Order in respect of Bonanza Portfolio Ltd.

WTM/RKA/ID-4/17/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGGARWAL, WHOLE TIME MEMBER ORDER Under section 12(3) of the SEBI Act read with regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008- In respect of Bonanza Portfolio Ltd. (SEBI Registration No. INB230637836). In the matter of-Shiv Raj Puri - Relationship Manager at Citibank, Gurgaon Branch. Appearances: For Noticee Mr. Ravi Kadam, Senior Advocate Mr. K.R.C.V. Seshachalam, Advocate Mr. Ameet Naik, Advocate - Naik Naik & Co. Mr. Abhishek Kale, Advocate - Naik Naik & Co. Mr. Vaibhav Bhure, Advocate - Naik Naik & Co. Mr. Shiv Kumar Goel, Director - Bonanza Porfolio Ltd. Mr. S.K. Uboveja. Senior Vice President - Bonanza Porfolio Ltd For SEBI: Mr. Sharad Krishna Sharma, General Manager Mr. Santosh Kumar Shukla, Joint Legal Adviser Mr. Siddhesh Lotlikar, Assistant General Manager, and Mr. Parag Kumar Sinha, Assistant Legal Adviser 1. SEBI received a letter dated December 20, 2012 from Citibank informing about a circular / letter dated January 1, 2012 purportedly issued by SEBI to Citibank recognizing certain individuals specified in the circular as custodians of the bank accounts.

Citibank also informed that it never made any application to SEBI and neither has Citibank received any such circular from SEBI. Accordingly, Citibank requested SEBI to confirm whether it had issued any such circular. SEBI vide letter dated December 22, 2010 confirmed to Citibank that no such circular/letter had been issued by SEBI. 2. SEBI investigation in the matter observed that Mr. Shiv Raj Puri ('Shivraj'), the relationship manager of Citibank at its Gurgaon Branch offered to its clients fabricated investment schemes which guaranteed high returns and received signatures on blank fund transfer forms. Through these blank funds transfer forms Shivraj made demand drafts favouring stock brokers and invested in the securities market and also transferred funds to his family members and associates. Shivraj, his family and associate company including Premnath (Shivraj's step grandfather), Sheila Premnath (Shivraj's grandmother) Rahgu Raj Puri (Shivraj's father), Deeksha Puri (Shivraj's mother), Norman Martins P. Ltd. (where Raghuraj and Deeksha were directors) and Metcam Holdings P. Ltd. (where Deeksha was the director) were found to be either singly or jointly holding bank accounts.

3. Investigation also revealed that M/s Bonanza Portfolio Ltd., a registered stock broker (SEBI Registration No. INB230637836) (hereinafter referred to as 'the noticee') executed trades for Shivraj (from April 1, 2009 to May 7, 2010), Raghuraj (from August 3, 2009 to December 20, 2010) and Deeksha (from September 14, 2009 to December 16, 2010). Shivraj traded in the Futures & Options (F&O) segment of NSE predominantly in Nifty Index options. It was observed that the noticee accepted third party demand drafts and fund transfer for trades of its clients and had failed to report information relating to suspicious transactions of its clients to the Financial Intelligence Unit (FIU). 4. Based on the findings of the investigation, SEBI initiated proceedings under SEBI (Intermediaries) Regulations, 2008 ('Intermediaries Regulations') in respect of the noticee and appointed the designated authority ('DA'). The DA conducted proceedings and submitted the Report dated February 29, 2012 in accordance with the provisions of the Intermediaries Regulations. In the Report, the DA enquired into and examined the following allegations against the noticee:- "1.

Noticee had not complied with SEBI circular no. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 on mode of payment and delivery by accepting third party demand drafts. 2. Noticee did not report information relating to suspicious transactions to the Financial Intelligence Unit (FIU) as required under SEBI master circular no. ISD/AML/CIR-1/2008 dated December 19, 2008 on Anti Money Laundering and Combating Financing of Terrorism Standards. 3. Noticee failed to maintain high standards of integrity, promptitude and fairness; failed to exercise proper due-diligence, skill, care while carrying on its business and did not comply with statutory requirements as stipulated under the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992." 5. In view of above allegations, in the proceedings before the DA, the noticee was charged with violation of above mentioned circulars and clause A (1), A (2) and A (5) of the code of conduct specified for stock brokers in Schedule II read with regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992(hereinafter referred to as the 'Stock Brokers Regulations').

6. In the Report, the DA has noted that Shivraj was placing orders on behalf of Raghuraj and Deeksha. He had confirmed to the noticee that Puri family was the founder of Norman Martins Brokers P. Ltd. (Norman Martins) and Raghuraj and Deeksha owned 60% of its paid up equity capital and were its directors. Raghuraj and Deeksha had authorised Shivraj through authorisation letter / power of attorney to execute trades on their behalf. Out of the various payments received for the trades of these three clients, through different modes, the noticee received three demand drafts for the value of `23.55 lakh, `50 lakh and `18 lakh, respectively that were issued from the bank account of Norman Martins with Citibank. There was one instance where `50 lakh was transferred by way of fund transfer from the account of Norman Martins with Citibank to the noticee's account for the trades of its client Deeksha. With regard to allegation of accepting third party payments for the trades of its clients, the DA observed that the noticee had accepted the demand drafts having Unique Client Codes of the respective clients on the face and there was nothing to indicate that the demand drafts were being issued from third party accounts.

The DA found that there was nothing on record to show that the noticee could have any reason to doubt that the demand drafts received by the noticee were issued from third party account.

7. The DA further noted that the receipt of `50 lakh by way of fund transfer from the account of Norman Martins to the noticee's account and not from the client Deeksha's account, was a third party payment and the noticee has not complied with SEBI circular number SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003. The DA observed that there was one such instance and there is nothing to show that the noticee could have doubted that the said payment was from third party. The DA gave benefit of doubt to the noticee and did not hold it guilty of violation of the SEBI circular number SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003. The DA, however, stated that ‘the noticee should be careful and cautious in dealing with his clients’. 8. With regard to the allegation of failure to report suspicious transactions to FIU, the DA found that, in the facts and circumstances of the case, there was no sufficient ground for the noticee to be suspicious of the transactions of its client. 9. In view of the above observations/ findings, the DA did not recommend any action against the noticee. 10. After considering the Report of the DA in terms of provisions of regulation 28 of the Intermediaries Regulations, a show cause notice (SCN) dated September 17, 2012 was issued to the noticee calling upon it to show cause as to why a penalty as provided under the Intermediaries Regulations should not be imposed upon it.

The SCN was issued in view of the prima facie observations of the designated member for disagreement with the recommendations of the DA for the reasons which are reproduced below: "i. The Designated Authority has observed "there was third party payment where fund transfer was there from Norman Martins account to Noticee's account and not from the client Deeksha Puri's account as claimed by the Noticee. Hence, I note that from the aforesaid instance that there was third party payment and Noticee has not complied with SEBI circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003." However, the Designated Authority has given benefit of doubt and did not hold you guilty of violation of SEBI circular no. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 and advised you to be careful and cautious in dealing with your clients. ii You may note that in terms of the aforesaid circular dated August 27, 2003, you are directed to accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. However, you have accepted consideration in respect of the transaction executed by you on behalf of Ms. Deeksha Puri, from a third party, Norman Martin.

The said act is in contravention of the circular dated August 27, 2003 for which you are liable to a penalty as envisaged under the provisions of the Intermediaries Regulations. iii. The Designated Authority also observed the following in the report, "...draft no. 157551 dated 30/7/2009 was for a sum of Rs.23.55 lakhs issued by Citi Bank for the benefit of client code D4S372 (Shiv Raj Puri) and the same was credited to the account of Shiv Raj Puri with them on 31/07/2009. I note that amount of Rs.23.55 lakhs was issued to the Noticee from the bank account of Norman Martins Brokers P Ltd.....". 11. The noticee replied to the SCN vide its letter dated October 16, 2012 wherein it inter alia submitted as under:- a) There was no trigger for a show cause notice under regulation 28 when no recommendations were given by the DA under regulation 27 in the Report. The regulations do not provide for any cause of action for the Designated Member to issue show cause notice under regulation 28 when no recommendations are given by the DA under regulation 27 in the Report. b) The noticee received funds from the clients through RTGS fund transfer by banks, online fund transfer through net banking, account payee cheques from the beneficiary clients and demand drafts issued by the bank containing on its face unique client code of the beneficiary clients.

Citibank had confirmed vide their letter dated September 19, 2009 stating unequivocally that "Remittances and Payments made to Bonanza Portfolio Ltd. are made from the clients accounts". Thus, the noticee was equipped with assurance of Citibank that the remittances and payments made to the noticee are made from the clients accounts.

c) The draft no. 157551 dated July 30, 2009 for a sum of `23.55 lacs issued by Citibank for the benefit of client code D4S372 (i.e. Shivraj) was not only within the guidelines laid down in SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 but also a step ahead by having the code of the intended beneficiary on the face if it mandated by Citibank. Hence, there was no reason for the noticee to doubt that the demand draft in question was issued from any other account.

d) The transfer of `50 lacs received on November 19, 2010 from Citibank credited to trading account (Code DDD40S985) of Deeksha was under bona fide belief as telephonically informed to the noticee by Shivraj, the representative of Deeksha in addition to the fact that the noticee was equipped with an assurance from Citibank vide letter dated September 19, 2009 which states that "Remittances and Payments made to Bonanza Portfolio Ltd. are made from the clients accounts". e) It has been held by the Hon'ble High Court of Delhi in the matter of M/s N. Chirag Travels (P) Ltd. Vs Mr. Ashwani Kumar and Anr, decided on September 1, 2009 that "If some material is brought on record consistent with the innocence of the accused which may reasonably be true, even though it is not positively proved to be true, the accused would be entitled to acquittal." 12. An opportunity of personal hearing was granted to the noticee on December 13, 2012 when Mr. Ravi Kadam, Senior Advocate made submissions on behalf of the noticee. The noticee vide letter dated December 21, 2012 (received on January 31, 2013) also filed written submissions.

The learned Senior Advocate raised preliminary objections to the validity of the SCN and argued that under regulation 27 of the Intermediaries Regulations, the DA is required to recommend any of the actions listed therein, only if facts so warrant. If facts do not warrant, the DA can not recommend action. He referred to para 12 at page 29 of the Report wherein the DA has recommended that -‘After taking into consideration all facts and circumstances of the case and also material available on record, I hereby do not recommend any action against the Noticee' and submitted that the DA did not recommend any action as the facts of the case did not so warrant. He also submitted that the jurisdiction of the designated member under regulation 28 of the Intermediaries Regulations is triggered only ‘on receipt of the report recommending the measures from the designated authority’ and the ‘measures’ referred to in regulation 28 can be only the actions that are listed in regulation 27. If the DA does not recommend any of the actions listed under regulation 27, the jurisdiction under regulation 28 to issue SCN is not triggered.

Referring to the statement in para (x) at page 26 of the Report- 'However, the Noticee should be careful and cautious in dealing with his client’, he argued that this statement is only an observation of the DA and not a recommended action under regulation 27 that could be treated a measure recommended for invoking jurisdiction under regulation 28. Since the DA has not recommended any action under regulation 27, the SCN in the instant case is without jurisdiction and can not sustain on this ground alone. 13. Relying upon the orders dated August 22, 2012 passed by Hon’ble Securities Appellate Tribunal in the matters of M/s. M.P. Vora Shares and Securities Pvt. Ltd. and Naman Securities and Finance Pvt. Ltd., the learned Senior Advocate further submitted that when the DA had recommended no action, the designated member cannot issue the SCN under regulation 28 for taking an action solely on the basis of same observations and findings that are given by the DA.

14. Arguing on the merits of the case, the learned Senior Advocate submitted that even on merits, there is no cause of action against the noticee. He submitted that Shivraj, Raghuraj and Deeksha were duly registered clients of the noticee. The noticee had done proper due diligence and had taken all precautions for their dealings. The noticee received funds from these clients by fund transfer (RGTS) initiated by the concerned bank, online fund transfer (net banking), account payee cheques from the beneficiary clients and demand drafts. 15. Learned Senior Advocate submitted that the cause of action as per the SCN is the receipt of the demand draft no. 157551 dated July 30, 2009 for a sum of `23.55 lakh and receipt of `50 lakh by way of fund transfer from the account of Norman Martins for the trading accounts of Shivraj and Deeksha, respectively. With regard to accepting the demand draft for `23.55 lakhs for the trading account of Shivraj, he submitted that the noticee acted bona fide and within the provisions of the SEBI circular dated August 27, 2003. He reiterated that the Citibank was issuing the demand drafts in favour of the noticee with the Unique Client Code of the beneficiary client. As mandated by the Citibank through these demand drafts, the noticee was giving credit of the amounts to the respective beneficiary client. By putting the Unique Client Code on the face of the demand drafts and then honouring the same, Citibank continuously assured that ownership of the money in the demand drafts vested with the respective clients. As such there was no reason for the noticee to suspect that the demand draft in question was issued from any other account. He emphasized that the DA has rightly accepted the submissions of the noticee and found that there is nothing on record to show that the noticee could have any reason to doubt that the amount in the said draft was coming from a third party i.e. Norman Martins.

16. With regard to the fund transfer of `50 lakh, on November 19, 2010 to the trading account of Deeksha, learned Senior Advocate reiterated that vide letter dated September 19, 2009, the Citibank had confirmed that 'Remittances and payments made to Bonanza Portfolio Ltd. are made from the clients account'. The noticee was thus equipped with the assurance from Citibank. Further, Raghuraj and Deeksha had duly authorised Shivraj to execute trades on their behalf. Relying upon a transcript of telephonic conversation between Shivraj, he submitted that the noticee was under bona fide belief that said `50 lakh were being transferred from the account of intended beneficiary client, Deeksha, from her own account in Citibank. He submitted that the noticee exercised due skill, care and diligence in this case since it relied upon the networth certificate of the clients and confirmation from Citibank that remittances and payments were made to it from client's account. Relying upon the order dated July 30, 2004 of Hon'ble SAT in the matter of Imperial Corporation Finance and Services Pvt. Ltd. vs. SEBI it was argued that the charges of non observance of due diligence must be sustained by a higher degree of proof and there must be convincing preponderance of evidence.

It is submitted that the DA rightly appreciated the facts and circumstances of the case and observed that there was nothing to show that the noticee could have doubted that the said payment was from third party and concluded that the noticee is not guilty of violation of SEBI circular dated August 27, 2003. The observation of DA that the noticee should be careful and cautious in dealing with its clients is not a recommendation under regulation 27 and the noticee has always been careful and cautious and will continue to be so in dealings with its clients. Therefore, this observation should not be treated as recommendation for even issuing a warning. 17. Without prejudice to and as alternative to above arguments, the learned Senior Advocate submitted that while the DA had dropped the charges and recommended no penalty with respect to the above receipt of demand draft and fund transfer, the observation of the DA that- 'the noticee should be careful and cautious in dealing with its clients' is with regard to solitary instance of the purported third party transfer of a miniscule sum of ` 50 lakhs as against the bona fide belief of the noticee.

In these circumstances, in order to impart reasonableness and fairness to the proceedings, the doctrine of proportionality should be applied. Relying upon the observations of Hon'ble Supreme Court in the matter of Coimbatore District Central Co-op Bank vs. Coimbatore District Central Co-op Bank Employees Association [(2007) 4SCC669] that " it is not permissible to use "sledgehammer to crack a nut". As has been said many a time; "where a paring knife suffices, battle axe is precluded" it was argued that even warning will not be proportionate to the purported solitary blemish in this case as there was no lack of due care and diligence on part of notice, in the facts and circumstances of the case. Therefore, the SCN should be dropped and the noticee should be discharged. 18. I have carefully considered the Report, the SCN, the submissions of the noticee and relevant material available on record. Before dealing with the merits of the case, I proceed to first deal with the preliminary objections raised by the learned Senior Advocate with regard to the validity of the SCN. For this purpose, it is necessary to understand the scheme, of the Securities and Exchange Board of India Act, 1992 (the Act) and the regulations made thereunder, with regard to the manner and procedure to be followed for taking action against a registered entity.

I note that section 11 of the SEBI Act, enumerates the powers and functions of the Board. Amongst several measures enumerated under section 11(2), include the measure to provide for 'registering and regulating the working of stock brokers'. Section 12 obligates that for carrying on their activity, the stock brokers should obtain certificate of registration from the Board in accordance with the regulations made under the Act. Section 12(3) empowers the Board to suspend or cancel, by order, the certificate of registration in such manner as may be determined by regulations. This section further provides that such order shall be passed after giving a reasonable 'opportunity of being heard' to the person concerned. As per section 19, the Board may delegate its powers (except regulation making power) to any of its members. Accordingly, the Board has delegated its power conferred upon it under section 12(3) to its Whole Time Members. Section 30(1) of the SEBI Act empowers the Board to make regulations to carry out the purposes of the Act. Section

30(2)(d), in particular and without prejudice to this general power of the Board, empowers it to make regulations to provide for- (a) conditions subject to which certificate of registration is to be issued, (b) the amount of fees to be paid for certificate of registration and (c) the manner of suspension or cancellation of registration under section 12. 19. The Board has made the Stock Brokers Regulations to deal with first two matters for stock brokers and Chapter V of the Intermediaries Regulations to deal with the third matter and provides for the manner and procedure for action in case of defaults by the registered entities. As per the procedure specified in Chapter V of the Intermediaries Regulations, the jurisdiction of the designated member is triggered on making a prima facie view under regulation 24 that a registered entity has committed default specified in regulation 23. For taking any action in case of such default, the appointment of the designated authority by the designated member under regulation 24 is the starting point. After such appointment, the designated authority is required to issue a show cause notice to the concerned person under regulation 25. Regulation 25 provides for the contents of the show cause notice, furnishing of documents, etc. and timeline for receipt of written representation of the person concerned.

Regulation 26 obligates the noticee to file its written representation and authorises designated authority to proceed ex parte if the noticee does not reply to the show cause notice. Under regulation 27, the DA considers the representations of the noticee, the fact and circumstances of the case and applicable provisions of laws, directions, circulars, etc. and submits a Report with his recommendations. On receipt of Report and recommendation of the DA, the designated member decides the case under regulation 28. For the sake of easy reference, I deem it necessary to reproduce the provisions of section 12(3) of the Act and regulations 23, 24, 27 and 28 of the Intermediaries Regulations hereunder:- Section 12(3) of the Act. " (3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations: Provided that no order under this sub-section shall be made unless the person concerned has been given a reasonable opportunity of being heard." Intermediaries Regulations "Cancellation or suspension of registration and other actions. 23. Where any person who has been granted a certificate of registration under the Act or regulations made thereunder – (a) fails to comply with any conditions subject to which a certificate of registration has been granted to him; (b) contravenes any of the provisions of the securities laws or directions, instructions or circulars issued thereunder;

the Board may, without prejudice to any action under the securities laws or directions, instructions or circulars issued thereunder, by order take such action in the manner provided under these regulations." "Appointment of designated authority. 24. (1) Where it appears to the designated member, that any person who has been granted certificate of registration under the Act, regulations made thereunder has committed any default of the nature specified in regulation 23, he may appoint an officer not below the rank of a Division Chief, as a designated authority: ………………………………………………………………………………………… " "Action in case of default. 27. After considering the representations, if any, of the noticee, the facts and circumstances of the case and applicable provisions of law or directions, instructions or circulars administered by the Board the designated authority shall submit a report, where the facts so warrant, recommending – (i) suspension of certificate of registration for a specified period; ii) cancellation of certificate of registration; (iii) prohibiting the noticee to take up any new assignment or contract or launch a new scheme for the period specified in the order; iv) debarring a principal officer of the noticee from being employed or associated with any registered intermediary or other registered person for the period specified in the order; (v) debarring a branch or an office of the noticee from carrying out activities for the specified period; (vi) warning the noticee."

"Procedure for action on receipt of the recommendation. 28. (1) On receipt of the report recommending the measures from the designated authority, the designated member shall consider the same and issue a show cause notice to the noticee enclosing a copy of the report submitted by the designated authority calling upon the noticee to submit its written representation as to why the action, including passing of appropriate direction, as the designated member considers appropriate, should not be taken. (2) …………………………………………………………………………………….." 20. I note that the above scheme of the Act and the Intermediaries Regulations is very clear. By virtue of power delegated under section 19 of the Act read with the provisions of regulation 28 of the Intermediaries Regulations, the power to take any action or not in case of any default specified in regulation 23 by the registered entities is vested with the designated whole time member. While the designated authority, appointed by the designated member based on his prima facie view, is empowered to conduct fact finding proceedings and make recommendations to the designated member, the power to decide to take any action or not in the matter is retained with the designated member.

I note that as per regulation 28 of the Intermediaries Regulations, on receipt of the report recommending the 'measures' from the designated authority, the designated member is required to 'consider the same' and issue a show-cause notice to the concerned entity calling upon it to submit its written representation as to why the action, including 'passing of appropriate direction', as the designated member 'considers appropriate', should not be taken. The expressions such as 'consider the same', 'appropriate direction" and 'considers appropriate', clearly suggest that final decision in the matter has to be taken by the designated member and not by the designated authority. Thus, findings and/or recommendations of the designated authority are not binding on the designated member while deciding the case. 21. It is settled position that power to take action /impose penalty includes power not to take action / impose penalty for justifiable reasons. In this regard, the decision of the Hon’ble High Court of Bombay in Appeal No. 7 of 2001:- The Securities & Exchange Board of India Vs. Cabot International Capital Corporation 2004 (2) CLJ 363, 2004 is worth mentioning wherein the Hon'ble High Court held that on particular facts and circumstances of the case, proper exercise of judicial discretion is a must and it is not necessary to impose penalty in each and every breach of provisions of the Act.

The Hon’ble High Court also held that - 'though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite, that in the statute minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to bona fide belief or there was too technical or venial breach, etc.' I further note that Hon'ble SAT, in Appeal No 198 of 2011, in the case of Dipak J. Panchal Vs. The Securities & Exchange Board of India, vide order dated November 12, 2012, held the same view in the following words:-'Simply because the Act provides for heavy penalties, does not mean that invariably heavy penalty alone should be imposed.' In my view, though these principles have been pronounced while dealing with the orders of the Adjudicating Officer under the Act, they hold good for and equally apply to any other penalty/action under the Act and regulations made thereunder. Thus, the power of the designated authority to make recommendation under regulation 27 of the Intermediaries Regulations also includes in itself the power to recommend no action, if facts of the case so warrant.

22. Further, from the language of regulation 28 of the Intermediaries Regulations, it is seen that on receipt of the report, recommending the 'measures' from the designated authority, the proceedings are continued before the designated member. The word 'measure' has not been defined or explained under the Intermediaries Regulations. It is well settled position that this word has to be understood in the sense in which it is generally understood in the context of the powers conferred upon the concerned authority. According to Corpus Juris Secundum, 'measure ' means- ' anything desired to be done with a view to the accomplishment of a purpose, a plan or course of action intended to obtain some object, any course of action proposed or adopted by the Government'. Measure is also understood 'as a means to an end'. It is clear that the purpose in which it is used in regulation 28 is to deal with consequences of possible default by a registered entity. Thus, the word 'measures' used in regulation 28 in its generic sense is of wide amplitude and includes in itself 'no action' and is not limited to the actions that are listed in regulation 27 as argued on behalf of the noticee.

I, therefore, find that the final decision on the Report of the designated authority with recommendation of no action also rests with the designated member under regulation 28. 23. Under the provisions of section 12(3) and regulation 28 the designated member is fully competent to deviate from or disagree with the findings and/or recommendations of the designated authority and may reduce /enhance the recommended measure/action. In my view, if the argument that where the designated authority has recommended no action the designated member cannot invoke his power under regulation 28 is accepted, it will defeat the scheme of the Act and Intermediaries Regulations in that the Report with recommendation of 'no action' would attain finality without consideration of the matter by the designated member and this would amount to abdication of power under section 12(3) that is delegated to a designated whole time member. In view of the above discussions, I hold that neither regulation 27 nor regulation 28 has the effect of abdicating the plenary power of the Board/ designated member under section 12(3) of the Act or regulation 28 of the Intermediaries Regulations.

Thus, the power of the designated member under regulation 28 is wide enough to include any action which may be different from/higher than the recommended measure including no action. The only thing the designated member has to do, in such situations, is to follow the principle of natural justice and issue the show cause notice giving reasons for proposed enhancement of the recommended action or take action listed in regulation 27 where no action is recommended by the DA. I am, therefore, unable to accept the argument of the learned Senior Advocate that where the DA has recommended no action, the designated member does not have power to issue the show cause notice under regulation 28 and find that there is no infirmity in the SCN with regard to the power to issue the same. 24. I have perused the orders dated August 22, 2012 passed by Hon'ble SAT in the matters of M/s. M. P. Vora Shares and Securities Pvt. Ltd. and Naman Securities & Finance Pvt. Ltd. that have been relied upon by the learned Senior Advocate of the noticee during hearing. I note that in the case of M/s. M. P. Vora the designated authority had recommended that the appellant in that case be prohibited to take up any new assignment for a period of one month.

The designated member issued a show cause notice proposing to take recommended action or impose a higher penalty. After completing the procedure under regulation 28, the designated member upheld the findings of the designated authority and suspended the certificate of registration of the appellant for a period of one month. The Hon'ble SAT held that:- "The scheme of the regulation clearly empowers the designated authority to recommend the action (to be) taken and authorises the designated member to pass order expeditiously. The principles of natural justice require that if the designated member is not agreeing with the recommendations of the designated authority, at the time of issuing show cause notice, it must give its reasons as to why it is not accepting the recommendations of the designated authority and proposes to take action and impose higher penalty on the appellant. By any stretch of imagination we are not suggesting that the designated member can not impose a higher penalty than what has been suggested by the designated authority …….." 25. I note that in the matter of Naman Securities & Finance Pvt. Ltd. the designated authority recommended no action under regulation 27 of the Intermediaries Regulations against the appellant.

In that case also, in the show cause notice under regulation 28 the designated member had observed that the alleged violations 'deserve higher penalty'. Hon'ble SAT observed that impugned order did not contain justifiable reasons for imposing a higher penalty and deviating from the report of the designated authority. Hon'ble SAT further observed that the impugned order had not brought on record further material and evidence to show that appellant deserved a higher penalty. 26. It is important to note that the facts of the present case and those of the above mentioned Naman Securities case were identical with regard to the recommendation of 'no action' by the designated authority and the show cause notice issued regulation 28. In Naman Securities case, Hon'ble SAT held that the designated member is competent under the provisions of the Act to deviate from the Report of the designated authority, and observed as under- 'We are conscious of the fact that the whole time member has every right under the provisions of the SEBI Act to deviate from the report of the designated authority and impose a higher penalty.

But it requires recording of proper and valid reasons which would justify a higher penalty as compared to the one already imposed by the adjudicating officer. ………..' 27. Thus, the legal position regarding the authority of the designated authority and power of the designated member is very clear from the above orders of Hon'ble SAT also. Having come to conclusion that the designated member is fully competent to deviate from the Report of the DA with recommendation of 'no penalty' and issue the show cause notice with proper and valid reasons, the next question is whether the SCN in this case was issued with valid and proper reasons. I note that it is very clear from the portion of the SCN extracted above that it specified reasons as to why the then designated member was, prima facie, not in agreement with the recommendation of the DA. In my view, therefore, there is no infirmity in the SCN with regard to reasonableness and fairness and compliance of principles of natural justice also. 28. I now proceed to deal with the charges against the noticee on merits. I note that the present proceedings as per the SCN is limited with regard to the allegation that the noticee had received third party payments through a demand draft number 157551 dated July 30, 2009 for a sum of ` 23.55 lakhs issued by the Citibank from the account of Norman Martins for the benefit of client code D4S372 (Shivraj) and a fund transfer (RGTS) of `50 lakh on November 19, 2010 from account of Norman Martins with Citibank to the trading account (code DDD40S985) of Deeksha.

The charge against the noticee is that it did not comply with SEBI circular no. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 by accepting third party payments and by such act/omission it did not comply with clause A (1), A (2) and A (5) of the code of conduct specified for stock brokers in Schedule II read with regulation 7 of the Stock Brokers Regulations. The provisions of regulation 7 and these clauses of Schedule II are as under:- "Stock Brokers to abide by the Code of Conduct. 7. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II. Code of Conduct (Schedule II) - 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 I 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.

" 29. I note that there is no allegation of any connection or nexus of the noticee with Shivraj or his family and associate company or to their purported device that was under investigation by SEBI. There is no dispute as to the receipt of the above payments by the noticee. Further, there is no allegation or charge that the noticee had deliberately accepted those payments from Norman Martins for the trades of Shivraj and Deeksha or with any ulterior motive. I note that, under the facts and circumstances of the case, the charge of non compliance of clause A(1) of the Code of Conduct cannot be made out. I further note that the circular dated August 27, 2003 permits the stock brokers to receive payments from the clients strictly (a) by account payee crossed cheques/demand drafts or (b) by way of direct credit into the bank account through EFT, or (c) any other mode allowed by Reserve Bank of India (RBI).Thus, the noticee has not contravened the requirements of the said circular with regard to mode of payments when it accepted payments by way of demand drafts and RTGS fund transfers. The limited question that remains to be examined, in the facts and circumstances of the case, is whether the noticee failed to exercise due skill, care and diligence when the above said two payments were received by it through the Citibank from the account of Norman Martins for the credit to the beneficiary account of Shivraj and Deeksha, respectively.

30. I note that the noticee has proved that the demand drafts issued by the Citibank in favour of the noticee had the Unique Client Code of the client on its face. The Citibank had honoured the demand drafts and assured that the ownership of the money in the demand draft vested with the respective client i.e. Shivraj, Raghuraj and Deeksha. The demand draft number 157551 dated July 30, 2009 for a sum of ` 23.55 lakhs issued by the Citibank for the benefit of client code D4S372 (Shivraj) had the client code of Shivraj on its face. I, therefore, am inclined to accept the arguments of the noticee that it had no reason to doubt that the demand draft in question was issued from any other account and it acted bona fide.

31. With regard to third party payment of ` 50 lacs on November 19, 2010 by way of transfer of fund (RTGS) from the account of Norman Martins (wherein Raghuraj and Deeksha were directors) to the noticee, I note that vide letter dated September 19, 2009 Citibank had confirmed to the noticee that net relationship value of Shivraj, Raghuraj and Deeksha was ` 49 crores and "Remittances and Payments made to Bonanza Portfolio Ltd. are made from the clients accounts". Further, Shivraj was also trading for and on behalf of Deeksha pursuant to a Power of Attorney. On perusal of the transcript of the conversation between Shivraj and representative of the noticee on November 19, 2010, I note that Shivraj had informed the noticee that he will transfer ` 50 lakh to ` 65 lakh to it from Citibank. I have also perused the bank account statement of the noticee and observe that on Novembers 19, 2010 the noticee had received `50 lakh under the description "Funds transfer Fund transfer" and `15 lakh under the description "Funds transfer Trfd from A/c of Deeksha Puri to A/c of Bonanza Portfolio Ltd." I further note the noticee had been regularly receiving fund transfers for the respective beneficiary client and the receipt of `50 lakh was the only instance without the description of the account of the beneficiary client. In view of the above confirmation of Citibank given to the noticee in advance, I find merit in the submission of the noticee that it could not doubt that the amount was being transferred from Norman Martins and not from Deeksha. In these facts and circumstances the preponderance of probability has shifted in favour of the noticee. I, therefore, do not find any blameworthy conduct on the part of the noticee with regard to this solitary instance of receipt of payment by way of such fund transfer from the account of a third party which noticee received under bona fide belief. 32. Considering the facts and circumstances as discussed above, I do not consider this case fit for taking action under section 12(3) of the Act read with regulations 27 and 28 of the Intermediaries Regulations. The show cause notice no. IVD/ID4/SKS/SL/20823/2012 dated September 17, 2012 is accordingly disposed of.

Date: April 17th, 2013 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA