Order in respect of Mr. Bhadresh Sanghvi (Trade name: M/s Arihant Investment)

WTM/PS/35/MIRSD-5/FEB/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 IN RESPECT OF MR. BHADRESH SANGHVI (Trade name: M/s Arihant Investment), Sub-Broker affiliated to Anand Rathi Share and Stock Brokers Limited, Member, National Stock Exchange [SEBI Registration No. INS 235801011] Date of hearing: December 27, 2012 Appearances For Noticee: Mr. Bhadresh Sanghvi For SEBI: Ms. Anitha Anoop, Deputy Legal Adviser Mr. Pradeep Kumar, Assistant Legal Adviser Mr. Ashish Kumar, Assistant General Manager

1. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') received a complaint regarding illegal trading activities being carried out by one Mr. Bhadresh Sanghvi (hereinafter referred to as 'Bhadresh'), a registered sub-broker operating under the trade name of M/s Arihant Investment (SEBI Registration No. INS 235801011), affiliated to Anand Rathi Share and Stock Brokers Limited, Member, National Stock Exchange (hereinafter referred to as 'NSE'). SEBI asked NSE and Bombay Stock Exchange (hereinafter referred to as 'BSE') to conduct a special purpose joint inspection of Arihant Investment. During the inspection conducted on December 20, 2009 it was prima facie revealed that Bhadresh had indulged in illegal trading activities and irregularities that were not in the interest of the investors.

2. Pursuant to the findings of the inspection, SEBI, vide an ad interim order dated December 21, 2009 (hereinafter referred to as 'interim order') prohibited Bhadresh from buying, selling or dealing in the securities market in any manner whatsoever or accessing the securities market, directly or indirectly, either for himself or for his clients. The interim order further directed that the depositories, National Securities Depository Limited and Central Depository Services (India) Limited, shall not effect any debit instruction in the demat accounts of Bhadresh or in the demat accounts of any beneficial owner on the authority of power of attorney obtained by Bhadresh. Subsequently, SEBI initiated inspection of the books of accounts and other records of Bhadresh. In the meantime, the interim directions issued against Bhadresh were confirmed vide order dated August 30, 2012 (hereinafter referred to as 'confirmatory order'), subject to the outcome of the inspection ordered by SEBI.

3. SEBI on completion of the inspection, initiated proceedings in terms of the SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as 'Intermediaries Regulations'), by appointing a Designated Authority under Regulation 24 of the Intermediaries Regulations vide order dated March 30, 2011. The Designated Authority enquired into the alleged violation of the provisions of the Securities Contracts (Regulation) Act, 1956, the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as 'Broker Regulations'), the SEBI Circulars and the circulars/ notices of the Stock Exchanges. The Designated Authority submitted his Report dated June 29, 2011 under the Intermediaries Regulations, recommending thereby a penalty of cancellation of the Certificate of Registration of Bhadresh with respect to his sub-brokership for the violations of Section 19 of the Securities Contract (Regulation) Act, 1956, Regulations 12A(1)(a) and 21 read with Regulation 16 of Broker Regulations and Clauses A(1), B(2), D(1) and D(2) of the Code of Conduct prescribed for sub-brokers specified under Schedule II under Regulation 15 of the Brokers Regulations, SEBI Circular bearing number MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, SEBI Circular bearing number SMD(B)/104/22775/93 dated October 29, 1993, SEBI Circular bearing number SEBI/MIRSD/Cir-06/2004 dated January 13, 2004, NSE Circular bearing no. NSE/MEM/1591 dated April 20, 2000, Regulation 2.1.12(a) of the Capital Market Segment of NSE and BSE Notice no. 20050808-26 dated August 08, 2005.

4. Subsequently, a Show Cause Notice (hereinafter referred to as 'SCN') dated December 21, 2011 was issued to Bhadresh, to show cause as to why action, as recommended by the Designated Authority or as considered appropriate should not be taken against him. Bhadresh was advised to reply to the SCN together with the documents that he may choose to rely upon in support of his reply within twenty one days from the receipt thereof. It was also informed that in case of failure, it would be presumed that he had no reply to submit and the matter would be proceeded with, on the basis of the evidence available on record. A copy of the Enquiry Report was also forwarded to Bhadresh along with the SCN.

5. The above said SCN was returned undelivered. Thereafter, with the assistance of Anand Rathi Share and Stock Brokers Limited, the affiliated broker of Bhadresh, the SCN was delivered. However, no reply to the SCN was received by SEBI despite due intimation. Before proceeding further, an opportunity of personal hearing was granted to Bhadresh on August 09, 2012. The date of hearing was later postponed to November 09, 2012 and the same was communicated to Bhadresh vide SEBI letter dated October 07, 2012 along with an advice to reply to the SCN. Bhadresh replied to this letter of SEBI vide his letter dated October 25, 2012 and submitted that he had not received the SCN. SEBI replied to this vide its letter dated October 30, 2012 and again forwarded a copy of the SCN (alongwith the copy of Enquiry Report) to Bhadresh with an advice to reply to the SCN before the date of hearing. On the date fixed for the personal hearing i.e. November 09, 2012, Bhadresh did not appear for the personal hearing nor gave prior intimation to SEBI regarding his absence on the date of hearing. Subsequently, a reply dated December 17, 2012 was received. Thereafter, Bhadresh attended the personal hearing on December 27, 2012 and made his submissions.

6. The submissions of the noticee in brief are: - The documents found in his office by the officials were not his and these may be of walk in clients sitting in his office for trading in the market through his terminal. The officials considered these documents as his which was a hand diary of one of the customers for the purpose of calculation of the profit or loss of his own transactions. - His demat account has already been blocked and he is in cash crunch.

7. Bhadresh has submitted in his reply that his demat account has been blocked. In this regard, I observe that the demat account of Bhadresh has been frozen on account of the interim/ confirmatory orders passed against him by SEBI. I observe from the interim/ confirmatory orders that Bhadresh was prima facie not co operating with the inspection team, executing trades outside the stock exchange mechanism, issuing contract notes in a format different from that prescribed by the exchanges and without signature of the trading member/ authorized signatory, displaying misleading sign board, not displaying the SEBI registration certificate, operating the Intermediate Message Layer (hereinafter referred to as 'IML') terminal at BSE without required certification and dealing with another broker for his own trades without prior permission of the exchange. I have considered the report of the Designated Authority, the SCN issued to Bhadresh, reply received and the material available on record. The relevant provisions of the Broker Regulations have been reproduced below:

Broker Regulations "Obligations of stock-broker on inspection by the Board. 21. (1) It shall be the duty of every director, proprietor, partner, officer and employee of the stock-broker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to the transactions in securities market within such time as the said officer may require. (2) The stock-broker shall allow the inspecting authority to have reasonable access to the premises occupied by such stock-broker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the stock-broker or any other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant. (3) The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any member, director, partner, proprietor and employee of the stock-broker. (4) It shall be the duty of every director, proprietor, partner, officer and employee of the stock broker to give to the inspecting authority all assistance in connection"

"Code of Conduct for Sub-brokers A. General. (1) Integrity: A sub-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business. (2) ...... B. Duty to the Investor. (1) .... (2) A sub-broker shall render necessary assistance to his client in obtaining the contract note from the stock-broker. (3) .... D. Sub-Brokers vis-a-vis Regulatory Authorities (1) General Conduct: A sub-broker shall not indulge in dishonourable, disgraceful or disorderly or improper conduct on the stock exchange nor shall he wilfully obstruct the business of the stock exchange. He shall comply with the rules, bye-laws and regulations of the stock exchange. (2) Failure to give Information: A sub-broker shall not neglect or fail or refuse to submit to the Board or the stock exchange with which he is registered, such books, special returns, correspondence, documents, and papers or any part thereof as may be required. (3) .... ...." Securities Contract (Regulation) Act, 1956 "Stock exchanges other than recognised stock exchanges prohibited. 19. (1) No person shall, except with the permission of the Central Government, organise or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities. ...."

8. From the available records, I observe that Bhadresh has failed to produce relevant records, documents, books of accounts, etc. as called for by the inspecting officials. I note that during inspection of 'Arihant Investment', officials of NSE and BSE were not allowed to scrutinize the computers used for trading and the documents/ files. The drawers at Arihant Investment were neither allowed to be opened nor any loose papers/ note books/ diaries were allowed to be inspected. Further, Bhadresh had also not identified the entries/ names which repeatedly appeared in the 'kacha' records (hand-written entries made by Bhadresh in notebook/ paper which were recovered during the inspection). Bhadresh in his replies has submitted that he has given full co-operation wherever required and have not done anything wrong. However, the available records show the contrary, as Bhadresh has neither commented nor given any explanation to the findings of the inspection.

Taking in view of the above discussion, I agree with the findings of the Designated Authority and find Bhadresh guilty of violating the provisions of Regulation 21 read with Regulation 16 of the Broker Regulations and Clause D(2) of the Code of Conduct prescribed for sub-brokers as specified under Schedule II under Regulation 15 of the Brokers Regulations.

9. It is also one of the findings of the Designated Authority that, Bhadresh was carrying out trades outside the exchange trading mechanism. In this regard, I observe that the report of the Designated Authority refers to certain sheets of paper maintained by Bhadresh to record the transactions which were not being executed through the trading mechanism of the exchanges. It has been found that most of the records found in the 'kacha' paper did not match with the trade records of the exchanges. I also observe from the report of the Designated Authority that trades which were being executed through Anand Rathi Financial Services Limited had been recorded in a 'kacha' paper in the name of one person, while the trades executed on the Exchange Trading Mechanism were in the name of some other person/ different client codes.

I note that the list of entries constituting major portion of the 'kacha' record for which no corresponding trades were found on the exchange and instances of execution of trades by using different client codes have been provided to Bhadresh. However, Bhadresh has not commented on the findings of the inspection. As already noted above, Bhadresh has also not identified the entries/ names which appeared continuously in the 'kacha' records. In his reply to the SCN, Bhadresh has submitted that the documents found by the inspecting officials in his office were not his and these may be of walk in clients sitting in his office. Further, he has also submitted that the inspecting officials had considered these documents as his, which was a hand diary of one of the customers for the purpose of calculation of profit/ loss of his own transactions. I note that Bhadresh has failed to provide the name of such customer nor has he shown that the documents/ hand diary, etc. were that of his clients. In the absence of any such details, it is difficult to accept the submission of Bhadresh.

Considering the facts and circumstances of the case, I find no reason to differ with the findings of the Designated Authority. Therefore, I find the noticee guilty of violating the provisions of Section 19 of the Securities Contracts (Regulation) Act, 1956.

10. The Designated Authority in its report has found that though Bhadresh, as a sub-broker, was not eligible to issue contract notes, he had issued such contract notes and that the same were neither in the format prescribed by SEBI nor did they bear any signatures. These activities of Bhadresh are in violation of the SEBI Circulars bearing numbers MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004 and SMD(B)/104/22775/93 dated October 29, 1993 read with Clauses

B(2) and D(1) of the Code of Conduct for sub brokers as specified in Schedule II under Regulation 15 of the Brokers Regulations.

11. It has also been found that Bhadresh had displayed a sign board at his office which was misleading and that he did not put up the registration certificate of his sub-brokership at the office. The Designated Authority has given a finding that Bhadresh, being the registered sub-broker of Anand Rathi Share and Stock Brokers Limited at NSE, traded for himself on the said exchange through another broker without the prior permission of NSE. Further, Bhadresh was found operating the BSE IML terminal. From the available records, it has been observed that Bhadresh was a sub-broker of Anand Rathi Share and Stock Brokers Limited only at NSE. He was neither a sub-broker nor an approved remisier at BSE and therefore he was not authorized to operate any BSE terminal. Such activities of Bhadresh are clearly in violation of the SEBI Circulars bearing number SEBI Circular no. SEBI/MIRSD/Cir-06/2004 dated January 13, 2004 read with Clauses A(1) and D(1) of the Code of Conduct prescribed for sub-brokers as specified under Schedule II under Regulation 15 of the Brokers Regulations, Regulation 12A(1)(a) of the Broker Regulations read with NSE Circular NSE/MEM/1591 dated April 20, 2000, BSE Notice no. 20070522-25 dated May 22, 2007 and Regulation 2.1.12(a) of Capital Market Segment of NSE.

12. The reply of Bhadresh is silent on these counts. As the noticee has chosen not the reply on these charges, it is presumed that he has admitted the wrongdoings. From the above discussed details about the activities of Bhadresh, I find that he has failed to perform its duties as specified in the code of conduct for sub-brokers in the Broker Regulations and violated the provisions of Securities Contracts (Regulation) Act, 1956, Broker Regulations, SEBI Circulars bearing numbers MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, SMD(B)/104/22775/93 dated October 29, 1993, SEBI/MIRSD/Cir-06/2004 dated January 13, 2004, NSE Circular no. NSE/MEM/1591 dated April 20, 2000, Regulation 2.1.12(a) of Capital Market Segment of NSE and BSE Notices no. 20070522-25 dated May 22, 2007 and 20071024-28 dated October 24, 2007. Having considered the above, I agree with the recommendation of the Designated Authority.

13. I, therefore, in exercise of the powers conferred upon me in terms of Section 19 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, hereby cancel the certificate of registration of the noticee namely Mr. Bhadresh Sanghvi (Trade name: M/s Arihant Investment) bearing SEBI Registration No. INS 235801011 [PAN: AXDPS 8704K].

14. This order shall come into force on expiry of twenty one days from the date of this order.

Date: February 28th, 2013 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOAD OF INDIA