Order aainst M/s IP Singh & Company in the matter of M/s Karishma Floriculture Ltd

WTM/RKA/IVD-NRO/05/2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER Show Cause Notice No. IVD/NRO/GRMR/JS/28445/2011 dated September 08, 2011 issued to Inder Pal Singh (Proprietor of M/s. I P Singh & Co.), SEBI Registration No.: (INB 050086816) in the matter of M/s. Karishma Floriculture Limited ORDER Under Regulation 28(2) read with Regulation 38 (2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008

1. Securities and Exchange Board of India (SEBI) conducted investigations into the trading and dealings in the shares of Karishma Floriculture Limited (company) during the period from April 1995 to May 1996. The investigations, inter alia, revealed that Inder Pal Singh [Proprietor of M/s. I P Singh & Co.] (noticee), a stock broker of Delhi Stock Exchange Ltd. (DSE) took large positions in the shares of the company on behalf of some of his clients, who defaulted in making payments, which in turn, resulted into default by the noticee in meeting his pay-in obligations and allegedly caused payment crisis at DSE. It was also alleged that the noticee had tried to mislead SEBI/DSE by making false complaints and spreading rumours regarding lost/stolen shares of the company to distort the market equilibrium and to cause fraud towards his other co-stock brokers and DSE. It was, therefore, alleged that the noticee has violated the provisions of regulation 7 read with clauses A (1), A (2), A (3) and C (6) of the code of conduct for stock brokers as specified in schedule II of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (Stock Broker Regulations), regulation 6 (a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 read with regulation 3 (c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and DSE Bye-laws 348 and 349.

2. Based on the findings of the investigation, SEBI initiated proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 [since repealed by the SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as ‘Intermediaries Regulations’)] read with regulation 13 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The Designated Authority (DA) appointed in the said proceedings submitted his report dated August 26, 2011, in which he gave the following findings and recommended warning to the noticee to avoid recurrence of such violation: (i) The noticee took unusually large positions in the shares of the company on behalf of his client Mr. Manganpreet Singh who defaulted in making payments, which in turn, resulted into default by the noticee in meeting his corresponding pay-in obligations. He, therefore, failed to exercise due care, skill and diligence in his dealings with the said client and thereby violated Clause A(2) of Code of Conduct for stock brokers as laid down under Schedule II read with regulation 7 of the Stock Broker Regulations. (ii) The charge that the noticee had mislead SEBI/DSE by making false complaints and spreading rumours regarding lost/stolen shares of the company to distort the market equilibrium and to cause fraud towards DSE and his other co-stock brokers can’t be established in the absence of complete document/evidence on record to support the said allegation. Therefore, benefit of doubt has been given to him in respect of this allegation.

3. Vide notice dated September 08, 2011 (SCN), SEBI forwarded a copy of the report of the DA and called upon the noticee to show cause as to why the appropriate penalty including warning as recommended by the DA should not be imposed on him in view of the findings in the said report.

4. The noticee replied vide e-mail dated September 25, 2011 stating therein that detailed replies and documentary evidence has been already and repeatedly forwarded to SEBI offices from time to time. The noticee, however, didn’t indicate his desire to avail personal hearing. Further, vide email dated September 26, 2011 and letter dated October 05, 2011 the noticee was once again advised to reply to the SCN on merits and indicate if he wants a personal hearing in the matter. The noticee neither replied the above letters nor indicated about availing personal hearing. In my view, enough opportunity of being heard has been provided to the noticee. I am, therefore, deciding the issue considering his reply dated September 25, 2011 in response to the SCN, earlier submission made to SEBI and other material available on record.

5. The issue for consideration before me is whether the noticee has violated Clause A(2) of Code of Conduct for stock brokers by taking unusually large positions in the shares of the company on behalf of Mr. Manganpreet Singh who defaulted in meeting his pay-in obligations which in turn resulted into delay/default by the noticee in meeting his pay in obligations at DSE and caused payment crisis at DSE.

6. As regards the other charge of misleading SEBI/DSE by making false complaints and spreading rumours regarding lost/stolen shares of the company to distort the market equilibrium and to cause fraud towards his other co - stock brokers and DSE, I note that the DA has given benefit of doubt to the noticee in respect of this charge in the absence of document/evidence on record to prove the said allegation. I find that there is no change in the evidence/document at this stage. In the absence of any additional document/evidence, I agree with the view taken by DA so far as this charge is concerned.

7. I note that during the period April 1995 to May 1996 the noticee had purchased 5, 19,000 shares and sold 2,44,700 shares of the company resulting into a net buy position of 2,74,300 shares of the company. Further, these transactions were done by the noticee mainly on behalf of four clients. Out of the four clients, the noticee’s net exposure of 1,75,300 shares of the company in respect of Mr. Magnapreet Singh was significantly large. It was alleged that over exposure in the shares of the company on behalf of Mr. Maganpreet Singh led to a situation that when the said client defaulted in payment, the noticee in turn defaulted to meet his pay in obligations at DSE, which caused payment crisis at DSE.

8. The noticee in his replies/submission made vide letters dated June 14, 2005, January 12, 2010 and January 20, 2010 before the Enquiry Officer/DA has, inter alia, stated that he had traded in the shares of the company on behalf of about 18 clients, who had been their customers since 1990-95. They were the noticee’s tested clients and there was no new customer to specifically trade in the shares of the company, which would have been a cause of concern. In respect of Mr. Maganpreet Singh, 1,24,800 shares were purchased during the month of December 1995. On receipt of the said shares, the noticee sent his driver to Mr. Maganpreet Singh’s office on January 08, 2006, when the same were lost/misplaced or stolen by someone. Mr. Maganpreet Singh took the plea that since the shares purchased were not delivered to him, he will not make the payment. Since the consideration towards the said purchase of 1,24,800 shares was not paid by Mr. Maganpreet Singh, it put the noticee into liquidity crunch. Subsequently, payment towards the said purchase was made by the noticee from his own pocket and there was delay in meeting his pay-in obligations towards the said shares. There was, however, no payment crisis at DSE.

9. I note that the DA has found that the noticee had made huge purchases in the shares of the company on behalf of his client Mr. Maganpreet Singh without appropriate margins or adequate balance in the client’s account with the noticee. I also find that the noticee’s net exposure of 1,75,300 shares in respect of Mr. Maganpreet Singh was significantly large and risky especially keeping in view the fact that it was not covered by appropriate margins. The over reliance or faith of the noticee on the client that he will make the payment on getting the delivery of large quantity of shares was something no prudent stock broker would do in securities transactions. The consequence was imminent as when the said client defaulted in making payments towards purchase of those shares, for whatever reasons, the noticee defaulted in meeting his pay-in-obligations. This ultimately led to payment crisis at the DSE because of which the management of DSE had to intervene in the matter. Pursuant to the intervention by the DSE, the noticee had to pay from his own pocket though belatedly. It is an admitted fact that there was delay in meeting pay-in-obligation at DSE by the noticee. The same is evident from the statement of the noticee made before the investigating authority and also confirmed by the fact that penalty was imposed by DSE on the noticee for the said delay/ default.

10. I am of the opinion that being a SEBI registered stock broker, the noticee had the responsibility to exercise sufficient due diligence while dealing with his clients especially when the exposure was high and such purchases were not covered with margins or sufficient funds in the clients’ account with the noticee. Such defaults do have consequences limited not only to him or his clients but affect the entire system. I, therefore, agree with the finding of the DA that the noticee has failed to exercise due care, skill and diligence in his dealings with the said client and has therefore, violated the provisions of clause A (2) of the code of conduct for stock brokers as specified in schedule II read with regulation 7 of the Stock Brokers Regulations. I also note that during the proceedings this is the solitary instance of default of such nature found by the DA on the basis of which warning has been recommended by the DA. Further, the transaction took place during December 1995 i.e. about 16 years back and the fact cannot be ignored that the noticee had subsequently made payment towards purchase of said shares in dispute from his own pocket. Considering all these mitigating factors, I find that warning, as recommended by the DA, is commensurate with the default found in this case.

11. I, therefore, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992, read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby issue warning to Inder Pal Singh (Proprietor of M/s. I P Singh & Co.), as a stock broker of DSE {(SEBI Registration No. INB 050086816) [PAN: AAYPS1851P]} to avoid recurrence of such defaults in future.

12. A copy of this Order shall be served upon Delhi Stock Exchange of which Inder Pal Singh is a stock broker for necessary action.

13. This Order shall come into force with immediate effect.

RAJEEV KUMAR AGARWAL DATE: February 01, 2012 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA