Order in the matter of BRH Wealth Kreators Limited ( Formerly known as BMA Wealth Creators Ltd)

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 THE MATTER OF –

Name of the Entity SEBI Registration No. PAN BRH WEALTH KREATORS LIMITED INZ000184733 AACCB5141L (FORMERLY KNOWN AS BMA WEALTH CREATORS LIMITED)

Background –

1. BRH Wealth Kreators Limited (CIN-U74999WB2004PLC100717), (“BWKL” / “Noticee”) is a Registered Stock Broker having membership of BSE Ltd (“BSE”) and National Stock Exchange of India Ltd. (“NSE”) (Earlier SEBI Registration Nos. INB/INF011233138 and INB/INF/INE230233132, Current SEBI Registration No. INZ000184733). The Noticee was incorporated on December 15, 2004 and was earlier known as BMA Wealth Creators Limited.

2. Securities and Exchange Board of India (“SEBI”) conducted inspection of the books and accounts of the Noticee from February 12, 2012 to February 22, 2012 to examine the irregularities / violations, if any, committed by the Noticee during Order in the matter of BRH Wealth Kreators Ltd.

the course of business for the period April 01, 2010 to February 11, 2012. The Inspection indicated violations of various provisions of SEBI Act, 1992, Securities Contracts (Regulations) Act, 1956 (“SCRA”), Securities Contracts (Regulation) Rules, 1957 (“SCRR”), SEBI (Stock Brokers) Regulations, 1992 (“Broker Regulations”) and various other circulars issued by SEBI and NSE. Accordingly, Enquiry Proceedings were initiated against the Noticee in terms of SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”).

3. The Designated Authority / Enquiry Officer (“DA”) issued a Show Cause Notice dated June 19, 2013 (“SCN1”) to the Noticee under Regulation 25(1) of the Intermediaries Regulations, inter-alia, alleging violations of Regulation 6A(e), 18B and 7 of Broker Regulations read with Clauses A(1), A(2), A(5), B(2), B(6) and D of Code of Conduct prescribed under Broker Regulations, Regulation 6 read with Regulation 9(e) of Broker Regulations and Rule 8(1)(f) and 8(3)(f) of SCRR and various circulars issued by SEBI. After considering the allegations in the SCN and the replies submitted by the Noticee, the DA submitted his Enquiry report on December 29, 2017 (“DA Report”), inter-alia, recommending that the Noticee, as a stock broker, be prohibited from registering fresh / new clients for a period of one month. Gist of major observations in the DA Report is given below:

a. Deficiencies in Know Your Client (“KYC”) forms b. Allotment of single email ID to multiple clients c. Delay in sending the KYCs to KYC Registering Authority (“KRA”) d. Execution of trades without uploading the client details e. Wrong / delayed intimations regarding Computer to Computer Link (CTCL) id and locations f. Deficiency in Order management-non-maintenance of order book g. Non-collection of margin from clients in derivative segment h. Client funding i. Non-settlement of running accounts j. Delayed transfer of corporate benefits k. Dealing with unregistered sub-brokers l. Non-compliance with provisions of the SEBI circular on Prevention of Money Laundering Act, 2002 (“PMLA”)

m. Deficiencies observed in system audit report n. Failure to redress investor complaints

4. A Post Enquiry Show-Cause Notice dated February 26, 2018 (“SCN2”) was issued to the Noticee, enclosing the copy of the DA Report and calling upon the Noticee to show cause as to why the action as recommended by the DA or any other penalty should not be imposed on it in terms of Regulations 28(1) and (2) of the Intermediaries Regulations.

Reply and Submissions

5. The noticee, vide letter dated April 12, 2018, submitted para wise replies against the findings of the DA. The Noticee was also given two opportunities for personal hearing, which were not availed by it. Submissions made by the Noticee in its reply dated April 12, 2018 are summarized below:

a. The Noticee had 2 lakh registered clients in capital market segment and executed over 70,000 trades on an average in a day and had an average turnover of Rs.1,100 crore per day.

b. The Noticee is also a Depository Participant (“DP”) of National Securities Depositories Ltd. (“NSDL”) and Central Depository Services Limited (“CDSL”) and provided DP services to 1.68 lakh clients.

c. The BMA Group provides direct employment to 1282 persons and the Noticee is a law abiding company having an absolutely clean track record.

d. Deficiencies noticed in KYC forms:

i. In compliance with SEBI circular No. CIR/MIRSD/16/2011, the Noticee had modified the Account opening Form (“AOF”). However, the old format was already in circulation and there was a delay in printing the new forms. However, accounts were activated only for those clients who had signed the new AOFs.

ii. With regard to 9 clients, the AOFs were processed without proper verification of the contents of the form and it happened inadvertently due to pure oversight and fresh KYC forms were obtained immediately after becoming aware of the alleged discrepancies.

iii. With regard to the observation on deficiencies observed in 25 KYCs, the said instances are negligible as compared to the size of the business and there were rare instances where corrective action was not taken.

iv. The Noticee has conducted regular training and assessment programs for its employees to prevent such recurrence in future.

v. DA has failed to accept the Noticee’s KYC acceptance policy in force, inter-alia, ensuring that complete information about the client is obtained and KYC documents are properly filled up.

vi. In view of the above, the Noticee has complied with the provisions of SEBI circular dated August 22,2011 read with Clause A(5) of Code of Conduct prescribed under Regulation 7 of Broker Regulations.

e. Allotment of single email ID to multiple clients:

i. Few clients did not have their own email IDs and email IDs of their associate / group person were uploaded in the system in the interest of and with the consent of the clients. Choice of email ID is purely that of the client and broker has to follow their instructions. Further, SEBI circular dated September 08, 2005 did not bar common email IDs.

ii. Digitally signed Electronic Contract Notes (“ECNs”) were sent only to those clients who had opted for the same. Only 2496 out of 46,922 email IDs were common.

iii. Post inspection, the Noticee has instructed the clients to keep their own individual email IDs only and removed all such email IDs.

iv. None of the clients having multiple email IDs had raised a complaint of non-receipt of contract notes and option to receive physical contracts notes were also kept open for all clients, irrespective of the ECN mandate given.

v. Thus, the Noticee has not violated the provisions of Regulation (B)(2) of Schedule II of Code of Conduct under Broker Regulations read with circular dated September 08, 2005, as alleged.

vi. As regards charging of processing fee, the processing fee referred to the minimum brokerage which is charged to the clients who generate brokerage of less than Rs.15. The brokerage plus processing charges so levied was within the permissible limits.

Minimum processing charges have been included in the Tariff Sheet in the New AOF.

vii. Charging of processing fee was in line with the industry practice and neither the clients nor exchanges have raised any objection to the same.

viii. NSE circular dated March 30, 2006 does not prohibit recovery of other levies, which in this case, was ‘brokerage’.

ix. The circulars referred to in the Inspection Report were on the format of the contract note and the Noticee confirms that it has complied with the same.

x. With regard to the allegation of charging processing fee / brokerage of Rs.13.50 for a trade amounting to Rs.46.50, it is submitted that the said amount is processing fee out of which brokerage is only Rs.1.50 which was less than 2.5% limit.

xi. In view of the above, it is submitted that the Noticee has complied with Regulation 7(B)(6) of Schedule II of Code of Conduct prescribed in Broker Regulations read with SEBI Circular dated August 05, 1996 and NSE circulars dated January 05, 2006 and March 30, 2006.

f. Delay in sending KYC to KRAs:

i. Out of 1571 clients registered during January 2012, 756 KYC forms were sent for uploading as on February 15, 2012 and the delay occurred in respect of balance cases due to delay on the part of the clients to furnish the details.

ii. Thereafter, the Noticee had expedited the process and uploaded all KYCs of the clients registered with it up to June 28, 2013.

iii. DA failed to appreciate that the CDSL Inspection Report for the period January 01, 2012 to January 31, 2013 establishes Noticee’s compliance to KRA requirements. Accordingly, the Noticee has complied with SEBI circular dated December 23, 2011.

g. Execution of trades without uploading of client details:

i. Trading accounts of clients are opened only after verification of KYC documents, undertaking necessary due diligence, verification of email and mobile nos. and ascertaining the financial status of the clients.

ii. Trading account is kept inactive till the success file is received from the Exchange, which is received after uploading the data online to the Exchange.

iii. At times, after execution of the trade on first day of opening a trading account, client details are rejected by the exchange for anomalies in the documents and the trade done in such accounts are reported as done before the account opening.

iv. The Noticee is empowered to deal in the said matter to ensure that such instances shall not recur.

v. Report from NSE pertaining to UCC violations shows that no violations had been found for FY2013-14.

vi. In view of the above, the Noticee stated that it had complied with the provisions of SEBI circulars dated July 13, 2006 and August 26, 2004.

h. CTCL mismatch:

i. The alleged violation is a venial deficiency and post inspection, corrective action including upgradation of CTCL software has been taken to prevent recurrence.

ii. All the trades executed from the given locations were bonafide and not unauthorized trades.

iii. DA failed to appreciate that CTCL mismatch / violations have gone down drastically and is nil as on the date of reply, which is evidenced in the NSE ENIT portal.

iv. Hence, Noticee submitted that it has complied with the provisions of NSE circular dated December 24, 2010 read with Regulation 7 and Clauses (A)(2) and (A)(5) of Schedule II of Code of Conduct under Broker Regulations.

i. Deficiency in order management:

i. Noticee denied that it did not have a proper order management system in place.

ii. Order time is recorded in all contract notes and voice instructions given over telephone are recorded.

iii. DA has failed to appreciate various steps taken by the Noticee to improve its order management system including installation of voice recording facility at all braches, acceptance of offline orders only from the client, compulsory confirmation of trades to all clients after-market hours through recorded lines etc.

iv. Noticee has also introduced real time SMS and IVRS facility to clients to confirm order instructions.

v. In the past, certain clients, after placing orders, had denied placing it and in respect of the 94 complaints, the Noticee has taken up the matter and redressed it to the satisfaction of the complainants.

j. Non-collection of margin from clients in derivatives segment i. DA has failed to appreciate various extraneous factors with regard to delay in collection of margins in derivative segments, including delay in deposit of cheques, out of station clients, extreme market volatility etc.

ii. Under instruction from the SEBI Inspection Team, the Noticee has developed a system to monitor the daily collection of margin to enable it to keep a check on short collection and the system is working well.

iii. As a result of alleged non-collection of margins, no defaults has occurred in so far as meeting of payment / delivery obligations are concerned and none of these clients have been found to be indulging in manipulation or fraudulent practices in the market.

iv. Given the inherent uncertain nature of the market, it is next to impossible for any broker to achieve 100% margin.

v. While there was non-collection of margin which happened under peculiar circumstances, there has not been any defaults in meeting obligations to stock exchanges and hence the Noticee has complied with the provisions of SEBI circulars dated July 27, 2000 and May 17, 2002.

k. Client Funding:

i. Noticee has denied to have funded its clients and charged interest in the garb of penal charges for delayed payment.

ii. The reason for charging delayed payment charges was to improve the collection and to ensure prompt payment by clients.

iii. Requisite up front margin was always ensured before trading on behalf of clients, except in few cases.

iv. Notice has not provided funding in any of the cases.

v. NSE circular dated April 26, 2012 permits brokers to levy late payment charges for delayed payments and NSE circular dated May 08, 2015 permits brokers to grant further exposure to the clients beyond fifth trading day to the extent of availability of excess of clients’ fully paid securities over his debit balance, deposited with the broker.

vi. Notwithstanding the above, such funding does not expose us to personal financial liability and therefore will not result in violation of Regulations 8(1)(f) and 8(3)(f) of SCRR read with SEBI circular dated May 07, 1997.

l. Non-settlement of Running Accounts i. It is denied that the Noticee had failed to settle running accounts of its clients despite instructions in the SEBI circular.

ii. The Noticee has been following quarterly settlement of running account judiciously.

iii. Settlement of securities is deemed to have been completed on the ‘T Day’ if the value of funds and securities available is lower than the value of funds and securities to be retained on ‘T day’.

iv. Noticee has settled 6644 clients for January 2013 and March 2013 and submitted that it is in compliance with SEBI circular dated December 03, 2009.

m. Delayed transfer of corporate benefits i. The Noticee was not able to decode the symbols issued by banks and determine the exact number of shares against which such symbols were indicated and therefore it became difficult to disburse the dividend in time to respective clients.

ii. After the guidance of the SEBI Inspection Team, the Noticee has followed the procedure systematically and all the dividends which were due had been paid.

iii. The funds received as dividend in the interregnum has not been used by the Noticee for any other purpose and the same has been credited to the clients’ accounts, albeit with some delay, which happened under peculiar circumstances.

iv. Thus, the Noticee was in compliance with the provisions of SEBI circulars dated November 18, 1993, February 01, 2001, April 21, 2004 and August 24, 2004 read with Clause A(1) of Code of Conduct under Schedule II of Broker Regulations.

n. Dealing with unregistered sub-brokers i. Activities of franchisees cannot be categorized as unregistered brokers.

ii. The business model involving opening of branch offices all over India is in line with the market practice and stock exchange norms.

iii. Due to complex laws on employer-employee relationship, the Noticee has adopted a policy of hiring a person on contract by naming him a franchisee and his roles and responsibilities are quite different from that of a SEBI registered sub-broker.

iv. The franchisees are paid commission / professional fees and has a limited role to perform and all risk management parameters, dispatch of contract notes, quarterly statements etc. are done from Head office.

v. Post Inspection, the Noticee, as an abundant caution, took steps to get these franchisees registered as Authorized Persons and as on the date of the reply, the Noticee was dealing only with registered Authorized Persons and therefore, the Noticee was in compliance with SEBI circulars dated March 31, 1997 and January 15, 2001.

o. Systems and Procedures w.r.t. PMLA i. Proper systems and procedures pertaining to PMLA are in place with effect from July 01, 2005.

ii. Noticee has a well-documented AML Policy and has conducted regular training programs for its employees at Head office.

iii. Measures have been taken to block PANs of SEBI debarred entities and illiquid scrips for active trading and alerts are generated by the trading system when order is placed for such illiquid scrips.

iv. Limits are placed in the system to restrict trading of clients to his capacity.

v. Clients are classified in line with the specifications in SEBI circular dated December 19, 2008 vi. DA, without dealing with the Noticee’s submissions, merely held that the Noticee has violated provisions of SEBI circular dated December 19, 2008.

p. System deficiencies i. The deficiencies observed in the System Audit Report for the year 2011-12 have been rectified and presently, the Noticee is in full compliance with the requirements.

q. Outstanding SEBI Turnover fees i. DA has already given a positive finding that the Noticee has settled the dues to SEBI, which were mentioned in the Inspection Report.

r. Failure to redress investor complaints i. The Noticee has sent replies to all 43 complaints pending as on the date of Inspection, but no communication was received from the clients thereafter.

ii. The complaint status received from the exchanges reflects that there is drastic improvement in resolution of Investor Grievance.

iii. The Noticee has a very strong investor grievance mechanism at its Head Office including periodic reviews by CEO/MD and its Board.

iv. In view of the above, the Noticee has complied with the provisions of Broker Regulations.

s. DA failed to explain how the facts and circumstances in the matter of Religare Securities Limited vs SEBI are different from the extant matter.

t. The alleged violations are technical and venial irregularities which have already been cured and steps have already been taken to prevent their recurrence.

u. In the past, for similar procedural / technical violations, regulators and exchanges had merely issued warning letters to brokers.

v. SAT, in the matter of UPSE Securities Limited vs SEBI, inter-alia, held that every little irregularity / deficiency noticed during the inspection was not culpable and did not call for initiation of penalty proceedings and also invited attention to Order of SEBI Adjudicating Officer dated June 16, 2017 in the matter of Indiabulls Mutual Fund, wherein it was, inter-alia, observed that the violations were non-repetitive and procedural in nature and investors’ interest have not been adversely affected on account of the procedural lapse.

w. Any action on the alleged violations would result in enormous misery not only to the Noticee but also to their clients who had been availing its services.

x. The alleged technical lapses were not deliberate and the Noticee had not indulged in manipulative, fraudulent or unfair trade practices and the Noticee had not defaulted in meeting its obligations with clients.

Consideration and Findings

6. I have considered the findings of the DA Report along with the written submissions made by the noticee. My observations and findings with respect to each of the allegations dealt with in the DA Report, are given below:

a. Deficiencies noticed in KYC forms: DA observed that the Noticee had entered into client broker agreements as late as December 2011 while the client broker agreement had been discontinued and was replaced with ‘Rights and Obligations’ documents with effect from September 22, 2011. DA has also observed that there were deficiencies in the sample of 25 KYC forms randomly examined by the Inspection Team where relevant information were not properly filled up. The Noticee, inter-alia, admitted that with regard to 9 clients, the Account opening Forms (“ AOF”) were processed without proper verification of the contents of the form and it happened inadvertently due to pure oversight and fresh KYC forms were obtained immediately after becoming aware of the alleged discrepancies. It was also submitted that accounts were activated only for those clients who had signed the new AOFs. As regards the deficiencies observed in 25 sample forms, the Noticee replied that the said instances are negligible as compared to the size of the business and there were rare instances where corrective action was not taken.

The Noticee has stated that the alleged violations occurred due to oversight and the instances were few in number and remedial action including training of staff has been done to prevent such recurrence. I note that SEBI, vide circular No. CIR/MIRSD/16/2011 dated August 22, 2011, inter-alia, replaced the existing client-broker agreements with the new ‘Rights and Obligations’ document, which was mandatory and binding on the existing and new stock brokers and clients. The said circular also laid down formats for Client Account Opening Forms for capturing KYC and other information related to the clients. Clause A(5) of Schedule II to broker Regulations, provides that a stock-broker shall abide by all the provisions of the SEBI 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. I note that the Noticee, failed to comply with the said requirements and thereby violated the provisions of SEBI circular dated August 22, 2011 read with Clause A(5) of Code of Conduct specified in Schedule II of Broker Regulations.

b. Allotment of single email ID to multiple clients: DA, inter-alia, observed that the Noticee had issued common email ids to multiple clients in 2496 instances and contracts notes were issued to the said email ids. Further, in 17 instances, the same email id was allotted to more than 10 clients. Noticee replied that common email ids were issued in 2496 instances as certain clients did not have their own email IDs and email IDs of their associate / group person was uploaded in the system in the interest of and with the consent of the clients. It was also submitted that digitally signed ECNs were sent only to those clients who had opted for the same and option to receive physical contract notes were also kept open for all clients, irrespective of the ECN mandate given. Further, none of the clients having multiple email IDs had raised a complaint of non-receipt of contract notes. I note that delivery of contract notes to clients is critical in maintaining integrity of the system and in preventing unauthorized trades and related disputes. In case of ECNs, which are delivered to clients through their email ids, it is important to ensure that the said ECNs are sent to the correct email ids which are accessed by the concerned clients. Incorrect email ids or use of common email ids for a multiple clients would cast doubts on the receipt of ECNs by the respective clients. While it is the duty of the clients opting for ECNs to provide email ids to the broker, the stock broker is also expected to exercise adequate due diligence in this regard to ensure that only correct and unique email ids are given by the clients to ensure proper delivery of ECNs. I note that the Noticee has failed to exercise adequate due diligence in this regard. However, I am constrained to note that the aforesaid acts do not fall within the provisions of Clause B(2) of Schedule II of Broker Regulations and SEBI Circular No. MRD/DoP/SE/Cir-20/2005 dated September 08, 2005, SEBI circular Nos. SMD/MDP/CIR/043/96 dated August 05, 1996 and NSE circular Nos. NSE/LEGAL/7037 dated January 05, 2006, as alleged.

c. Charging of excess brokerage: DA observed that the Noticee had charged processing fee besides brokerage and other statutory dues. Noticee submitted that the processing fee referred to the minimum brokerage which is charged to the clients who generate brokerage of less than Rs.15. It was also submitted that the brokerage plus processing charges so levied was within the permissible limits and minimum processing charges have been included in the Tariff Sheet in the New AOF. Further, Noticee added that charging of processing fee was in line with the industry practice and neither the clients nor exchanges have raised any objection to the same. I note that the Noticee has admitted to having levied processing fee from clients in certain cases, which were in excess of 2.5%, the maximum mandated brokerage. However, I am constrained to note that the aforesaid acts do not attract violation of the provisions of Clause B (6) of Schedule II of Broker Regulations and NSE/INSP/7329 dated March 30, 2006, as alleged.

d. Delay in sending KYC to KRAs: DA observed that the Noticee failed to send 815 KYC forms in respect of clients registered in January 2012 to KYC Registration Agency (KRA) by February 15, 2012, being the prescribed due date. The Noticee, inter-alia, replied that the delay occurred at the clients’ end in furnishing the same and it has uploaded all KYCs of its clients who were registered with it up to June 28, 2013. Noticee has also stated that the CDSL Inspection Report for the period January 01, 2012 to January 31, 2013 establishes Noticee’s compliance to KRA requirements. I note that SEBI circular No. MIRSD/Cir-26/2011 dated December 23, 2011, inter-alia, required an intermediary to upload KYC information on the system of the KRA and send the KYC documents of the clients to KRA within 10 working days from the date of execution of documents by the client and maintain proof of dispatch. However, Para 4 of the said circular provides that for the clients’ accounts opened between January 01, 2012 and January 31, 2012, the intermediaries may upload the KYC data on the KRA system and send the relevant KYC documents to KRA by February 15, 2012. Thus, the Noticee was required to upload the KYC data and send the KYC documents in respect of clients registered during January 2012 latest by February 15, 2012. The Noticee has admitted to the non-compliance and stated that the delay was caused due to delay in furnishing information by the clients. The submission is not acceptable as the Noticee, in my opinion, should not have registered such clients pending receipt of KYC documents / information. Hence, I find that the Noticee had failed to comply with the provisions of SEBI circular No. MIRSD/Cir-26/2011 dated December 23, 2011.

e. Execution of trades without uploading of client details: DA observed that the Noticee had executed trades on behalf of its clients without uploading the Unique Client Codes (UCC) to the Stock Exchanges. The Noticee replied that trading accounts of clients are opened and activated only after verification of KYC and receipt of success file from exchange after uploading the data online to the Stock Exchanges. It was also submitted that at times, after execution of the trade on first day of opening a trading account, client details were rejected by the exchange for anomalies in the documents and the trade done in such accounts were reported as done before the account opening. Noticee further submitted that it has adopted steps to ensure that such instances shall not recur and the NSE report on UCC violations for the year 2013-14 did not show any violations. I note that the Noticee has indicated that the reported instances would have occurred due to rejection of client details by the exchanges due to anomalies in the documents. As such, the Noticee could have avoided such instances by exercising due diligence and care while processing and uploading client details. Even though the observations in the DA report in this regard, do not indicate any specific violation of provisions contained in SEBI circular Nos. MRD/DoP/SE/Cir- 8/2006 dated July 13, 2006 and SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, the omissions can be stated to be against the spirit of the circulars.

f. Computer to Computer Link (CTCL) Mismatch: DA observed that the Noticee had failed to provide correct and timely intimation to NSE regarding the details of id and location of CTCL. Noticee, inter-alia, replied that the alleged violation was a venial deficiency which has been corrected post inspection and all trades executed from those locations were genuine trades and the CTCL mismatch / violations have since gone down drastically. Though the Noticee has claimed to have taken corrective action and stated that the instances of violation have come down drastically and has become NIL as on the date of their reply, the fact remains that the Noticee admittedly failed to provide correct and timely intimation to NSE regarding the details of id and location of CTCL, and the same falls within the list of violations contained in the NSE circular No. NSE/INSP/2010/111 dated December 24, 2010. I also note that non-compliance with the exchange requirements would also attract violation of Clause A(2) and A(5) of Schedule II to Broker Regulations.

g. Deficiency in Order Management: DA inter-alia, observed that the Noticee did not have proper order management system and failed to maintain proper order book, thereby resulting in significant number of complaints pertaining to unauthorized trading. Noticee denied the allegation and replied that order time was recorded in all contract notes and voice instructions given over telephone were recorded. It was also stated that DA has failed to appreciate various steps taken by the Noticee to improve its order management system including installation of voice recording facility at all branches, acceptance of offline orders only from the client, compulsory confirmation of trades to all clients after market hours through recorded lines etc. As regards the 94 complaints on unauthorized trading, Noticee stated that it had taken up the matter and redressed it to the satisfaction of the complainants. In this regard, I note that the Noticee failed to maintain proper records pertaining to orders placed by clients, as required vide SEBI circular No. SMD/POLICY/IECG//-97 dated February 11, 1997, thereby resulting in many complaints alleging unauthorized trading. The Noticee has not denied the fact of having received complaints on unauthorised trading. The assertion of the Noticee of having redressed the complaints without any supporting evidence, does not carry conviction. Hence, I find that this is against the provisions of SEBI circular No. SMD/POLICY/IECG//- 97 dated February 11, 1997.

h. Non-collection of margin from clients in derivative segment: DA observed that the Noticee failed to collect the required margin from its clients. The Noticee admitted to the fact of short collection of margins in certain cases and, inter-alia, replied that the delay in collection of margins occurred due to various extraneous factors, including delay in deposit of cheques, outstation clients, extreme market volatility etc. Noticee also submitted that given the inherent uncertain nature of the market, it is next to impossible for any broker to achieve 100% margin and no default has occurred owing to such non-collection / short collection of margins and the respective clients were not found to be involved in market manipulation. The Noticee has tried to justify the short collection of margins from clients citing various reasons. I note that the short collection in 20 instances observed in the Inspection Report amounted to Rs.2.19crore and there were 13,823 such instances during the period from August 2011 to January 2012. SEBI circular No. SMDRP/POLICY/CIR-33/2000 dated July 27, 2000 and SEBI Circular No. SMD/Policy/Cir-12/2002 dated May 17, 2002, inter-alia, mandate upfront collection of margins from clients. The extraneous factors cited by the Noticee for short collection, such as delay in deposit of cheques, outstation clients and market volatility, etc. in my view, are not valid reasons for such non-compliance. Short collection / non-collection of margins from clients before execution of trades not only resulted in violation of the provisions of the aforesaid circulars but also exposed the stock broker to risk of default and thereby endangering the smooth functioning of the securities market and its integrity.

i. Client Funding: DA observed that the Noticee had indulged in funding activities and the late payment charges collected by the Noticee from its clients were nothing but interest and thereby violated provisions of Rule8(1)(f) and 8(3)(f) of SCRR read with SEBI circular No. SMD/POLICY/CIR-6//97 dated May 07, 1997. It was also alleged that the Noticee had allowed clients to take further exposure despite having huge debit balances. Noticee denied to have funded its clients and charged interest in the garb of penal charges for delayed payment. It was replied that the reason for charging delayed payment charges was to improve the collection and to ensure prompt payment by clients. Noticee has also stated that NSE circular dated April 26, 2012 permits brokers to levy late payment charges for delayed payments and NSE circular dated May 08, 2015 permits brokers to grant further exposure to the clients beyond fifth trading day to the extent of availability of excess of clients’ fully paid securities over his debit balance, deposited with the broker. It was also stated that such funding did not expose them to personal financial liability.

I note that NSE circulars dated April 26, 2012 and May 08, 2015 quoted by the Noticee in its reply are not relevant in the extant matter as the alleged violations in the DA Report happened prior to issuance of these circulars, i.e. during the period April 01, 2010 to February 11, 2012. I note that Rules 8(1)(f) and 8(3)(f) of SCRR, inter-alia, provides that a stock broker shall not be engaged as a principal or employee in any business other than that of securities or commodity derivatives except as a broker or agent not involving any personal financial liability. Further, SEBI circular dated May 07, 1997, inter-alia, clarifies that borrowing and lending of funds, by a trading member, in connection with or incidental to or consequential upon the securities business, would not be disqualified under Rule 8(1)(f) and 8(3)(f). I note that the allegation in the present matter is that the Noticee collected late payment charges and also allowed clients having debit balance to take further exposure. In this regard, I note that the instances of collection of late payment charges appears to have been in connection with and incidental to the securities business.

Hence the collection of late payment charge, in my view, would not be in violation of Rule 8(1)(f) and 8(3)(f) of SCRR, as clarified vide SEBI circular dated May 07, 1997. Further, allowing debit balance clients to take further exposure, would not, in my view, violate the aforesaid rules.

j. Non-settlement of Running Accounts: DA observed that the Noticee had failed to settle running accounts of its clients in line with the requirements of SEBI circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009. Noticee denied the allegations and stated that it has been following quarterly settlement of running account judiciously.

It was also stated that Settlement of securities is deemed to have been completed on the T Day if the value of funds and securities available is lower than the value of funds and securities to be retained on T day. Noticee also stated that it had settled 6644 clients for January 2013 and March 2013 and submitted that it is in compliance with SEBI circular dated December 03, 2009. I note that the Inspection Report and the DA report has alleged non-settlement of running accounts by the Noticee. However, no specific evidence including detailed calculations to indicate non-settlement of clients’ accounts on periodic basis has been brought out therein. Merely having some balances in the clients’ accounts at the close of every quarter cannot, by itself, be an indicator that the Noticee has not been settling running accounts with its clients, as the Noticee is entitled to retain, inter-alia, margins and the value of transactions pending settlement, if any. In the absence of a detailed computation showing that the amounts appearing in the clients’ accounts were in excess of the amount that is required to be kept, having outstanding balances in the clients’ accounts alone would not be sufficient to draw a conclusion regarding non-settlement of accounts by the Noticee. Hence, in my view, the allegation regarding non-settlement of running accounts by the Noticee does not stand established.

k. Delayed transfer of corporate benefits: DA observed that the Noticee has admitted to its failure / delays in transfer of corporate benefits to its clients. Noticee, in its reply, stated that the delays occurred due to its inability to decode the symbols issued by the banks, causing difficulty in disbursing dividends to respective clients. Noticee also stated that the funds so received as dividends were not misused and after guidance from the SEBI Inspection Team, the Noticee has followed the procedure and the dividends have been credited to respective clients’ accounts, albeit with some delay. I note from the Inspection Report that there has been delays in the range of 3 to 22 months in crediting dividends to clients’ account. I note that SEBI Circular No. MRD/DoP/SE/Dep/Cir- 30/2004 dated August 24, 2004, inter-alia, requires a stock broker to transfer the funds and securities from their respective pool account to the respective beneficiary account of their clients within one working day after the pay-out day. I also note that inability to decode symbols issued by banks cannot be a valid argument to justify the delay in crediting corporate benefits to clients. In view of the above, I am of the view that the failure of the Noticee in transferring the corporate benefits to its clients on time has resulted in violation of the provisions of the SEBI circular dated August 24, 2004 and Clause A(1) of Schedule II to Broker Regulations. However, I do not find any violation of provisions of SEBI circular Nos. SMD/SED/Cir/93/23321 dated November 18, 1993, Cir- 05/2001 dated February 01, 2001 and SEBI/MRD/Policy/AT/Cir-19/2004 dated April 24, 2004, in respect of the aforesaid actions, even though the same has been brought out in the inspection report and alleged by the DA.

l. Dealing with unregistered sub-brokers: DA observed that the Noticee was carrying out trades through unregistered and unauthorized persons by entering into franchisee agreement with them. Noticee, inter-alia, replied that their business model involving opening of branch offices all over India is in line with the market practice and stock exchange norms. It was also submitted that the roles and responsibilities of franchisees are quite different from that of a SEBI registered sub-broker and they are paid commission / professional fees and has a limited role to perform and all risk management parameters, dispatch of contract notes, quarterly statements etc. are done from the Noticee’s Head office. Noticee has also replied that post Inspection, the Noticee, as an abundant caution, has taken steps to get these franchisees registered as Authorized Persons and as on the date of the reply, the Noticee was dealing only with registered Authorized Persons. I note from the DA Report and the replies submitted by the Noticee that the Noticee has been dealing with around 2700 franchisees which did not have SEBI registration. Further, it is observed that these franchisees did not operate as the branch offices of the Noticee and there were no employee-employer relationship between the Noticee and the franchisees. I note that the franchisees were charged user fees and the revenue was shared among the Noticee and the franchisees. Hence, I am inclined to accept the observation of the DA that these franchisees acted as unregistered sub-brokers and the corrective action stated to be taken by the Noticee subsequently to get these entities registered as authorized persons will not absolve the Noticee of the violations. I note that SEBI circular No. SMD/POLICY/CIRCULAR/3-97 dated March 31, 1997, inter-alia, prohibits a stock broker from dealing with a person who is acting as a sub-broker unless he is registered with SEBI. Further, SEBI circular No. SUB-BROK/CIR/02/2001 dated January 15, 2001, inter-alia, requires brokers to permit their sub-brokers to start business only after receipt of sub-broker registration certificate from SEBI. I note that the Noticee, by dealing with unregistered entities in the capacity of sub-brokers, has violated the provisions of the aforesaid SEBI circulars.

m. Non-compliance with provisions of the SEBI circular on PMLA: DA observed that the Noticee had failed to categorize ‘Clients of Special Category’ (“CSC”) in line with the PMLA requirements. Noticee, inter-alia, replied that proper systems and procedures pertaining to PMLA are in place with effect from July 01, 2005 and Noticee has a well-documented Anti Money Laundering (“AML”) Policy and had conducted regular training programs for its employees at Head office. It was also submitted that Noticee’s clients were classified in line with the specifications in SEBI circular dated December 19, 2008. I note that Para 5.3 SEBI Master Circular No. ISD/AML/CIR-1/2008 dated December 19, 2008, inter-alia, requires a registered intermediary to undertake enhanced customer due diligence process for higher risk categories of customers. Further, Para 5.4 of the said circular, inter-alia, requires an intermediary to exercise independent judgment to ascertain whether new clients should be classified as CSC or not. SEBI Inspection revealed that the Noticee had not done such classification as it was not in possession of details pertaining to Non-resident clients, High Net worth Clients, Trusts, Charities, Non-Governmental Organizations,

Politically Exposed Persons etc. I note that the Noticee did not provide the details of categorization of its clients as CSCs to the Inspection Team. Mere assertion in the reply that the Noticee has systems in place pertaining to PMLA and it has categorized clients as CSCs under various categories as required under the SEBI circular, in my view, will not be adequate to vouch for compliance with the aforesaid requirements. In the absence of any details submitted in the reply regarding the categorization of clients in line with the requirements of SEBI circular, I am inclined to accept the observation of the DA that the Noticee has violated the requirement of SEBI circular No. ISD/AML/CIR-1/2008 dated December 19, 2008.

n. System Deficiencies: DA observed that the Noticee, inter-alia, failed to maintain records for test of business continuity and disaster and logs of access to systems, database, network and applications, as observed in the system audit report for the year 2011-12. Noticee replied that the deficiencies observed in the System Audit Report for the year 2011-12 have been rectified and the Noticee has since been in full compliance with the requirements. I note that the Noticee has not contested the observations of the DA in this regard and only replied that the deficiencies so observed have since been rectified, which does not tantamount to rebuttal of the charge.

o. Outstanding SEBI Turnover Fee: DA observed that the Noticee has paid an amount of Rs.1,02,23,674 to SEBI on August 22, 2013 which included outstanding fee of Rs.64,41,590 and the interest accrued thereon, thereby settling the dues to SEBI. In view of the aforesaid observation, I do not find any fees to be outstanding and payable by the Noticee to SEBI in respect of the period covered under the inspection.

p. Non-redressal of investor complaints: DA observed that there were 43 investor complaints pending against the Noticee at the time of SEBI Inspection and most of the complaints pertained to unauthorized trading. Noticee, inter-alia, replied that it had sent replies to all 43 complaints pending as on the date of Inspection, but no communication was received from the clients thereafter. It was also submitted that the complaint status received from the exchanges reflected that there was drastic improvement in resolution of Investor Grievance and the Noticee has a very strong investor grievance mechanism at its Head Office including periodic reviews by CEO/MD and its Board. I note that out of the 43 investor complaints pending as on the date of Inspection, 32 complaints were pending for a period of more than one month. I note that Regulation 9(e) of Broker Regulations, requires a stock broker to take adequate steps for redressal of grievances of the investors within one month of the date of receipt of the complaint. I find that the Noticee has failed to redress the investor grievances within the specified timeline in respect of 32 complaints which were pending for more than 30 days as on February 20, 2012, and thereby failed to comply with Regulation 9(e) read with Clause A(5) of Schedule II of Broker Regulations.

q. I also note that the Noticee has submitted that the alleged violations were technical and venial irregularities, which have already been cured by it and it has also taken steps to prevent the recurrence.

Conclusion

7. Out of the 16 violations alleged in the SCN2/DA Report, I find that violations discussed at Para 6(a), (d), (f), (g), (h), (k), (l), (m) and (p) stand established against the Noticee. Of these, certain observations such as Non-collection of margin from clients, delayed transfer of corporate benefits to clients, dealing with unregistered sub-brokers etc. are serious in nature. I also find that no specific violation, as alleged, has been established in respect of the matters discussed at Para 6(b), (c), (e), (i), (j), (n) and (o). I also note that the Noticee has submitted that it has taken corrective action in respect of the violations observed at Para 6(a), (b), (d), (e), (f), (g), (k), (l), (m), (n), (o) and (p) above.

8. Incidentally, I also note that the SEBI, vide order dated October 07, 2019, inter-alia, observed that the Noticee, inter-alia, failed to segregate the securities and funds of its clients, provided misleading information to the exchanges, failed to unpledge and return the securities due to its clients and made unauthorized transfer of shares from clients’ demat accounts and hence it has debarred the Noticee from accessing the securities market, from buying, selling or otherwise dealing in securities, from being associated with the securities market in any manner and from undertaking any activity in the securities market in any manner whatsoever, till further orders. The said directions have been confirmed by SEBI vide a confirmatory order dated January 02, 2020. I also note that the NSE and BSE have also declared the Noticee a defaulter.

9. Thus, while the Noticee has claimed to have taken corrective action in respect of various violations discussed at 6(a), (b), (d), (e), (f), (g), (k), (l), (m), (n), (o) and (p) above, it now appears that the Noticee has continued its lackadaisical attitude towards compliance as observed from the findings in the aforesaid SEBI orders. While the violations observed in the said orders are not covered in the extant proceedings, I cannot be oblivious to the fact that the Noticee continued to be in violation of various provisions of the securities laws, putting the interest of investors in jeopardy.

10. The Noticee, while stating excerpts from the SAT order in the matter of UPSE Securities Limited vs. SEBI and the SEBI Order dated June 16, 2017 in the matter of Indiabulls Mutual Funds, argued that similar procedural / technical violations would warrant only a warning. I note that the facts and circumstances including the underlying violations are different in the extant matter and as such, the aforesaid orders would not be applicable in the extant matter. I also find that while the Noticee has submitted that many of the violations observed in the SCN2 / DA Report were procedural / technical and venial irregularities which had since been rectified, the conduct of the Noticee post the inspection, leading up to the SEBI orders dated October 07, 2019 and January 02, 2020, indicate that adequate corrective action has not been taken by the Noticee to ensure compliance with the applicable laws and to protect the interest of investors.

11. DA has observed that there were serious lapses in the functioning of the Noticee, including weak internal control, dealing with un-registered sub-brokers, delay in passing on the corporate benefits to its clients, indulging in client funding, lacunae in redressing investor complaints, non-settlement of running accounts etc. and recommended that the Noticee be prohibited from registering fresh / new clients for a period of one month. I note that out of all the violations observed by the DA, 9 violations, viz. Deficiencies noticed in KYC forms, Delay in sending KYC to KRAs, CTCL mismatch, Deficiency in order management, Non-collection of margin from clients in derivatives segment, Delayed transfer of corporate benefits, Dealing with unregistered sub-brokers, Systems and Procedures w.r.t PMLA and Failure to redress investor complaints stand established. I observe that some of the violations including Non-collection of margin from clients, delayed transfer of corporate benefits to clients, dealing with unregistered sub-brokers etc. are serious in nature having potential to jeopardize the interest of investors and the orderly functioning of the securities market. Considering the gravity of the violations and the observations made in Para 7 -10 above, I am inclined to modify the recommendation of the DA and I am of the view that the directions, as given in the heading “Directions”, would be appropriate in the extant matter.

Directions

12. Therefore, in exercise of powers conferred on me under Section 12 (3) of the SEBI Act read with Regulation 27 and Regulation 28 of the SEBI (Intermediaries) Regulations, 2008, upon consideration of the facts and circumstances listed in this Order, applicable legal provisions and submissions of the Noticee, I hereby direct that the Noticee i.e. BRH Wealth Kreators Limited (Formerly known as BMA Wealth Creators Limited), having SEBI Registration No.INZ000184733, shall not take on board any new client for a period of 6 months from the date of this order. The prohibition under this order shall be in addition to and run independent of the directions contained in SEBI orders dated October 07, 2019 and January 02, 2020. The Noticee shall disclose the contents of these directions on its website immediately.

13. Copy of this order shall be also be served on the Recognised Stock Exchanges for information and necessary compliance.

DATE: March 31, 2020 G. MAHALINGAM PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA