Order in respect of Kirtikumar Kantilal Shah (now known as V & U Securities Pvt. Ltd.) in the matter of dealing in shares of Divine Entertainment Ltd.

UNDER REGULATION 28(2) READ WITH REGULATION 38(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ( INTERMEDIARIES) REGULATIONS, 2008 In respect of Kirtikumar Kantilal Shah (now known as V & U Securities Pvt. Ltd.) in the matter of dealing in shares of Divine Entertainment Ltd.

Appearances:

For M/s. Kirtikumar Kantilal Shah: 1. Mr. Mayukh Pandya, Authorised Representative

For SEBI: 1. Mr. Santosh Kumar Shukla, Joint Legal Adviser 2. Mr. B Rajendran, General Manager 3. Mr. Dipak Lingot, Assistant Legal Adviser, and 4. Ms. P. L. Leena Shree, Assistant Legal Adviser 1. The Securities and Exchange Board of India ('SEBI') conducted investigations, for the period November 01, 1999 to March 30, 2000 ('investigation period'), into the irregular trading in the scrip of M/s. Denim Enterprises Ltd. [now known as M/s. Divine Entertainment Ltd. (hereinafter referred to as 'DEL')]. During the investigation period price of the scrip of DEL opened at ` 7 on November 1, 1999 and reached a high of ` 348.20 on March 08, 2000. Kirtikumar Kantilal Shah [now known as V & U Securities Pvt. Ltd. (hereinafter referred to as 'the noticee'), a stock broker having SEBI Registration No. (INB021105730), and a member of the Ahmadabad Stock Exchange Limited (ASE) had dealt in the scrip of DEL during the investigation period. 2. Pursuant to the investigations, proceedings under regulation 25(1) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) were initiated against the noticee to enquire into the alleged violations of clauses A(1), A(2) and A(3) of the code of conduct specified in schedule II read with regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 ('Stock Brokers Regulations') and rule 8(3)(f) of the Securities Contracts (Regulations) Rules, 1957 (SCRR). After completing the proceedings, the Designated Authority (DA) submitted the Report in terms of regulation 27 and 38(2) of the Intermediaries Regulations. In the Report the DA inter alia found that:- i. The proprietorship concern of Mr. Kirtikumar Kantilal Shah (a stock broker / member of ASE) was converted into a body corporate under the name M/s V&U Securities Pvt. Ltd. in the year 2001. ii. The clients of noticee; viz. Mr. Vaibhav J Shah, Mr. Himanshu J Shah, Mr. Hulaschand Dugar and M/s. V & U Caplease are not only related/known to each other but are also related/known to the promoter-directors of DEL. iii. During the investigation period the noticee had traded in the shares of DEL as under:-

Name of the stock broker / Quantity bought Quantity sold client M/s M. P. Vora (stock broker) 1,00,500 shares 1,46,200 shares Active Finstock Pvt. Ltd (for M/s 49,300 shares 81,100 shares V&U Investments) M/s Khandwala (client) 8,300 shares 89,000 shares Proprietary trades of the noticee 7900 shares. 7900 shares.

iv. The noticee had traded for its clients through a BSE broker, viz; M/s M. P. Vora Shares & Securities Pvt. Ltd. Further, for its client viz; M/s. V & U Investments, the noticee also traded through another BSE broker, viz; Active Finstock Pvt. Ltd. While the noticee had made arrangement for BSE On-line Trading (BOLT) as per the BSE circular number 2967/99 for its trading through M/s M. P. Vora Shares & Securities Pvt. Ltd.; it did not have any formal and valid arrangement for its trades through M/s Active Finstock Pvt. Ltd. Thus, while dealing for its client, M/s. V & U Investments, the noticee had acted as an unregistered sub-broker of Active Finstock Pvt. Ltd. v. The KYC forms obtained by the for its certain clients were not complete in all respects. Certain important information such as annual income in last three years, PAN / GIR, market value of portfolio, particulars of registration with other brokers, date of KYC form, etc. had been left blank in those KYC forms. Further, in most of the KYC forms, the column relating to ‘particulars of the introducer’ was also missing. The noticee had not furnished copies of client registration application forms/ broker–client agreements of its five clients (out of list of its top ten clients), viz; M/s V&U Investments, M/s Yash Engineering Metal Industries, M/s

Khandwala, M/s C. Cube Investments and Mr. Dhiren Shah. Thus, it had not exercised due care and diligence in ascertaining the antecedents of its clients. vi. The noticee had not furnished a copy of the delivery register to investigating authority in support of its claim that the shares of DEL were delivered by it in physical form rendering it impossible to verify whether the sellers of the shares were the actual holders of those shares or not. vii. The noticee had not taken proper margins from certain clients and had used its own funds for the purchases made on their behalf. The noticee was not making prompt payments of sales proceeds to its clients and was retaining the same in its own account for a certain period. Instances of such practice are as below: a) In case of M/s Yash Engineering Metal Industries, sales proceeds of ` 5,96,401/- realized by the noticee on February 27, 2000 were paid to the client on March 24, 2000. b) Sales proceeds of ` 4,58,679/- received by the noticee on February 13, 2000 were paid to the client Mr. Hulaschand Dugar on March 15, 2000. c) In case of M/s C. Cube Investments, sale proceeds of `3,46,290 realized on January 23, 2000 were paid to the client on March 14, 2000. d) Mr. Vaibhav J. Shah sold 3000 shares the proceeds of which amounting to ` 5,20,198 were received by the noticee on February 19, 2000 but had not been paid to the client till March 31, 2000. e) Sales proceeds of ` 15,28,176 received by the noticee on February 19, 2000 was paid to Mr. Himanshu J. Shah on March 28, 2000. viii.

The noticee was having financing arrangements with its some of its clients. For example – a) The noticee had paid a sum of ` 3,00,000/- to Mr. Himanshu J. Shah on January 13, 2000 whereas the credit balance in his account was only ` 627.70. b) The credit balance in the account of M/s V&U Investments had been quite substantial during the period under investigation, ranging from `4.76 lakh to `80.88 lakh. There was a credit balance of 4,76,645 in the account M/s V&U Investments on November 06, 1999. The noticee had received a cheque for 14 lakhs from the said client on November 11, 1999 even though the client had not made any major purchases from November, 1999 to early February, 2000. These funds were used by the noticee for carrying out its business operations. In view of the above, it was observed that there was a financing arrangement between the noticee. 3. In view of the above, the DA has found that the noticee had violated clauses A (1), A (2) and A (3) of the code of conduct as laid down in schedule II under regulation 7 of Stock Brokers Regulation and Rule 8 (3) (f) of the SCRR.

The DA has recommended that the certificate of registration of the noticee may be suspended for a period of one week.

4. After considering the Report of the DA, a show cause notice (SCN) dated April 06, 2011, was issued to the noticee under regulation 28(1) of the Intermediaries Regulations calling upon it to show cause as to why the action as recommended by DA should not be taken against it or higher penalty should not be imposed on it as deemed fit by the Competent Authority. Even after lapse of considerable time, the noticee did not file its reply to the SCN. An opportunity of personal hearing was granted to the noticee on December 20, 2012. The noticee vide its letter dated December 06, 2012 requested for a copy of the SCN and also requested for a fresh date of personal hearing in the matter which were provided to it. Despite receipt of the SCN twice, the noticee failed to file its reply. Shri Mayukh Pandya, authorized representative of the noticee appeared for personal hearing on February 21, 2013 and filed the reply to the SCN and undertook to submit certain documents in support of his submissions i.e. a copy of Memorandum of Understanding (MoU) between ASE and BSE in respect of usage of BOLT, a translated English copy of FIR with regard to breaking of fire in its premises.

Vide letters dated March 05, 2013, and March 18, 2013 the noticee had filed a copy of the MoU between ASE and BSE, and English version of FIR dated July 09,2008 filed with Naranpura police station, Ahmadabad City. The noticee has, inter alia, made the following submissions:- i. All the allegations are denied by the noticee. The noticee has submitted that it was not aware that certain clients were related / known to each other and also to the promoter - directors of DEL, as alleged in the SCN and it has nothing to do with the price movement of the scrip as stated in the SCN. The noticee was neither directly nor indirectly involved in the price movement of the scrip. There is no charge in the SCN against the noticee in this regard. ii. As per MoU dated June 26, 1997 between ASE and BSE, the BSE's BOLT system was extended to the members of ASE. The noticee had traded through the BSE broker under the said arrangement and it did not act as an unregistered sub -broker as alleged. iii. The allegations regarding incomplete KYC forms are incorrect. As per the noticee's information and knowledge the details submitted before the relevant authority was complete in all respect.

Further, fire took place at the go-down of the company on July 09, 2008. The noticee had furnished a copy of the FIR filed by it in that regard to the investigating authority. Therefore, the allegation of “not exercising due care and diligence" in this regard is denied as the noticee has fully cooperated and supported the investigating authority and also furnished information him at the relevant time. iv. The noticee has submitted that it has collected proper margins from its clients and it has never used its own funds for the purchases of alleged scrip and/or any other scrip on behalf of its clients. As per the Rules, Regulations and Bye Laws of the relevant exchange and authority it has collected the full amount for the purchases made on behalf of its clients. v. The noticee denied that it had financing arrangement with any of its clients.

vi. The noticee has never indulged in manipulative, fraudulent transactions in its own account or on behalf of any of its clients and has made no personal gain from the transactions done in the alleged scrip. vii. The noticee has not violated clauses A (1), A (2) and A (3) of Code of Conduct as laid down in schedule II under Regulation 7 of the Stock Broker Regulation. 5. I have considered the Report, the SCN, submissions made by the noticee and all other relevant material available on record. I note that the charges against the noticee in the present matter is that it had violated the provisions of clauses A(1)(2) and (3) of the Code of Conduct specified in Schedule II read with regulation 7 of the Stock Brokers Regulations and Rule 8(3)(f) of the SCRR. The basis of the charge against the noticee as per the Report of the DA are as follows– i. the noticee had acted as unregistered sub – broker of Active Finstock Pvt. Ltd. ii. the KYC forms collected by the noticee for its clients were not complete in various respect. iii. the noticee also failed to submit copies of delivery register and broker – client agreement to investigating authority when demanded. iv. the noticee did not collect proper margins from its clients. v. the noticee had engaged in financing transactions with some of its clients.

6. There is no dispute as to fact that the noticee, as ASE stock broker, had traded for its client M/s. V & U Investments through Active Finstock Pvt. Ltd, a BSE broker and it was not a registered sub-broker of Active Finstock Pvt. Ltd. The noticee has submitted that it had traded through Active Finstock Pvt. Ltd. under the arrangement available by virtue of MoU dated June 26, 1997 between ASE and BSE. I have perused the copy of the said MoU and note that it provides for the arrangement between ASE and BSE to extend the BSE's BOLT to the brokers of ASE and ASE's ACTS to the members of BSE. As per this MoU members of BSE can provide trading terminal of BOLT to the members of ASE and vice versa. The MoU also stipulates that the members will require No Objection Certificate (NOC) from the respective stock exchange for establishing terminal of other stock exchange. From the copy of the NOC dated July 24, 2008, I note that the noticee was permitted by ASE to have BOLT terminal of a BSE broker M. P. Vora Share and Securities Pvt. Ltd. and not of Active Finstock Pvt. Ltd. I, therefore, find that the documents submitted by the noticee do not substantiate its claim that it had traded through Active Finstock Pvt. Ltd. under a formal arrangement between ASE and BSE.

In this regard, I note that vide SEBI circular dated January 16, 1998, it has been clarified that members of one stock exchange executing transactions of its clients through members of other stock exchanges are to be treated as sub-brokers and they cannot deal in securities in that manner unless they hold a certificate of registration as sub-broker under section 12(1) of the SEBI Act. I note that section 12(1) of the SEBI Act provides that no sub-broker shall buy, sell and deal in securities without a certificate of registration from the Board.

Regulation 11(1) of the Stock Brokers Regulation also mandates that no sub-broker shall act as such unless he holds a certificate granted by the Board. I find that noticee had traded in the shares of DEL for its client M/s. V & U Investments as an unregistered sub-broker on BSE through Active Finstock Pvt. Ltd. a BSE broker. 7. I note that the KYC forms obtained by the noticee from its clients clearly show that the KYC forms were incomplete and several vital and important information such as annual income in last three years, PAN / GIR, market value of portfolio, particulars of registration with other brokers, particulars of the introducer, date of the KYC forms, etc. were not filled in the said KYCs forms. These details are crucial for establishing the identity of the clients and beneficial ownership. In order to discharge its obligations of client due diligence, the noticee must have obtained those details in the KYC forms of its clients. I, therefore, find that by not obtaining those details in the KYC forms, the noticee has failed to exercise due care and diligence as found by the DA.

8. The DA has further found that during the investigation period the noticee had traded for various clients in the scrip of DEL. However, it had failed to furnish copies of client registration forms of five out of its top ten clients. The DA has further found that in compliance of its delivery obligations of its clients, the noticee had delivered shares in physical mode. However, it did not provide copies of the delivery register which could enable the verification as to whether the sellers of the shares where the actual holders thereof, or not. I note that the noticee has claimed that it had cooperated with the investigating authority and had furnished all the information to him at the relevant time without substantiating its claim by any evidence. It is admitted position that the noticee had not executed the broker-client agreements with its clients; hence it did not produce the copies thereof to the investigating authority. In view of the same, I find that the noticee has not furnished the relevant documents which could establish the client identity and the beneficial owners of the clients.

In my view, the noticee being a stock broker should have obtained and/or maintained the client registration application forms, broker-client agreements and the delivery register and it was mandatory for him to produce the same when demanded by the investigating authority. In my view, these documents are also vital for the purpose of identification of the clients and for ascertaining their rights and obligations. 9. I note that relying upon a FIR dated July 09, 2008 the noticee has claimed that its files containing KYC documents that were stored in its godown at "E/1, Meghalaya Apartment, Naranpura, Ahmedabad City" were burnt due to fire that broke in that premises on July 09, 2008. The noticee has also claimed that a copy of the FIR was furnished to the investigating authority. I note that the relevant documents were supposed to be executed by the noticee during the year 1999-2000 and if executed they could be produced by it much before the fire broke in its go-down on July 09, 2008 as claimed. Thus, the incident of subsequent fire, if any, cannot help the noticee to support its claim.

Every stock broker is obligated to execute these documents and also to maintain them. Had the noticee executed those documents, they must have been in possession of the noticee at the time when investigating authority demanded it and should have been produced before the investigating authority. However, the noticee had failed to produce them before the investigating authority. In these facts and circumstances, it can be safely presumed that the noticee either did not execute those documents or if it has executed them it deliberately evaded production thereof before the investigating authority. The conduct of the noticee, in my view, is unbecoming of a registered intermediary. I, therefore, agree with the findings of the DA. 10. I note that the noticee has merely stated that it had collected proper margins and had never used its own funds for the purchases made by its clients without substantiating its claim. On perusal of ledger accounts of its clients in the books of the noticee, it is noted that the noticee had not collected proper margins from its client viz. M/s Khandwala. From the material on record, I find that pay-in obligations were initially met by the noticee from its own funds on behalf of its client, M/s Khandwala and the money was received by the noticee from M/s Khandwala after a gap of over one month.

I, therefore, agree with the findings of DA that the noticee had not collected proper margins from its client. 11. Further, the noticee has merely denied the allegation that it had a financing arrangement with its clients. The noticee has not filed any evidence in support of its submissions in this regard. I note that in the Report, the DA has analyzed the ledger account of some the clients of the noticee and has cited examples where the noticee had received high amount cheques from its clients even when the clients had not made any major purchases. These funds collected by the noticee were used by it for carrying out its business operations. I, therefore, agree with the findings of the DA that the noticee had a financing arrangement with it clients thereby had violated the provisions of rule 8(3) (f) of the SCRR that prohibits members of a stock exchange to engage in such fund based activities. 12. The noticee being a registered intermediary is expected to be diligent and use required skill and care while acting as a stock broker, in which as found by the DA, the noticee has failed and I find no reason or material to differ with findings of the DA.

I, therefore, find the noticee guilty of violations as found in the Report that it has failed to maintain high standard of integrity, promptitude and fairness in the conduct of its business and has also failed to exercise due care, skill and diligence and has, thus, violated clause A (1), (2) and A (3) of Code of Conduct for stock brokers specified under Schedule II read with regulation 7 of the Stock Brokers Regulations. The noticee has also contravened the provisions of rule 8(3) (f) of the Securities Contracts (Regulations) Rules, 1957 for the reasons stated above.

13. In the facts and circumstances of this case, I am satisfied that it is necessary to secure the proper management of the noticee. Considering the interest of the securities market, I am in agreement with the recommendation of the DA that the certificate of registration of the noticee be suspended for a period of seven days. 14. I, therefore, in exercise of the power conferred upon me by virtue of section 19 read with section 12(3) of the Securities and Exchange Board of India Act, 1992, and regulations 28 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of the noticee, V & U Securities Pvt. Ltd (earlier known as Kirtikumar Kantilal Shah) having SEBI Registration No. (INB021105730), and a member of the Ahmadabad Stock Exchange Limited (ASE) for a period of seven days. 15. A copy of this order shall be served upon the noticee and to the Ahmedabad Stock Exchange, in accordance with regulation 30 of the SEBI (Intermediaries) Regulations, 2008 for necessary action. 16. This order shall come into force immediately on expiry of twenty one days from the date of this order.

RAJEEV KUMAR AGARWAL DATE: August 20th, 2013 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA