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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
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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