities and
Exchange Board of India Act, 1992. The appellant filed a reply dated November 12, 2007
denying the allegations of irregularities and denying th at it had violated any of the
regulations/guidelines of the Board with regard to maintenance of its books of accounts.
An opportunity of hearing was also provided to the appellant after which the adjudicating
officer of the Board passe d the impugned order dated February 14, 2011 holding the
appellant guilty of the following irregularities:
(i) Paying and receiving cash to/from clients in lieu of securities thereby
violating regulation 26(xv) of the Securities and Exchange Board of India
(Stock brokers and Sub-Brokers) Re gulations, 1992 (for short the stock
brokers regulations) read with Board’s Circulars dated November 18, 1993
and August 27, 2003.
(ii) Allowing unauthorized persons to carry out proprieta ry account trading
besides client based tradi ng thereby violating regula tion 26(xv) of the stock
brokers regulations.
(iii) Failing to segregate client’s funds with its own thus violating regulation
26(xiii) of stock brokers regulations and Board’s circular dated November 18,
2003; and
(iv) Not mentioning the settlement number in contract notes issued by it thereby
violating regulation 26(xvi) of stock brokers regulations.
By the impugned order, the adjudica ting officer imposed a penalty of ` 5 lacs on the
appellant for the aforesaid violations. Hence this appeal.
- We have heard the learned counsel for the parties w ho have taken us through the
record. It is argued by learned counsel for the appellant that it has furnished satisfactory
explanation which has not be en accepted by the adjudicating officer. The alleged
irregularities are procedural in nature and foll owing the dictum of ear lier orders of this
Tribunal, no penalty can be imposed on the appellant for th e alleged irregularities. Our
attention was also drawn to an order of this Tribunal passe d on June 16, 2011 in 3
Appeal no. 23 of 2011 (Religare Securities Limited vs Securities and Exchange Board of
India) wherein the Tribunal has observed as under:-
“It must be remembered that the purpose of carrying out inspection is not
punitive and the object is to make the intermediary comply with the
procedural requirements in regard to the maintenance of records. We also
cannot lose sight of the fact that every minor discrepancy/irregularity
found during the course of inspection is not culpable and the object of the
inspection could well be ac hieved by pointing out the
irregularities/deficiencies to the intermediary at the time of inspection and
making it compliant. This will, of course, depend on th e nature of the
irregularity noticed and we hasten to add a caveat that it is not being
suggested that if any serious lapse is found dur ing the course of the
inspection, the Board should not proceed against the delinquent.”
Learned counsel for the appellant has also dr awn our attention to this Tribunal’s order
dated May 2, 2008 in Appeal no. 27 of 2008 (SMC Global Securities Limited vs
Securities and Exchange Board of India) wher e observations made in an earlier case of
Harinarayan G. Bajaj (Appeal no. 117 of 2003 dated 10.10. 2007) we re relied upon and
submitted that procedural precautions prescrib ed in Board’s circular are only guidelines
and not mandatory and hence penal provisions are not attracted. This is what the Tribunal
has held:
“8.……..The learned senior counsel for th e appellants referred to the Board circular no.SMD I / 23341 dated 18.11.1993 listing the
precautions to be exercised by me mber-brokers of recognized stock
exchanges while trading on behalf of their clie nts and entertaining new
clients. The Board in it s wisdom considered it necessary to list these
precautions so that they were uniformly followed by the member-brokers
as this would prot ect the interests of member-b rokers, instill transparency
and discipline in the deal between clients and brokers and would contribute
to the healthy working of the secondary capital market. The precautions to
be exercised by the member-brokers have been classified into two
categories- (a) mandatory; and (b) precautions by way of a guideline. The
Board wants member-brokers of the ex changes to compulsorily follow the
precautions suggested in part (a) of their operat ing system, whereas those
suggested in part (b) may be treated as guidelines to be followed as and
when circumstances warrant. We have gone through the mandatory
precautions laid down by the board and find that there is no
requirement of any broker to know fr om his client the names of other
brokers through whom he may be dealing with …..In view of the
aforesaid circular issued by the Bo ard, we have no hesitation in holding
that it was not a mandator y requirement for a trader to inform his broker
about other brokers through whom he was dealing in the scrip though the
form contains a clause requiri ng a trader to furnish such
information…..”.(emphasis supplied).”
Let us now examine the irregul arities which have been poin ted out by the Board in the
impugned order. The appellant is alleged to have paid and received cash to/from clients
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in lieu of securities which is alleged to be in violation of Regulation 26(xv) of the stock
brokers regulations read with Board’s circul ar dated November 18, 1993 and
August 27, 2003. The appellant subm itted before the Board that the transactions were
made against trading obligation of clients in exceptional circumstances and in the interest
of commercial prudence. It was further submitted by it that the number of such
transactions is negligible when compared to the total transactions during the period
covered by the inspection repor t. All such cash transactions were of small amount and
were not violative of even the requirements of the Income Tax Act. Under the Board’s
circular dated November 18, 1993, these instructions are only guidelines and not
mandatory requirements. It is only under the circular da ted August 27, 2003 that the
instructions were reiterated that brokers and sub-brokers should not accept cash from the
client. The Board has not ac cepted the reply of the appe llant on the gr ound that the
noticee failed to give strict proof of the ex ceptional circumstances that led noticee to
accept or pay to the clients in cash. Lear ned counsel for the Board submitted before us
that even if the cash transac tions entered into by the a ppellant may not be large as
compared to the total tr ansactions and irrespective of the fact that these transactions are
for an amount of ` 20,000/- and less, it will not make any difference as the circular
issued by the Board specifica lly mandates that all payments shall be received/made by
the brokers from/to the clients strictly by account payee crossed cheques/ demand drafts
or by way of direct credit into the bank acc ount or any other mode allowed by the
Reserve Bank of India. It is only in exceptional circumstances that a broker or sub broker
may receive the amount in cash to the extent not in violation of income tax requirements
as may be enforced from time to time. Even this requirement of making payment in cash
in exceptional circumst ances was introduced onl y by the Board’s circular dated
August 27, 2003. The earlier circular dated November 18, 1993 did not permit even such
concession.
- Regulation 26 of the stock brokers regulations makes a stock broker or a sub
broker liable to monetary pena lties in respect of the viol ations mentioned thereunder.
Clause (xv) of the said regulation makes failure to comply with the directions issued by
the Board under the Act or the Regulations framed thereunder liable to monetary penalty. 5
The violation in the case in hand is neither of the Act nor of the Regulations framed
thereunder but of the two circulars mentioned above. Perusal of the record made available
to us shows that the nu mber of transactions which were entered into by the appellant in
cash to/from clients in lieu of securities is smal l as compared to th e total number of
transactions entered into by the appellant during the inspection report and all such
transactions are of amounts less than ` 20,000/-. As observed in th e earlier decisions of
this Tribunal referred to above, the purpose of carrying out inspection is not punitive and
every minor discre pancy/ irregularity f ound during the course of inspection is not
culpable and the object of the inspection could well be achieved by pointing out the
irregularities/deficiencies to the intermediary at the time of inspection and making it
compliant. We also notice that while holding the appellant gui lty of this irregularity, the
adjudicating officer has stated that the noticee failed to give strict proof of what were the
exceptional circumstances that led noticee to accep t or pay to the client in cash. If that
was so, the adjudicating officer could have sought further clarification from the appellant
which was not done. We are inclined to agree with the learned counsel for the appellant
that in the facts and circumst ances of this case the irregu larity is not culpable enough
calling for monetary penalty. - The other irregularity for which the appellant has been held guilty by the
adjudicating officer is that the appellant allowed unauthorized persons i.e. the employees
of its group company M/s. Utta m Financial Services Limite d to carry out proprietary
account trading besides client based trading. The appellan t had admitted that some
persons who operated the proprietary account trading enabled terminals were employees
of its group company and those employees were seconded to it by the said group
company and were working under the direct control and supervision of the appellant. The
proof of secondment of the persons by th e group company was also submitted by the
appellant which was not accepted by the adjudicating officer on the ground that it is not
ascertainable whether the pe rsons who were deputed to the noticee carried out the
proprietary trading besides cl ient based trading. The othe r ground for not accepting the
appellant’s reply was that the memos of sec ondment are blanket agreement entered into
with a group company. We are unable to accept the logi c given by the adjudicating 6
officer of the Board. In the absence of any bar in the rules or regulations on this subject,
we do not find any illegality or irregularity in the procedure adopted by the appellant in
this regard. Further the appell ant has been held guilty of violating regulation 26(xv) of
the stock brokers regulations. The said Regulation makes a stock-broker or sub-broker
liable to monetary penalty if he fails to comply with directions issued by the Board under
the Act or Regulations framed thereunder. No provisions of the Act or Regulations have
been pointed out which have been violated by the appellant in this case. We are,
therefore, unable to agree with the findings arrived at by the adjudicating officer in this
regard. - The next irregularity on which the appellant has been found guilty is failure to
segregate the client’s fund fro m its own fund which resulted in client’s accounts being
used for purposes other than that of clients’ transaction. In its response to the adjudicating
officer, the appellant had submitted that the amounts alleged to have been withdrawn by
it from the client accounts a nd used for purposes other than client transaction never
exceeded the brokerage due to it on the date of such withdrawal. In support, the appellant
had submitted summary of funds transferred from client’s account to business account
which were later on certified by the chartere d accountant also that the said amounts
represent the brokerage. Howeve r, the explanation furnishe d by the appellant was not
accepted by the adjudicating officer stating that from the details furnished, it is not clear
that the withdrawals were the actual brokerage earned by the appellant on the said dates.
Learned counsel for the responde nt Board has placed on record sample of receipts and
payments made through the client account wh ich were made availa ble to the appellant
also along with the sh ow cause notice which shows r eceipts and paym ents even on
account of “salary and other benefits,” “ interest on FD,” “FDR,” “ telephone charges”
etc. It was submitted that th e expenses/investments made from the clients fund by the
appellant as noted above are not permissible under the regulations and hence violative of
regulation 26(xiii) of the stock-brokers regulations. We have considered the submissions
made by both the parties and also seen th e documents relied upon by them. The Board’s
circular dated November 18, 1993 which prescr ibes regulation of transactions between 7
clients and brokers sp ecifically mandates that no mone y shall be drawn from clients
account other than:
“(i) money properly required for paym ent to or on behalf of clients or
for or towards payment of a debt due to the Member from clients or
money drawn on client’s authority, or money in respect of which,
there is a liability of clients to the Member, provided that money so
drawn shall not in any case exceed the total of the money so held for
the time being for such each client:
(ii) such money belonging to the Me mber as may have been paid into
the client account under para 1 C [ii] or 1 C [iv] given above;
(iii) money which may by mist ake or accident have be en paid into such
account in contravention of para C above.”
No explanation is forthcoming on records explaining the entries in the sample of receipts
and payments made through clie nt’s account with regard to salary, interest on FD,
telephone charges, FDR etc. Such withdrawals are not pe rmissible under the Board’s
circular referred to above a nd, therefore, we do not find any infirmity in the findings
arrived at by the adjudicating officer in this regard. - The last irregularity on whic h the appellant has been f ound guilty is that he had
not mentioned settlement number and order time in the contract notes and thus, failed to
issue the contract notes in the form and manner and this amount s to violation of
regulation 26(xvi) of the stoc k-brokers regulations. The sa id regulation makes a sub-
broker liable to monetary penalty for failure to exercise due skill, care and diligence. The
explanation furnished by the appellant was two fold, (i) the date of sett lement is duly
mentioned in the contract notes issued to the clients and (ii) they were issuing a single
contract note to the client for all the transactions during the day. Therefore they were not
mentioning the settlement number. It was furt her clarified by the appellant that after the
irregularity was pointed out, it had started incorporating the settlement number and order
time in the contract notes. This explanation has not been accepted by the adjudicating
officer and the appellant has been found guilty of violatin g Regulation 26(xvi) of the
Stock-Brokers Regulations. Af ter perusing the record, hear ing learned counsel for the
parties and relying on the principle laid down in earlier orders of the Tribunal referred to
above, we are of the considered view that these procedural irregularities for which
corrective measures have been taken by the appellant do not call for any punitive action. 8 - As stated above, the action to be taken against an intermediary for violation of
procedural requirements noted during inspection will depend on the nature of irregularity
committed by it. The adjudicating officer found the appellant guilty of four irregularities.
However, we are of the considered view that the appellant is guilty of only one
irregularity i.e. using client’s account for purposes other than client’s transactions which
is violative of Board’s circular dated November 18, 1993 read with regulations 26 (xiii)
of the Regulations. In the facts and the circumstances of the present case and keeping in
view the earlier orders of this Tribunal referred to above, we are of the c onsidered view
that the ends of justice could be met by imposing a penalty of rupees one lakh only. In the result, the appe al is partly allowed. The penalty imposed by the
adjudicating officer is reduced to rupees one lakh with no order as to costs.
Sd/-
P.K.Malhotra
Member Sd/-
S.S.N. Moorthy
Member
29.7.2011
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