Order in respect of Motilal Oswal Securities Limited in the matter -Pyramid Saimira Theatre Limited

WTM/SR/SEBI/EFD/195/12/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER Under Section 12(3) of SEBI Act and Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 in the matter of the stock broker Motilal Oswal Securities Limited [SEBI Registration No. for BSE - INB011041257 and for NSE - INB231041238] PAN: AAACD3654Q in the matter of Pyramid Saimira Theatre Limited.

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") conducted an investigation into the buying, selling and dealing in the shares of Pyramid Saimira Theatre Limited (hereinafter referred to as ‘PSTL/company’) and passed an Ad-interim Ex-parte Order dated April 23, 2009 restricting certain persons/ entities from buying, selling or dealing in the securities market. Subsequent to the issuance of the said order, it was observed that Motilal Oswal Securities Ltd. (hereinafter referred to as "Noticee") a Stock Broker registered with SEBI, executed trades on behalf of its clients viz. Mr. Shailesh Jayantilal Shah, Mr. Rajesh Jayantilal Shah and Ms. Ritaben Rohitkumar Shah who were restrained from buying, selling or dealing in securities market vide the aforesaid Order.

2. Subsequently, SEBI initiated proceedings under SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as 'Intermediaries Regulations') against the Noticee and appointed the Designated Authority ("DA") to enquire into the alleged violations of provisions of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as "Brokers Regulations").

3. The DA conducted the proceedings to enquire into the above mentioned allegations. The DA after completing the proceedings submitted the Enquiry Report dated March 30, 2012 ("the Report") in terms of Regulation 27 of Intermediaries Regulations.

4. DA concluded in the Report that the Noticee had violated Regulations 27 (xv) & 27(xvii) read with Regulations 26(xv) of Brokers Regulations and Clauses A(1), A(2) and A(5) of Code of Conduct for Brokers as specified in Schedule II under Regulation 7 of Brokers Regulations. The DA also recommended that the Certificate of Registration of the Noticee may be suspended for a period of seven (7) days.

5. After considering the report, a Show Cause Notice dated April 17, 2012 ("SCN") under Regulation 28 of Intermediaries Regulations was issued to the Noticee calling upon it to show cause as to why the appropriate penalty including the penalty as recommended by the DA should not be imposed upon it. A copy of the Report was also forwarded to the Noticee along with the said SCN. The Noticee vide letter dated June 14, 2012 replied to the said SCN and inter-alia submitted as under : a. "We deny that we have violated any provision of law as alleged in SCN and Report. There is nothing in the SCN or Report that require regulatory intervention in this regard. The Regulations are inapplicable and cannot be pressed into service against the Noticee in present case. b. Clients in question had been dealing on regular basis through it until April 23, 2009 when SEBI restrained them from dealing in securities. The clients' open positions were squared off. In fact, now SEBI has itself become cognizant of the need to enable squaring up of pending positions. This is precisely what happened in the instant case. We have ourselves had a direct experience of such policy of SEBI as in the case of and order dated December 31, 2009, passed by SEBI, where various brokers including the Noticee were permitted to square up the trades of the entities being debarred. c. Thus the trading accounts of the clients were temporarily active at the dealing desk solely and exclusively for the purpose of closing out of outstanding positions. The dealer executed the sale transactions of outstanding positions on May 07, 2009 for the securities of the clients bought on April 22, 2009 and April 23, 2009 which were sold and the position was squared up. Hence, there was only a sale transaction and no fresh purchase in the said accounts. d. The trading accounts of the clients were deactivated by the Noticee after the sale transaction and the proceeds of the sale transactions were held back by the Noticee by passing appropriate entries in the books of the clients and the payout was stopped by the Noticee. The clients did not benefit from the squaring up transactions. e. The closing out of the open positions of the clients as stated above was in line with the directions given by SEBI earlier, and consistent with directions being given by SEBI even now.

f. There was no malice in the trades executed for the clients and there was no collusion with the clients to disregard the directions given to the clients by SEBI. The trades executed and the brokerage earned was a meagre amount of Rs.3375/- which amounted to 0.028% of the total brokerage earned on May 07, 2009. We state that we have not dealt in the shares of PSTL on May 7, 2009 and the subject shares of the clients were sold from our pool account and not through the Depository Participant Account of the clients. g. It is pertinent to note that SEBI has in the past dealt with this very issue and in other identical cases have disposed off the proceedings against the stock broker without imposing any penalty on the stock broker. For instance in the matter of ICICI Securities Ltd (Order dated March 03, 2010) the Adjudicating Officer had not imposed any penalty on the broker as he opined that the case did not warrant imposition of penalty and accordingly the proceedings initiated against the broker were disposed off. h. Such precedents were submitted to the Designated Authority but had not been considered at all in the report other than merely quoting the details of the said cases. i. We have a good track record in compliance with regulatory requirements and there was no such instances of such lapses before or thereafter. We have necessary infrastructure/ process in place that enables us to identify the clients based on PAN who have been debarred by SEBI. The system further ensures that the trading account of such clients are de-activated, if client has trading account with the Noticee. j. In view of the submissions above, we humbly request you to drop the allegations against us and dispose of the SCN without any penalty".

6. The Noticee was thereafter granted an opportunity of personal hearing and advised to appear before me on November 21, 2013. However, the Noticee sought an adjournment and thereafter appeared before me on December 04, 2013. Mr. Somasekhar Sundaresan and Mr. Ravichandra S. Hegde from J. Sagar Associates alongwith Mr. Neeraj Agarwal and Mr. Ajay Menon on behalf of Noticee appeared on the said date and reiterated the earlier submissions. The Noticee was directed to confirm whether any prior action had been initiated by SEBI (completed or pending) or any punishment imposed till date in respect of any other case. In response, the Noticee vide letter dated December 05, 2013 submitted that "there has been no action taken by SEBI in the past in respect of its broking operations save and except two warnings issued by SEBI in relation to some trades that were executed on behalf of its clients during the period 1999 to 2001 and 2002 in the scrip of Cyberspace Ltd and Amarraja Batteries Ltd. No other action had been taken by SEBI post issuance of present SCN for the alleged transaction in 2009".

Consideration of Issues and findings: 7. I have considered the SCN issued by SEBI and the Enquiry Report dated March 30, 2012, the replies filed by the Noticee and the submissions made by its authorized representative during the course of personal hearing before me. In the light of the same, I shall now proceed to deal with the charges alleged against the Noticee. As per the SCN, the Noticee had allegedly violated Clauses A(1), A(2) and A(5) of Code of Conduct for Brokers as specified in Schedule II under Regulation 7 of Brokers Regulations.

8. Before dealing with the aforesaid charges, the relevant legal provisions, the contravention of which have been alleged in this case may be reproduced hereunder for the purpose of reference : Regulation 7 of the Broker Regulations: Stock-Brokers to abide by Code of Conduct. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II. Relevant Clauses of the Code of Conduct- Schedule II Clause (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. Clause (2) Exercise Of Due Skill And Care: A stock-broker, shall act with due skill, care and diligence in the conduct of all his business. Clause (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.

9. It is noted that the Noticee had executed trades for its debarred clients viz. Mr. Shailesh Jayantilal Shah, Mr. Rajesh Jayantilal Shah and Ms. Ritaben Rohitkumar Shah who were restrained from buying, selling or dealing in the securities market vide SEBI's Ad-interim Ex-parte Order dated April 23, 2009. The Noticee executed trades for the said debarred clients in F & O segment on April 24, 27, 28 & 29, 2009 and in cash segment on May 07, 2009 after SEBI debarred the said clients from buying, selling or dealing in the securities market. It is observed from the contentions of the Noticee submitted to Investigation Department vide its letter dated May 22, 2009 that the Noticee was aware of SEBI's debarment Order dated April 23, 2009 and had taken note of the names of the persons mentioned in the said Order. It is admitted that due to inadvertent error at the dealer's end at its centralized dealing desk, securities of the clients which were bought on April 22 & 23, 2009 prior to the receipt of order received from SEBI and were lying with it in pool account were sold on April 24, 27, 28 & 29 and May 07, 2009 on an assumption that these were square off transactions. Upon knowing the facts, the Noticee immediately took corrective action and deactivated the clients' accounts from the centralized dealing desk. It is also submitted that all the open positions in the F & O segment of debarred clients got expired on the last trading day of April contract and no fresh trades were done after receipt of the said debarment order of SEBI.

10. The Noticee submitted that in the past SEBI had allowed square off transactions of clients involved in SEBI's debarment orders. In a similar instance, the Noticee sought and received prior permission from SEBI before squaring off the transactions of a client. In respect of this submission of the Noticee, it is pertinent to note that in the instant case, no prior permission was sought from SEBI for squaring off the open positions of its clients. Hence, the present case materially differs from the case cited by the Noticee. It is clear that the Noticee failed to exercise due skill, care and diligence with respect to the transactions in the present case and thus, violated Regulations 7 of Brokers Regulations read with Clause A(1), A(2) & A(5) of Code of Conduct for Stock Brokers as specified in Schedule II of Brokers Regulations.

11. I note that being a registered stock broking firm, having a diversified client base and a group net worth of ` 5.58 billion (as on March 31, 2012), the Noticee ought to have put in place adequate systems to avoid such mistakes. The Noticee is bound to abide by the Code of Conduct at all times and to act in a prompt, ethical, and professional manner and exercise at all times, due skill, care and diligence in the conduct of all their business dealings.

12. However, the following facts are also pertinent to mention:  It is noted that for the same lapses on the part of the Noticee, a monetary penalty of `75,000/- had already been imposed on the Noticee by the BSE.  It is also noted from the submissions of the Noticee that subsequent to this error, corrective steps were taken by the Noticee such as deactivating the trading accounts of the clients, withholding the proceeds of sale transactions, passing appropriate entries in the books of the clients, and stopping payout in respect of the said trades, etc.

13. Considering all the facts and circumstances as narrated above, I am of the view that the matter may be allowed to rest with a strong warning to the Noticee for executing trades on behalf of the clients who were debarred by the Ad-interim Ex-parte order dated April 23, 2009 passed by SEBI thereby violating Clause A(1), A(2) & A(5) of Code of Conduct for Stock Brokers as specified in Schedule II under Regulation 7 of Brokers Regulations.

14. I, therefore, in exercise of the powers conferred upon me by virtue of Section 19 of Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Intermediaries Regulations, hereby warn the Noticee, to be more careful and cautious in the conduct of its business and to adhere to and comply with all the statutory provisions while carrying out its activities in the securities market. Any future lapse on its part in complying with the said provisions shall invite stringent action.

Place: Mumbai S. RAMAN Date: December 07, 2015 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA