Order in respect of GKK Capital Market Private Limited - in the matter of Divine Entertainment Limited

WTM/RKA/EFD/168/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 12(3) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 28(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008. IN RESPECT OF GKK CAPITAL MARKET PRIVATE LIMITED, SEBI REGISTRATION NO. INB 030974733 PAN: AAACG9906E. IN THE MATTER OF DIVINE ENTERTAINMENT LIMITED 1. Securities and Exchange Board of India (“SEBI”) had conducted an investigation into the alleged irregularities in the trading of the shares of Divine Entertainment Limited (“DEL”) and into the possible violations of the provisions of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”) and various Rules and Regulations made thereunder. 2. The investigation revealed that GKK Capital Markets Private Limited (hereinafter referred to as the “Noticee”), a member of Calcutta Stock Exchange Limited (“CSE”) acted as an unregistered sub-broker while trading in the scrip of DEL in the Bombay Stock Exchange Ltd. (“BSE”). The Noticee on October 25, 2002 sold 80000 shares of DEL in settlement no. 148 on behalf of the ultimate client M/s. Vincomp Marketings Private Limited (“Vincomp”) through BSE Member TCP Stock Brokers Limited (“TCP”). The delivery of the said shares of DEL was from the demat account of the Noticee and not from the demat account of Vincomp. The Noticee credited ₹ 1,19,157 in the account of Vincomp, thereby, closing the transaction of sale for the client Vincomp and paying the proceeds of the sale to the client. Investigation also revealed that the Noticee had not done proper due diligence while entering the Know Your Client (“KYC”) for its client Vincomp. Many of the columns in the KYC form of Vincomp such as date of incorporation, date of commencement of business, net worth, annual income in the last 3 years, market value of portfolio, registration with other brokers, photograph of the director, etc. were left blank. Also, no proof of residence of the director was taken by the Noticee. The Noticee had not taken adequate margin from its clients, viz. Vinvomp, Mr. Aushim Khetrapal and Mrs. Anita Khetrapal while trading for them,

Order in respect of GKK Capital Market Private Limited although a substantial amount was already due from them. The Noticee also accepted payments on behalf of the clients from third parties, viz. Sri Sai Films etc. 3. For the above acts/omissions of the Noticee, it was thus alleged that the Noticee had violated the provisions of Section 12(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), regulation 11(1) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the “Broker Regulations”) and Clauses A(1) and A(2) of the Code of Conduct laid down in Schedule II under regulation 7 of the Broker Regulations. 4. In view of the above, SEBI initiated proceedings against the Noticee under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as the “Intermediaries Regulations”) and vide order dated June 16, 2009 appointed Mr. B.N. Sahoo as the Designated Authority (“DA”) under regulation 24(1) of the Intermediaries Regulations to inquire into the alleged violations committed by the Noticee.

Consequent, to the transfer of Mr. B.N. Sahoo, SEBI vide order dated January 4, 2012 appointed Mr. P.K. Kuriachen as the DA. 5. Mr. B.N. Sahoo had issued a Notice dated July 1, 2009 (hereinafter referred to as SCN) to the Noticee in terms of the provisions of regulation 25(1) of Intermediaries Regulations to show cause as to why appropriate recommendation should not be made against it under regulation 27 of Intermediaries Regulations. The following facts and allegations were, inter alia, contained in the SCN: i) DEL was listed on BSE and Ahmedabad Stock Exchange. The Noticee, a member of Calcutta Stock Exchange was registered as a client of TCP, a member of BSE. The Noticee on October 25, 2002, sold 80000 shares of DEL in settlement no. 148 on behalf of the ultimate client, Vincomp, through BSE member TCP. The delivery of the said shares of DEL was from the demat account of the Noticee and not from the demat account of Vincomp. The Noticee credited ₹1,19,157 in the account of Vincomp, thereby, closing the transaction of sale for the client Vincomp and paying the proceeds of the sale to the client Vincomp.

The Noticee thus acted as a sub-broker of TCP for its client Vincomp though it was not registered as a sub-broker of TCP. ii) The columns (such as date of incorporation, date of commencement of business, networth, etc.) in the KYC form of Vincomp were left blank. Also no proof of the residence of the director had been taken by the Noticee. One of the directors of Vincomp was Mr. C. S. Dhyani who was an employee of Mr. Aushim Khetrapal. Vincomp was a front entity of Mr. Aushim Khetrapal. Mr. Aushim Khetrapal and his wife Mrs. Anita Khetrapal were already the clients of the Noticee and the Noticee was dealing for them since April 2001. The Noticee had not taken adequate margins from the aforesaid entities and Vincomp, while dealing for them. The Noticee continued to buy shares for Mrs. Anita Khetrapal and Vincomp even though the cheques issued by them got bounced. The Noticee also accepted the payments on behalf of the clients from third parties, viz. Sri Sai Films, etc. The Noticee failed to exercise due skill, care and diligence and alleged to have violated the aforesaid provisions of SEBI Act and the Broker Regulations.

6. The Noticee vide letter dated January 20, 2011, replied to the SCN, submitting, inter alia, that DEL was not traded on Calcutta Stock Exchange and for that it had executed the trades through TCP, a member of BSE Ltd. and the same was reported to Calcutta Stock Exchange after discussion and taking confirmation from them. Further, Mr. Aushim Khetrapal, the Noticee’s existing client had requested it to open the client code for Vincomp and start trading, and had assured submission of pending documents within a reasonable time. In good faith, the Noticee started dealing for Vincomp. It was holding 539525 shares of DEL in its Depository Participant (DP) account from which it transferred 3 lakh shares to Vincomp as it requested the same, citing urgent pay-in requirements and on assurance of immediate return. Vincomp had deposited a cheque of ₹ 2 lakh as margin before trading with it. However, the said cheque was dishonoured by the Bank. Vincomp committed at the time to issue another cheque to continue the transaction. Relying on this commitment and also on request the Noticee had continued to buy in favour of Vincomp.

On October 1 and 9, 2002, they had deposited three cheques of ₹ 2 lakh, ₹ 2.54 lakh and ₹ 2 lakh to Global Trust Bank, Mumbai which was as per system but without any intimation given to the Noticee. Therefore, it was not possible for the Noticee to know whether the cheques were issued by Sri Sai Films or Vincomp. On non-recovery of funds, it had no alternative but to intimate the client that it had to sell its shares to recover the dues. Vincomp sold 80000 shares of DEL with the specific promise that it will deliver the shares within the settlement period, but it failed to do so and at that very time, for its request to avoid auction, it had to deliver the said shares to TCP from its DP account, and the amount of ₹1,19,157 was credited to its account. 7. After considering the reply of the Noticee, Mr. B.N. Sahoo vide letter dated February 21, 2011 granted an opportunity of personal hearing to the Noticee on February 24, 2011. The Noticee through its authorized representative appeared for the said hearing. Thereafter, when consequent to the transfer of Mr. B.N. Sahoo a new DA (Mr. P.K.

Kuriachen) was appointed, another opportunity of personal hearing was granted to the Noticee in March 27, 2012. The Noticee through its authorized representative appeared for the said personal hearing and reiterated its earlier submissions. 8. Pursuant thereto, the DA (Mr. P.K. Kuriachen) submitted his enquiry report dated March 30, 2012 wherein he found as following-. a) The Noticee is a member of Calcutta Stock Exchange and a client of TCP who is a member of BSE. The scrip of DEL was listed on BSE and Ahmedabad Stock Exchange. Vincomp, on whose behalf the Noticee had traded in BSE, was registered as a client of the Noticee on September 10, 2009. One of the directors of Vincomp was Mr. C. S. Dhyani who was an employee of Mr. Aushim Khetrapal. b) The Noticee had knowledge of the fact that Vincomp was a front entity of Mr. Aushim Khetrapal because of the following reasons: i. The director of the Noticee, Mr. Naveen Khandelwal in his statement recorded before the Investigating Authority on November 3, 2004, pointed out that Mr. Aushim Khetrapal was the only person who has dealt through Vincomp. ii.

The Noticee transferred a total of 3,00,000 shares of DEL to the demat account of Vincomp on September 3, 2002 and September 5, 2002 on the instructions of Mr. Aushim Khetrapal much before Vincomp was registered as a client of the Noticee. iii. Further, the Noticee also knew that Mr. Aushim Khetrapal was the director of DEL. c) Mr. Aushim Khetrapal and his wife Mrs. Anita Khetrapal were the clients of the Noticee and the Noticee was dealing for the said entities since April 2001. It was observed from the accounts of Vincomp, Mr. Aushim Khetrapal and Mrs. Anita Khetrapal, in the books of the Noticee that proper margins were not taken by the Noticee before dealing for the said entities. A sum of ₹ 9 lakh was already due from Mr. Aushim Khetrapal when the Noticee further purchased 73825 shares of DEL for him on April 19 and 26, 2001. On 4 occasions, cheques given by Mrs. Anita Khetrapal and Vincomp got dishonoured and yet the Noticee continued to buy shares for them. The total amount outstanding from Vincomp as on October 3, 2002 was ₹ 23,61,757. d) The Noticee on October 25, 2002 sold 80000 shares on BSE through TCP in settlement no. 148. However, the delivery of the said 80000 shares on October 28, 2002 was from the demat account no. 10031130 which belongs to the Noticee and not from the demat account of Vincomp.

Moreover, the proceeds of the sale of the said 80000 shares of DEL, ₹ 1,19,157 was credited to the account of Vincomp. If the intention of the Noticee was to recover its dues then it would have kept the sale proceeds instead of crediting the same to the account of Vincomp. e) Moreover, the Noticee had not produced any evidence to show that it had taken any legal action against Vincomp to recover the shares of DEL. The acts of the Notice reveal that it was dealing in the scrip of DEL for its client Vincomp. The sale of the shares of DEL had taken place in BSE of which the Noticee is not a registered member of Sub-broker. In view of this, it is proved that the Noticee had sold 80000 shares for its client Vincomp on BSE through TCP and acted as an unregistered sub-broker. Therefore, the Noticee has violated section 12(1) of the SEBI Act and regulation 11(1) of the Broker Regulations. f) Further, the details of most of the columns of the KYC form of Vincomp, such as date of incorporation, date of commencement of business, net worth, annual income in last 3 years, market value of the portfolio, etc., were left blank.

Also, there was no proof of the residence of the director of Vincomp. The Noticee should not have opened a client account of Vincomp till it had received all the relevant proofs/documents. g) The account of Vincomp was opened in 2002, while the investigation was done in 2004. Even after two years had lapsed, the Noticee had failed to obtain the relevant documents from Vincomp/Mr. Aushim Khetrapal. The Noticee had dealt for its clients, Vincomp, Mr. Aushim Khetrapal and Mrs. Anita Khetrapal, without taking adequate margins. The Noticee had therefore, failed in exercising due care, skill and due diligence while dealing with its clients and has failed in maintaining a standard of integrity, fairness and promptitude in the conduct of its business. Therefore, the Noticee had violated clauses A(1) and A(2) of the Code of Conduct of Brokers as specified in Schedule II under regulation 7 of the Broker Regulations. 9. In light of the above observations, the DA was of the opinion that it is a fit case for recommending penalty under regulation 27(i) of the Intermediaries Regulations and accordingly recommended that the certificate of registration of the Noticee may be suspended for a period of one week.

10. It is noted that the Noticee had filed a settlement application dated July 23, 2009 which was rejected. The said rejection of the application was intimated to the Noticee vide letter dated December 21, 2010. After the submission of the enquiry report dated March 30, 2012, post-enquiry show cause notice was issued to the Noticee vide letter dated April 27, 2012. Thereafter, vide letter dated May 2, 2012, the Noticee sought permission for filing a settlement application in this matter. Vide letter dated October 4, 2012, the Noticee was informed that it may file a settlement application in accordance with SEBI Circular No. Cir/EFD/1/2012 dated May 25, 2012 read with Circular No. EFD/ED/Cir.-01/2007 dated April 20, 2007. The Noticee vide letter dated October 8, 2012, once again sought permission to submit a proposal of settlement as per the SEBI Circulars. However, as on date, no fresh settlement application has been filed by the Noticee in the matter. 11. With reference to the post-enquiry show cause notice dated April 27, 2012, an opportunity of personal hearing was granted to the Noticee on August 3, 2016, the notice whereof was sent to the Noticee vide letter dated July 11, 2016. The Noticee vide letter dated July 18, 2016, responded that it was not in a position to attend the said hearing and it had no further statement to make or correspondence to provide in this matter.

Considering the above, I proceed to conclude these proceedings on the basis of material available on record. 12. In this case, the Noticee has been charged with the violations of the provisions of sections 12(1) of the SEBI Act, regulation 11(1) of the Broker Regulations and regulation 7 read with clause A(1) and (2) of the Code of Conduct for Stock Brokers specified under schedule II of Broker Regulations. 13. I find that in response to the post-enquiry show cause notice, the Noticee has not furnished any defense by filing reply or written or oral submissions. While responding to the SCN issued by the DA, the Noticee had submitted its reply and explanations in response to the alleged violations. The DA, however, did not find the reply of the Noticee to be satisfactory and found the Noticee to be guilty of the violation of the aforementioned provisions of SEBI Act and the Broker Regulations. 14. As noted above, the Noticee was also provided with opportunities to file its written reply or present oral explanations/justifications in response to the findings made by the DA in his enquiry report.

However, the Noticee has chosen not to dispute any of the findings contained in the DA’s report and has submitted that it has no further statement or correspondence to provide in the matter. In view of the above, I do not find any reason to disagree with the findings of the DA and find that the Noticee’s acts and omissions discussed hereinabove were in violation of the provisions of sections 12(1) of the SEBI Act, regulation 11(1) of the Broker Regulations and regulation 7 read with clause A(1) and (2) of the Code of Conduct for Stock Brokers specified under schedule II of Broker Regulations. 15. I note that the prohibited activities and types of contraventions as found by the DA in this matter definitely have a potential to disturb the market integrity and disturb the fair, equitable and efficient functioning of securities market. I am also satisfied that it is necessary to secure the proper management of the activity of the Noticee. In these facts of and circumstances, I do not find any reason to deviate from the findings and recommendations of the DA Hence, I am of the view that suspension of certificate of registration of GKK Capital Market Private Limited for a period of one week, as recommended by the DA, would be commensurate with the violations found hereinabove.

16. I, therefore, in exercise of powers conferred upon me by virtue of section 19 read with section 12(3) of the SEBI Act and regulation 28(2) of the Intermediaries Regulations hereby suspend the certificate of registration of the Noticee i.e. GKK Capital Market Private Limited for a period of one week. 17. This order shall come into force immediately on expiry of twenty one days from the date of this order. 18. A copy of this order shall be served upon the Noticee and Calcutta Stock Exchange in accordance with regulation 30(3) of the Intermediaries Regulations.

Sd/-

Date: October 27th, 2016 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA