Order in the matter of Dynamic Stock Broking(I) Pvt. Ltd

WTM/RKA/IVD/ID-2/73/2013

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MR. RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER ORDER UNDER REGULATIONS 28(2) AND 38(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008 AGAINST DYNAMIC STOCK BROKING (INDIA) PRIVATE LIMITED (SEBI REGISTRATION No. INB011163632) 1. Pursuant to an ad-interim, ex-parte order dated April 23, 2009 the Securities and Exchange Board of India ('SEBI') conducted an inspection, from May 04, 2009 to May 08, 2009, of the books of accounts and other documents/records of M/s Dynamic Stock Broking (I) Pvt. Ltd. ('Dynamic') for the period April 01, 2008 to March 31, 2009 ('inspection period'). 2. SEBI inspection inter alia revealed several non-compliances of rules, regulations, guidelines and circulars issued by SEBI and the Bombay Stock Exchange Ltd. ('BSE') by Dynamic and procedural and regulatory lapses in its functioning. In view of such non-compliances and lapses, SEBI initiated proceedings against Dynamic under the SEBI (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) and vide Order dated October 03, 2009 appointed a Designated Authority ('DA') to inquire into the following alleged contraventions by Dynamic:

i. Regulation 6A (1) (b) and clauses A(2), A(5), B(2), D(1) of code of conduct for brokers stipulated under Schedule II read with regulation 7 of SEBI (Stock Brokers and Sub- Brokers) Regulations, 1992; ii. SEBI Circular no. FITTC/DC/CIR-1/98 dated June 16, 1998; iii. SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004; iv. SEBI Circular Ref. No. MIRSD/DPS-III/130466/2008 dated July 2, 2008; v. SEBI Circular SMDRP/Policy/CIR-39/2001 dated July 18, 2001; vi. SEBI Circular MRD/DoP/SE/Cir-8/2006 dated July 13, 2006; vii. SEBI Circular no. SMD/SED/CIR/93/23321 dated November 18, 1993; viii. Rule/s 8(1)(f) & 8(3)(f) of Securities Contracts (Regulations) Rules, 1957 ('SCRR') read with SEBI Circular no. SMD/Policy/Cir-6 dated May 7, 1997 and SEBI Circular SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004;

ix. SEBI Circular ISD/CIR/RR/AML/2/06 dated March 20, 2006; x. SEBI Circular no. MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006; xi. SEBI guidelines on Anti-Money Laundering issued vide Circular no. ISD/CIR/RR/AML/1/06 dated January 18, 2006 and further directions vide Circular no. ISD/CIR/RR/AML/2/06 dated March 20, 2006; xii. Rule 15 of the SCRR and regulation 17 of the SEBI (Brokers and Sub-Brokers) Regulations, 1992; xiii. SEBI Circulars IES/DC/CIR-4/99 dated 28th July 1999, IES/DC/CIR- 5/00 dated December 11, 2000 and SMDRP/DC/CIR- 7/01 dated June 20, 2001. 3. After completion of the proceedings, the DA submitted his Report dated March 30, 2010 ('the Report') in terms of regulations 27 and 38(2) of the Intermediaries Regulations. In the Report, the DA found that Dynamic had violated the aforesaid provisions and is liable for appropriate action. The DA recommended that the certificate of registration of Dynamic be suspended for a period of 3 months. 4. After considering the Report, a show cause notice ('SCN') dated May 24, 2010 was issued to Dynamic ('the noticee') under regulation 28(1) of the Intermediaries Regulations calling upon it to show cause as to why the appropriate penalty including penalty as recommended by the DA should not be imposed on it.

A copy of the Report was also forwarded to the noticee alongwith the SCN. 5. The noticee did not file its reply in response to the SCN and filed a consent application that was rejected by SEBI and communicated to it vide letter dated February 04, 2011. While the proceedings were pending, the noticee preferred an Appeal number 186 of 2012 before the Hon'ble Securities Appellate Tribunal (SAT). In the said appeal, the noticee waived the right of personal hearing in these proceedings and prayed that the Board may be directed to pass a final order in these proceedings expeditiously. Vide order dated October 29, 2012, Hon'ble SAT disposed of the appeal with a direction to pass a final order in the matter within a period of four weeks from the date of the order. Vide order dated December 26, 2012, the Hon'ble SAT adjourned the matter in Misc. Application filed by SEBI in the matter to January 10, 2013 and, in the meantime, gave liberty to the Board to pass final order as per direction contained in the order dated October 29, 2012. 6. Accordingly, I have considered the Report, the SCN and the relevant material available on record.

I note that the noticee has not filed any reply to the SCN and has not disputed any of the findings of the DA. I also note that even before the DA it had not disputed any of the charges against it and claimed that it has taken corrective steps to rectify its non-compliances and lapses. However, it had not substantiated any of its claims by furnishing any evidence. 7. Admittedly, the noticee had 46 terminals in BSE cash segment, 25 in the National Stock Exchange Ltd. (NSE) cash segment and 26 in NSE Futures & Options (F&O) segment in its offices in Mumbai and Ahmedabad and those terminals were operated either by its employees or dealers. It has been found in the report that the noticee had provided trading terminals to certain dealers to trade on its account who were not on its pay-roll and thus it violated BSE notices no. 104616/2001 dated November 12, 2001 and 20040205-13 dated February 02, 2004, respectively that stipulate that the staff of members (brokers) operating BOLT terminal in the members’ offices must be on a member’s pay-roll. It has been, further, found that one of the dealers of noticee, Mr. Sagar S. Sanghvi who was allowed to operate noticee's F&O terminal did not hold NCFM certification.

Thus, the noticee had contravened BSE notice no. 20050808-26 dated August 08, 2005 that stipulate that the operators of the trading terminals are required to have NCFM certifications. The noticee had submitted before the DA that on realizing the lapse after inspection, it had taken majority of such dealers including Mr. Sagar S. Sanghvi on its pay-roll. In view of these admitted facts, I do not find any reason to differ with the findings of the DA that the noticee has contravened the directions of BSE vide its above mentioned notices number 104616/2001 dated November 12, 2001, 20040205-13 dated February 02, 2004 and 20050808-26 dated August 08, 2005. 8. With regard to the allegation that most of the KYC details of the clients were not captured in the back office software of the noticee, the noticee had admitted these lapses before the DA and has submitted that they were unintentional and technical in nature and it had strengthened its internal controls. Thus, it is an admitted fact that during inspection period, the noticee committed these lapses. I further note that the claim of the noticee that it had strengthened its internal control is not supported by any documentary evidence to prove as to what steps the noticee has taken to avoid the repetition of such lapses.

In view of the same, I agree with the findings of the DA that by not capturing the requisite details of the clients in the back office software, the noticee has not exercised due skill, care & diligence in conduct of its business as stipulated under clause A (2) of Code of Conduct for brokers specified under Schedule II read with regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 ('Stock Brokers Regulations'). 9. I note that the DA has found several discrepancies with regard to the KYC process /account opening process followed by the noticee. Such discrepancies were found with respect to various documents such as client registration forms, agreements between stock broker and client, uniform risk disclosure documents, voluntary documents, etc. I find that the noticee has not given any plausible explanation with regard to these discrepancies as described in detail in the Report and many of the discrepancies are not even disputed by it. On perusal of the findings in the Report, I agree that the noticee has failed to maintain KYC details in accordance with the SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004 and had not exercised due skill, care and diligence in conduct of its business as stipulated under clause A (2) of Code of Conduct for stock brokers specified under Schedule II read with regulation 7 of Stock Brokers Regulations.

Admittedly, by not conducting in-person verification of the clients at the time of client registration, the noticee has not complied with the SEBI Circular no. MIRSD/DPS- III/130466/2008 dated July 2, 2008. Further, I find that these acts of the noticee such as not entering into agreements with its client, not properly managing the agreements and keeping incomplete agreements are in violations of clause D (1) of Code of Conduct for stock brokers stipulated under Schedule II read with regulation 7 of Stock Brokers Regulations. I, therefore, do not find any reason or material on record to differ from the findings and observations of the DA that the noticee has violated SEBI Circulars SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, MIRSD/DPS-III/130466/2008 dated July 2, 2008, clauses A (2) and D(1) of Code of Conduct for brokers specified under Schedule II read with regulation 7 of the Stock Brokers Regulations. 10. The noticee has admitted that it had uploaded multiple unique client codes ('UCC') and multiple Permanent Account Numbers ('PAN') in the websites of BSE and NSE as discussed in the Report.

The noticee had admitted this default and had undertaken that it would take due care in its future dealings. I, therefore, agree with the findings of the DA that the noticee has not exercised due skill, care and diligence in conduct of its business as stipulated under clauses A(2) & A(5) of the Code of Conduct for stock brokers specified in Schedule II read with regulation 7 of Stock Brokers Regulations and has contravened the directions of SEBI vide its Circulars no. SMDRP/Policy/CIR-39/2001 dated July 18, 2001 and MRD/DoP/SE/Cir-8/2006 dated July 13, 2006. 11. The noticee has also admitted that it does not maintain any proof of delivery of the contract notes sent to its clients and send quarterly account statements to its clients, as found in the Report. I, therefore, agree with the findings and observations of the DA that the noticee has not complied with SEBI Circular no. SMD/SED/CIR/93/23321 dated November 18, 1993, clause B(2) of Code of Conduct for stock brokers specified under Schedule II read with regulation 7 of the Stock Brokers Regulations, BSE Circular numbers 20020906-3 dated September 06, 2002, 20030114-9 dated January 14, 2003 and 20080307-8 dated March 07, 2008. 12. It has been found in the Report that the noticee had transferred huge amounts (to the tune of `19.8 Crores) from client's account to its own account, in much excess of the total brokerage of around `50.3 lacs earned by it during the same period.

The noticee was also having overdraft facility in its client's bank account. The noticee had not given reasons for these huge transfers from its client's account to its own account and from having overdraft facility in the client's account. Further, the noticee had admitted these lapses before the DA and submitted that it had, subsequently, put proper system in place through its back office software to ensure that client's funds are never used for its own purposes and they are always kept separate. Thus, I find that the noticee had not maintained segregation of client's account with its own account and has used client's money to meet its pay-in requirements. I, therefore, agree with the findings of the DA that the noticee has violated SEBI circular SMD/SED/CIR/93/23321 dated November 18, 1993, BSE bye-law 247A (BSE notice no: 4850/97 dated December 10, 1997) and clause A(2) & A(5) of the Code of Conduct for stock brokers as stipulated in Schedule II read with regulation 7 of the Stock Brokers Regulations. 13. It has further, been found in the Report that the noticee has been frequently taking loans from its own directors as well as other people for funding its own business.

For instance, one of the clients of the noticee, Mr. Suresh U. Trevadia had his client ledger debit for around 215 days and the maximum debit in his ledger was more than ` 2 crores and the same client has provided loan to the noticee. Instead of clearing the debit balance in its client's ledger account, the noticee has taken loan from the same client and also paid him interest on the loan. On the other hand, the noticee was not charging any interest on the debit balance in his clients' ledger account. The noticee had admitted these practices before the DA and submitted that it was a pragmatic decision to accommodate the clients who have subsequently cleared their dues. It has duly strengthened its internal surveillance systems and ageing analysis so that such incidents again do not occur. On perusal of the findings in the Report, I find that the submission of the noticee does not offer a valid explanation with respect to its conduct and clearly indicates that there were problems with its internal surveillance systems. Further, the noticee has not produced any documentary evidence to prove that it has taken steps/measures to strengthen its internal surveillance systems.

I, therefore, do not find any reason or material to differ from the findings and observations of the DA in the Report and hold that the noticee, by engaging in fund-based activities, has acted in contravention of rules 8(1)(f) & 8(3)(f) of SCRR read with SEBI Circular no. SMD/Policy/Cir-6 dated May 7, 1997 and SEBI Circular SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004. 14. Another allegation against the noticee is with regard to mismatch between noticee’s trade file and exchange’s BRK file. In this regard, I note from the Report that on January 7, 2009, the client Ms. Bela Sanghvi (Client Code: 1B004) is shown to have sold 4000 shares of 'Bartronics' as per noticee’s trade file. However, as per BSE’s BRK file the same client was shown to have sold only 3088 shares and the rest 912 shares of 'Bartronics' were shown to have been sold by Mr. Ajit Jani (Code A11000). The noticee had admitted these mismatches before the DA and submitted that it could not make the necessary changes during trading hours and post close session as the requirement to make a change in client codes was brought to its knowledge, subsequently.

I note from the Report that the noticee has committed these lapses during the inspection period and has not been able to give any plausible explanation to the DA regarding the same. The noticee has not given any explanation with regard to these lapses even in these proceedings. I, therefore, agree with the findings and observations of the DA that the noticee is guilty of violating BSE notice no. 20060221 dated February 21, 2006. 15. The noticee has also admitted the allegation that by not capturing the details of the clients such as their bank's details and the bank account number in the back office software, the noticee was not having a third party check/control in place and thus running the risk of third party payments/receipts by the clients. The noticee had submitted before the DA that post-inspection, it has a system in place to ensure proper compliance. However, it had not provided any evidence about putting such system in place after the non compliances were observed during the inspection. I, therefore, agree with the findings and observations of the DA that the noticee has not exercised due skill, care and diligence as required in the conduct of its business as a stock broker and has violated clause A (2) of the Code of Conduct for stock brokers as specified in Schedule II read with regulation 7 of the Stock Brokers Regulations.

I also agree with the findings of the DA that by not having a third party check/control in place, the noticee had contravened the provisions of SEBI guidelines on Anti-money Laundering contained in Circular no. ISD/CIR/RR/AML/2/06 dated March 20, 2006. 16. It is also been alleged that the noticee had reported the appointment of its Principal Officer to Financial Intelligence Unit (FIU) belatedly. As per SEBI guidelines on Anti-Money Laundering vide circular no. ISD/CIR/RR/AML/1/06 dated January 18, 2006 read with SEBI circular number ISD/CIR/RR/AML/2/06 dated March 20, 2006 the intermediaries were obligated to have written anti-money laundering policy/procedures in place as per those circulars within one month from the date of the circular. The intermediaries were also obligated to designate an officer as ‘Principal Officer’ who would be responsible for ensuring compliance of the provisions of the Prevention of Money Laundering Act (PMLA), 2002 and to intimate the name, designation and addresses (including e-mail addresses) of the ‘Principal Officer’ to the Financial Intelligence Unit (FIU) 'on an immediate basis'.

Apparently, the Guidelines emphasise the intermediaries to put adequate systems in place including the appointment of the Principal Officer immediately so as to ensure prevention of money laundering through taking preventive measures such as customer due diligence, threshold/suspicious transaction reporting, record keeping, etc. The Principal Officer is responsible to ensure compliance of these requirements and act as link between FIU and the intermediary for ensuring prevention of money laundering. Admittedly, in this case, while the noticee made its written policy in this regard during 2005-06, it intimated the appointment of its Principal Officer to FIU only on August 07, 2008. I, therefore, agree with the findings and observations of the DA that the noticee has, in this regard, contravened above mentioned SEBI Guidelines on Anti-Money Laundering. 17. Another allegation against the noticee is that it committed delay in formally communicating its investor grievance e-mail ID (grievances_dynamic@rediifmail.com to its clients. The noticee had submitted before the DA that in case of any grievance, a complaint book was available at the office desk for the clients to record their grievances.

The said submission of the noticee shows its casual approach with regard to dealing with the investors' grievances. I do not find merit in such explanation and agree with the findings and observations of the DA in the Report that the noticee has contravened the provision of SEBI Circular no. MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006 and BSE notice no. 20070131/11 dated January 31, 2007. 18. It has also been alleged that the noticee was not maintaining the books of accounts such as Order Book, Securities Register and Margin Deposit Book. The noticee had submitted before the DA that it was, at all point of time, maintaining the Order Book in the name and nomenclature of 'Rough register'/'Order register' and the same was regularly reconciled with the actual trades executed on the daily basis and accordingly confirmed to the clients. Further, margins were collected from clients on ad-hoc basis and a margin deposit register was being maintained by way of soft copy which was updated by the system. The back office software used by the noticee provides utility wherein the noticee can provide any client with a summary as well as detailed statement of the securities traded by him including the gross purchase quantity, gross purchase amount, gross sale quantity, gross sale amount, net quantity & profit/loss.

In this regard, I note from the Report that during the time of inspection, the noticee did not submit any proof that it was maintaining all these books of accounts with different nomenclature as submitted by the noticee before the DA. I, thus, find that the above explanation is just an afterthought put up by the noticee. I, therefore, concur with the findings and observations of the DA that the noticee has violated rule 15 of SCRR read with regulation 17 of Stock Brokers Regulations. 19. I also agree with the findings and observations of the Enquiry Officer that the practice followed by the noticee of not collecting the margins from the clients for trading in F&O segment because its clients are maintaining a running account with it was not a healthy practice as it puts potential danger on risk containment measures in F&O segment. I, therefore, find that the noticee has contravened the provisions of Circulars no. IES/DC/CIR-4/99 dated July 28 1999, IES/DC/CIR- 5/00 dated December 11, 2000 and SMDRP/DC/CIR- 7/01 dated June 20, 2001. 20. I note that in terms of rule 4 (b) of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992 read with regulation 6A (1)(b) of the Stock Brokers Regulations, the certificate of registration granted to a stock broker is subject to inter alia the condition that he shall abide by the rules, regulations, bye-laws of the stock exchange of which he is a member.

The certificate of registration is granted to a stock broker also subject to condition that he shall abide by the provisions of the SEBI Act, Securities Contracts (Regulation) Act, 1956 and the rules, regulations / directives issued by the Central Government, SEBI and the stock exchange as may be applicable to him. As per regulation 7 of the Stock Brokers Regulations, the stock broker is mandated to abide by the specified Code of Conduct. As per clause A(2) of the Code of Conduct specified in Schedule II of the Stock Brokers Regulations, the stock broker is obligated to act with due skill, care and diligence in the conduct of all his business. Clause A(5) further mandates the stock broker to abide by all the provisions of the SEBI Act and rules, regulations issued by the Government, SEBI and the stock exchange. As per clause B(2), the stock broker is obligated to issue contract notes in the format specified by the stock exchange without delay to its clients. As per clause D (1), the stock broker is obligated to enter into the agreement with the clients as specified by the Board. In view of the facts and circumstances, of the case as found by the DA, I find that the noticee has contravened various provisions of the notices, rules/bye-laws of BSE and the provisions of the Stock Brokers Regulations including these clauses of the Code of Conduct and the directives contained in SEBI circulars as found in the Report.

I am convinced that by indulging into all these breach of regulatory obligations imposed on the noticee, the noticee has failed to exercise due diligence, proper care and fulfil its obligations in a prompt, ethical and professional manner. Being a market intermediary, the noticee had to exhibit a high standard of professional prudence, which it clearly failed to demonstrate in this case. 21. I also agree with the observations of the DA that all regulatory provisions have a specific purpose behind their enactment and enforcement. The very purpose of enacting any legislation is to ensure the sound and smooth functioning of the capital market. I find that the noticee has committed several lapses, contraventions and violations as mentioned herein above. While none of the lapses / non compliances can be ignored on the ground of technicality or otherwise in this case, I find that some of the contraventions such as allowing use of its terminal by persons who are not at the pay-roll of the noticee, non-segregation of noticee's and clients' funds and use of client's money for meeting noticee's own pay-in requirements, uploading multiple PAN and UCC for the same client, fund based activities, discrepancies in the KYC processes, non-maintenance of proof of delivery of contract notes and books of accounts,etc. as established against the noticee, pose a prudential threat to the integrity and functioning of the securities market.

In view of these observations, I am satisfied that it is necessary to secure the proper management of the activity of the noticee. In my view, considering the facts and circumstances of this case and taking into account the interests of the investors, the action as recommended by the Designated Authority in his Report is commensurate with the lapses, non-compliances, contraventions and violations committed by the noticee. 22. I, therefore, in exercise of powers conferred under section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration granted to M/s Dynamic Stock Broking (I) Pvt. Ltd.(SEBI Registration no. INB011163632) a member of BSE for a period of three months. 23. This Order shall come into force immediately on expiry of twenty one days from the date of this Order. 24. A copy of this Order shall also be forwarded to BSE to ensure compliance with order in Para 22 above.

DATE: January 8th, 2013 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA