Century Finvest Private Limited vs Sebi

Order Reserved on: 14.08.2019

Date of Decision : 09.09.2019

Appeal No. 425 of 2015

Century Finvest Private Limited 75, 2nd Floor, Vijay Block, Laxmi Nagar, Vikas Marg, New Delhi - 110 092. ..... Appellant Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ....Respondent

Mr. P.N. Modi, Senior Advocate with Mr. Neville Lashkari, Mr. Joby Mathew, Mr. Nikhil Shah and Ms. Mahima Mongia, Advocates i/b Joby Mathew & Associates for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Abhiraj Arora and Ms. Misbah Dada, Advocates i/b ELP for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Dr. C.K.G. Nair, Member

1.

Vide order dated September 15, 2015 the Whole Time

Member ('WTM' for short) of Securities and Exchange Board

of India ('SEBI' for short) has ordered the suspension of 2

registration of the appellant, who is a broker with the National

Stock Exchange of India Limited ('NSE' for short), for a

period of one year. This appeal has been filed aggrieved by

the said order.

2. Facts relevant to the matter are the following:-

(a) Officials of SEBI and NSE conducted a joint

inspection of two branch offices of the appellant in

Aligarh, U.P. and registered office in Delhi during

January - February 2005. These inspections

brought out a number of irregularities in the

functioning of the appellant as a stock broker. The

inspection report was submitted on June 20, 2005.

A copy of the said report was given to the

appellant vide SEBI letter dated July 5, 2005. On

further reminder dated September 13, 2005 the

appellant submitted its reply to the inspection

report vide its letter dated November 14, 2005.

(b) An enquiry process was initiated against the

appellant under SEBI (Procedure for Holding

Enquiry by Enquiry Officer and Imposing Penalty)

Regulations, 2002 and a show cause notice issued

on June 19, 2006. The appellant submitted its 3

reply to the show cause notice on October 24,

2006. Thereafter, a personal hearing was granted

and held on December 9, 2010 which was attended

by the appellant.

(c) Since the appellant is a broker, under Regulation

27 of the SEBI (Intermediaries) Regulations, 2008

('Intermediaries Regulations' for short) a

Designated Authority ('DA' for short) was

appointed who submitted the enquiry report on

October 21, 2011. This enquiry report, inter alia,

found multiple violations of SEBI Act, Rules,

Regulations and Circulars and therefore

recommended suspension of the appellant's

registration for a period of five years. A post-

enquiry show cause notice was issued to the

appellant on November 22, 2011 along with a

copy of the enquiry report. The appellant was also

provided an opportunity of personal hearing. The

appellant sought multiple extensions for both

filing reply as well as for personal hearing which

was granted and after this process was completed

the impugned order was passed by the WTM 4

thereby suspending the registration of the

appellant for a period of one year. The main

findings in the impugned order are that the

appellant had committed grave violations,

including allowing unregistered entities and clients

to operate the trading terminals allotted to it by the

NSE; aiding and abetting unregistered entities to

function as sub-brokers by issuing contract notes

carrying several client codes to such unauthorized

persons such as BGSPL; failing to collect daily

margins from its clients or collecting margins less

than the required amount under the law, reporting

of false information regarding such margins

collection to the NSE; delay in remitting dividends

to its clients; failing to maintain a proper

segregation between its own funds and its clients

fund etc.

3. We have heard the extensive submissions made by

Shri P.N. Modi, learned senior counsel for the appellant on

the various charges upheld in the impugned order. It was

contended that the allegations relating to appellant's

connection with M/s. Bhadra Gupta Securities Pvt. Ltd. 5

('BGSPL' for short) and its Director Shri Puneet Agarwal is

devoid of any merit. Shri Puneet Agarwal was the owner of

the premises where the appellant's branch office was located;

the premises had other brokers also in operation; BGSPL was

later found to be fit and proper and granted registration as a

sub broker by SEBI; Shri Puneet Agarwal was shown as

Branch Manager in the VSAT application form given to NSE

was for facilitating installation of the VSAT at the roof top of

the building since he was the owner of the premises; if any

cash deposit was found in the account of BGSPL it had no

connection to the appellant and the appellant never took cash

from its client as alleged. There was no issue of multiple

unique client code as alleged, all trades were carried out in the

client code of BGSPL and other codes found in the contract

notes were just reference codes to distinguish between various

trades conducted by BGSPL and no such client as alleged has

been found by SEBI. Similar submissions were also made in

respect of the alleged violations relating to using the

employees of BGSPL for the trading work of the appellant

stating that appellant's own employees were operating

appellant's terminals the employees of BGSPL might have

been in the premises for doing BGSPL's own work. Salary

slips or bank statements could not be produced because the 6

Aligarh office of the appellant was closed since about 2005.

Therefore, it was wrong to allege that there was mismatch

between the trade logs in the books of account of the

appellant as well as stock exchange data. The diaries / manual

registers found in the premises were also not of the appellant.

4. Further, on the allegation of not separating or

intermingling appellant's own account with client accounts

and thereby violating SEBI circular dated November 18, 1993

the learned senior counsel contended that these payments

were paid from appellant's own account for various services

rendered by some people (not clients), such as consultancy

services, VSAT installation etc. Further, on delay reportedly

in crediting dividend to the client accounts is only that of a

few days which was needed for operationalising the same and

there is no client complaint in this regard. Similarly, the

margin shortfall alleged to be made in the cash segment by

the appellant is a very small amount of Rs. 62853.75 during

the entire period while because of the typographical error in

the impugned order it is shown as Rs. 6285375 and sufficient

margin was available with the appellant. Since sufficient

margin money was available with the appellant's account

there is no violation relating to the relevant circulars 7

regarding 10% upfront margin collection as the broker had the

required discretion in this regard since the appellant was not a

clearing member. Similarly, the alleged violation relating to

margin collection in the F & O segment is too small in respect

of only 10 clients on only a few days in the context of the

appellant having an annual turnover of more than Rs. 10,000

crore and a client base of 7500. In fact, during the entire

period of 13 years the NSE had found no fault by the

appellant in such matters.

5. In short, the learned senior counsel for the appellant

submitted that there was no major violation by the appellant

on any of the grounds stated in the impugned order. At best,

there could be some technical violation because of

circumstantial factors such as the appellant operating from

hired premises, some of them belonging to its clients.

However, all the premises were taken on rent and were

operated by appellant's own employees. Therefore, for some

minor technical violations penalty of one year suspension of

registration of the appellant is too harsh. Effectively, one year

suspension of a broker's registration is like capital

punishment because during such a long period all clients

would move away and the business has to be closed. Given 8

the fact that appellant has 26 sub brokers in 10 cities and 200

employees, such a harsh order will affect not only the

appellant's own business but lead to large number of

unemployment. Moreover, the fact that during the last 13

years the appellant was not found wanting in its functioning

as a broker and never found violating any rules and

procedures and the impugned order has been issued after

more than 10 years after the alleged violations in 2005 should

come to the aid of the appellant in mitigating the punishment.

6. The learned senior counsel for the appellant also relied

on two orders of this Tribunal, Samkit Share and Stock

Brokers (P.) Ltd. vs. Securities and Exchange Board of

India, MANU/SB/0237/2004 and Cholamandalam

Securities Ltd. vs Securities and Exchange Board of India,

MANU/SB/0166/2005 whereby this Tribunal had let off the

appellants therein with just a warning in place of suspension

of six months and three months respectively ordered by the

impugned orders therein.

7. We have heard Shri Pradeep Sancheti, learned senior

counsel for the respondent. He submitted that suspension of

the license is different from cancellation of the license and

while the DA recommended five years suspension the WTM, 9

after considering all the mitigating factors and circumstances,

has reduced it to a one year period. He further contended that

the orders relied on by the appellant are distinguishable as the

violations committed by the appellant are of much serious

nature and therefore cannot be let off with warning. He

further submitted that with respect to BGSPL working as a

sub broker before giving license to do so the appellant

misguided SEBI in stating that he is the landlord while the

lease agreement has been signed by the appellant and one

Shri Vasant Sharma, who is stated to be the landlord.

Similarly, on account codes mismatch details relating to 192

such clients are on record in Volume-I of the appeal memo.

Effectively, the appellant was using a system of unauthorized

sub broker which is a serious offence.

8. On a detailed hearing of the matter and perusal of all the

records we feel that the contentions of the appellant are more

in the nature of explanations or justifications rather than proof

of no violations. Even if it is assumed that the branch offices

of the appellant were operating in hired premises and some of

the premises were taken on lease from clients and some of

these premises had other brokers or entities also functioning

do not absolve the appellant from serious deficiencies in 10

discharging the duties of a broker with due diligence and care.

Safekeeping all the documents and material relating to a

broker's functions is a basic responsibility. Conflicting replies

relating to the role of BGSPL and Shri Puneet Agarwal as

well as relating to other similar clients owned premises based

branch operations therefore do not absolve the appellant fully

from the violations upheld in the impugned order. It is held in

the impugned order that the appellant violated various

provisions of law, regulations and circulars issued thereunder.

These include SEBI (Stock Brokers and Sub-Brokers)

Regulations, 1992, PFUTP Regulations, Securities Contract

(Regulations) Act, 1956 and the Securities Contract

(Regulations) Rules, 1957 and various circulars issued by

SEBI. Some of the violations though may be technical and

procedural in nature.

9. We also do not agree with the contentions of the

appellant that client codes given in the contract notes are just

reference codes in the absence of SEBI identifying those

clients. When BGSPL was only one client and its unique

client code was used there was no requirement for using other

reference codes. Therefore, we do not find any fault in the

finding in the impugned order that the appellant was using the 11

services of unregistered sub brokers or some of its clients

were actually discharging functions of sub brokers without

SEBI registration. Whether BGSPL or some other such

entities got the registration for sub broker-ship later is not

germane to the matter because what is relevant is whether

they were certified sub brokers at the relevant time.

Therefore, given these major violations we do not find any

fault in penalizing the appellant with an order of suspension.

10. However, given the undue delay in passing the

impugned order during which substantial positive changes

have happened in broker operations, procedures and

technology on account of continuous changes in regulations,

regulatory practices and market dynamics many of the

violations of the past era would look magnified now. The

instant violations in 2005 therefore would look very serious

when compared with the practices in 2015 as a decade of

development in the securities / financial markets coupled with

drastic innovations in technology would make earlier

practices very crude. Therefore, the time frame is very

important while judging gravity of offences across time and in

doing justice. We also agree with the submissions of the

appellant that a long period of suspension of a market

intermediary like a broker would make them completely 12

defunct which, in the given context would make the

punishment disproportionate. At the same time we do not

agree with the submission that a warning would suffice since

utilizing unauthorized sub-broker type dealing by a broker is a

serious offence irrespective of the vintage of the offence.

Balancing all these factors and circumstances into account we

are of the view that a complete suspension of the appellant for

a period of one year may not do full justice. Therefore, we

modify the order of one year suspension of the appellant to

that of one year restriction from taking any fresh clients.

Therefore, the appellant shall not admit or take business from

any new clients for a period of one year from the date of this

order.

11. Appeal is accordingly partially allowed with no orders

on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 09.09.2019 Prepared and compared by:msb