Master Share & Stock Brokers Ltd. vs Sebi

Master Share & Stock Brokers Ltd. Master Chamber, S.C.O. 19, Feroze Gandhi Market, Ludhiana -141 001. ... Appellant

Versus

Securities & Exchange Board of India SEBI Bhavan, C-4A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051. ... Respondent

Mr. Prakash Shah, Advocate for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Pulkit Sukhramani, Advocate i/b The Law Point for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Jog Singh, Member

Per : Jog Singh, Member (Oral)

1.

The Appellant has challenged the impugned Order dated 30th June,

2014 passed by the Respondent by which penalty of Rs.3 lac has been

imposed on the Appellant for violation of Securities and Exchange Board of

India ("SEBI") Circular dated 22nd October, 2001 read with Clause A(2) of the

Code of Conduct as prescribed under Schedule II, Regulation 15 of Securities

and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations,

1992 (for short "Stock Brokers and Sub-Brokers Regulations, 1992").

2. Briefly stated the facts of the case are that the Appellant namely,

Master Share & Stock Brokers Ltd., is a sub-broker registered with SEBI. -2-

Appellant is a sub-broker of M/s. LSE Securities Ltd. which happens to be a

subsidiary of Ludhiana Stock Exchange Ltd. SEBI conducted an investigation

on 7th/8th August, 2012 of various book of accounts, records and other

documents maintained as furnished by the Appellant in respect of its affairs.

It was found that the Appellant had not taken due care and skill in the

conduct of its business as prescribed by the Code of Conduct under the Stock

Brokers and Sub-Brokers Regulations, 1992 along with the provisions of SEBI

Circular dated 22nd October, 2001. SEBI accordingly appointed an

Adjudicating Officer to conduct detailed enquiry into the matter as per the

SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating

Officer) Rules, 1995 and adjudge under Section 15HB of the SEBI Act, 1992.

Accordingly, a show-cause notice dated 18th October, 2013 was issued to the

Appellant and it filed a reply dated 30th November, 2013 denying the

allegations levelled in the said show-cause notice.

3. After a full and proper enquiry as per the procedure established by

law and after affording due opportunity of hearing to the Appellant, the

learned Adjudicating Officer found that out of 20 terminals of Bombay Stock

Exchange Limited and 9 terminals of National Stock Exchange Limited which

were granted to the Appellant, 4 terminals at 3 locations were allotted to the

ultimate clients in contravention of SEBI Circular dated 22nd October, 2001

thereby violating the provisions of the Code of Conduct and the Regulations

in question.

4. The learned counsel for the Appellant, Shri Prakash Shah, vehemently

argued that 4 terminals at 3 locations in dispute were being run by the -3-

professionals who were appointed on contract basis and there was no bar in

having terminals fixed at other locations.

5. We have heard learned counsel for the parties at length and perused

the pleadings and provisions of law in detail. Para 2 of the said Circular

makes it abundantly clear that the trading terminals granted to the

stockbrokers cannot be misutilized for unregistered sub-broking activities.

The trading terminals are only to be granted at the members' registered

office, branch office or its registered sub-brokers' offices. Therefore, terminals

granted at other locations than the prescribed ones in the circular would be

totally illegal. The underlying idea seems to be to have proper control over

the terminals for regulation purposes and it should be within the knowledge

of the Stock Exchange as well as SEBI that the terminals are being run at the

office of the broker or its branch office or at the registered sub-broker's office.

No other place is authorized to have a trading terminal. The relevant portion

of the said Circular dated 22nd October, 2001 is reproduced hereinbelow for

facility of reference:

"Grant of trading terminals It has further come to the notice of SEBI that the trading terminals granted to the stockbrokers at various locations are being mis-utilised for unregistered sub-broking activities. In view of the above, Exchanges are advised to grant trading terminals only at the members' registered office, branch offices and their registered sub-brokers' offices. Trading terminals granted earlier in places other than mentioned above should be withdrawn immediately. The Stock Exchanges shall amend their bye laws accordingly to take action against the broker who mis-utilises or lets misutilisation of their trading terminals of unregistered sub-broking activities.

Stock Exchanges are also advised to amend their bye-laws suitably to prohibit their members from dealing with sub-brokers who are not registered with SEBI."

-4- 6. We find from the contents of the show-cause notice and the impugned

order that crux of the allegations against the Appellant is that he allotted

trading terminals to the ultimate clients, which is prohibited by SEBI. The

legality of the Circular is not in dispute. Therefore, the Appellant has been

rightly found guilty of violating the provisions of the Circular as well as the

Code of Conduct and the norms prescribed under the Stock Brokers and Sub-

Brokers Regulations, 1992. Shri Kumar Desai, learned counsel for the

Respondent also brought to our notice Circular No.163 dated 20th April, 2000

issued by the National Stock Exchange Limited to all the members. Para 2 of

the said circular categorically provides that the trading terminals shall be

required to be under the direct control of the trading member and be

managed either by an authorized employee or by a registered sub-broker of

the trading member. In the present case, admittedly, the 4 terminals at 3

locations in dispute were managed by a consultants/persons engaged on

contract basis and not by authorized employee or by the sub-broker himself.

7. Turning to the point urged by Shri Prakash Shah that the penalty is

unjustified and any minor punishment would have sufficed the purpose. In

this context, we would like to reproduce para 13 of the impugned order in

which the learned Adjudicating Officer has already taken various factors into

consideration and has imposed a token penalty of Rs.3 lacs only on the

Appellant which cannot be termed as unjustified or disproportionate. Para

13 of the impugned order is reproduced under:-

"13. Section 15HB of the SEBI Act provides that any person who indulges in fraudulent and unfair trade practices relating to securities, shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage made as a result of such -5-

non-compliance by the Noticee. Further from the material available on record, it is not possible to ascertain the exact monetary loss to the investors on account of non-compliance by the Noticee. I, however, note that the turnover of the Noticee from NSE terminal MSB05 from March 30, 2012 (since the terminal was allotted to the Noticee on March 30, 2012) till the date of inspection i.e. August 8, 2012 was Rs.93,09,655 on buy side and Rs.96,65,424 on sell side. The turnover from BSE terminal MSB024 from January 1, 2011 to March 30, 2012 was Rs.2,15,26,163 on buy side and Rs.2,05,88,628 on sell side; from BSE terminal MSB05 from January 5, 2011 to July 12, 2012 was Rs.13,35,276 on buy side and Rs.13,14,855 on sell side; and from BSE terminal MSB06 from January 4, 2011 to August 9, 2012 was Rs.19,65,494 on buy side and Rs.12,76,972 on sell side. I note that all the 4 terminals at 3 locations were being operated by persons who were not employees of the Noticee, but, were the clients of the Noticee."

8. To sum up, the Appellant has knowingly allowed the ultimate clients

to operate the terminals which were meant for the sub-broker himself or for

his authorized employees. There is no convincing reason for doing so. This

practice is against the SEBI Circular dated 22nd October, 2001 in question as

well as the norms prescribed by Stock Brokers and Sub-Brokers Regulations,

1992 in this regard. Therefore, even the Stock Exchanges or the brokers

should be cautious in permitting sub-brokers to install terminals at the

requisite places only and to also monitor that they are operated by authorized

employees or persons.

9. In the circumstances, the Appeal is hereby dismissed with no order as

to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 5/8/2015 Prepared & compared by-ddg