Order in the matter of summary proceedings against M/s. C.R. Jain and Company who defaulted in payment of registration fees

WTM/MSS/MIRSD/101/2011 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF SUMMARY PROCEEDINGS AGAINST M/s. C. R. JAIN & CO. WHO DEFAULTED IN PAYMENT OF REGISTRATION FEES Date of Hearing: June 8, 2011 Appearances: For Noticee: Mr. Manoj Jain, Authorised Representative Mr. Ravi Kumar Varanasi, Advocate, and Mr. Deepak Rane, Advocate. For SEBI: Mr. B. N. Sahoo, Deputy General Manager Mr. Yazdi Pir, Manager, and Mr. Amitesh Kumar, Assistant Legal Adviser. ORDER UNDER REGULATIONS 33A AND 33B OF THE SEBI (INTERMEDIARIES) REGULATIONS, 2008

1. Vide an Order dated August 2, 2005 under regulation 16(1) of the extant SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, SEBI had appointed an Enquiry Officer to conduct summary proceeding inter alia against M/s. C. R. Jain & Co. (SEBI Regn. No. INB050963310) (Proprietor Ms. Chand Rani Jain) (noticee) who had allegedly defaulted in the payment of registration fees as a stock broker. The Officer submitted report recommending suspension of the certificate of registration for a period of six months or till such time the outstanding registration fees is paid, whichever is later. Accordingly, SEBI, vide its Order dated August 10, 2009, accepted the said recommendations. On an appeal, the Hon’ble SAT remitted, vide Order dated April 26, 2011, the matter back to SEBI with a direction to pass a fresh order after furnishing a copy of the enquiry report and allowing the noticee to file her reply, if any. Vide letter dated May 2, 2011, a copy of the enquiry report was sent to the noticee with an advice to reply to the same. She filed a reply, vide letter dated May 16, 2011, and availed the personal hearing on June 8, 2011. She also made a written submission vide letter dated June 16, 2011. 2. I have considered the enquiry report, the reply, the oral and written submissions of the noticee as well as the other material available on record.

3. As per the documents enclosed to her reply, the noticee was admitted as a member of Delhi Stock Exchange (DSE) on April 24, 1990. She was permitted to trade under the name and style of “Chand Rani Jain” vide DSE’s letter dated March 25, 1992. Vide her letter dated May 12, 1992, she informed DSE that she wanted to start her business in the name and style of “M/s. C. R. Jain & Co.” and sought permission for the same. Subsequently, the SEBI (Stock Broker and Sub-Broker) Regulations, 1992 (Regulations) were notified on October 23, 1992 providing for a registration framework for stock brokers as well as registration fees payable by them. Vide letter dated January 24, 2994, DSE forwarded the application of the noticee to SEBI for registration as a stock broker in the prescribed format. Vide letter dated March 21, 1997, DSE followed up with SEBI that though more than 3 years had passed, the noticee had not yet received registration. SEBI granted registration on May 13, 1997. 4. I find that SEBI has computed the registration fees payable by the noticee as a stock broker with reference to her date of registration, i.e., March 13, 1997, as a stock broker with SEBI.

The noticee, however, contends that the registration fees should be computed with reference to her date of admission, i.e., April 24, 1990, as a member of Delhi Stock Exchange, as the date of registration with SEBI is just a formality. The issue, therefore, is the determination of the reference date for the purpose of computation of her fee liability under the Regulations. 5. The representatives of SEBI stated at the hearing that registration granted to a broker is subject to the condition that it pays such fees and in such manner as specified in Schedule III of the Regulations. The Schedule III specifies that a stock broker is liable to pay, for the first five financial years from the date of initial registration, registration fees linked to the volume of turnover in the previous financial years and thereafter, a fixed amount for every block of five financial years. Thus, regulations require payment of registration fees with reference to the date of registration. They also stated that this issue has been settled by the Hon’ble SAT in its Order dated September 19, 2003 in the matter of Anoop Jain & Co vs. SEBI in Appeal No.102/2002 as under: “Thus it is clear that circular No.07/2002 is of a clarificatory nature and it is not meant to amend the substantive provisions of the Regulations.

It is to be noted that Para I of Schedule III to the Stock Broker Regulations does not take the date of commencement of business by Stock Brokers as a referral point, though the circular refers to the commencement of business as a referral date. Sub para (c) of Para I takes “date of initial registration” as the referal date.” It further observed: “Obtaining certificate of registration in terms of section 12, thus is a condition precedent for carrying out the activities of a stock broker. The proviso provides protection to those who were already carrying on the business of stock broker etc. on the date of commencement of the SEBI Act, as in the absence of such a provision, in the light of the clear mandate in sub section (1) those existing intermediaries would have been debarred from continuing with their ongoing business. The proviso is thus to avoid hardship to those existing intermediaries. It provides relaxation from the requirement of regulation 12(1). It is only a protective measure. The proviso does not grant any deemed registration status to the intermediaries from the date on which section 12(1) came into operation.” 6. The learned Advocate for the noticee mostly relied on SEBI Circular No. SMD/Policy/Cir- 07/2002 dated March 28, 2002 which had clarified certain issues raised by the brokers.

It clarified that the period of first five years as specified in the regulations shall be computed as under: “Brokers who were already carrying on their activities in the financial year 1991-1992 would have to pay the fees for the financial year 1992-93 on the basis of their turnover for the previous financial year i.e. 1991-92. The brokers who have commenced their business from the financial year 1992-93 and onwards, would pay a flat fee of Rs.5,000/-for the first financial year if they have a nil turnover in the preceding financial year. For the next four years, brokers would pay fees based on their corresponding previous financial year’s turnover.” The learned Advocate argued that as per the circular, a stock broker who has been carrying on activities in the financial year 1991-92 would have to pay fees for the financial year 1992-93 on the basis of its turnover for 1991-92. For the next four years, it would pay fees based on its corresponding previous years’ turnover. Since the noticee was carrying on the stock broking business in 1991-92, it would pay turnover based fee for five years from 1992-93 onwards.

7. I find that Hon’ble SAT has addressed exactly this contention of the noticee in its Order in the matter of Anoop Jain & Co vs. SEBI cited by the representatives of SEBI. The intention behind the aforesaid circular was to clarify the relevant five years for a particular registration. If an entity, which was doing business in 1991-92, obtained registration in 1992-93 when the registration framework was put in place, it would pay fees based on its turnover in 1991-92. If it was not doing business in 1991-92 and obtained registration in 1992-93, it would pay Rs.5,000 for the first year as it did not have any business in the previous year. This is a special provision for the registrants in 1992- 93, not for members of stock exchanges who were carrying on business in 1991-92. The important point to note in this circular is that this is applicable to stock brokers registered with SEBI. This is not applicable to a member of stock exchange who is not yet registered with SEBI as a stock broker. Since the fees are registration fees and these are payable by registered stock brokers, the fee would accrue with reference to the date of registration.

The registration with SEBI is not a mere formality, contrary to the contention of the noticee. It is not that all members of exchange ultimately and necessarily get registration as stock brokers. While every registered stock broker is a member of a stock exchange, all members of a stock exchange are not registered stock brokers. 8. The learned Advocate for the noticee submitted at the hearing that SEBI has computed fees with reference to the date of commencement of business / admission as a member of stock exchange in many cases instead of the date of registration as stock broker and there are several case laws to support the same. At his request, the noticee was allowed time upto June 23, 2011 to submit a few such examples and few such case laws. Though the noticee has made a written submission, she has not provided any such example or case law. 9. In view of the aforesaid findings of the Hon’ble SAT and the requirement in the Regulations to levy fees with reference to the date of registration, I conclude that the registration fee liability of the noticee should be computed with reference to the date of her registration, i.e., May 13, 1997, as stock broker with SEBI.

10. I note that in terms of Regulation 6A (1) of the Broker Regulations, registration granted to a stock broker is subject to the condition that it pays the fees in the manner provided in the Regulations. Regulation 10(1) requires a stock broker to pay fees as specified in Schedule III. Schedule III requires a stock broker to pay the fees computed with reference to annual turnover of the preceding financial year by first day of October. I note that the noticee failed to pay the fees as per the Schedule III of the Broker Regulations by October for the preceding financial year. It did not pay subsequently despite follow up from SEBI. Regulation 10(2) authorizes SEBI to suspend the registration of a stock broker who fails to pay the fees required under the Regulations. Under Regulation 27(vii), a stock broker is liable for actions, including suspension of registration, if it has failed to pay fees as per Schedule III. It is clear from the enquiry report and the records of SEBI that the noticee has not paid fees in accordance with the Regulations and no more fulfils the condition of registration, and is, therefore, liable for actions under Regulation 10(2) read with Regulation 27(vii).

11. I note that the SEBI (Procedure for Holding Enquiry by the Enquiry Officer and Imposing Penalty) Regulations, 2002 have since been repealed and replaced by the SEBI (Intermediaries) Regulations, 2008.

12. I, therefore, in exercise of the powers conferred upon me under section 19 of the SEBI Act, 1992 read with regulation 33B (5) of the SEBI (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of M/s. C. R. Jain & Co. (SEBI Regn. No. INB050963310) till the time outstanding registration fees is paid in full. 13. A copy of this Order shall be served on the Delhi Stock Exchange Limited of which M/s. C. R. Jain & Co. is a member for necessary action. 14. This Order shall come into force on the expiry of 21 days from the date of this Order.

Date: June 23, 2011 M. S. SAHOO Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA