Order in the matter of KCGP Share Broking Services Pvt Ltd

WTM/GM/EFD-II/79/2020-21 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Section 12 (3) of SEBI Act, 1992 read with Regulation 28 (2) of SEBI (Intermediaries) Regulations, 2008 in the matter of KCGP Share Broking Services Pvt. Ltd.

NOTICEE SEBI REGISTRATION NO KCGP Share Broking Services Pvt. Ltd. INB 031017437

Background 1. KCGP Share Broking Services Pvt. Ltd. (hereinafter referred to as the ‘Noticee’/KCGP) is registered with Securities and Exchange Board of India (hereinafter referred to as "SEBI") as a stock broker (SEBI Registration No. INB 031017437) and is a member of the Calcutta Stock Exchange (CSE).

2. SEBI had received references from the Income Tax Department regarding alleged Long Term Capital Gains irregularities employing the stock exchange platform and in this regard it was decided to conduct an investigation into the affairs of the intermediaries named in the reference. Accordingly, it was decided to inspect the affairs of the Noticee and an inspection notice along with a questionnaire was sent to KCGP vide letter dated February 12, 2016.

3. In reply, the Noticee informed SEBI that Mr. S. Jhunjhunwala, the director of the Noticee, was busy with the treatment of his son who had met with an accident, and sought a period of one month for replying to the questionnaire. The request made by the Noticee was accepted and it was also decided to postpone the inspection to the FY 2016-17. Thereafter, vide email dated July 14, 2016, a reminder was sent to the Noticee for submitting the information sought by SEBI. Noticee was also intimated vide the said email that the SEBI inspection would commence from July 21, 2016. The Noticee replied stating that Mr. S. Order in the matter of KCGP Share Broking Services Pvt. Ltd.

Jhunjhunwala, would return to Kolkata only on July 25, 2016 and the inspection could commence any time thereafter. Consequently, SEBI vide its email dated July 25, 2016, informed the Noticee that the inspection is scheduled for July 26, 2016. The Noticee was also advised to keep the following information ready at the time of the inspection along with information sought earlier through the questionnaire, - i. Client database in the following format

Client Client PAN Acc. Date Mobile Email Address Bank BO Name Code Opening of No. id acc. id date KRA No. upload ii. Net pay-in obligation of the member for the following dates during the inspection period,-

May 29, 2012, October 04, 2012, March 08, 2013, July 23, 2013, September 19, 2013, November 03, 2013, January 23, 2014, July 07, 2014, September 08, 2014, November 28, 2014 and January 29, 2015.

iii. MG-13 File and Compliance File for the following dates,-

June 01, 2012, July 26, 2012, September 05, 2012, April 15, 2013, June 26, 2013, August 21, 2013, August 27, 2013, September 03, 2013, May 08, 2014, December 17, 2014 and January 22, 2014.

4. SEBI conducted Inspection of the Noticee on July 26, 2016 and made the following observations in respect of the Noticee,- i. On July 26, 2016, the inspecting team visited the office of the Noticee i.e. 16, India Exchange Place, Ground Floor, Room No-42, Kolkata-700001. During inspection, it was found that infrastructure to run brokering business was absent viz. lighting system was poor, no employee, no compliance officer, no system in place, no books of accounts, no investor grievance mechanism etc. In addition to the above, the broker could not provide information and documents with regard to the questionnaire sent along with the letter dated February 16, 2016. However, on July 27, 2016 the broker provided part information as sought, but never submitted full information as per the questionnaire provided by SEBI.

ii. CSE, vide email dated October 3, 2017 informed that the member KCGP last traded on January 14, 2015.

iii. It was observed that KCGP is not active in the market; on the other hand, KCGP has failed to produce books of accounts to inspecting authority. Further, no books of accounts and records were found in its registered office which implies that the broker is not preserving those documents. KCGP also failed to give all assistance in connection with the inspection to the inspecting authority.

5. Subsequent to this, an enquiry proceeding under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as “Enquiry Regulations”) was initiated against the Noticee to enquire into the violations of SEBI Act/Rules/Regulations/Circulars and provisions of SCRA and SCRR. Pursuant to this, a Show Cause Notice (SCN) dated August 16, 2017 was issued to the Noticee to show cause as to why action under Regulation 13 (1) of the Enquiry Regulations should not be taken against the Noticee.

6. Based on the above, SEBI initiated enquiry proceedings against the Noticee under Chapter V of the SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations") and appointed a Designated Authority ("DA") to enquire into alleged violations of the Noticee.

7. Upon completion of the enquiry, an Enquiry Report (DA’s Report) dated March 18, 2020, was submitted by the DA to the Designated Member (“DM”) recommending that the Certificate of Registration of the Noticee be cancelled.

8. Pursuant to this, a post enquiry SCN(P-SCN) dated July 02, 2020 was issued to the Noticee, under Regulation 28 (1) of SEBI (Intermediaries) Regulations, 2008, to show cause as to why action, as recommended by the DA or any other action as considered appropriate should not be taken against the Noticee. A copy of the DA’s Report was also forwarded to the Noticee along with an advice to file reply, if any, within 21 days from the date of receipt of the notice.

9. The Noticee was given an opportunity of personal hearing on January 06, 2021, wherein the Noticee was represented by Mr. Vikas Bengani, Advocate. Subsequent to this, Noticee vide email dated January 16, 2021 submitted written submissions and the document sought from the Noticee during the hearing held on January 06, 2021. The main submissions made on behalf of the Noticee are as under,- i. Noticee is more than a 100-year-old firm and was a founding member of the Calcutta Stock Exchange.

ii. Noticee has never defaulted in its obligations to the stock exchange.

iii. The stock exchange or SEBI has not received a single investor complaint against the Noticee till date nor has any adverse orders been passed against the Noticee.

iv. Noticee’s broking business is at a standstill from January, 2015.

v. Since CSE is not a vibrant platform for trading in shares and securities like NSE and BSE, the Noticee was not having much of a client base. Client base of the Noticee was 34 as of January, 2015.

vi. Noticee was providing broking business for cash segment only. Therefore, there was no issue of collecting margin requirement on daily basis like in Derivatives Segment.

vii. Noticee’s Director cum Compliance Officer could not assist the inspection team in February, 2016 as his son fell down from third floor of his building and he had suffered severe injuries in his body. His son at that time was only 8 years old and required full attention and care for next 2 years to cure.

viii. Despite the broking business being halted and the treatment of the son of Noticee’s Director cum Compliance Officer being ongoing, when SEBI once again in July, 2016 sought inspection of the documents, Noticee’s Director cum Compliance Officer after initially expressing his inability to attend the same due to the ongoing treatment of his son, later agreed to be present during the inspection on 26-07-2016.

ix. During the course of inspection on 26-07-2016, the Noticee’s Compliance Officer provided all the requisite documents as asked by the team and further assured to the concerned officer to provide more requisite documents. The remaining requisite documents had been provided to the concerned officer vide email dated 27-07-2016.

x. Since the Noticee was having only a small client base and not having huge turnover, they had no hesitation in providing the requisite documents to the inspection team.

xi. Noticee denied the observations made in the inspection report that the lighting system in their office was poor, that they had no compliance officer, no system in place, no books of accounts, no investor grievances mechanism etc.

xii. It was submitted that the Noticee had no employees at the time of inspection as they were not having any business at that time. Mr. Suraj Jhunjhunwala was, however, the Compliance Officer of the Noticee and the observation in the inspection report that the Noticee had no compliance officer is not factually correct. The Noticee also submitted copies of the communication with CSE wherein they have informed the exchange that Mr. Jhunjhunwala was the compliance officer of the Noticee.

xiii. It was submitted that most of the books of accounts were kept in the Noticee’s computer system and the rest which were maintained physically were made available to the inspection team.

xiv. Noticee submitted that the firm had a proper accounting system even if it was not as sophisticated as those kept by big broking firms. All the books are maintained using the software CBOS.

xv. It was further submitted that they had properly maintained Investors Grievances Redressal System. It was pointed out that SEBI and/or Exchange did not receive any Investor Complaint against the Noticee.

xvi. It was also submitted that vide Email dated 27-07-2016, the Noticee had provided requisite details as asked by the inspection team. It was further submitted that after a few days from the date of the completion of the inspection, Noticee’s director cum Compliance Officer called the concerned SEBI officer over phone and asked him to let him know if any more documents are required. On phone, the Officer did not ask any further details or documents and assured that if any additional information was required, he would inform the Noticee’s Compliance Officer.

xvii. The Inspection Team comprising of three officers had duly inspected the following documents:- a. All KYC Documents b. Books of Accounts in our Computer System for F. Y. 2013-2014 and 2014- 2015. c. Contract Notes Files. d. AML Policy e. Client Due Diligence reports f. Payment methods g. Compliance function reports h. Quarterly settlement reports were in the software in our Computer. i. Complaint Register/categorized Investor complaint register j. Top Ten clients list as per turnover k. Top ten Scrips list as per turnover l. Bank Statements of all banks. m. Demat account statement xviii. It was further submitted that prior to the inspection conducted by the team of SEBI, the CSE had inspected the Noticee’s accounts for two years i.e. 2013 - 2014 and 2014-2015 and did not find any fault with their accounting system. There was no adverse finding against the Company by the CSE.

xix. It was also submitted by the Noticee that the IA did not bring on record the complete details of the documents submitted by the Noticee. Further, SEBI has failed to provide any evidence such as photographs or video recording etc. to establish that the Noticee was having inadequate lighting, poor infrastructure, etc.

xx. The Noticee further requested for the screenshot of email inbox of the member of the SEBI inspection to whom they had submitted the information on July 27, 2016.

10. I have considered the Report submitted by the DA, the Post-Enquiry SCN issued to the Noticee, oral and written submissions of the Noticee along with the documents contained therein and other material available on record. I note that the issues that arise for consideration in the present matter stem from,- a. the alleged failure of the Noticee to furnish information sought by SEBI vide a questionnaire, and b. the non-compliances observed during the inspection conducted by SEBI.

11. I note that the Noticee has vehemently contested all observations regarding the non-compliance with various regulatory provisions that was brought out in the inspection report and has also stated that they had submitted all the required information sought by SEBI.

12. I note that Regulation 21 of the Stock Brokers Regulations cast an obligation on 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 information relating to the transactions in securities market within such time as the said officer may require. Further, stock brokers are mandated to allow the Inspecting Authority to have reasonable access to its premises and also extend reasonable facility for examining any books, records, etc. in its possession and also provide copies of documents relevant to the Inspecting Authority. The stock broker is also mandated to provide all necessary assistance in connection with the inspection. The obligations imposed under Regulation 21 also extends to every director, proprietor, partner, officer and employee of the stock broker.

13. I note from the inspection report that it was observed by the SEBI inspection team that the Noticee was not having adequate infrastructure to run the stock broking business. In this regard, it was contented by the Noticee that its business had come to a standstill in January 2015 and that was the reason why there was no staff present at its office at the time of the inspection. It was confirmed by CSE, vide email dated October 3, 2017, that KCGP last traded on January 14, 2015. I further note that the Noticee is a member only of the Calcutta Stock Exchange, where at the time the inspection, there was no trading happening due to issues surrounding its de-recognition by SEBI and consequent litigation. Under such circumstances, I note that it cannot be expected from a stock broker who is exclusively a member of CSE to maintain adequate infrastructure as is normally expected out of a functional stock broker. However, the status of the recognition of the exchange being in uncertainty cannot be a defence for not maintaining the documents and other records for the period they were active in the market, as required under the SEBI regulations, and for non-production of the same during inspections conducted by SEBI. In view of the same, I am in agreement with the findings of the DA that the Noticee has not complied with the requirements under Regulations 21(1), 21(2) and 21(4) of the Stock Brokers Regulations.

14. As regards, the information sought vide the questionnaire by SEBI, I note from the information available on record that the Noticee has substantially provided the information sought. I further note that the allegation that the Noticee did not have a compliance officer does not stand as the Noticee had submitted copies of its communication with CSE prior to the date of the SEBI inspection wherein it had intimated the exchange that Mr. Jhunjhunwala is acting as the Compliance Officer of the Noticee.

15. In view of the above, having regard to the facts and circumstances of the instant proceedings, I find that the action as recommended by the Designated Authority is not commensurate with the defaults, non-compliances, contraventions and violations committed by the Noticee.

Order – 16. I, 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 issue a warning to the Noticee /KCGP Share Broking Services Pvt. Ltd. (SEBI Registration No INB 031017437). The Noticee is warned to be careful and diligent in the maintenance of records pertaining to its stock broking activity, comply with all the statutory provisions applicable in this regard and ensure all assistance to any SEBI inspection that may be conducted into the affairs of the Noticee in the future. Any such lapses in future will be viewed seriously.

Place: Mumbai G. MAHALINGAM Date: March 09, 2021 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA