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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/514/2015 ]

________________________________________________________________

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

MANUBHAI MANGALDAS SECURITIES PVT. LTD

(PAN:AAACM8035G)

___________________________________________________________________

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

had conducted an inspection into the books of accounts and other records of

Manubhai Mangaldas Securities Pvt. Limited (hereinafter referred to as "the

Noticee"), a SEBI registered stock broker and a member of the National

Stock Exchange (NSE) & the Bombay Stock Exchange Limited (BSE), and to

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

and various Rules and Regulations with respect to quarterly / monthly

settlement of funds and securities of the clients for the period between April

01, 2012 to June 17, 2014 and whether corrective steps were taken for the

deficiencies as observed in the Internal Audit Report and NSE Inspection

Report with respect to quarterly / monthly settlement of funds and securities

of clients.

2. Upon inspection, the following was observed with respect to quarterly /

monthly settlement of funds and securities of the clients:

(a) Failed to settle client accounts, either monthly or quarterly, as per the

preference of the clients.

(b) Failed to settle client accounts, either monthly or quarterly, having credit

and debit balances.

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(c) The statements of retention provided to the clients were observed to be

undated and failure to provide statement of funds and securities to clients.

(d) Delay in submission of data / information to SEBI.

3. SEBI has, therefore, initiated Adjudication proceedings against the Noticee

for violating the SEBI circulars bearing Nos. MIRSD/SE/Cir-19/2009 dated

December 03, 2009 and MIRSD/SE/Cir-5/2010 dated March 31, 2010 (herein

after referred to as the 'SEBI circulars dated December 03, 2009 and March

31, 2010'), Clauses A(1), A(2) and A(5) of the Code of Conduct as specified

under Schedule II read with Regulation 9 of the SEBI (Stock Brokers and

Sub-Brokers) Regulations, 1992 (herein after referred to as the 'Broker

Regulations') and Regulation 21(1) and (4) of the Broker Regulations for the

aforesaid violations with respect to the quarterly / monthly settlement of funds

and securities of clients.

APPOINTMENT OF ADJUDICATING OFFICER

4. I have been appointed as the Adjudicating Officer vide order dated March 11,

2015 under Section 15-I of 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 March 31, 2015

(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. Vide letter dated April 15, 2015, the

Noticee requested for extension of time by 4 weeks to file its reply to the

SCN. Accordingly, vide letter dated May 06, 2015, the Noticee submitted its

reply in the matter. 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 August 31, 2015. The

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Authorized Representative (AR) appeared on the scheduled date and

reiterated the submissions already made by the Noticee vide its reply dated

May 06, 2015. Further, the AR requested for time to file additional

submissions in the matter. The said request was acceded to and the Noticee

was advised to file its additional submissions on or before September 07,

2015. Accordingly, vide letter dated September 04, 2015 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 provisions of the SEBI

circular dated December 03, 2009 and March 31, 2010, Clauses

A(1), A(2) and A(5) of the code of conduct as specified under

Schedule II read with Regulation 9 of the Broker Regulations and

Regulation 21(1) & (4) of the Broker Regulations?

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

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

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 Circulars dated December 03, 2009 and March

31, 2010 which read as under:

SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03,

2009

Subject: Dealings between a client and a stock broker (trading

members included)

1. This is in continuation of circulars (a) No. SMD/SED/CIR/93/23321

dated November 18, 1993 specifying the norms for regulation of

transactions between clients and brokers, (b) No. SEBI/MIRSD/DPS-

1/Cir-31/2004 dated August 26, 2004 specifying the model format for

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the Member Clients Agreements, and (c) No. MRD/DoP/SE/Cir-

20/2005 dated September 8, 2005 specifying the conditions for issuing

electronic contract notes.

2. With a view to instill greater transparency and discipline in the

dealings between the clients and the stock brokers, it has been

decided, in consultation with Investor Associations, Secondary Market

Advisory Committee of SEBI (SMAC), market participants and major

stock exchanges, that the stock brokers shall comply with the

requirements as annexed to this circular.

3. The stock brokers shall take necessary steps to implement this

circular immediately and ensure its full compliance in respect of all

clients – existing or new – at the latest by 31st March 2010.

4. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers

and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and

regulations for the implementation of the above decision in co-

ordination with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the

provisions of this circular in their Monthly Development Reports.

5. This circular is issued in exercise of powers conferred under Section

11(1) of the Securities and Exchange Board of India Act, 1992 to protect

the interests of investors in securities and to promote the development

of, and to regulate the securities markets.

Annexure A

Requirements relating to dealings between a Client and Stock

Broker

Client Registration Procedure

1. The stock broker shall register a client by entering into an agreement

with him. For this purpose, the stock broker shall make available a

folder /book containing all the documents required for registration of a

client. The folder/book shall have an index page listing all the

documents contained in it and indicating briefly significance of each

document. Once signed, a copy of the same shall be made available to

the client.

2. The folder/book shall have two parts: (a) Mandatory and (b) Non-

mandatory.

Mandatory Documents

3. The mandatory documents are:

a. Member Client Agreement (MCA)/Tripartite Agreement in case sub-

broker is associated,

b. Know Your Client (KYC) Form

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c. Risk Disclosure Document (RDD)

These shall be executed in the format as prescribed by SEBI.

4. The Client shall indicate the stock exchange as well as the market

segment where he intends his trades to be executed. He shall do so in

the KYC form in his own hand and sign against these.

5. The KYC form shall capture the identity and the address of the

introducer instead of his MAPIN/UID. The KYC form shall be modified

to this extent.

6. The stock broker shall have documentary evidence of financial

details provided by the clients who opt to deal in the derivative

segment. In respect of other clients, the stock broker shall obtain the

documents in accordance with its risk management system.

7. The Stock Broker shall also capture details of action taken against a

client by SEBI or other authorities during the last 3 years.

8. There shall be a mandatory document dealing with policies and

procedures for each of the following under appropriate headings:

a. refusal of orders for penny stocks,

b. setting up client’s exposure limits,

c. applicable brokerage rate,

d. imposition of penalty/delayed payment charges by either party,

specifying the rate and the period (This must not result in funding by

the broker in contravention of the applicable laws),

e. the right to sell clients’ securities or close clients’ positions, without

giving notice to the client, on account of non-payment of client’s dues

(This shall be limited to the extent of settlement/margin obligation),

f. shortages in obligations arising out of internal netting of trades,

g. conditions under which a client may not be allowed to take further

position or the broker may close the existing position of a client,

h. temporarily suspending or closing a client’s account at the client’s

request, and

i. deregistering a client.

Non-mandatory Documents

9. Any term or condition other than those stated in the mandatory part

shall form part of non-mandatory documents.

10. The clauses in the non-mandatory part shall not be in contravention

of any of the clauses in the mandatory documents, as also the Rules,

Regulations, Articles, Byelaws, circulars, directives and guidelines of

SEBI and Exchanges. Any such contravening clause shall be null and

void.

11. Any authorization sought in non-mandatory part shall be a

separate document and shall have specific consent of the client.

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Running Account Authorization

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

of funds/securities shall be done within 24 hours of the payout.

However, a client may specifically authorize the stock broker to

maintain a running account subject to the following conditions:

a. The authorization shall be renewed at least once a year and shall be

dated.

b. The authorization shall be signed by the client only and not by any

authorised person on his behalf or any holder of the Power of Attorney.

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

the authorization at any time.

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

the stock broker may retain the requisite securities/funds towards

such obligations and may also retain the funds expected to be required

to meet margin obligations for next 5 trading days, calculated in the

manner specified by the exchanges.

e. The actual settlement of funds and securities shall be done by the

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

preference of the client. While settling the account, the broker shall

send to the client a ‘statement of accounts’ containing an extract from

the client ledger for funds and an extract from the register of securities

displaying all receipts/deliveries of funds/securities. The statement

shall also explain the retention of funds/securities and the details of

the pledge, if any.

f. The client shall bring any dispute arising from the statement of

account or settlement so made to the notice of the broker preferably

within 7 working days from the date of receipt of funds/securities or

statement, as the case may be.

g. Such periodic settlement of running account may not be necessary:

i. for clients availing margin trading facility as per SEBI circular

ii. for funds received from the clients towards collaterals/margin in the

form of bank guarantee (BG)/Fixed Deposit receipts (FDR).

h. The stock broker shall transfer the funds / securities lying in the

credit of the client within one working day of the request if the same

are lying with him and within three working days from the request if

the same are lying with the Clearing Member/Clearing Corporation.

i. There shall be no inter-client adjustments for the purpose of

settlement of the ‘running account’.

j. These conditions shall not apply to institutional clients settling trades

through custodians. The existing practice may continue for them.

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Authorization for Electronic Contract Notes

13. The stock broker may issue electronic contract notes (ECN) if

specifically authorized by the client subject to the following conditions:

a. The authorization shall be in writing and be signed by the client only

and not by any authorised person on his behalf or holder of the Power

of Attorney.

b. The email id shall not be created by the broker. The client desirous of

receiving ECN shall create/provide his own email id to the stock broker.

c. The authorization shall have a clause to the effect that that any

change in the email-id shall be communicated by the client through a

physical letter to the broker. In respect of internet clients, the request

for change of email id may be made through the secured access by

way of client specific user id and password.

General

14. All the documents in both the mandatory and the non-mandatory

parts shall be printed in minimum font size of 11.

15. A copy of all the documents executed by client shall be given to

him, free of charge, within 7 days from the date of execution of

documents by the client. The stock broker shall take client’s

acknowledgement for receipt of the same.

16. The stock brokers having own web-sites shall display all the

documents executed by a client, client’s position, margin and other

related information, statement of accounts, etc. in the web-site and

allow secured access by way of client-specific user id and password.

17. No term of the agreement, other than those prescribed by SEBI,

shall be changed without the consent of the client. Such change needs

to be preceded by a notice of 15 days.

18. The stock broker shall frame the policy regarding treatment of

inactive accounts which should, inter-alia, cover aspects of time period,

return of client assets and procedure for reactivation of the same. It

shall display the same on its web site, if any.

19. As on 31st March of every year, a statement of balance of Funds

and Securities in hard form and signed by the broker shall be sent to

all the clients.

SEBI Circular No. MIRSD/SE/Cir-5/2010 dated March 31, 2010

Subject: Clarification on dealings between a client and a stock

broker

1. This is with reference to SEBI circular No. MIRSD/SE/Cir-19/2009

dated December 3, 2009 in terms of which the stock brokers were

directed to take necessary steps to implement the circular immediately

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and ensure its full compliance in respect of all clients - existing and

new - latest by March 31, 2010.

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

received representations from market participants expressing

difficulties in implementation of the circular and requesting extension of

time. Hence, in consultation with the major stock exchanges, it has

been decided to extend the time line.

3. The stock brokers are now directed to ensure the full compliance of

the said circular dated December 3, 2009 in respect of all clients-

existing and new - latest by June 30, 2010.

4. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers

and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and

regulations for the implementation of the above decision in co-

ordination with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the

provisions of this circular in their Monthly Development Reports.

5. This circular is issued in exercise of powers conferred under Section

11(1) of the Securities and Exchange Board of India Act, 1992 to protect

the interests of investors in securities and to promote the development

of, and to regulate the securities markets.

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.

Obligation of Stock-broker on inspection by the Board

21(1) It shall be the duty of every director, proprietor, partner, officer

and employee of the stock-broker, who is being inspected, to produce

to the inspecting authority such books, accounts and other documents

in his custody or control and furnish him with the statements and

information relating to the transactions in securities market within

such time as the said officer may require.

(4) It shall be the duty of every director, proprietor, partner, officer and

employee of the stock broker to give to the inspecting authority all

assistance in connection with the inspection, which the stock broker

may reasonably be expected to give.

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Schedule II

Code 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.

8. I find from the SCN that the Noticee is a member carrying out services in

Cash, Currency and Equity Derivative Segment of NSE and BSE and was

incorporated in the year 1998. Further, in response to a questionnaire by the

inspection team with respect to the quarterly / monthly settlement of funds /

securities of clients, the Noticee vide its undated letter (received by SEBI on

January 06, 2014) had submitted that settlement of funds and securities are

being done by them. The implementation date of this policy was stated to be

in April 2010. As per the policy adopted by the Noticee for the settlement of

funds and / or securities, the same was to be done within one working day of

the payout, unless client specifically authorizes the Noticee in writing to

maintain a running account and actual settlement of funds and securities

shall be done at least once in a calendar quarter or month depending on the

preference of the client. It was observed that as per the client master

submitted by the Noticee, vide its email dated June 27, 2014, all its clients

have given running account authorization and opted for quarterly settlement

of funds / securities. However, upon analysis of the reports of pending

account balances of the clients, it was noted that the Noticee was not doing

the actual settlement of funds and securities at least once in a calendar

quarter as has been opted by the clients. Upon enquiry, the Noticee, vide its

email dated July 09, 2014, had submitted the following details:-

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Table 1: Number of client accounts (with break-up of active and inactive

clients) settled quarter wise:

FY2012-2013

Details April-June

2012

July-Sept

2012

Oct- Dec

2012

Jan-Mar

2013

Total Clients 24595 24595 24595 24595

Active 3725 3816 4224 4006

Inactive 20870 20779 20371 20589

Number of clients who have

opted for running account

24595 24595 24595 24595

Active 3725 3816 4224 4006

Inactive 20870 20779 20371 20589

Number of accounts settled 4495 4669 5426 5750

Active 1549 1727 2005 2168

Inactive 2946 2942 2870 3582

FY 2013-2014

Details April-June

2013

July-Sept

2013

Oct- Dec

2013

Jan-Mar

2014

Total Clients 25,022 25,022 25,022 25,022

Active 3,488 3,381 3,868 3,618

Inactive 21,534 21,641 21,154 21,404

Number of clients who have

opted for running account

25,022 25,022 25,022 25,022

Active 3,488 3,381 3,868 3,618

Inactive 21,534 21,641 21,154 21,404

Number of accounts settled

(only for creditors)

4,415 4,369 4,763 6,420

Active 1,562 1,456 1,908 2,334

Inactive 2,853 2,913 2,855 4,086

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9. Upon analyzing the above data, it was alleged in the SCN that out of the total

number of clients who had opted for running account, very few accounts were

actually settled. Further, it was noted that despite repeated requests, the

Noticee had failed to provide the data for accounts not settled to the

inspection team.

10. The aging analysis for clients with debit balance and clients with credit

balance from last 30, 45, 90, 120, 180 days was obtained from the Noticee

for the inspection period, quarter wise. The said report provided the details of

amount standing to the debit or credit of the client's accounts for more than

specified period (monthly/quarterly/half yearly/yearly). During the course of

the inspection, ageing report for 8 quarters viz. June 2012 - March 2014 were

examined and the details of the same are as under:

i. Clients having credit balance, who have opted for running account

Quarter wise, number of active clients having credit balance (for more than 90

days) is given in the table below:

Sl.

No.

Quarter Clients having credit balance,

more than ` 1000/-

Clients having credit balance,

more than ` 10,000/-

No. Amount (`) No. Amount (`)

1 June 2012 743 13,31,46,765 217 13,13,93,358

2 September 2012 768 19,36,91,564 232 19,18,22,600

3 December 2012 790 18,71,65,321 259 18,53,83,256

4 March 2013 706 16,17,80,582 199 16,01,16,279

5 June 2013 767 26,92,96,662 216 26,74,84,434

6 September 2013 834 5,38,27,912 236 5,18,80,312

7 December 2013 NSE vide their circular dated

29/10/2013 clarified that member may

retain an amount of Rs. 10,000/- after

taking written consent of the client.

246 5,09,41,608

8 March 2014 207 1,63,50,606

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ii Clients having debit balance, who have opted for running account

Quarter wise, number of active clients having debit balance (for more than

90 days) is given in the table below:

Sl.

No.

Quarter No. of clients having debit balance,

more than ` 10,000/-

Amount (`)

1 June 2012 189 3,88,16,278

2 September 2012 217 7,14,06,697

3 December 2012 210 5,84,15,334

4 March 2013 166 3,49,76,672-

5 June 2013 194 14,41,30,900

6 September 2013 210 5,54,20,459

7 December 2013 204 5,33,54,207

8 March 2014 141 2,01,38,338

11. From the above, it was alleged in the SCN that the Noticee had not settled

accounts of the clients who had opted for running accounts for more than 90

days which was in violation of SEBI Circulars dated December 03, 2009 and

March 31, 2010 thereby, did not exercise due care and diligence as required

in the conduct of business as a stock broker which is in violation of the code

of conduct as specified in Schedule II of the Broker Regulations.

12. I further find that during the inspection, vide email dated June 27, 2014, the

Noticee was asked to provide details of collateral in respect of sample of the

15 clients as mentioned below, which were selected randomly:-

Sr.

No.

Client

Code Client Name Quarter T - 30 T - 45 T - 90

1 60J054 Johny Kriplani Jun-12 12,649,162.77 11,710,378.55 8,598,234.99

2 31108

Rajesh Chhaganlal

Bhansali Jun-12 849,651.42 849,651.42 675,143.64

3 81322 Dharmendra J. Patel Sep-12 658,847.44 658,847.44 658,847.44

4 81284 Desai Jasmin Nalinbhai Dec-12 499,082.21 499,082.21 499,082.21

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5 60A133 A J S Investment Dec-12 7,736,365.79 7,736,365.79 7,736,365.79

6 81336 Anup K Patel Dec-12 498,311.98 498,311.98 498,311.98

7 06A902 Ashit Kantilal Mehta Mar-13 2,294,613.00 2,294,613.00 2,294,613.00

8 64313

Ajay Kailashnath

Agarwal Mar-13 667,434.39 667,434.39 667,097.31

9 60A023 Alisha Johny Kriplani Sep-13 4,481,737.76 4,481,737.76 4,481,737.76

10 22229 Kalpesh Sheth Sep-13 1,453,607.88 1,453,596.64 1,430,397.47

11 R158 Rupal Keyur Bhagat Dec-13 859,154.02 859,154.02 859,154.02

12 06A902 ASHIT Kantilal Mehta Mar-14 2,295,565.86 2,295,565.86 2,295,532.14

13 87095 Kavita Mehta Mar-14 142,130.59 142,130.59 142,130.59

14 915126

Hetal Vikrantgiri

Goswami Mar-14 322,665.98 322,665.98 322,665.98

15 40111 Heena Jitendra Parmar Mar-14 108,586.18 108,586.18 108,586.18

13. In response to the above, I note that the Noticee had replied vide email dated

July 03, 2014 and stated that out of 15 sample clients, no collaterals were

there in respect of 11 clients, and collaterals which they have in respect of

remaining 2 clients are less than the debit balance. Details of the same are

given below:-

Sr.

No.

Client

Code Client Name Quarter T - 30 T - 45 T - 90

Value of

collaterals

1 60J054 Johny Kriplani Jun-12 12,649,162.77 11,710,378.55 8,598,234.99 20,780,066

2 31108

Rajesh

Chhaganlal

Bhansali

Jun-12 849,651.42 849,651.42 675,143.64 Nil

3 81322 Dharmendra

J. Patel Sep-12 658,847.44 658,847.44 658,847.44 Nil

4 81284 Desai Jasmin

Nalinbhai

Dec-12

499,082.21

499,082.21

499,082.21

Nil

5 60A133 A J S

Investment Dec-12 7,736,365.79 7,736,365.79 7,736,365.79 14,107,698

6 81336 Anup K Patel Dec-12 498,311.98 498,311.98 498,311.98 Nil

7 06A902 Ashit Kantilal

Mar-13 2,294,613.00 2,294,613.00 2,294,613.00 Nil

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Mehta

8 64313

Ajay

Kailashnath

Agarwal

Mar-13 667,434.39 667,434.39 667,097.31 Nil

9 60A023 Alisha Johny

Kriplani Sep-13 4,481,737.76 4,481,737.76 4,481,737.76 Nil

10 22229 Kalpesh Sheth Sep-13 1,453,607.88 1,453,596.64 1,430,397.47 Nil

11 R158 Rupal Keyur

Bhagat Dec-13 859,154.02 859,154.02 859,154.02 Nil

12 06A902 Ashit Kantilal

Mehta Mar-14 2,295,565.86 2,295,565.86 2,295,532.14 177,850

13 87095 Kavita Mehta Mar-14 142,130.59 142,130.59 142,130.59 Nil

14 915126

Hetal

Vikrantgiri

Goswami

Mar-14 322,665.98 322,665.98 322,665.98

112,700

15 40111

Heena

Jitendra

Parmar

Mar-14 108,586.18 108,586.18 108,586.18 Nil

14. From the above table, it was observed that, for client viz. Johny Kriplani, the

amount of debit balance was less than the collateral value in T-30, T-45 and

T-90 days. This resulted in net credit in the account of the client. Hence, the

Noticee was under an obligation to return / settle the balance excess value of

securities to the client. Similarly, it was observed that for clients viz. Anup K

Patel and Hetal Vikrantgiri Goswami, the debit balance was less than the

value of securities available. The Noticee was again under an obligation to

return / settle the balance excess value of securities to the said clients.

However, the said client accounts remained unsettled for the said quarters. It

was, therefore, alleged that the Noticee was in violation of the SEBI Circular

dated December 09, 2009 and March 31, 2010 by failing to settle the client

accounts.

15. Further, for a randomly selected sample of 30 clients having credit balance,

the Noticee was asked to submit the amount of securities, if any, lying in the

accounts of the clients. The Noticee had submitted that the securities were

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available for 6 clients out of the 30. However, the Noticee had failed to

provide any proof of having settled these securities anytime during a quarter,

as per preference of the client. It was, therefore, alleged that the Noticee had

not settled the client’s accounts who had opted for quarterly settlement and

had credit balance in funds account or credit in securities accounts, thereby,

not complying with SEBI Circular dated December 3, 2009 and thereby had

failed to exercise due care and diligence as required in the conduct of

business as a Stock Broker which is in violation of Clauses A (2) and A (5) of

the Code of conduct in terms of the Broker Regulations.

16. In addition, the Noticee was also asked to confirm for a sample of following

20 clients (selected randomly), whether they had opted for running account,

whether accounts of these clients were settled once in the corresponding

quarter, the available balance at the end of the quarter and the date of

settlement.

Sr. No. Client Code Name Client Quarter ending

1 81900 Mukesh Maganbhai Patel Jun-12

2 87152 Usha Surana Jun-12

3 60J054 Johny Kriplani Jun-12

4 60R100 Ricky Kriplani NRE Sep-12

5 60M177 Mala Jangiani Sep-12

6 60A133 A J S Investment. Sep-12

7 60H200 Haresh T Keswani Dec-12

8 31128 Rajiv P. Patel Dec-12

9 M241 Manubhai Mangaldas Sec. Pvt. Ltd Dec-12

10 K001 Keyur Manubhai Bhagat Mar-13

11 60A023 Alisha Johny Kriplani Mar-13

12 62221 Deepali Manish Shah Jun-13

13 06A902 Ashit Kantilal Mehta Jun-13

14 H036 Hasmukh B Bhagat HUF Sep-13

Page 16 of 27

15 62163 Pushpaben Rajnikant Shah Sep-13

16 70925 Parin P. Bhagat Dec-13

17 98751 Purvit Dineshbhai Janjavadia Dec-13

18 79102 Viral D Chheda Mar-14

19 06A902 Ashit Kantilal Mehta Mar-14

20 915126 Hetal Vikrantgiri Goswami Mar-14

17. However, it was alleged that the Noticee had not provided the requisite

information in time. Further, as per the information submitted by the Noticee

on July 09, 2014, it was noted that the Noticee had confirmed that none of

the sample of 20 client’s accounts were settled in the corresponding quarter.

Also, the reasons submitted by the Noticee for non-settlement of the said

client accounts were found to be vague and unsatisfactory by the inspection

team.

18. As per the client master submitted by the Noticee vide its email dated June

27, 2014, it was noted that all its clients had opted for physical statements,

though some of the clients had given their e-mail IDs. In view of the same

and to further analyze the details with respect to the statements, the Noticee

was asked to provide statement of funds and securities as provided to the

clients for the aforesaid sample of 20 clients at the time of settlement. The

said statement of funds and securities were found to be as per the format

prescribed by the stock exchange. However, it was noted that the Noticee

had submitted statements (duplicate print outs) for only 3 out of the 20

clients. Further, it was noted that the said statements were not even dated.

Despite enquiring from the Noticee, it was alleged that the Noticee failed to

submit the proof of dispatch for the same. Some of the other sample proof of

dispatch submitted by the Noticee also did not clearly show if it pertained to

the retention statement or not. Hence, it was alleged in the SCN that the

Noticee had failed to establish that it was issuing statement of retention /

settlement of funds and securities to the clients upon settlement of accounts.

It was further alleged that the Noticee had not settled the clients' accounts

Page 17 of 27

who had opted for quarterly settlement and even for those whose accounts

which were claimed by the Noticee to be settled, the statement was not

issued for retention of funds and securities. Therefore, even after lapse of 4

financial years, the Noticee was alleged to have failed to comply with the

provisions of SEBI Circulars dated December 03, 2009 and March 31, 2010

and further had not exercised due care and diligence as required under

Clause A(2) and (5) of the code of conduct for stock brokers under the Broker

Regulations.

19. During the inspection, the running account authorization form of the Noticee

was checked and one of the clauses of the authorization form was:

“l / we shall bring any discrepancy to your notice within 7 working days from

the receipt of Statements”;

20. During inspection, I find that Running Account Authorization forms for 18

clients were checked and though the Noticee had submitted that all the

clients had opted for quarterly settlement; it was noted that in 1 authorization

form the client has opted for monthly settlement.

21. In view of the above, it was alleged in the SCN that the Noticee, by not

adhering to the quarterly / monthly settlement of funds/ securities of clients'

accounts, has violated the SEBI Circulars dated December 03, 2009 and

March 31, 2010 and also violated Clauses A(1), (2) and (5) of the code of

conduct as specified under schedule II read with Regulation 9 of the Broker

Regulations. Further, by not providing the requisite information on time to the

inspection team, the Noticee was further alleged to have violated the

provisions of Regulation 21(1) and (4) of the Broker Regulations.

22. Vide letter dated May 06, 2015, the Noticee submitted its reply to the said

SCN. The Noticee submitted that it is a stock broking company having three

decades of experience and is registered member of the BSE since 1986 and

registered member of the NSE since 2000. It is a Depository Participant of

CDSL. It has 28891 retail clients and 7023 active clients as on March 31,

2015. The Noticee states that majority of its clients are trading through the

Page 18 of 27

Noticee for more than a decade. The Noticee while denying the allegations

leveled against it in the SCN submitted that it had never violated SEBI

Circulars dated December 03, 2009 and March 31, 2010 and the settlement

of funds and securities were being done by it as per the policy and as per the

guidelines. Further, the Noticee submitted that all the information, as required

by the inspection team, was fully provided and the information in whatever

form was furnished to SEBI during the inspection of books of the Noticee.

23. The Noticee submitted that the table provided by it with regard to the total

number of clients and the total number of active clients and the details of

quarterly settlements quarter-wise has been misunderstood by the inspection

team to be for all clients who have opted for running account authorization

and that they are all active clients. The Noticee clarifies that the table in fact

demonstrated that out of the total 25,022 clients, on an average 3,766 clients

were active over the sample eight quarters and the same constitutes about

15% of the total clients' during each quarter. The Noticee submitted that all

the client accounts were almost settled by it and that the number of clients

where there is a delay in settlement across all quarters is approximately 5%

of its total clients. Therefore, it is the case of the Noticee that in any particular

quarter, it has settled client accounts of more than 90-95% of its clients.

Further the Noticee stated that the client accounts which remained unsettled

in any quarter were settled in subsequent quarters. Therefore, the Noticee

submitted that all the clients have been settled in one or the other quarter in

the sample eight quarters. Also, the Noticee stated that most of the clients

whose accounts were unsettled had a balance of less than ` 10,000 which is

the limit prescribed by the NSE. It is submitted that due to outstanding

positions in F&O segments, some clients wanted the Noticee to retain their

funds and securities towards margins. Hence, in certain cases quarterly

settlements did not take place.

24. With respect to the allegation of failure to send statement of accounts to the

clients on monthly / quarterly basis, the Noticee stated that it has been

sending statement of funds and securities to all the clients on a quarterly

basis. It submitted that all its clients are aware of their balances and

Page 19 of 27

securities lying with the Noticee in their accounts. Also, the Noticee submitted

that it has not received any complaint from its clients regarding non

settlement of funds and securities.

25. With respect to the allegation of non-furnishing of data of client accounts not

settled during the inspection period, the Noticee stated that the said

information was not furnished as the same was not sought by SEBI

inspection team. The Noticee submitted that the data regarding unsettled

client accounts was subsequently furnished by it to SEBI and the same

reflects the fact that the Noticee was in substantial compliance with the

stipulation regarding quarterly settlement of client accounts. Further, the

Noticee submitted that total number of clients means all the clients

registered, irrespective of the fact whether they have any trading activity or

any financial balances. Active clients means the clients who have at least one

trade (active) during a particular quarter and inactive clients are those who

have not traded at all during the said quarter. Therefore, the Noticee denied

the allegation that only few client accounts out of the total accounts were

settled by it during the sample quarters. It is the case of the Noticee that

substantial number of accounts were settled by it.

26. With respect to the ageing analysis report, the Noticee submitted that the

same was prepared on the instructions of the inspection team which gave the

ageing of financial balances in the clients' accounts and outstanding (Dr/Cr)

as on a particular date. The said report did not distinguish between active

and non-active clients. The SCN stated that if the name of the client appears

in the ageing report, the same denotes that his/her account is not settled. The

Noticee submitted that a credit ageing analysis report was submitted to SEBI

for 8 quarters showing percentage wise how many credit accounts were

settled. In the said analysis, the Noticee states that almost all the client

accounts were settled by it in the subsequent quarters. To give an example,

the Noticee explained that as on March 2014, the total amount of creditors

outstanding was only ` 1,63,50,606. The said fact shows that majority of the

credit clients were settled at the end of the year. The number of clients whose

Page 20 of 27

accounts were settled with delay across all quarters was approximately 5% of

the Noticee's total clients.

27. The Noticee further submitted that for the client accounts which were settled

with a delay, it has prepared a client wise report for each of the quarter and

the same is enclosed with the said reply. The Noticee explained that from the

said report, for the quarter ending June 2012, there were three clients who

had outstanding balances as the details are as under:

T30 T45 T90

Haresh T Keswani Y -167018379.9 -143867348.35 -139539488.28 111411476.06

Ricky Kriplani NRE Y -72702463.68 -51799983.76 -24243462.96 -2792384.94

Keyur Manubhai Bhagat Y -1248341.75 -1226527.57 -1226521.68 -1205121.78

28. The Noticee stated that the total outstanding of the above clients constitute

90% of the total purported outstanding amount. Among the above, Shri Keyur

M Bhagat is the Director and major shareholder of the Noticee. The other two

accounts belong to the Family of Kriplani. The Noticee submitted that it has

around 14 accounts which are termed as Kriplani Family and the Noticee has

been given an express and clear undertaking letter requesting it to settle their

accounts (i.e. 14 Kriplani Family accounts) together so that the credit

balances in some accounts could be adjusted for debit balances, if any, in

other accounts. A copy of the said undertaking has been provided by the

Noticee in support of the said submission. The Noticee stated that the said

family accounts were opened over more than a decade and each of the

family member is well versed with the capital market regulations. On account

of these accounts, the outstanding purported unsettled accounts were

showing a higher number and it is the case of the Noticee that if these

accounts are taken away from the said analysis, the total amounts

outstanding would be far lesser. The Noticee submits that it has practiced the

said exercise for all the seven quarters and the major contributors for the said

delay in settlement of funds was on account of the above mentioned clients

only.

Page 21 of 27

29. The Noticee stated that when the clients had asked for settling their accounts

together with an explicit authority given to the Broker, the Noticee is justified

in accepting the same. Also, the Noticee submitted that it is a risk mitigating

tool in the hands of the Brokers and it need not resort to enforcement actions

against its clients by netting the settlements among the family members. By

adopting this method, the Noticee states that it is saving lot of resources and

time on recovery process, etc. from defaulting clients.

30. With respect to the allegation of not settling the securities for sample 30

clients, the noticee submitted that out of the sample 30 clients, 24 clients

were settled as there are no securities outstanding in those respective

accounts. Therefore, there was an allegation in the SCN that remaining 6

accounts have not been settled. In this regard, the Noticee sibmitted that the

securities of Johny Kriplani, Alisha Kriplani and AJS Investment are lying in

their respective DMAT accounts only and are not lying in the Noticee's

beneficiary account. Therefore, the question of non-settlement of securities

does not arise. The same is the case with Anup K. Patel and Hetal Vikrantgiri

Goswami. The DMAT statements of the said clients were submitted to SEBI

during inspection. Only with respect to one client viz. Mr. Ajay Jain (client

code 87008), the shares were kept in the Noticee's beneficiary account as

the said client had a debit balance which was not cleared in time to the tune

of ` 2,79,523/-. The Noticee submitted that the value of the shares kept in its

beneficiary account was only ` 6055/- and therefore, all the sample 30 client

accounts were settled.

31. With respect to the allegation of not providing any proof of delivery of the

statement of funds and securities to the clients, the Noticee submitted that it

had initially submitted only 3 client's statement of funds and securities as only

three were settled. Subsequently, the Noticee stated that it had furnished the

statements for all the 20 clients. As it is a normal practice to courier all the

required documents in one envelope to all the clients like contracts, bills,

margin statements, ledgers and funds and securities statement, the POD

does not specify any particular document. Therefore, it is the case of the

Page 22 of 27

Noticee that it had not failed to establish issuance of statement of retention /

settlement of funds and securities.

32. The Noticee further submitted that the NSE has imposed monetary penalties

on the Noticee for the said purported violation of non-settlement of funds and

any further imposition of penalty will amount to double jeopardy on the

Noticee. Further, vide its additional submissions dated September 04, 2015,

the Noticee reiterated the submissions made by it in the earlier reply and also

stated that the total turnover of the Noticee during the relevant period was

around ` 30,000 Crores annually. Therefore, the quarterly turnover comes to

be around ` 7,500 Crores out of which only around ` 1.5 Crores remained

unsettled excluding the credit balances of family accounts and the Proprietor.

The Noticee also submitted that non-settlement of accounts is a venial and

technical violation and hence, no penalty should be imposed for the said

violation.

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

and the submissions made by it. I find that the Noticee has been following the

practice of settlement of funds and securities of the clients but the same is

not practiced for all the clients. I find merit in the submission of the Noticee

that the client accounts which are active can only be considered for

settlement for a particular quarter, however, I find from the tables at para no.

10 above that considerable credit balances have been seen in the client

accounts over the eight quarters under consideration and the same have not

been settled in the quarters in which they should have been settled. I also

find from the submissions of the Noticee that the Noticee has admitted that

the settlement of client accounts was being done with a delay and therefore,

the credit balances have been seen over the said quarters. In view of the

same, I conclude that the said delayed settlement of client accounts, which

amounts to non settlement of client account in the particular quarter, is

nothing but a violation of SEBI Circular dated December 03, 2009 and March

31, 2010 which mandates settlement of funds and securities in the client

accounts on a monthly / quarterly basis.

Page 23 of 27

34. Further, I find from para no. 10(i) that the Noticee had not settled accounts of

certain clients on a quarterly basis and therefore, credit balances were seen

outstanding for the respective quarters. The Noticee in its reply has stated

that it was treating certain accounts as family accounts and therefore, the

settlement of the said accounts was done in a consolidated manner in

subsequent quarters and even remained unsettled due to their positions in

the trading accounts. The said practice is being followed by the Noticee on an

explicit undertaking given by the said clients to treat their accounts together

and to settle them against one another. I find that the Noticee has admitted

that the accounts which are treated as family accounts have not been settled

by it on a quarterly basis and there are outstanding credit balances in the

said accounts. I also find that the Noticee has admitted that there was a lapse

on its part to settle the client accounts on quarterly basis as there were

outstanding positions in F&O segments and there were requests from clients

to retain their funds and securities towards margins.

35. I do not find merit in the submissions of the Noticee as the said practice

followed by the Noticee is in contravention to the policy laid down in the SEBI

Circulars dated December 03, 2009 and March 31, 2010. The SEBI Circular

dated December 03, 2009 specifically prohibits inter-client adjustment for the

purpose of settlement. The relevant clause states " There shall be no inter-

client adjustments for the purpose of settlement of the ‘running

account’. Also, just to save resources and time, the Noticee cannot be

adopting practices which are not in line with the statutory policies / provisions.

I find that adopting an internal policy which is in deviation with the regulatory

guidelines cannot be taken as an excuse by the Noticee and therefore, I

conclude that the Noticee has failed to settle the client accounts having

substantial credit balances in particular quarters and thereby, has violated the

SEBI Circulars dated December 03, 2009 and March 31, 2010.

36. Further, I note that the Noticee in its reply has stated that statement of funds

and securities / statement of retention was sent to the clients on a periodical

manner and no complaints have been received from the clients stating non-

Page 24 of 27

receipt of statement of accounts. Further, the Noticee has also stated that

many documents were sent to the clients in a consolidated manner and

therefore, to find out which documents were being couriered to them was not

possible. I find that the practices followed by the Brokers in sending the

documents to the clients may differ and the fact that there are no client

complaints for non-receipt of statement of accounts quarterly shows that the

Noticee may not have defaulted in forwarding the statements to its clients.

Also, the submissions of the Noticee that the collaterals of the clients are not

kept in the Noticee's beneficiary account and are held by the clients

themselves in their DMAT account cannot be ignored. In view of the same, I

find that the said charge of not issuing statements of funds and securities and

further, not settling accounts of the clients having higher collateral against the

debit balances is not established.

37. I find that during the inspection, certain documents and reports were

requested by the inspection team of SEBI to be furnished by the Noticee to

carry out the inspection. However, the Noticee had delayed in providing the

said information and at certain times, the Noticee had even provided

incomplete information and in a piecemeal manner. Despite sending

reminders to the Noticee, the Noticee had failed in providing the data or

information on time and had provided the same with a delay. On perusal of

the chronology of events and the dates of submission of the data /

information by the Noticee, I conclude that the Noticee did delay the

inspection process and failed to provide information to the inspection team in

time which I find is in violation of Regulation 21(1) & (4) of the Broker

Regulations.

38. I find that the Noticee has even submitted that NSE has already imposed

monetary penalties on the Noticee for the said purported violation of non-

settlement of funds and any further imposition of penalty will amount to

double jeopardy on the Noticee. Here, I would like to state that the

proceeding initiated by NSE for the defaults of the Noticee were separate

proceedings and the present proceedings are independent. At this juncture, I

rely on the judgement of the Hon'ble High Court of Bombay in the case of

Page 25 of 27

SEBI Vs. Cabot International Capital Corporation (2004) wherein, it was

observed that "the adjudication for imposition of penalty by Adjudication

Officer, after due inquiry, is neither a criminal nor a quasi criminal proceeding.

The penalty leviable under this Chapter or under these sections, is penalty in

cases of default or failure of statutory obligation or in other words, breach of

civil obligation. The provisions and scheme of penalty under SEBI Act and

the regulations, there is not element of criminal offence or punishment as

contemplated under criminal proceedings." In view of the same, I find that the

principal of double jeopardy is not applicable in the said proceedings.

39. From the foregoing, I find that the Noticee had failed to comply with the

provisions of quarterly / monthly settlement of funds and securities of clients

on various occasions and thereby, did not exercise due care and skill in

carrying out the business of the Stock Broker. Therefore, I conclude that the

Noticee by carrying out its business in the manner mentioned in the above

paragraphs has violated the SEBI Circulars dated December 03, 2009 and

March 31, 2010 and Clauses A(1), A(2) and A(5) of the Code of Conduct as

specified under Schedule II read with Regulation 9 of the Broker Regulations.

Further, I also conclude that the Noticee did provide information to the

inspection team but with a delay and in piecemeal which is in violation of

Regulation 21(1) & (4) of the Broker Regulations. The said violations by the

Noticee makes it liable for 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.

40. At this instant, it is important to quote the observations of the Hon’ble

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

Page 26 of 27

such violation becomes totally irrelevant. Once the contravention is

established then the penalty is to follow.”

41. While imposing monetary penalty, it is necessary 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.”

42. 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, 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 Circulars dated December 03, 2009 and March 31, 2010 is that it shall

be compulsory for all the member brokers to settle the running accounts of

the clients on a monthly / quarterly basis so as to promote transparency.

Therefore, I conclude that the Noticee has not exercised due skill, care and

diligence in its operations and failed to comply with the provisions of Circulars

dated December 03, 2009 and March 31, 2010 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), 21(1) & (4) of the Broker Regulations

and the same deserves & attracts penalty as per law.

Page 27 of 27

ORDER

43. 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. Manubhai Mangaldas

Securities Pvt. Limited under Section 15HB of the Act. In my view, the penalty

imposed is commensurate with the defaults committed by the Noticee.

44. 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, EFD - DRA II, Securities

and Exchange Board of India, SEBI Bhavan, Plot No. C - 4A , 'G' Block, Bandra

Kurla Complex, Bandra (E), Mumbai - 400051.

45. 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: September 28, 2015 D. SURA REDDY

Place: Mumbai GENERAL MANAGER &

ADJUDICATING OFFICER