Adjudication Order against Keynote Capital Ltd

8/10/2019 Adjudication Order against Keynote Capital Ltd

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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/ 319/2014 ]

________________________________________________________________

UNDER SECTION 15-IOF SECURITIES AND EXCHANGE BOARD OF INDIA

ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING

INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER)

RULES, 1995

In respect of

Keynote Capital Limited

___________________________________________________________________

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

conducted an inspection into the books of accounts of Keynote Capital Limited

(hereinafter referred to as "the Noticee"), a SEBI registered stock broker and a

member of the Bombay Stock Exchange Limited (BSE), the National Stock

Exchange (NSE) and the Multi Commodity Exchange of India Limited (MCX), to

examine whether it had complied with the provisions of the SEBI Circulars and

various Rules and Regulations with respect to the segregation of funds and

securities for the period from April 01, 2011 to August 31, 2012.

2. Upon inspection, the following was observed with respect to the non-

segregation of funds of clients with that of the Noticee's own:

(a) Working Capital arrangement: Funds were transferred from NSE/BSE Client

account to Overdraft (OD) against FD Account No. 36290 and again from the

said OD against FD A/c to NSE/BSE Clients account. There was no

segregation of funds of clients with that of the Noticee's own funds and

therefore, it was observed that the Noticee had not complied with the provisions

of SEBI Circular dated November 18, 1993.

(b) Instances of Non-client funds being accounted in Client Accounts: It was

observed that the money received / paid from / to one Shivraj Sales Pvt. Ltd

and Mr. Karthik Sankaran were accounted for in Clients Accounts. The said two

entities were not registered clients with the Noticee.

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(c) Instances of transactions with respect to expenses accounted from Client

Accounts: Many transactions with respect to expenses A/c were accounted in

Clients Accounts. It was noted that large number of such entries (NSE Client

A/c-71 entries, BSE Client A/c-6 entries) accounted in clients account spread

from April 2012 to February 2013.

(d) Transactions relating to OD-Intra Account No. 30542 in NSE Client Account:

It was observed that the Noticee had transferred Rs. 72,00,000 from NSE

Client A/c to OD Infra A/c No. 30542 on May 11, 2012.

(e) Transactions relating to OD-demat A/c in NSE Client A/c: It was observed

that the Noticee had transferred Rs. 48,00,000 on April 04, 2012 and Rs.

36,00,000 on May 11, 2012 from NSE Client A/c to OD- Demat A/c.

3. SEBI has, therefore, initiated Adjudication proceedings against the Noticee forviolating the SEBI circular bearing No. SMD/SED/CIR/93/23321 dated November

18, 1993 (herein after referred to as the 'SEBI circular dated November 18, 1993')

and Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under

Schedule II read with Regulation 9(f) of the SEBI (Stock Brokers and Sub-Brokers)

Regulations, 1992, (herein after referred to as the 'Broker Regulations') for the

aforesaid violations with respect to the segregation of funds and securities of

clients.

APPOINTMENT OF ADJUDICATING OFFICER

4. I have been appointed as the Adjudicating Officer vide order dated January 17,

2014 under Section 15-Iof the SEBI Act, 1992 (hereinafter referred to as the

Act) read with Rule 3 of the SEBI ( Procedure for Holding Inquiry and Imposing

Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the

said Rules) to inquire into and adjudge under Section 15HB of the Act, the

alleged violation of provisions of law by the Noticee.

NOTICE, REPLY AND PERSONAL HEARING

5. The Noticee was issued a Show Cause Notice dated April 09, 2014

(hereinafter referred to as SCN) under Rule 4(1) of the said Rules to show

cause as to why an inquiry should not be held and why penalty be not

imposed on it for the aforesaid violations. However, the said SCN was returned



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undelivered. Therefore, vide letter dated April 23, 2014, the said SCN was sent

for affixture at the last known address of the Noticee. During the affixture, the

Noticee's other address was provided and accordingly, vide letter dated April

28, 2014, the SCN was sent to the new address by "Hand Delivery". The said

SCN was duly delivered at the said address and the proof of delivery is on

record. Vide letter dated May 12, 2014, the Noticee submitted its reply to the

SCN. Thereafter, in the interest of natural justice and in order to conduct an

inquiry as per Rule 4(3) of the said Rules, an opportunity of personal hearing

was granted to the Noticee on July 08, 2014. The Authorized Representatives

(ARs) appeared on the scheduled date and made oral submissions by

reiterating the submissions made by the Noticee vide its reply dated May 12,

2014. Further, the ARs requested one weeks' time to file additional

submissions in the matter. Accordingly, the Noticee was advised to file the

same on or before July 15, 2014 and vide letter dated July 14, 2014, the

Noticee submitted its additional reply in the matter.

CONSIDERATION OF EVIDENCE AND FINDINGS

6. I have carefully perused the charges leveled against the Noticee in the SCN,

written submissions made by the Noticee and the documents available on

record. In the instant matter, the following issues arise for consideration and

determination :-

a. Whether the Noticee has violated the provis ions of the SEBI circular

dated November 18, 1993 and Clauses A (1), A (2) and A(5) of the

code of conduct as specified under Schedule II read with Regulation

9(f) of the Broker Regulations?

b. Whether the Noticee is liable for monetary penalty as prescribed

under Section 15 HB of the SEBI Act for the aforesaid violation?

c. If so, what should be the quantum of monetary penalty?

7. Before proceeding further, I would like to refer to the relevant provisions of the

Broker Regulations and the SEBI Circular dated November 18, 1993 which read as

under:



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Stock brokers to abide by Code of Conduct.

9(f).The stock broker holding a certificate shall at all times abide by the

Code of Conduct as specified in Schedule II.

Schedule IICode Of Conduct For Stock Brokers

[Regulation 9(f)]

A. General

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

promptitude and fairness in the conduct of all his business.

(2) Exercise of due skill and care: A stock broker, shall act with due

skill, care and diligence in the conduct of all his business.

.....

(5) Compliance with statutory requirements : A stock broker, shall

abide by all the provisions of the Act and the rules, regulations issued by

the Government, the Board and the Stock Exchange from time to time as

may be applicable to him.

SEBI Circular dated November 18,1993

1. It shall be compulsory for all Member brokers to keep the money of theclients in a separate account and their own money in a separate account.

No payment for transactions in which the Member broker is taking a

position as a principal will be allowed to be made from the clients

account. The above principles and the circumstances under which

transfer from clients account to Member brokers account would be

allowed are enumerated below.

A] Member Broker to keep Accounts: Every member broker shall keep

such books of accounts, as will be necessary, to show and distinguish in

connection with his business as a member -

i. Moneys received from or on account of each of his clients and,

ii. the moneys received and the moneys paid on Members own account.

B] Obligation to pay money into "clients accounts". Every member broker

who holds or receives money on account of a client shall forthwith pay

such money to current or deposit account at bank to be kept in the name



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of the member in the title of which the word "clients" shall appear

(hereinafter referred to as "clients account"). Member broker may keep

one consolidated clients account for all the clients or accounts in the

name of each client, as he thinks fit: Provided that when a Member

broker receives a cheque or draft representing in part money belonging to

the client and in part money due to the Member, he shall pay the whole

of such cheque or draft into the clients account and effect subsequent

transfer as laid down below in para D (ii).

C] What moneys to be paid into "clients account". No money shall be paid

into clients account other than -

i. money held or received on account of clients;

ii. such money belonging to the Member as may be necessary for the

purpose of opening or maintaining the account;

iii. money for replacement of any sum which may by mistake or accident

have been drawn from the account in contravention of para D givenbelow;

iv. a cheque or draft received by the Member representing in part money

belonging to the client and in part money due to the Member.

D] What moneys to be withdrawn from "clients account". No money shall

be drawn from clients account other than -

i. money properly required for payment to or on behalf of clients or for or

towards payment of a debt due to the Member from clients or money

drawn on clients authority, or money in respect of which there is a

liability of clients to the Member, provided that money so drawn shall notin any case exceed the total of the money so held for the time being for

such each client;

ii. such money belonging to the Member 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 mistake or accident have been paid into such

account in contravention of para C above.

E] Right to lien, set-off etc., not affected. Nothing in this para 1 shall

deprive a Member broker of any recourse or right, whether by way of

lien, set-off, counter-claim charge or otherwise against moneys standing

to the credit of clients account.

2. It shall be compulsory for all Member brokers to keep separate

accounts for clients securities and to keep such books of accounts, as

may be necessary, to distinguish such securities from his/their own

securities. Such accounts for clients securities shall, inter-alia provide for

the following:-



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a. Securities received for sale or kept pending delivery in the market;

b. Securities fully paid for, pending delivery to clients;

c. Securities received for transfer or sent for transfer by the Member, in

the name of client or his nominee(s);

d. Securities that are fully paid for and are held in custody by the

Member as security/margin etc. Proper authorization from client for the

same shall be obtained by Member;

e. Fully paid for clients securities registered in the name of Member, if

any, towards margin requirements etc.;

f. Securities given on Vyaj-badla. Member shall obtain authorization from

clients for the same.

3. Member Brokers shall make payment to their clients or deliver the

securities purchased within two working days of pay-out unless the

client has requested otherwise. Stock Exchange shall issue a Press

Release immediately after the pay-out.

4. Member Brokers shall buy securities on behalf of client only on receipt

of margin of minimum 20 percent on the price of the securities proposed

to be purchased, unless the client already has an equivalent credit with

the broker. Member may not, if they so desire, collect such a margin from

Financial Institutions, Mutual Funds and FIIs.

5. Member brokers shall sell securities on behalf of client only on receipt

of a minimum margin of 20 percent on the price of securities proposed to

be sold, unless the member has received the securities to be sold with

valid transfer documents to his satisfaction prior to such sale. Member

may not, if they so desire, collect such a margin from Financial

Institutions, Mutual Funds and FIIs.

6. Member brokers shall issue the contract note for purchase/sale of

securities to a client within 24 hours of the execution of the contract.

7. In case of purchases on behalf of clients, Member brokers shall be a

liberty to close out the transactions by selling the securities, in case the

client fails to make the full payment to the Member Broker for the

execution of the contract within two days of contract note having been

delivered for cash shares and seven days for specified shares or before

pay-in day (as fixed by Stock Exchange for the concerned settlement

period), whichever is earlier; unless the client already has an equivalent

credit with the Member. The loss incurred in this regard, if any, will be

met from the margin money of that client.



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10. With respect to the clients securities, the Noticee had submitted that all

securities payout from respective exchange are initially transferred to clients

margin demat a/c and then payout to clients are made from the same account

subject to risk policy & procedure. Further, it was stated that outward transfer of

securities from Clients Margin demat a/c was only made in case of respective

clients securities pay-in obligation and/or transfer to clients own demat a/c

and/or transfer to clearing member/exchange towards respective clients margin

utilization. Also, that the Noticee's own securities are transferred to designated

own demat a/c only. Further, it was submitted that clients securities were not

transferred to its own demat a/c under any circumstances.

11. Vide letter dated May 17, 2013, write up on Advance Client Deposit, Working

Capital arrangement and securities pay-in/pay-out process was provided by the

Noticee. From the said letter, it was observed that in order to have seamless

trading system and settlement of funds pay-in and payout on T+2 day with

exchanges and clients respectively, the Noticee had infused enough working

capital for day to day operation. Further, the Noticee had deployed funds

(` 15 crores approx.) towards working capital with the respective exchanges

towards margin in the form of cash and fixed deposits (FDs). Also, the Noticee

had converted the referred working capital in the form of FDs with the banks

and had obtained over draft (OD) facility against the same to save on cost of

funds. As a daily routine practice, the Noticee used to transfer excess idle

money lying in all bank accounts at the end of the day to the said own/overdraft

against FD A/c and on the following working day the Noticee was transferring

the requisite funds to the respective bank accounts. Further, vide letter dated

July 18, 2013, the Noticee had clarified that Axis Bank offered products like

Bank Guarantee. The bank offered overdraft facility with a margin of 50%

against Fixed Deposit and as per mutual discussions the Noticee utilized 100%

of OD limit for making further FD, which shall be under Banks lien towards

margin requirement. To save further cost of OD, as a daily routine practice, the

Noticee transfers (through automated process) excess idle money lying in all

respective bank accounts held with Axis bank at the end of the day to the said

OD against FD A/c (i.e. A/c no. 004010300036290) and on the following day

requisite funds get transferred to the respective bank Accounts through an



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Noticee, however, bank transactions relating to them were appearing in NSE

Client A/c. Accounts of Shivraj Sales Pvt.Ltd and Karthik Sankaran as

appearing in the Noticee's ledger are as follows:

SHIVRAJ SALES PVT.LTD.

Voucher

Date

Entry

Details

Amount

Debit

Amount

Credit

Running

Balance DrCr

SHIVRAJSALESPVTLTD

OpeningBalance 0.00 Cr

130612 AXISBANKLTDNSECASHCLIENTA/C 0.00 7500000.00 7500000.00 Cr

RTGSDLXBH12165000481/SHIVRAJSALES

PVTLTD


Cheque#:RTGSdated18/06/12


PVTLTD

A/CNOTOPEN


Cheque#:RTGSdated19/06/12


PVTLTD



PVTLTD




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PVTLTD



PVTLTD


Cheque#:199008dated26/07/12

BEINGCHEQUERECDAGSTA/C

TransactionTotals 0.00 41000000.00

ClosingBalance 41000000.00 Cr

(ii) From the above table, it can be noted that the Noticee had received

payments (on different dates) totaling to `4.10 crores from Shivraj Sales Pvt.

Ltd. However, as mentioned earlier, the name of the entity does not appear in

the client master list maintained and provided by the Noticee.

KARTHIK SANKARAN

200910

Voucher

Date

Entry

Details

Amount

Debit

Amount

Credit

Running

Balance DrCr

KARTHIKSANKARAN


060509 AXISBANK[NSECLIENTA/C] 0.00 3000000.00 3000000.00 Cr


HDFCBKCHURCHGATE ONA/C




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201011

Voucher

Date

Entry

Details

Amount

Debit

Amount

Credit

Running

Balance DrCr

KARTHIK

SANKARAN

[DEPOSIT

FROM

PARTIES]


0.00 0.00



201112

Voucher

Date

Entry

Details

Amount

Debit

Amount

Credit

Running

Balance DrCr

KARTHIK

SANKARAN

[DEPOSIT

FROM

PARTIES]


0.00 0.00



201213

Voucher

Date

Entry

Details

Amount

Debit

Amount

Credit

Running

Balance DrCr



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KARTHIK

SANKARAN

[DEPOSIT

FROM

PARTIES]




(beingchissuedtowardsrefundof

deposit)

TransactionTotals

3000000.00 0.00


(iii) From the above table, it can be seen that the Noticee had received payment

of` 30 lakh from Mr. Karthik Sankaran on May 06, 2009. No transactions were

observed during 2010-11 and 2011-12. The said amount was paid back to

Mr. Karthik Sankaran on January 31, 2013 with narration showing as being

cheque issued towards refund of deposit. However, it is observed that name of

Mr. Karthik Sankaran does not appear in the client master list maintained /

provided by the Noticee.

(iv) In view of the above, it was alleged that the Noticee had accounted for the

funds received from Shivraj Sales Pvt. Ltd. and Mr. Karthik Sankaran in the same

account (i.e A/c no. 004010200012647) which is designated as NSE Client A/c

and maintained to keep Clients funds received/paid from/to or on account of

clients and therefore, in violation of SEBI circular dated November 18, 1993issued in respect of Regulation of transactions between clients and brokers.



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(B) INSTANCES OF TRANSACTIONS W.R.T. EXPENSE ACCOUNT FROM

CLIENT ACCOUNT:

(i) The Noticee had submitted that Axis Bank Account No. 910020005043882

was for payment of all expenses like authorized person payout, salary and other

expenses. However, transaction pertaining to this account figured in NSE client

A/c and BSE client A/c. In view of the identified transaction as mentioned in the

Annexure to SCN, which shows that transaction relating to regular business

expenses had been accounted in Clients Accounts, it was alleged that the

Noticee had failed to segregate the client accounts and thereby, violated the

provisions of SEBI circular dated November 18, 1993 issued in respect of

Regulation of transactions between clients and brokers.

(C) INSTANCES OF TRANSACTION W.R.T. NSE EXCHANGE DUES IN NSE

CLIENT A/C NO. 004010200012647:

(i) It was submitted by the Noticee that Axis Bank Account No. 004010200616812

was maintained for the purpose of exchange dues. Upon examination, the

following instances of transactions pertaining to NSE Exchange Dues account no.

616812 in NSE Client A/c 004010200012647 were observed.

Date

Branch

AccountHead Cheque# Chq.Date

Receipts

Payments

090412 HO INTERSEGMENT

01Jan

00 0.00 1000000.00

BEINGAMTTRFTO02.616812


01Jan

00 0.00 1000000.00

TRFTOAXIS616812


01Jan

00 0.00 1000000.00


010812 HO INTERSEGMENT letter

01Aug

12 0.00 1000000.00

(beingamttrfdtoKCLUTI



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616812)*


01Jan

00 0.00 2000000.00


220213 HO INTERSEGMENT letter

22Feb

13 0.00 1000000.00

(beingamttrfdtoKCLUTI

616812exchange

duesa/c)*


01Jan

00 0.00 26000000.00


(ii) Upon perusal of the above table, it was observed that the entries pertaining to

payment of Exchange Due were also figuring in bank account maintained for

Client funds which was not in accordance with the provisions of SEBI circular

dated November 18, 1993.

(D) TRANSACTION RELATING TO AXIS BANK A/C NO. 004010300030542

(OD-INTRA A/C) IN NSE CLIENT ACCOUNT NO. 004010200012647:

(i) As submitted by the Noticee the Account No. 00401010300030542 was

maintained for OD (Overdraft) on Intraday basis. Further, the Noticee had

clarified that at times on emergency fund requirement, bank gives OD against

pending cheque clearing, payout receivables etc. for one day on request.

Following transaction were observed in the NSE Client Account relating to OD-

Intra A/c no. 30542.

Date Branch AccountHead Chq.Date Receipts Payments

110512 HO INTERSEGMENT 01Jan00 0.00 7200000.00




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for purposes other than the ones mentioned in the SEBI Circular dated

November 19, 1993 i.e. using them for Expense A/c and NSE Exchange Dues

A/c, etc. Therefore, the Noticee was alleged to have failed to comply with the

provisions of SEBI Circular dated November 18, 1993 in respect of regulation of

transactions between clients and brokers which inter aliastates that it shall be

compulsory for all member brokers to keep the money of the clients in a

separate account and their own money in a separate account. The said SEBI

circular also indicates what moneys to be paid into Clients account and what

moneys to be withdrawn from Clients account.

Reply:

15. The Noticee vide letter dated May 12, 2014 submitted its reply to the SCN. The

Noticee submitted that it has never misused any client funds. The Noticee as a

Stock Broker is entitled to receive brokerage for the trades undertaken. As per

the SEBI Circular, the Noticee submitted that it is legal to keep such brokerage

in a separate account of the Client. The Noticee stated that the SEBI Circular

dated November 18, 1993 at para 1(C)(ii) states that a cheque or a draft

received by by the Member representing in part money belonging to the Client

and in part due to the Member can be de[posited in a clients' Bank Account

belonging to Noticee. In addition, the Noticee stated that none of its clients

have complained about its funds being misused by the Noticee for meeting its

own obligations and therefore, the Noticee denies having misutilised the funds.

16. The Noticee further submitted that the various functions purported to have been

undertaken by the Noticees were activities that the Noticee undertook in the

due course of its business in compliance with the referred Circular in true spirit

with respect to segregation of clients' funds and securities. It submitted that it

had opened separate bank accounts and demat accounts for segregation of

own and clients funds and securities and most of the time the receipts and

payments of the clients were routed through the clients bank account and own

transactions were routed through its own accounts.

17. With respect to the receipts from Shivraj Sales Pvt. Ltd, the Noticee referred to

Point No. 1(C)(ii) and Point No. 1(D)(iii) of the SEBI Circular dated November



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A/c No. 37332 was in fact towards refund of the same amount of` 48 Lakh

which was transferred from the OD A/c No. 37332 to BSE Client A/c No. 20402

one day prior i.e. on April 03, 2012 towards clients' pay-in obligation. Similarly,

the Noticee submitted that the referred transfer if Rs. 36 Lakh on May 11, 2012

from the Client Account to OD A/c No. 37332 was in fact towards refund of the

same amount which was transferred from OD A/c No. 37332 to NSE Settlement

A/c and BSE Settlement A/c one day prior i.e. on May 10, 2012 towards clients'

pay-in obligation.

20. Vide letter dated July 14, 2014 the Noticee submitted its additional reply in the

matter and stated that the activities such as transfer of funds from NSE / BSE

Client Accounts to OD Account and vice versa pursuant to irrevocable

authorization given to Axis Bank to transfer funds as mentioned, has been

stopped since January 2014. Vide letter dated January 06, 2014, the Noticee

has categorically withdrawn the aforesaid irrevocable authorization from Axis

bank. The Noticee further reiterated its submissions made vide its earlier reply

dated May 12, 2014.

Findings:

21. I have carefully perused the charges leveled against the Noticee in the SCN

and the submissions made by it. With respect to non-client funds being

accounted for in client account by the Noticee, I find from the instances that the

Noticee did transfer receipts from two entities i.e. Shivraj Sales Pvt. Ltd. (`4.10

crores) and Mr. Karthik Sankaran (`30 Lakh) in the Client Bank Account despite

they not appearing in the client list as maintained / provided by the Noticee. I

further find that the Noticee in its submissions has stated that the said receipts

were transferred in the client account inadvertently and with respect of the

payment received from Shivraj Sales Pvt. Ltd., the same was reversed and the

monies were transferred to "Deposit from Parties-Shivraj Sales Pvt. Ltd" later.

However, with respect to the receipt of money from Mr. Karthik Sankaran, the

same kept lying in the clients' account till 2012-13. I find that admittedly, on

both the instances, the Noticee did default in accounting non-client funds in



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client accounts and therefore, I conclude that the Noticee did violate the SEBI

Circular dated November 18, 1993.

22. Further, I find that the Noticee did utilize funds from the clients account for

carrying out transaction with respect to Expenses Account. I do not find any

merit in the submissions of the Noticee that the funds lying in the accounts of

the client were Noticee's own funds transferred from Client Account to

expenses account out of the accrued brokerage which was in the Clients Bank

Account. I find that the amounts received from the clients towards brokerage or

accrued brokerage have to be properly segregated and the Broker cannot keep

the amounts received on account of brokerage in the clients account and use it

for the expense accounting. I find from the instance quoted in the Inspection

Report that the Axis Bank A/c No. 910020005043882 was opened by the

Noticee for the specific purpose of payment of all expenses like authorized

person payout, salary and other expenses. However, I conclude that the

Noticee by carrying out the transactions pertaining to the expense account from

the NSE client A/c and BSE client A/c has clearly violated the provisions of the

SEBI Circular dated November 18, 1993.

23. With respect to the transactions with respect to NSE Exchange Dues appearing

in the Client Account, I find that the Noticee has submitted that the funds which

were transferred from the clients' account to the NSE Exchange Due A/c were

its own funds accruing from the brokerage, accrued transaction charges and

other statutory charges collected from the client which were lying in the clients'

account. The said submission is again similar to the submission made with

respect to the transactions carried out for Expense Account from the Client

Account and is not acceptable inasmuch as the SEBI Circular clearly mandates

segregation of client funds from that of the Broker Funds and segregation of

Client Securities with that of the Broker Securities. By utilizing the said client

accounts for any purposes other than for client related transactions, the Noticee

has violated the provisions of SEBI Circular dated November 18, 1993.

24. Further, I note, vide email dated July 25, 2013, the Noticee had submitted that it

had obtained the OD facility (as mentioned in para 12 above) in the month of



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October 2008 from the Axis Bank. In support of the said submission, the

Noticee had provided scanned copies of Axis Banks letter dated October 29,

2008 conveying the sanction of credit facilities to it and the Noticee's letter

dated December 11, 2008 requesting the bank, in order to reduce the interest

on overdraft, to transfer funds from 3 clients account (NSE Client A/c no.

004010200012647, BSE Client A/c no. 004010200020402 & F&O Client A/c

no. 004010200027025) to said OD account everyday in the evening and

transfer back the funds the very next day in the morning from the said OD

account to any of the said accounts in case of any shortfall in the respective

accounts. It was also observed that vide letter dated May 19, 2011 the noticee

had given standing instructions (irrevocable authorization) to the bank for

transfer for funds from OD A/c no. 36290 to A/c Nos. 12647 (NSE Client A/c)

and 20402 (BSE Client A/c) every morning and that this irrevocable

authorization was to be in effect till further instruction in writing. Further, the

said authorization also stated that Axis Bank can transfer entire clear balance in

excess of ` 2,00,000/- (in multiple of ` 50,000/-) from 7 bank accounts

(including said 2 NSE/BSE clients A/cs) held by the noticee to OD A/c No.

36290.

25. From the above, I find that the OD A/c No. 36290 is an account maintained by

the Noticee with Axis Bank to facilitate its stock market business and for

smooth functioning of activities relating to stock market. Axis Bank has

extended credit facilities to the Noticee under pre- agreed terms and conditions.

Further, the Noticee has also given irrevocable authorization to Axis Bank to

transfer funds from said OD A/c 36290 to its 2 Accounts i.e. A/c no.s 12647

(NSE Client A/c) and 20402 (BSE Client A/c) and transfer funds from 7 bank

accounts (including said 2 NSE/BSE clients A/cs) to said OD A/c. The Noticee

has submitted that it stands to save on the cost of funds/OD and it has been

more than 4 years since this system was adopted by it in October 2008.

However, the Noticee in its submissions dated July 14, 2014 has submitted that

the facility has been withdrawn and the irrevocable authorization has been lifted

since January 2014. I further note from the two instances quoted in the

inspection report that the Noticee had carried out transactions relating to Axis

Bank A/c No. 004010300030542 (OD Intra A/c) and Axis Bank A/c No.



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004010300037332 (OD-Demat A/c) in the NSE Client A/c No.

00401020001267. Both the instances make it abundantly clear that the Noticee

did use the Client A/c to make transactions other than the specified

transactions in the SEBI Circular dated November 18, 1993. In view of the fact

that the funds were being transferred from the NSE/ BSE Client Accounts to the

OD A/c of the Noticee and further from the OD A/c to the said Clients Account, I

conclude that there was a clear violation of the SEBI Circular dated November

18, 1993 by the Noticee.

26. From the foregoing, I find that the Noticee did fail to comply with the standards

of segregation of funds of clients with that of its own on various occasions and

thereby, has not exercised due care and skill in carrying out the business of the

Stock Broker. Therefore, I conclude that the Noticee by transacting in the

manner mentioned in the above paragraphs has violated the SEBI Circular

dated November 18, 1993 and Clauses A(1), A(2) and A(5) of the Code of

Conduct as specified under Schedule II read with Regulation 9(f) of the Broker

Regulations thus, warranting monetary penalty as prescribed under Section

15HB of the Act which reads as under.

Penalty for contravention where no separate penalty has been

provided.

15HB. Whoever fails to comply with any provision of this Act, the rules or

the regulations made or directions issued by the Board there under for

which no separate penalty has been provided, shall be liable to a penalty

which may extend to one crore rupees.

27. At this instant, it is important to quote the observations of the Honble Supreme

Court of India in the matter of SEBI v. Shri Ram Mutual Fund [2006] 68 SCL

216(SC), wherein the court , inter alia, held that: once the violation of statutory

regulations is established, imposition of penalty becomes sine qua non of violation

and the intention of parties committing such violation becomes totally irrelevant.

Once the contravention is established then the penalty is to follow.



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28. While imposing monetary penalty, it is important to consider the factors stipulated

under Section 15J of SEBI Act, which reads as under:

15J - Factors to be taken into account by the adjudicating officer:

While adjudging quantum of penalty under section 15-I, the adjudicating

officer shall have due regard to the following factors, namely:-

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

quantifiable, made as a result of the default;

b) the amount of loss caused to an investor or group of investors as a result

of the default;

(c) the repetitive nature of the default.

29. I observe, from the material available on record, that any quantifiable gain or

unfair advantage accrued to the Noticee or the extent of loss suffered by the

investors as a result of the default cannot be computed. The defaults on the

part of the Noticee are repetitive in nature. However, I find that the Noticee

being a registered intermediary is required to comply with the various Circulars

and Rules and Regulations as laid down by the Regulator to ensure smooth

and stable functioning of the capital market. The very purpose of the SEBI

Circular dated November 18, 1993 is that it shall be compulsory for all the

member brokers to keep the money of the clients in a separate account and

their own money in a separate account and further also indicates what monies

to be paid into the "Client Account" and what monies to be withdrawn from the

said accounts. Therefore, I conclude that the Noticee has not exercised

adequate due skill, care and diligence in its operations and failed to comply with

the provisions of Circular dated November 18, 1993 issued by the Board and

also Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under

Schedule II read with Regulation 9(f) of the Broker Regulations Such

wrongdoings and misconduct cannot be ignored and the same deserves &

attract penalty as per law.



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ORDER

30. In view of the above, after considering all the facts and circumstances of the case

and exercising the powers conferred upon me under section 15-I (2) of the SEBI

Act read with Rule 5 of the said Rules, I hereby impose a penalty of `5,00,000/-

(Rupees Five Lakh Only ) on the Noticee viz.Keynote Capital Limited under

Section 15HB of the Act. In my view, the penalty imposed is commensurate with

the default committed by the Noticee.

31. The above penalty amount shall be paid by the Noticee through a duly crossed

demand draft drawn in favour of SEBI Penalties Remittable to Government of

India and payable at Mumbai within 45 days of receipt of this order. The said

demand draft shall be forwarded to the Division Chief, MIRSD-I, Securities and

Exchange Board of India, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai

- 400021.

32. In terms of the Rule 6 of the said Rules, copy of this order is sent to the Noticee

and also to Securities and Exchange Board of India.

Date: December 18, 2014 D. SURA REDDY

Place: Mumbai GENERAL MANAGER &

ADJUDICATING OFFICER

Documents

Adjudication Order against Keynote Capital Ltd