Adjudication Order in the matter of M/s. Bonanza Portfolio Ltd

8/20/2019 Adjudication Order in the matter of M/s. Bonanza Portfolio Ltd.

1/33

_____________________________________________________________________________

Adjudication Order in the matter of M/s. Bonanza Portfolio Ltd Page 1 of 33

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AK/AO-01/2016]

________________________________________________________________________

UNDER SECTION 15-I OF 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

M/s. Bonanza Portfolio Ltd.

(PAN: AAACB0764B)

________________________________________________________________________

FACTS OF THE CASE

1

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an inspection of

the books of accounts and other records of the stock broker M/s. Bonanza Portfolio Ltd. (hereinafter

referred to as ‘the Noticee/Bonanza’) to examine inter alia investor grievance handling mechanism

and whether adequate steps for redressal of investor grievance were being taken by the Noticee

and availability of adequate infrastructure for the same. The inspection was conducted based on

analysis of samples and test checking of investor grievances, related books of accounts and other

records of the Noticee as well as written/ oral submissions of the Noticee. Inspection noted that the

client base of the Noticee consisted of retail, HNI, Corporate & Institutions with turnover of Rs.

12,74,427 crores for the FY 2012-13 and turnover of Rs. 2,11,092.58 for the period April 2013 to

May 2013 from 51,321 clients. The inspection covered a period of FY 2012-13 and FY 2013-14 till the

date of inspection i.e. June 19, 2013 (hereinafter referred to as ‘the inspection period’).

2

Based on the aforesaid inspection, it was observed that the Noticee had violated the provisions

under Regulation 6A(1)(e) of the SEBI (Stock Brokers & Sub Brokers) Regulation, 1992 and theprovisions of clause A (1), (2) and (5) as specified in Schedule II read with Regulation 7 of the SEBI

(Stock Brokers & Sub Brokers) Regulation, 1992 (hereinafter referred to as the ‘Broker Regulation’).

The aforesaid alleged violations by the Noticee, if established, make it liable for penalty under


2/33

_____________________________________________________________________________


Section 15HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI

Act’).

APPOINTMENT OF ADJUDICATING OFFICER

3

The undersigned was appointed as the Adjudicating Officer vide Order dated July 03, 2014 under

section 15-I of SEBI Act read with rule 3 of SEBI (Procedure for Holding Inquiry and Imposing

Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘SEBI Rules’) to inquire

into and adjudge under Section 15HB of SEBI Act for the alleged violation committed by the

Noticee.

SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING

4

A Show Cause Notice (hereinafter referred to as ‘SCN’) Ref. No. EAD-6/AK/6838/2015 dated

March 04, 2015 was issued to the Noticee under rule 4(1) of SEBI Rules communicating the

alleged violation of Regulation 6A(1)(e) and the provisions of clauses A (1), (2) and (5) of code of

conduct specified under Schedule II read with Regulation 7 of the Brokers Regulation.

5

The Noticee vide letter dated April 13, 2015 while denying the violation of the aforesaid

provisions of the Brokers Regulations inter alia submitted as under:

That they have a strong Investor Grievance Mechanism & proper grievance redressal policy and

they are constantly making efforts to improve their investor grievance redressal system;

That given the size of their operations, their rate of grievances is very less and it reflects

sophistication of their operations;

That inspection of books of accounts carried out by SEBI was limited only to investor grievances

and nothing else. As such, Show Cause Notice is bad under law for invoking a wrong provision. The

only allegation in the SCN being delay in resolution of Investor grievances, section 15HB of SEBI Act

cannot be invoked for any alleged violation of non-redressal of investor grievances, when a specificsection 15C is present in the Act which prescribes certain processes and criteria for charging a

person/ entity for non- redressal of investor grievances;


3/33

_____________________________________________________________________________


That the section 15C mandates that the Board should first call upon the Noticee in writing to

redress any grievance and if the Noticee fails to redress any grievance in such stipulated time, the

Noticee are liable for such penalty. However, no such procedure has been followed in their case;

That since the present allegations squarely pertain only to non-redressal of investor grievance, no

other provision of law which is generic in nature like Section 15HB can be invoked against them. It

amounts to circumventing the process stipulated in section 15C;

That although complaints were received in Financial Year 2012-2013 & Financial Year 2013-2014,

the transaction period / trading period for most of the complaints was Financial Year 2011-2012 &

period prior to that. The Noticee provided the following table reflecting the transaction period of

unauthorized complaints:

Unauthorised Trades Upto 2011-2012 Upto 2012-2013 2012-2013 Total

Direct Complaints 24 6 31 61

Exchange Complaints 32 5 20 57

Common Complaints 10 1 12 23

pertaining to commodity - - - 1

Total 119

That the following table provides the details of total number of clients, active clients, total

turnover, retail turnover and proprietary turnover during the following financial years:

(Rs. Crore)

Financial

Year

Total

Turnover

Retail

Turnover

Proprietary

Turnover

% of Retail

Turnover

Active

clients

Total

Clients

2011-2012 11,46,197.77 8,88,570.62 2,57,627.14 77.52 66,182 2,73,025

2012-2013 12,74,429.04 9,79,454.85 2,94,974.19 76.85 51,321 2,85,637

2013-2014 9,42,098.98 5,79,783.05 3,62,315.93 61.54 40,848 3,02,531

That the number of complaints must be viewed in relation with the total number of retail clientele.

Therefore 257 complaints against the total active retail clients amount to 0.50%, and against the

total retail clients amount to 0.08%, which is quite low;


4/33

_____________________________________________________________________________


That out of the total 288 complaints (i.e. 257 complaints received + 31 at the beginning of the

year), 265 Complaints were resolved i.e. the grievance resolution rate was around 92% of the total

complaints received. Further bonafide efforts were made to resolve 15 more complaints and they

were ultimately referred to arbitration. Out of 15 Arbitrations, only 4 awards were against the

Noticee. The Arbitral awards that went against the Noticee were honored and corrective steps on

the findings of the said awards were initiated;

That around 46% of the total complaints received were categorized as unauthorized trades in

nature. However, the classification of unauthorised trades is based on “tick” marked by the

complainant in the Complaint form, which may or may not be unauthorized. Certain percentage of

trades do not actually fall in the category of unauthorized trading as the complainants file their

complaints in exchanges, where the complainant had not even entered into a single transaction,

and therefore are closed immediately to the satisfaction of the complainants. In F.Y 2012-2013,

there were 9 complaints filed in BSE under the category of unauthorized trades, whereas the

complainant had not even entered into any single transaction in BSE. Therefore 9 complaints which

constitute 7.56% of the total unauthorized complaints cannot even be termed as complaints;

That from the Turnover perspective, the turnover during the relevant period was Rs. 11,46,197

crore and the total claim amount under various complaints was Rs. 1.70 crore, which constitute

0.0014% of the total turnover;

That most of the complaints for unauthorised trading are not entirely genuine in nature as most of

the client book losses in a bearish market and later resort to this kind of disputes with a view to

recoup their losses. It is evident from the arbitration cases wherein 75% of the cases where the

allegations were of unauthorized trades, were outright rejected by the Arbitral panel and awards

were given in the Noticee’s favour. Further, most of the complaints registered during the

inspection period pertained to the transactions during financial Year 2011-2012 and period prior to

it;

That out of 51,321 active clients (Total 2,85,637), the Noticee had only 9 complaints of non-receipt

of documents which constitute less than 0.02%. Similarly, complaints relating to delay/ non receipt

of funds/ securities constitute less than 0.04%. When it comes to IPO related complaints, it is

almost nil, with only a solitary complaint which was resolved to the satisfaction of the

complainant;


5/33

_____________________________________________________________________________


That inspection observation that the maximum number of complaints received pertained to un-

authorised trades and accounted for 46.30% is correct only with reference to total number of

complaints received. However, 119 complaints constitute only 0.22% when compared to total

number of active clients during the relevant period. Likewise service related complaints constitute

0.09% of the total active clients;

That though there is no statutory stipulation of considering the Grievance of clients in Board

meetings, the Noticee had devised their own internal systems and processes for resolution of

grievances. The very fact that the investor grievances were part of Board agenda in a structured

manner is a factor to be considered in the Noticee’s favour;

That the pending complaints were always discussed in the Board meetings under the agenda, more

in a freelance way and appropriate oral instructions were given to the concerned for resolution,

which is not recorded in the minutes, since the minutes are not reflective of verbatim reproduction

of the deliberations of the Board. The issues relating to the complaints were always discussed in

the Board meetings;

With regard to allegation that conclusions of the Board meetings appeared stereotype, the Board

minutes are reflective of the fact of a discussion and not the minute details of the discussion. In an

endeavor to examine the status of the Complaints, the Noticee had devised a system of

deliberations in the Board meeting, which had automatically brought seriousness into the

grievance redressal mechanism. In regular Board meetings, the matters related to investor

Grievances were discussed and evaluated appropriately, but, the same were not reflected in

minutes at length;

With regard to allegation that Board in each of the meetings had made conflicting observations,

whereby on one hand the Board had expressed satisfaction with regard to grievance redressal

system and on the other hand had also suggested that the number of complaints be brought down,

it is submitted that the satisfaction was with regard to the nature of resolution of the complaints

and the suggestion with regard to bringing down the number of complaints is with regard to

unresolved complaints. There was no conflict as alleged in the Show Cause Notice by the Inspection

team;

With regard to allegation that Board appeared to have expressed satisfaction of the redressal

mechanism without evaluating the efficiency of the same, it is submitted that the expression of


6/33

_____________________________________________________________________________


satisfaction was with regard to the quality of resolution, and after evaluation of number of

resolutions in the relevant period, it was decided that the number had to be brought down. In view

of the above, it is denied that the Board expressed satisfaction of the redressal mechanism without

evaluating the efficiency;

that upon evaluation and examination, the Board had initiated several corrective steps such as,

Installing Voice loggers across branches, trade Confirmation through tele-calling on random basis,

telephonic verification of Email Id, mobile no & other details at the time of account opening,

quarterly settlement of funds, net trade confirmation via SMS at the end of the trading session,

Periodical branch Inspection & review of the findings, giving real time MTM alerts & alert for debit

clearance through Short Messenger Service. The initiative of SEBI to communicate the trade details

by way of SMS directly by Exchanges and by the Broking houses has also been implemented;

That with the introduction of the above mentioned processes, the number of complaints have

drastically reduced by more than 50% in Financial Year 2014-15 and only one client has filed

arbitral claim against the Noticee;

The first corrective step was to percolate the issues related to overall compliances & Investor

Grievances down the line to HODs of every department, Zonal Heads & Regional Heads and strict

instructions were given to make efforts to minimize the complaints, address & route the

complaints through proper channels, strictly adhere to Guidelines Rules, Regulations of Regulators;

With reference to allegation that the Noticee had decentralized control despite of their operations

and also with respect to the investor grievances redressal, it is submitted that the Noticee had

proper grievance redressal policy and strong investor grievance mechanism. All complaints

received whether directly or through exchanges/regulator are recorded and attended in an

expeditious manner;

With reference to allegation that the Noticee failed to adhere to the complaints within the

stipulated time in violation of regulation 6A(1)(e) of Broker Regulations, it is submitted that the

Noticee had substantially complied with the time lines of resolution. That the Noticee had acted

upon 204 of 280 complaints within 30 days, which constitute 72% of the Complaints. Even with

respect to the complaints received from exchanges, the resolution amounted to 87.50% of the

complaints;


7/33

_____________________________________________________________________________


That with regards to 54 direct complaints and 12 complaints received through regulators; it has

been submitted that certain complaints involve elaborate examination of facts, retrieval and

compilation of data, verifications of facts and coordination with clients and liasoning with

branches. This process is required to appropriately address the complaints to the satisfaction of the

Complainant and the Exchanges. Hence delay if any, was not very significant given the facts of the

each case and was not deliberate on their part;

That as per the recent SEBI circular, they are not only trying to reply to the complaints in speedy

manner, but, also trying to resolve the grievances to the satisfaction of complainants within

stipulated time period;

That with reference to allegation that no proper records had been maintained, it has been

submitted that direct complaints were handled by Head office as well as other offices

simultaneously at the relevant time, and therefore there was a scope of some manual errors with

respect to maintenance of records;

That they had initiated the process of addressing the Complaints through new software, which

enabled them to maintain the records in a centralized manner with minimum manual interference.

As of today all complaints received directly are channelized through the said new software, which

is in turn supervised and monitored by the Senior Vice President cum Compliance Officer;

With regard to the allegation that they did not have a proper grievance redressal policy and had a

weak grievance redressal mechanism not commensurate with the size of the operation, it is stated

that they had duly complied with all the Rules & Regulations with respect to maintaining proper

Register giving details about date of receipt, nature of complaint, identity of client (client code),

date of action taken and resolution. However, source of receipt of complaint was immediately

incorporated on the suggestion of the Inspection Team;

That complainants had various modes of approaching with their complaint, such as by way of

sending letter through post/courier, hand delivered at our branches, through emails, as well as

through telecommunication;

That there was no reference to unauthorized trades in the Administrative Warning letter, which

was not punitive in nature;


8/33

_____________________________________________________________________________


That in Financial year 2013 -14 & Financial year 2014-15, only 8% of the complaints received had

escalated to the regulators, and only one client have opted for arbitration during Financial Year

2014-15;

That they maintained high standards of integrity, promptitude and fairness in the conduct of all his

business. Only a miniscule 0.50% of clients expressed their grievances, out of which 92% have been

resolved.

6

In accordance with the principle of natural justice and in order to provide a fair chance to the

Noticee to put forth its case, an opportunity of personal hearing was granted to the Noticee on

September 23, 2015 vide hearing notice dated September 04, 2015. Advocate Mr. K.R.C.V

Sheshachalam and Ms. Mugdha Modi, appeared as Authorized Representatives (hereinafter

referred to as ‘ARs’) on behalf of the Noticee on September 23, 2015. The ARs reiterated the

submission made vide letter dated April 13, 2015 and submitted the following judgments viz.

Finquest Securities Pvt Ltd vs. SEBI, RR Chokhani Stock Brokers Pvt. Ltd. vs. SEBI and JK Cotton

Spinning & Weaving Mills Co. Ltd. vs State of UP. The ARs were inter alia advised to provide in

respect of 11 complaints for which no action taken information was provided to inspection,

details of action taken subsequent to inspection and its current status. The ARs were inter alia

also advised to submit violations of SEBI Act and Regulations and action taken by SEBI in the past,

if any, against the Noticee. The ARs sought two weeks time for making further submissions by

October 09, 2015.

7

Pursuant to the personal hearing, vide letter dated October 07, 2015, the Noticee while

reiterating their earlier submissions, inter alia made the following further submissions:

that when a specific section 15C is available for penalizing for non-redressal of investor

grievances, no other provision, which is generic in nature can be invoked. In this regard, it was

submitted that the Hon’ble Supreme Court in the matter of The J. K. Cotton Spinning &

Weaving v/s The State Of Uttar Pradesh & Ors (1961 AIR 1170) had held as under:

“The rule that general provisions should yield to specific provisions is not an arbitrary principle

made by lawyers and judges but springs from the common understanding of men and women

that when the same person gives two directions one covering a large number of matters in


9/33

_____________________________________________________________________________


general and another to only some of them his intention is that these latter directions should

prevail as regards these while as regards all the rest the earlier direction should have effect. In

Pretty v. Solly (1) (quoted in Craies on Statute Law at p. 205, 5th Edition) Romilly, M.R.

mentioned the rule thus:"The rule is, that whenever there is a particular enactment and a

general enactment in the same statute and the latter, taken in its most comprehensive sense,

would overrule the former, the particular enactment (1) (1859) 26 Beav. 606, 610.”

As regards 54 complaints which were alleged to have been acted upon after 30 days, of which 42

complaints were received directly, 15 complaints were replied upon before 15 days & 6

complaints were replied upon before 30 days;

With regard to 11 complaints, where no action was reported, it was submitted that all these 11

complaints were acted upon immediately and it was not captured in the inspection report. Out

of these 11 complaints, 7 were replied within 15 days & in 3 complaints action was taken within

15 days;

That they had substantially complied with the time lines of resolution. Considering the revised

data, 151 complaints out of 281 i.e. approx 54% of the complaints had been replied, acted upon

within 15 days, and 81 out of 281 complaints were replied between 16-30 days;

Also 12 out of 96 complaints received from Exchanges were replied after 30 days;

That as per the revised details, they had acted upon 232 of 281 complaints within 30 days which

constitute 82.56% of the Complaints. Even the complaints received from exchanges the

resolution amounted to 87.50% of the complaints;

that they had initiated the process of addressing the Complaints through software – “Talisma”

which enabled the Noticee to maintain the records in centralized manner with minimum manual

interference. As of today all complaints received directly are channelized through “Talisma” ,

which is in turn supervised and monitored by the Senior Vice President cum compliance officer.

With the introduction of Talisma, the process is now completely centralized & scope of non

maintenance of records & manual errors is almost negligible;

That the violations, if any, are very technical and venial in nature and there is no loss to any

investor and the minor infractions, if any, have been rectified immediately;


10/33

_____________________________________________________________________________


That in the Order passed by the Hon’ble Securities Appellate tribunal in the matter of R. R.

Chokhani Stock Brokers Pvt. Ltd. (Appeal No. 217 of 2012Date of Decision: 25.09.2013) , it was

held inter alia as under:

“In view of above said discussion of law, facts and precedent cited above, in present case also we

are convinced that a mistake of venial nature has inadvertently occasioned. Moreover, error has

been rectified immediately on being brought to notice of appellant. In these circumstances, when

the lapse is technical, unintentional, and does not involve monetary loss to any party in our

opinion, on facts of present case, it would have been just and proper to warn the appellant to be

more diligent in complying regulatory norms prescribed by SEBI instead of imposing penalty ”;

That further in the matter of Finquest Securities Pvt. Ltd (Appeal No. 119 of 2013 Date of

Decision: 25.09.2013), it was held inter alia as under:

“Since the error has been rectified immediately on being brought to notice of the appellant and

accordingly, in these circumstances, when the lapse is technical, unintentional, and does not

involve monetary loss to any party in our opinion, on facts of present case, it would have been

just and proper towards appellant to be more diligent in complying regulatory norms prescribed

by SEBI, instead of imposing a penalty .” ;

That the issue of earlier violations, if any, may not be taken as an aggravating factor since the

same was not put in the SCN.

8

Pursuant to the Noticee’s submissions and the hearing held on September 23, 2015, vide letter

dated November 04, 2015, the Noticee was informed that the present adjudication proceedings

have been initiated pursuant to the findings of inspection conducted by the SEBI inspection team.

It was observed during inspection that the Noticee had failed to take steps to redress the investor

complaints received through the exchange as well as directly from the investor within one month

as stipulated under Regulation 6A(1)e of the Brokers Regulations. From a reading of Section 15C

of SEBI Act, it becomes clear that the section would apply to matters where SEBI upon receivingcomplaint(s) from investor(s) has formally communicated to the stock broker in writing to redress

the complaint(s), and the stock broker has failed to do so within the stipulated time. In the extant

case, adjudication proceedings were initiated against the Noticee for the alleged violation of


11/33

_____________________________________________________________________________


Regulation 6A(1)(e) and the provisions of Clause A(1), (2) and (5) of the Code of Conduct specified

under Regulation 7 of Brokers Regulations, based on the Inspection finding that the Noticee had

taken more than 30 days to reply/ act upon 54 out of total of 281 complaints i.e. 19% of the

complaints were replied/ acted upon only after 30 days, thereby failing to adhere to the

stipulated time period of one month in one out of every five complaints received. Hence, for the

aforesaid violation observed during Inspection, Section 15HB was invoked and the Noticee has

been made liable for penalty under Section 15HB of the SEBI Act. In case the Noticee had any

further comments/submissions to offer in the matter, the Noticee was advised to submit the

same by November 20, 2015.

9

The Noticee vide letter dated November 18, 2015 sought two weeks time to make its submission

in the matter and the same was acceded to vide email dated November 19, 2015. Vide letter

dated December 01, 2015, the Noticee inter alia further submitted as follows:

That the inspection was conducted for the limited purpose of verifying resolution of investor

grievances only and nothing else. If any violation could be attributed to the Noticee from the said

inspection, it can only relate to resolution of investor grievances. Any allegation of any

transgression with regard to non-resolution of investor grievances should be limited to the

contours of the said section 15C and no provision else. When the violation does not fall under the

contours of section 15C, it cannot be treated as violation at all since the field with regard to

violation called “non-resolution of investor grievances” has already been occupied by the said

section 15C;

that the interpretation that 15C is invoked “wher e SEBI upon receiving complaint(s) from

investor(s) has formally communicated to the stock broker in writing to redress the said

complaint( s) and the stock broker has failed to do so within the stipulated time” is incorrect and

it is not flowing from the plain reading of the said section. When the law is plain and simple, no

additional language should be added to it to give a different meaning;

that in the presence of a specific section 15C in the SEBI Act, which prescribes certain process and

criteria for charging a person/ entity for non-redressal of investor grievances, no other provision

can be invoked;


12/33

_____________________________________________________________________________


that the said section 15C, which is a complete code in itself regarding penalizing non-redressal of

investor grievances, has the following components:

a.

An intermediary should first be called upon by the Board to redress the investor grievances,

b.

Board should specify the time within which the such grievances have to be resolved,

c.

If an intermediary shall resolve the grievances within the said time specified by the Board,

d.

If an intermediary fails to resolve the grievances in that specified period, he is liable for

penalty;

that no such procedure had been followed in their case. They had not been issued any notice by

the Board calling upon to resolve any complaints in any specified time as mandated in the

section. It is the duty of SEBI to follow the procedure/ manner as specified in the above section;

that in Dr. R.D. Lodhi Vs. Chairman, Lucknow Development Authority, Lucknow & Others, the

Hon'ble Supreme Court held that when law requires something to be done in a particular

manner, things done otherwise are prohibited.

That in Dhananjaya Reddy Vs. State of Karnataka 2001 (4) SCC 9 in para 23 of the judgment

the Hon'ble Supreme Court held:

“It is a settled principle of law that where a power is given to do a certain thing in a certain

manner, the thing must be done in that way or not at all.”

That in Commissioner of Income Tax, Mumbai Vs. Anjum M.H. Ghaswala 2002 (1) SCC 633 , it

was held by the Hon'ble Supreme Court that:

“ It is a normal rule of construction that when a statute vests certain power in an authority to be

exercised in a particular manner then the said authority has to exercise it only in the manner

provided in the statute itself.”

That in Competent Authority Vs. Barangore Jute Factory & others : 2005 (13) SCC 477 , it was

held that:

“It is settled law that where a statute requir es a particular act to be done in a particular manner,

the act has to be done in that manner alone. Every word of the statute has to be given its due

meaning”

That in State of Jharkhand & others Vs. Ambay Cements & another 2005 (1) SCC 368 in para 26

of the judgment, the Court held :


13/33

_____________________________________________________________________________


“It is the cardinal rule of interpretation that where a statute provides that a particular thing

should be done, it should be done in the manner prescribed and not in any other way.”

that invoking section 15HB was only a subterfuge to get over the rigors of section 15C, by trying

to do something indirectly, which cannot be done directly;

that the provisions of SEBI Act cannot be circumvented by doing something indirectly which

cannot be done directly;

that since the present allegations squarely pertain only to non-redressal of investor grievance, no

other provision of law, which is generic in nature like Section 15HB can be invoked against the

Noticee;

that it amounts to circumventing the process stipulated in section 15C. ( Hon’ble Supreme Court

in the matter of the J. K. Cotton Spinning & Weaving v/s The State of Uttar Pradesh & Ors

(1961 AIR 1170))

CONSIDERATION OF ISSUES

10

I have carefully perused the written submissions made by the Noticee, the submissions put forth

during the hearing and the documents available on record. The issues that therefore arise for

consideration in the present case are:

a.

Whether the Noticee has violated the provisions of Regulation 6A(1)(e) of the Broker

Regulation?

b.

Whether the Noticee has violated the provisions of clause A (1), (2) and (5) as specified in

Schedule II read with Regulation 7 of the Broker Regulation?

c.

Does the violations, if any, attract monetary penalty under Section 15HB of SEBI Act?

d.

If so, what would be the monetary penalty that can be imposed taking into consideration the

factors mentioned in Section 15J of SEBI Act?

FINDINGS

11

Before moving forward, it is pertinent to refer to the relevant provisions of Regulation 6A(1)(e) of

Broker Regulation and of clauses A (1), (2) and (5) of code of conduct specified under Schedule II

read with Regulation 7 of the Broker Regulation, which reads as under:


14/33

_____________________________________________________________________________


6A. (1) Any registration granted by the Board under regulation 6 shall be subject to the following

conditions, namely –

(a) ………….

(b) …………;

(c) …………..;

(d) ………….; and

(e) he shall take adequate steps for redressal of grievances of the investors within one month of

the date of receipt of the complaint and keep the Board informed about the number, nature and

other particulars of the complaints received from such investors.

Stock-Brokers to abide by Code of Conduct

The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at

Schedule II.

SCHEDULE II

SECURITIES AND EXCHANGE BOARD OF INDIA

(STOCK BROKERS AND SUB-BROKERS) REGULATIONS, 1992

CODE OF CONDUCT FOR STOCK BROKERS

(Regulation 7)

A. GENERAL

(1) INTEGRITY: A stock-broker, shall maintain high standards of integrity, promptitude and fairness inthe 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.

(3) ……………

(4) …………….

(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.

12

Before we examine the allegation in the extant matter, I find that the Noticee has in its

submissions stated that Section 15 HB cannot be invoked against it for non-redressal of investor

grievances, in the presence of a specific Section 15C in the SEBI Act, which prescribes certain

processes and criteria for charging a person/entity for non-redressal of investor grievances. The


15/33

_____________________________________________________________________________


Noticee has submitted that the only allegation against it in the SCN is that there is a delay in the

resolution of investor grievances, therefore, the SCN is bad in law for invoking a wrong provision.

13

I note here that Section 15C of the SEBI Act reads verbatim as under:

“15C.Penalty for failure to redress investors' grievances. - [If any listed company or any person who

is registered as an intermediary, after having been called upon by the Board in writing, to redress

the grievances of investors, fails to redress such grievances within the time specified by the Board,

such company or intermediary shall be liable to a penalty of one lakh rupees for each day during

which such failure continues or one crore rupees, whichever is less.]”

14

I note from the Inspection Report, a copy of which was provided to the Noticee, that the focus of

the inspection was to verify investor grievance handling mechanism of the stock broker and

whether adequate steps for redressal of investor grievance were being taken by the stock broker

and availability of adequate infrastructure for the same. The inspection findings are based on

analysis of samples and test checking of investor grievances, related books of accounts and other

records of the Noticee as well as written/ oral submissions of the Noticee. During Inspection

conducted as such, based on certain instances, it was noted that the Noticee took more than one

month’s time in dealing with some of the investor complaints. These complaints included

complaints received directly, or, through Exchange/ SEBI. It was inter alia further observed that

the Noticee did not have a strong, effective and efficient investor grievance mechanism

commensurate with its operations, so as to comply with the timelines stipulated vide Regulation

6A(1)(e) of Brokers Regulations for redressal of grievances of the investors. It was inter alia also

observed that there was no proper supervision and monitoring in respect of investor complaints.

It is in this context, it was alleged that the Noticee had violated the provisions of Regulation

6A(1)(e) of the Brokers Regulations and the provisions of clauses A(1), (2) and (5) of Code of

Conduct specified under Schedule II read with Regulation 7 of the Brokers Regulations.

15

It may be noted that Section 15C of the SEBI Act would apply to matters where SEBI upon

receiving complaint/(s) from investor/(s) had formally communicated to the Noticee in writing to

redress the said complaint/(s) and the Noticee had failed to do so within the stipulated time. On


16/33

_____________________________________________________________________________


the other hand, in the extant case, the focus of Inspection was to verify the investor grievance

handling mechanism of the Noticee and whether adequate steps had been taken by the Noticee

for redressal of investor grievances. Hence, I find it was only right on the part of SEBI to appoint

an Adjudication Officer to adjudicate under Section 15HB of the SEBI Act, the alleged violations

committed by the Noticee, and not under Section 15C of SEBI Act as argued by the Noticee.

16

I find here that the Noticee has drawn attention to various case judgments viz. Dr. RD Lodhi v.

Chairman Lucknow Development Authority Lucknow & Others, Dhananjaya Reddy v. State of

Karnataka 2001 (4) SCC 9, Commissioner of Income Tax, Mumbai v. Anjum MH Ghaswala 2002

(1) SCC 633, Competant Authority v. Bangalore Jute Factory & Others 2005 (13) SCC 477, State of

Jharkhand & others v. Ambay Cements & another 2005 (1) SCC 368 and J. K. Cotton Spinning &

Weaving v/s The State of Uttar Pradesh & Ors (1961 AIR 1170) wherein the Courts have inter

alia held that when a statute vests certain power in an authority to be exercised in a particular

manner, then the said authority has to exercise it only in the manner provided in the statute itself.

Also that whenever there is a particular enactment and a general enactment in the same statute,

and the latter, taken in its most comprehensive sense, would overrule the former, the particular

enactment must be operative, and the general enactment must be taken to affect only the other

parts of the statute to which it may properly apply. In view of the same, the Noticee has inter alia

argued that the provisions of SEBI Act cannot be circumvented by doing something indirectly

which cannot be done directly.

17

In the matter, I note that the Hon’ble Supreme Court in Reserve Bank of India v. Peerless General

Finance and Investment Co. Ltd., 1987 SCR (2) 1 had held as thus in the matter of interpretation

of statutes: "Interpretation must depend on the text and the context. They are the basis of

interpretation. One may well say if the text is the texture, context is what gives the colour. Neither

can be ignored. Both are important. That interpretation is best which makes the textual

interpretation match the contextual. A statute is best interpreted when we know why it was

enacted. With this knowledge, the statute must be read, first as a whole and then section by

section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the

context of its enactment, with the glasses of the statute-maker, provided by such context, its


17/33

_____________________________________________________________________________


scheme, the sections, clauses, phrases and words may take colour and appear different than when

the statute is looked at without the glasses provided by the context. With these glasses we must

look at the Act as a whole and discover what each section, each clause, each phrase and each

word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute

and no word of a statute can be construed in isolation. Statutes have to be construed so that every

word has a place and everything is in its place."

18

In the same vein, I am of the view that a charge cannot be viewed out of context. Thus, I note that

the focus must be on the principal subject matter plus the particular perspective. In the extant

case, I find that the subject matter of Inspection was the investor grievance redressal mechanism

adopted by the Noticee. The perspective was whether adequate steps for redressal of investor

grievances (whether received directly by the Noticee or through Exchange/ SEBI) were being

taken by the Noticee and availability of adequate infrastructure for the same.

19

I find it pertinent to mention here that Section 11(2) of the SEBI Act contains measures available

with SEBI to implement the legislated duty of investor protection. One of such measures includes

undertaking inspection of intermediaries registered with it. Inspection is a part of an evaluation

exercise conducted by SEBI for implementation of an effective compliance program. Delayed

redressal of investor complaints observed in the extant case was a part of finding of such

Inspection conducted by SEBI in 2013, covering a period of FY 2012-13 and FY 2013-14 till the date

of inspection i.e. June 19, 2013. As a result, SEBI alleged that the Noticee had violated Regulation

6A(1)(e) and the provisions of clauses A(1), A(2) and A(5) of Code of Conduct specified under

Schedule II read with Regulation 7 of the Brokers Regulations. Further, SEBI also noted that the

Noticee vide letter dated September 19, 2011, in response to the Administrative Warning issued

to it vide letter dated August 11, 2011 inter alia for not having prudent investor grievance

handling mechanism, had submitted an Action Taken Report stating that the Noticee had inter

alia taken steps to resolve the investor complaints within a short period of time. However despite

the same, it was noted that the violation had recurred.


18/33

_____________________________________________________________________________


20

Further the present Inspection noted that in the instances brought out, the Noticee had either

resolved the grievances of investors after a lapse of one month, or had failed to address the same

even after the expiry of the one month period. And the Noticee had already received such

complaints, either from SEBI or the Stock Exchange or from complainants directly. Under such

circumstances, where the complaints were redressed after lapse of one month, there was no

scope for SEBI to again call upon the Noticee to redress the grievance of investors. Even in cases

where complaints received were pending beyond the stipulated time, there too, I do not find that

there was any need for SEBI to again call upon the Noticee to redress the grievances of investors,

fails to redress such grievances, subsequent to which the Noticee be made liable to a penalty

under Section 15C of SEBI Act.

21

As such, I am of the view that if the contention of the Noticee is accepted, it would only defeat

the larger purpose of investor protection on a mere technicality. It is a settled position that SEBI

Act is pre-eminently a social welfare legislation seeking to protect the interests of small investors,

hence, while interpreting its provisions, its larger objective should be kept in mind. In this regard, I

note that the Hon’ble Supreme Court in SEBI vs Ajay Agarwal, AIR 2010 SC 3466 has laid down

the principle to be adopted while interpreting the SEBI Act as follows: “It is a well known canon of

construction that when Court is called upon to interpret provisions of a social welfare legislation,

the paramount duty of the Court is to adopt such an interpretation as to further the purposes of

law and if possible eschew the one which frustrates it.”

22

By looking fairly at the language used in Section 15C of the SEBI Act, I note that operation of 15C is

limited only to cases where an intermediary fails to redress grievances specifically referred to it by

SEBI, within the stipulated time. It does not cover cases not referred to by SEBI. On the other

hand, the intent of the Inspection was to take a comprehensive view of the investor grievance

handling mechanism of the Noticee. In this context, I find that Section 15HB of SEBI Act applies to

failure to comply with any provision of the Act, the Rules or the Regulations made or directions

issued thereunder, for which no separate penalty has been provided.


19/33

_____________________________________________________________________________


23

Thus, from the detailed discussion above, I am of the considered view that the said violation of

Regulation 6A(1)(e) and of clauses A(1), A(2) and A(5) of Code of Conduct specified under

Schedule II read with Regulation 7 of the Brokers Regulations, does not get covered under the

special provision 15C of the SEBI Act, hence, has to be considered under the general provision

Section 15HB of the SEBI Act.

24

With this in place, we will now examine the allegations against the Noticee. As has been brought

out above, the Inspection Report had alleged that the Noticee did not have a strong, effective and

efficient investor grievance mechanism commensurate with its operation. It is also alleged that

there was no proper supervision and monitoring in respect of investor complaints.

25

The details of the complaints received by the Noticee from clients has been summarized as under:

Mode of

Receipt

Opening

Balance

Inspection Period Complaints Status

Received Resolved Pending Referred

for

arbitration

Cases where

arbitration

awards have

gone against

the Noticee

SEBI/BSE/

NSE

31 96* 75 21 15 4

31

(Resolved

during the

year)

DIRECT - 185* 159 26 - Nil

TOTAL 31 281* 265 47 15 4*24 were common complaints

26

Inspection observed that the Noticee had 31 complaints pending at the beginning of the

inspection period. It had received 281 complaints (96 from BSE/NSE/MCX/ SEBI and 185 directly

from the clients), of which 24 complaints were common i.e. received from the exchanges as well

as directly from the clients during the inspection period. Therefore, in effect the numbers of

complaints were 257 (i.e. 281-24) during the inspection period. The details of 96 complaints

received through exchanges and details of the 185 complaints received directly was provided to

the Noticee along with the SCN. The Noticee informed that 265 complaints, including 31 pending


20/33

_____________________________________________________________________________


complaints at the beginning of the year were resolved during the period and 47 complaints were

pending at the end of the period. Further that during the inspection period, 15 complaints were

referred for arbitration, of which 4 complaints had gone against the Noticee.

27

In the matter, I note that the Noticee has stated inter alia that given the size of their operations,

their rate of grievances is very less. It has been stated that the number of complaints must be

viewed against the fact that 257 complaints amount to 0.50% of the total active retail clients and

0.08% of the total retail clients, which is quite low. Also that from the turnover perspective, the

complaints constituted 0.0014% of the total turnover. I note here that the Noticee has compared

the complaints that could not be redressed within the stipulated one month period as observed

by Inspection through sample and test checking basis, with its total retail and active retail

clientele and from the turnover perspective, to put forth the fact that the rate of grievance was

very low. However, I note here that adjudication proceedings were initiated not because of the

complaints received, but, in view of the fact that Inspection had observed that the Noticee had

taken more than 30 days to reply/ act upon 54 out of 281 complaints i.e. 19% of the complaints

received were replied/ acted upon only after 30 days. It was, hence, alleged that the Noticee had

failed to adhere to the stipulated time period of one month in one out of almost five complaints

received by the Noticee in violation of Regulation 6A(1)(e) of the Brokers Regulations. Besides the

same, it was also noted by Inspection that action taken date was prior to the complaint received

date in 10 of the 281 complaints and in case of 13 of the 281 complaints, action taken date was

not mentioned at all.

28

Here, I find it noteworthy to mention that the number of complaints received is not per se a

relevant figure, but, it is the manner in which the complaints are received and addressed that

demonstrates an important measure of organisation’s commitment to investor satisfaction. It

conveys to the investors that their complaints and concerns are taken into consideration.

However, in the extant case, Inspection observed that in respect of 12 of the 96 complaints

received from the Exchanges, the Noticee had taken more than 30 days time to reply to the

complainant. Further that 13 of the 96 complaints received from the Exchanges were under

process as on the date of inspection and 4 out of the 96 complainants had opted for arbitration.


21/33

_____________________________________________________________________________


As regards the complaints received directly by the Noticee, Inspection had observed that no

proper records had been maintained. Inspection noted that of the 185 complaints received

directly, action in respect of 42 complaints was taken only after 30 days and in respect of 13

complaints, no action taken date had been mentioned. Further that in 10 out of the 185

complaints received directly, action taken date was prior to the date of complaints received.

29

In the matter, I note that the Noticee has stated that of the 42 complaints received directly, 15

complaints were replied upon before 15 days and 6 complaints were replied upon before 30 days.

From the revised data at Exhibit 2 of the written submission filed vide letter dated October 07,

2015 pursuant to hearing, I note from the ‘Remark’ column that except for a couple of cases,

generally in all such instances, the complainants were, however, not satisfied with the replies

provided by the Noticee and had to escalate the complaint to the Exchange. This in itself shows

that the replies were far from satisfactory. In some cases, the Noticee has stated that the date of

receipt of the complaint was wrongly mentioned. This only indicates that the record keeping was

not proper.

30

The Noticee has also stated that in cases where no action taken date was reported, 7 complaints

were replied within 15 days and in 3 complaints, action was taken within 15 days. Here too from

Exhibit 3 of written submission filed vide letter dated October 07, 2015 pursuant to hearing, I note

from the ‘Remark’ column that most of these complaints were forwarded to the concerned

branches, and this date of forwarding to the concerned branch for action has been considered as

action taken date in the column ‘Reply Status’. In most of the cases, date when the branch

actually acted upon the complaints/ resolved the complaint has not been noted. This only

strengthens the poor handling of investor complaints by the Noticee.

31

In the matter, Inspection had also observed that the Noticee did not maintain proper records of

the complaints received directly from the investors. I find that the Noticee has submitted that

direct complaints were handled by Head Office as well as other offices simultaneously at the

relevant time, and, therefore, there was scope for manual errors with respect to maintenance of

records. However, Inspection had observed that the complaint register provided in the excel


22/33

_____________________________________________________________________________


sheet did not even capture the basic details such as nature of complaints, replies provided, basis

of complaints, channel of receipt, date of resolution etc., despite the claim made by the Noticee

to the Inspection team that in the register maintained by the Noticee all details about the nature

of complaint, date of receipt, date of reply, source of complaints etc. are entered. The importance

of proper maintenance of records assumes significance in view of the fact that without a formal

system of recording complaints, the complaints do not get properly addressed or communicated

to the management. In addition, complaints data offer a valuable source of information for the

organization about systemic problems, investors views etc. It is, therefore, that Regulation

6A(1)(e) also requires every stock broker to keep SEBI informed about the number, nature and

other particulars of the complaints received from investors as well.

32

Inspection further observed that the category of complaints received by the Noticee from SEBI,

NSE, BSE and MCX during the inspection period were as follows:

Sl.

No.

Nature of Complaints received No. of

Complaints

Percentage

%

1 Non Receipt Of Documents (Contract Notes,

Agreements, Quarterly Statement etc.) 9 3.50

2 Delays/Non Receipt Of Payments/ Delivery of

Securities 20 7.78

3 Unauthorized Trading/Misappropriation 119 46.30

4 IPO related 1 0.39

5 Service Related:

A. Excess Brokerage 9 3.50

B. Wrong execution of order 3 1.17

C. Non receipts of corporate benefits 1 0.39

D. Other services defaults 42 16.34

E. Closing out /squaring up 4 1.56

6 Others 49 19.07

Total 257 100.00

33

From the above, inspection observed that the maximum number of complaints received pertained

to un-authorized trades which accounted (46.30%), followed by service related complaints

(22.9%) and then by delays/ non-receipt of payments/ delivery of securities (7.78%). In the

matter, I note that the Noticee has inter alia submitted that the aforesaid percentages are correct

only with reference to total number of complaints received. Further that they are miniscule when


23/33

_____________________________________________________________________________


compared to the total number of active clients. Also that most of the complaints registered during

the inspection period pertained to transactions during Financial Year (FY) 2011-12 and period

prior to it.

34

However, Inspection noted that 50% of the complaints had consistently continued to be of

unauthorized trade category over a period from January 2009 onwards as per details given below:

Period No. of Complaints Percentage %

January 2009 to February 2010 (Previous Inspection) 64 49.61

FY 2012-13 and FY 2013-14 (Extant Inspection) 119 46.30

35

In the matter, I note further that the Noticee has stated that 75% of the cases where the

allegation were of unauthorized trade were outright rejected by the Arbitral panel and awards

were given in the Noticee’s favour. However, the same cannot be adopted as a yardstick to

measure the genuineness of the complaints, since there can be reasons such as lack of proper

documentation on the part of investor etc. also for award going in favour of the Noticee. Besides

50% of complaints consistently falling in the unauthorized trade category over a period of time,

definitely indicates that there appears to be a cause of concern about the Noticee’s conduct. In

fact, it is important on the Noticee’s part to carry out a thorough root cause analysis of such

complaints, in order to reduce receiving of similar such complaints in future.

36

In the matter, I note that the Noticee has submitted that classification of unauthorized trades is

based on a “tick” mark by the complainant in the complaint form, which may or may not be

unauthorized. The Noticee has further also submitted that most of the complaints for

unauthorized trades are not entirely genuine in nature, as most of the clients book losses in a

bearish market and later resort to this kind of disputes with a view to recoup their losses. Also

that certain percentages of trades do not actually fall in the unauthorized category, as

complainants file their complaints in Exchanges where the complainant had not entered into a

single transaction, hence, immediately closed to the satisfaction of the complainants. It has been

pointed out that in FY 2012-13, there were 9 such complaints filed under the unauthorized trade

category in BSE, whereas the complainant had not even entered into any single transaction in BSE.


24/33

_____________________________________________________________________________


37

In the matter, complaints that are quickly resolved in a transparent and time bound manner to

the satisfaction of the complainants, helps in enhancing the confidence of the investors and

thereby the integrity of the securities markets. However, the issue under consideration is ofcomplaints that are not resolved quickly and fairly, and, thus, become a cause of concern for the

Regulator. This is because Investor Grievance Redressal Mechanism and protection of small

investors goes hand in hand. It has, hence, been the regulatory objective of SEBI to ensure that

every complaint is managed efficiently and at appropriate level and resolved within the stipulated

time provided under the Regulations.

38

I note here that Inspection observed that the complaints received by the Noticee were reviewed

in the Board meetings by its Board of directors (hereinafter referred to as the ‘BoD’) as regards

their redressal on a half yearly basis. Information compiled by inspection team on the basis of

Minutes of the Board meetings provided by the Noticee is as per the table below:

Half Year Meeting

held

Complaints Gist of the Minutes of the

Board MeetingOpening Received Resolved Pending

Apr 2011

to

Sep 2011

Nov

2011

- 116 68 48 The BoD while being satisfied

suggested that the number of

complaints may be brought

down.

Oct 2011

to

Mar 2012

Jun

2012

48 64 37 75 The BoD while being satisfied



down.

Apr 2012

to

Sep 2012

Nov

2012




down.

Oct 2012

to

Mar 2013

Jun

2013




down.

39

Inspection observed from the minutes of meeting of the BoD that pending complaints had never

been a part of consideration in any of its meetings. Further that there was no mention of the


25/33

_____________________________________________________________________________


complaints that had been directly received by the Noticee. Also, inspection observed from the

above that the conclusions of the BoD meetings appeared stereotype. Inspection further

observed that the BoD in each of the meetings had made conflicting observations, whereby on

one hand, they had expressed satisfaction with regard to grievance redressal system, and, on the

other hand, they had also suggested that the number of complaints be brought down.

40

In the matter, I find that the Noticee has submitted that though there is no statutory stipulation of

considering the grievance of clients in BoD meetings, they had devised their own internal systems

and process for resolution of grievances. The Noticee has inter alia submitted that the pending

complaints were discussed in Board meetings under the agenda more in a freelance way and

appropriate oral instructions were given to the concerned for resolution, which was not recorded

in the minutes, since the minutes are not reflective of verbatim reproduction of the deliberations

of the Board. Further that upon evaluation and examination, the Board initiated several corrective

steps. As regards the conclusion of the BoD meetings appearing stereotype, the Noticee has inter

alia stated that the Board minutes are reflective of the fact of a discussion and not the minute

details of the discussion. Further that the system of deliberations in the Board meetings had

automatically brought seriousness into the grievance redressal mechanism. As regards the

conflicting observations made by the Board, the Noticee has stated that the satisfaction was with

regard to the nature and quality of resolution of the complaints, and, suggestion for bringing

down the number of complaints was with regard to unresolved complaints.

41

Firstly, I find it surprising that the Board of the Noticee was going on expressing satisfaction half

year after half year, despite the falling redressal rate, which fell from 58% in April to September

2011 to 33% in October 2011 to March 2012, further to 13% in April to September 2012 half year

and to 16% in October 2012 to March 2013 half year, taking into consideration the overall

complaints pending with the Noticee. It was in this context that Inspection had remarked that the

gist of the BoD meetings that: “The BoD while being satisfied suggested that the number of

complaints may be brought down” , which continued to remain unchanged despite such poor

redressal, apparently appeared stereotype in nature. The Board of Directors has to recognize and

accept that complaints are an important part of accountability. It is required to have a


26/33

_____________________________________________________________________________


commitment from the top down to ensure that the investor grievance redressal mechanism does

not fall into disrepair or disrepute. In the extant case, it is not clear on what basis the Board of

Directors of the Noticee were satisfied with the nature and quality of complaints as submitted by

the Noticee, when the redressal rate in the first place was so poor, and was falling half year after

half year. I note here that the Noticee has stated that there is no statutory stipulation of

considering the grievance of clients in BoD meetings. However, I find it pertinent to mention here

that the Board of Directors have an overall responsibility and accountability for the management

and governance of complaints handling. It is, hence, that SEBI too vide circular dated December

18, 2014 on “Redressal of investor grievances through SEBI Complaints Redress System (SCORES)

platform” has inter alia made the Board of Directors/ Proprietor/ Partner of the registered

intermediary responsible for ensuring compliance with the provisions of the said Circular.

42

Inspection also observed that the Noticee had decentralized control in respect of its operations

and also with respect to the investor grievances redressal. The Noticee had stated during the

inspection that there were 4 executives (2 each at the corporate office in Mumbai and Registered

office in New Delhi) attending to the investor grievances and reporting to the Senior Vice

President cum Compliance Officer. However despite the same, from the table below, I note that

the Noticee has not been able to redress more than one-fourth of the complaints received within

the stipulated period of one month:

First Reply/ Action Taken from the date of Complaint

15 days or

less

16-30

days

More than

30 days

Action date prior to the

complaint received date

Action taken date not

mentioned

129 75 54 10 13

43

I note here that the Noticee has submitted that it had a proper grievance redressal policy and

strong investor grievance mechanism. Also that all complaints received whether directly or

through Exchanges/ regulator are recorded and attended in an expeditious manner. However, in

view of the findings discussed in the earlier paras of this Order, it becomes clear that the Noticee

did not have an efficient & effective grievance redressal mechanism during the Inspection period.

I note that the Noticee has stated here that they have acted upon 204 of 280 complaints i.e. 72%

within 30 days, and that even with respect to Exchanges, the resolution amounted to 87.5%. In


27/33

_____________________________________________________________________________


the matter, I find it noteworthy to mention here that the above table reflects the first reply/

Action taken from the date of the complaint, which need not necessarily be resolution of the

complaint. And the fact that Noticee had taken more than a month to act upon more than one-

fourth of the complaints received by the Noticee is definitely a cause of concern from the

Regulator’s point of view.

44

I find that the Noticee has also stated here that the delay, if any, was not very significant

considering that certain complaints inter alia involved elaborate examination of facts, verification

of facts, co-ordination with clients and liasoning with the branches, etc. to appropriately address

the complaints to the satisfaction of the complainant and the Exchanges. Even considering the

same, however, the fact remains that a broker is required to take adequate steps for redressal of

grievances of the investors within one month of the date of receipt of the complaint as stipulated

vide Regulation 6A(1)(e) of the Brokers Regulations.

45

Thus, from all of the above, I find that the Noticee despite its repeated claim of having a strong,

effective and efficient investor grievance mechanism commensurate with its operation and

assurance given to SEBI vide the aforesaid letter dated September 19, 2011, was not able to

comply with the timelines stipulated vide Regulation 6A(1)(e) of the Broker Regulations for

redressal of grievances of the investors. It also appears from the same that there was no proper

supervision and monitoring in respect of the investor complaints. This is strengthened by the

admission made by the Noticee that the direct complaints were handled by many personnel, and,

therefore, there was scope for some manual errors, thus, confirming that there was no proper

framework, guidelines in place, resulting in poor maintenance and handling of investor

complaints, which further aggravated the delay. Therefore, it is established that the Noticee has

failed to take adequate steps for redressal of grievances of the investors within one month of the

date of the receipt of the complaint, thereby violating the provisions of Regulation 6A(1)(e) of

Broker Regulations and the provisions of clauses A (1), (2) and (5) of code of conduct specified

under Schedule II read with Regulation 7 of the Broker Regulation.


28/33

_____________________________________________________________________________


46

The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL

216(SC) held that “In our considered opinion, penalty is attracted as soon as the contravention of

the statutory obligation as contemplated by the Act and the Regulations is established and hence

the intention of the parties committing such violation becomes wholly irrelevant…”.

47

In view of the foregoing, I am convinced that it is a fit case to impose monetary penalty under

Section 15 HB of the SEBI Act, which reads as under:

15HB. Penalty for contravention where no separate penalty has been provided.-

Whoever fails to comply with any provision of this Act, the rules or the regulations made or

directions issued by the Board thereunder for which no separate penalty has been provided, shall

be liable to a penalty which may extend to one crore rupees.”

48

While determining the quantum of monetary penalty under Section 15 HB, I have considered the

factors stipulated in Section 15-J 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.”

49

It is difficult, in cases of such nature, to quantify exactly the disproportionate gains or unfair

advantage enjoyed by an entity and the consequent losses suffered as a result of the default. It is

noted that no quantifiable figures are available to assess the disproportionate gain or unfair

advantage made as a result of such default by the Noticee.

50

I have taken note of the submissions by the Noticee that upon evaluation and examination, its

Board has initiated several corrective steps including percolating the issues related to the overall

compliances and investor grievances down to the line of Head of Departments of every


29/33

_____________________________________________________________________________


department, Zonal Heads and Regional Heads. Also that the Board had given strict instructions to

strictly adhere to the Guidelines, Rules and Regulations of the Regulators, and as a result, the

number of complaints have drastically reduced by more than 50% in FY 2014-15. I have also taken

note of the fact that the Noticee has now initiated a process of addressing the complaints through

software called “Talisma” which enables the Noticee to maintain its records in a centralized

manner with minimum manual interference and which, in turn, is supervised and monitored by

the Senior Vice President cum Compliance Officer.

51

However, the fact remains that the Noticee, being a stock broker with a vast clientele, failed to

fulfill its duty of complying with the Brokers Regulation during the Inspection period. It is the duty

of SEBI to ensure speedy resolution of investor grievances, and to further the cause, every Stock

Broker whose registration is granted by SEBI is required to take adequate steps for redressal of

grievances of the investors within the stipulated time. It is of utmost importance that every stock

broker assigns high priority to investor grievances and takes all necessary steps to redress the

grievances of investors at the earliest, which the Noticee failed to do at the relevant point in time.

52

Besides, I note that SEBI had earlier conducted an inspection of the Noticee during September

2010 for the period January 2009 to February 2010. The main observations during the said

inspection were that the Noticee had not been exercising due control over the operations of its

staff, that the Noticee had not been maintaining proper records of complaints received from all

the sources, and lack of control over the complaints received at the outlets level. In response to

the said Administrative Warning, the Noticee vide letter dated September 19, 2011 submitted

therewith an Action Taken Report (ATR) stating that the Noticee had inter alia taken steps to

resolve the investor complaints within a short period of time. The findings of the subsequent

Inspection conducted on June 19, 2013 covering the period FY 2012-13 and FY 2013-14 (till the

date of Inspection i.e. June 19, 2013), which are before me, are, thus, despite the Administrative

Warning issued vide SEBI’s letter dated August 11, 2011 inter alia for not having a prudent

investor grievance handling mechanism pursuant to inspection conducted during the earlier

period viz. January 2009 to February 2010 and the Noticee’s response to the same vide letter


30/33

_____________________________________________________________________________


dated September 19, 2011. Thus, I note that the Noticee’s inability to take appropriate and

adequate steps for redressal of investor grievances has been found to be of repetitive nature.

53

Further the gravity of such repetitive violation by the Noticee, needs to be viewed keeping in

mind the fact that redressal of investor grievances is one of the key components of SEBI’s efforts

to protect the interests of investors in securities. Investors need to have their complaints sorted

out satisfactorily as speedily as possible, and the importance of this basic requirement can never

be under-estimated. It clearly matters a great deal to the investors how long it takes from

registering a complaint to resolution. It is, hence, that SEBI vide Regulation 6A(1)(e) of Brokers

Regulations has stipulated a time line of one month to take adequate steps to redress the

grievance of the investors. A weak investor grievance redressal mechanism also undermines the

integrity and efficiency of the securities market and investor confidence in them.

54

In the matter, I find that the Hon’ble Securities Appellate Tribunal (hereinafter referred to as

‘ SAT ’ ) in S. S. Forgings & Engineering Limited & Others v SEBI, Appeal No. 176 of 2014 (decided

on August 28, 2014) has inter alia observed that – “………………Undoubtedly, an obligation is cast

upon every listed company to redress investors’ grievances in a time bound manner as may be

prescribed by SEBI from time to time………. This Tribunal has consistently held that redressal of

investors’ grievances is extremely important for the Regulator to regulate the capital market. If the

grievances are not redressed within a time bound framework, it leads to frustration among the

investors’ who may not be motivated to further invest in the capital market. Hence the importance

of complaints redressal system initiated by SEBI in June, 2011 cannot be undermined and its

sanctity has to be maintained by all the listed companies…….”

55

The principle laid down by the Hon’ble SAT vide its aforesaid Order that investors grievances need

to be redressed within the time bound framework as prescribed by SEBI, applies to intermediaries

registered with SEBI as well. An effective investor grievance redressal is a timely redressal. Against

the said background, the fact that the Noticee did not take adequate steps for redressing the

grievances of investors, thereby resulting in repeated breach of the timelines set by SEBI for

redressal of grievances of investors, need to be viewed seriously.


31/33

_____________________________________________________________________________


56

In the matter, I note that the Noticee has stated that the violations, if any, were technical and

venial in nature, that there was no loss to any investor, and the minor infractions, if any, have

been rectified immediately. The Noticee has further referred to the Order of Hon’ble SAT in thematter of R. R. Chokhani Stock Brokers Pvt. Ltd. (Appeal No. 217 of 2012 Date of Decision:

25.09.2013) and the Order of Hon’ble SAT in the matter of Finquest Securities Pvt. Ltd (Appeal

No. 119 of 2013 Date of Decision: 25.09.2013), wherein the Hon’ble SAT had inter alia observed

that in the said cases, a mistake of venial nature had inadvertently occasioned, which had been

rectified immediately on being brought to notice. Under these circumstances, the Hon’ble SAT

had held that when the lapse is technical, unintentional, and does not involve monetary loss to

any party, on facts of the said cases, it would have been just and proper to issue a warning to be

more diligent in complying regulatory norms prescribed by SEBI, instead of imposing penalty.

57

On perusal of the said Orders of the Hon’ble SAT, I note that the issue involved in the said two

cases was regarding accepting third party payments. However even in the said Orders, I find that

the Hon’ble SAT has held that the justification that such transactions were miniscule compared to

the appellants’ total transactions and hence inconsequential, is very weak and not convincing.

Further, the Hon’ble SAT has inter alia noted in the said Orders that the transactions have not

been undertaken with intention to defraud anybody or as a matter of willful defiance, but, more

or less technical in nature and appear to be due to inadvertence or oversight. Even the case of

Samkit Share and Stock Brokers Pvt. Ltd. cited by the Hon’ble SAT in the said Orders, SAT had

noted that mistakes were committed inadvertently. It was, hence, that the Hon’ble SAT

considered the lapse as technical, unintentional, not involving monetary loss to any party, and

thereby felt just and proper to warn the appellants to be more diligent in complying with

regulatory norms prescribed by SEBI, instead of imposing a penalty.

58

Unlike the same, I find that in the given case, the Noticee was already warned by SEBI on one

occasion for not having a prudent investor grievance handling mechanism pursuant to inspection.

However, despite the same and assurance given by the Noticee to SEBI vide its letter dated

September 19, 2011 that the Noticee had inter alia taken steps to resolve the investor complaints

within a short period of time, it has been observed that the default had recurred immediately


32/33

_____________________________________________________________________________


thereafter. Besides, I note from the preceding paras of the Order that the delay in resolving the

complaints within the stipulated time was not inadvertent in nature. In fact, in the extant case, I

note that Noticee had taken more than 30 days to reply/ act upon 54 out of 281 complaints i.e.

19% of the complaints received were replied/ acted upon only after 30 days. Thus, I note that the

Noticee had failed to adhere to the stipulated time period of one month in one out of almost five

complaints received by the Noticee, immediately after assuring SEBI that it had taken appropriate

steps in the matter. This can under no standards be considered as “inadvertent”. Thus in the first

place, the argument of the Noticee that the violation was technical or venial in nature, itself does

not stand. Further, I note that nothing has been brought on record to show that facts in the so

referred cases are similar to the facts in the extant case. I note that circumstances and the facts of

the said two cases referred by the Noticee are otherwise different to the facts of the extant case

as has been brought out above in detail. Hence, I conclude that the determination of penalty in

the extant case would depend upon the facts and circumstances of the extant case.

ORDER

59

After taking into consideration all the facts and circumstances of the case, I impose a penalty of

Rs. 20,00,000/- (Rupees Twenty Lac only) on the Noticee viz. M/s Bonanza Portfolio Ltd. under

Section 15HB of the SEBI Act, 1992 for violation of the provisions of Regulation 6A(1)(e) of SEBI

(Stock Brokers & Sub Brokers) Regulations, 1992 and the provisions of clauses A (1), (2) and (5) of

code of conduct specified under Schedule II read with Regulation 7 of the SEBI (Stock Brokers &

Sub Brokers) Regulations, 1992 which will be commensurate with the violations committed

by the Noticee.

60