M/S. Sunflower Broking Private Limited vs Sebi

Date of decision: 03/05/2016

Appeal No.277 of 2014

M/s. Sunflower Broking Private Limited "Sunflower House", 5th Floor, 80 Feet Road, Near Bhaktinagar Circle, Rajkot (Gujarat) - 360 002. ... Appellant

Versus

Securities and Exchange Board of India having its registered office at SEBI Bhavan, Plot No.C4-A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent

Mr. J.J. Bhatt a/w Ms. Rinku Valanju, Advocates for the Appellant.

Mr. Kumar Desai a/w Mr. Mihir Mody and Mr. Harekrishna Ashar, Advocates i/b K. Ashar & Co. and Mr. Sumit Agrawal, AGM, SEBI for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Mr. Jog Singh, Member Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair (Oral)

1.

Appellant is aggrieved by the impugned order passed by the

Adjudicating Officer ("AO" for short) of Securities and Exchange Board of

India ("SEBI" for short) on 28th May, 2014 whereby a penalty of Rs.10 lac has

been imposed under Section 15HB of the Securities and Exchange Board of

India Act, 1992 ("SEBI Act" for short).

2. The facts of the case are as follows:-

-2-

3. Appellant - M/s. Sunflower Broking Private Limited - is a member of

Bombay Stock Exchange ("BSE" for short) with effect from 17/12/2009 and

National Stock Exchange ("NSE" for short) with effect from 18/2/2010. SEBI

carried out inspection of the books of accounts of the Appellant for the period

2011-12 and 2012-13 on 1st and 2nd November, 2012. During this inspection,

certain violation of provisions of SEBI Circular No.MIRSD/SE/Cir-19/2009

dated December 03, 2009 and clauses A(2) & A(5) of the code of conduct

specified under Schedule II read with regulation 7 of SEBI (Stock Brokers &

Sub Brokers) Regulations 1992, were noticed.

4. The said Circular dated December 03, 2009 specifies the conditions of

maintaining the accounts of a client by a stock-broker including running

account authorization, quarterly/monthly settlement of funds and securities

etc. All brokers were expected to ensure its full compliance by March 31,

2010.

5. Since during the inspection conducted by SEBI during 1st and 2nd

November, 2012, it was observed that the clients' accounts were not settled by

the appellant, a show-cause notice (SCN) dated 22/1/2014 was issued to the

appellant whereby the appellant was asked to explain the violations. The

appellant, in response, stated that they commenced business only on

17/12/2009 in BSE and on 18/2/2010 in NSE; they were in the initial stage of

business with insufficient manpower; they had communicated the relevant

provisions of the December 03, 2009 circular to their sub-brokers, business

associates and clients and emphasized the need for following the conditions

therein; many of the sub-brokers and their clients were not giving their

consent for the release of the fund payout or they were not accepting the -3-

payout of the funds released by the appellant, instead the sub-brokers and

the clients were insisting on keeping the fund with the appellant for future

obligations.

6. Subsequently, the appellant was asked to appear before SEBI vide

notice dated April 9, 2014. The authorized representative of the appellant

during this hearing made the following submissions:-

"We have already submitted our reply vide letter dated February 13, 2014, we are making further submissions vide letter dated 28/04/2014. We had started our operations in February-March 2010 and client accounts were mostly opened in the month of May-June 2010 and we had initiated steps to comply with the SEBI circular No.MIRSD/SE/Cir-19/2009. We have no further submissions to make in the matter."

Vide letter dated April 28, 2014 the appellant made further written

submissions which, inter alia, included sample of the ledgers pertaining to 12

accounts which were settled on a quarterly basis

7. During the course of the hearing of appeal before this Tribunal,

Counsel for the Appellant submitted that the impugned order is liable to be

quashed and set aside for the following reasons:-

a. The Appellant had provided evidence of ledger and statements

confirming the settlement of funds on a quarterly basis in respect of

12 clients which was sufficient to prove that they were indeed

settling the accounts of the clients as per the SEBI Circular dated

December 03, 2009.

b. Since the appellant started actual business of enrolling clients, etc.

from May 2010, it was not possible to start settling clients' accounts

from March, 2010.

-4-

c. The finding in the impugned order that the appellant had

implemented the said circular (December 03,2009) in February 2012

i.e. with a delay of approximately two years emanated from a

typographical error which happened in their written statement to

SEBI wherein it was stated by the Appellant that "we have started

the implementation of the above circular after receipt of

clarificatory Circular of NSE as on 3/2/2012", whereas the NSE

Circular is in fact dated 3/2/2010. Therefore, this inadvertent

typographical error resulted in an impression that the Appellant

had started implementation of the circular after two years while it

started the process in 2010 itself.

d. Inference drawn by the AO that since the Appellant had produced

the ledger of only 12 clients, the Appellant must not have settled

the accounts of other clients is erroneous, because the said ledgers

were produced by the Appellant voluntarily to show that the

accounts were settled as per the SEBI Circular. Having not called

upon to produce ledgers of other clients, the AO was not justified

in drawing adverse inference against the Appellant.

On the basis of the above arguments, Counsel for the Appellant submitted

that the impugned decision is based on a wrong understanding arising from a

typing error and the impugned order passed being harsh, ought to be

quashed and set aside.

8. Counsel for the Respondent argued that the appellant had a total of

4618 clients out of which 2585 were active clients during the period under

inspection. However, the appellant chose to produce evidence of settling -5-

clients' accounts only in respect of 12 accounts. Therefore, the contention of

the AO that the appellant chose to produce only a very small sample wherein

the accounts were settled on a quarterly basis without producing evidence

relating to the vast majority of clients whose accounts were not actually

settled, cannot be faulted. It was also pointed out by the Counsel for the

Respondent that a NSE inspection report during December, 2011 whereby the

books of accounts for 2011-12 of the appellant were inspected, also resulted in

penalising the Appellant on account of wrong reporting, funding client

transactions and not doing actual settlement of funds and securities. The

following statement was noted from the minutes of the Internal Committee of

NSE on the finding of the said inspection report in respect of the appellant

which was also communicated to the Appellant vide NSE letter dated

29/3/2012.

"Actual settlement of funds and securities not done.

The Committee observed that the trading member had not done actual settlement of funds & securities as per the consent of the client on monthly or quarterly basis and hence decided that a fine of Rs.10,000/- be levied on the trading member in respect of the observation."

9. It was noted by this Tribunal that, the Appellant in its appeal

memorandum made the following statement:

"6.12 The adjudicating Officer has erred in holding the delayed implementation of the SEBI circular w.e.f. 03.02.2012 as the Appellant had implemented the said circular from the very beginning - be it partial. Appellant's acts of such implementation from the beginning shows that it followed the instructive guidelines and circulars and had no intention to defy them." (emphasis added)

By this statement, the Appellant has admitted that the implementation of the

circular dated December 03, 2009 was partial.

-6- 10. During the hearing, Counsel for the Appellant was asked by this

Tribunal as to whether he is agreeable to produce evidence that some of the

accounts were not settled because of the request made by those clients.

However, the Appellant was unable to produce any documentary evidence.

The Appellant was further asked whether it is possible to produce copies of

the ledger in respect of other clients (other than the 12 produced before the

AO). This also could not be honoured by the Appellant. Apart from the

above, in para 6.20 of the Appeal Memo, the Appellant has placed on record

that NSE and BSE have imposed penalty on the Appellant for non settlement

of the accounts during the years 2011-12 to 2013-14. Thus, it is established

that the Appellant has repeatedly failed to comply with the circular issued by

SEBI.

11. The contention of the Appellant that AO in his order has erred in

stating that provisions of the Circular dated December 03, 2009 were

implemented after a period of two years arising out of typographical error

though factual, does not vitiate the basic charge because of the finding that

the clients' accounts were not settled as per the provisions of the said

Circular. This Tribunal also notes that the AO, while imposing the penalty of

Rs.10 lac for violations by the appellant, had considered the factors under

Section 15J of SEBI Act. Further, Section 15HB provides for a monetary

penalty of upto rupees one crore. Hence penalty of Rs.10 lac imposed on the

Appellant cannot be said to be harsh.

-7-

12. In light of the above reasons, we find no merit in the Appeal.

Accordingly, Appeal is dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member

03/05/2016 Prepared & compared by-ddg