Order in the matter of Sunchan Securities Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had received various complaints from investors against the stock broker, Sunchan Securities Limited (hereinafter referred to as the stock broker) during December 2008-January 2009 inter alia alleging that they had not received funds and securities due to them. The said complaints were subsequently forwarded by SEBI to the National Stock Exchange of India Limited (hereinafter referred to as NSE) and the Bombay Stock Exchange Limited (hereinafter referred to as BSE) to carry out a special purpose inspection of the stock broker and to submit a report. On receipt of reports from NSE and BSE, SEBI, vide an ad-interim ex parte order dated January 30, 2009 inter alia restrained the stock broker and its directors namely, Mr. Sunil Mansinghani, Mrs. Kanchan Mansinghani and Mr. Ajay Janardan Kotwal and its compliance officer Mr. Riyaz Ismail Shaikh from buying, selling or dealing in securities, directly or indirectly in any manner whatsoever, either for themselves or for their clients. Pursuant to affording an opportunity of hearing, SEBI, vide Order dated October 26, 2009 confirmed the said directions except as against Mr. Ajay Janardan Kotwal, for the reasons stated therein.

In the meanwhile, SEBI, vide Order dated June 8, 2009 appointed a Designated Authority (hereinafter referred to as the Enquiry Officer) under the provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as the Intermediaries Regulations) to enquire into the alleged violations committed by the stock broker. The Enquiry Officer, vide Report dated February 23, 2010 recommended the suspension of the certificate of registration of the stock broker for a period of five years. As the charges and resultant violations were extremely grave and serious in nature, SEBI was of the view that the recommended penalty was not commensurate with the violations committed by the stock broker and accordingly, issued a notice dated April 8, 2010 to the stock broker advising it to show cause as to why the recommended penalty should not be enhanced which may extend to the cancellation of its certificate of registration. The stock broker, vide electronic mail/letter dated May 3, 2010, though, requested SEBI to grant three weeks time to file the reply but, failed to adhere to the same.

Thereafter, another opportunity was provided to the stock broker by SEBI to file the reply by June 17, 2010. It was also informed to the stock broker that in case of its failure to submit the reply within the time stipulated, SEBI would proceed in the matter on the basis of the documents available on record. In reply, the stock broker informed SEBI that, it would not be possible to file the reply before June 17, 2010. Thereafter, the stock broker, vide letter dated June 28, 2010 (received by SEBI on July 1, 2010) submitted its reply to the show cause notice dated April 8, 2010. Subsequently, an opportunity of hearing was also granted to the stock broker on July 15, 2010. However, vide letter dated July 13, 2010, the stock broker informed SEBI about its inability to appear on the said date and stated “ …. I have made my written submissions on 01st July 2010 through which I have presented the facts of my case and I am hopeful that honorable member would take note of the same before pronouncing the final order”. Further, according to the stock broker, it had never indulged in manipulative trading practices which were harmful for the integrity of the market.

In view of the aforesaid reply of the stock broker, I do not consider it necessary to provide another opportunity of hearing to the stock broker and the present enquiry proceeding is being considered and disposed of on the basis of the Enquiry Report, the written submissions of the stock broker dated June 28, 2010 and other material available on record.

2. The Enquiry Officer, in his Report, found that the stock broker had contravened the following provisions of law:

i. Clause A (4), Clause A(1) and C(6) of Code of Conduct for stock brokers as prescribed in Schedule II of Regulation 7, Clause 1(e) of Regulation 6A, Regulation 21(1) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Stock Brokers Regulations). ii. SEBI Circular No. SMD/POLICY/CIR-6/97 dated May 7, 1997, SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993, SEBI Circular. No. SMDRP/Policy/CIR-39/2001 dated July 18, 2001, SEBI Circular: MRD/DoP/SE/Cir- 11/2008 dated April 17, 2008, SEBI Circular No. MIRSD/DPS-1/Cir-31/2004 August 26, 2004. iii. Section 12(1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act). iv. Rule 8 (3)(f) of the Securities Contracts (Regulation) Rules, 1957. 3. The stock broker, in its reply dated June 28, 2010 inter alia while stating that all the allegations had been dealt with in its earlier replies dated November 4, 2009 and February 2, 2010 (submitted to the Enquiry Officer), had put the blame on SMC Global Securities Limited (hereinafter referred to as SMC), its Clearing Member. The said reply explained the arrangement between the stock broker and SMC and the subsequent events. The stock broker had also made the following submissions:

“45. The actions of SMC have resulted in untold hardships and loss to Sunchan. Sunchan has suffered a major setback in business on account of breach of understanding by SMC which resulted in closure of entire business of Sunchan. Shutting down of Sunchan’s business, freezing of trading account by SEBI, directions against the Directors and the Compliance Officer, exparte interim Order passed by SEBI, are few of the outcomes which are solely attributed to the foul play of SMC. 46. The SEBI order was passed on 30.1.2009. The said exparte order was passed by SEBI because innumerable clients complaints were made to SEBI against Sunchan. The reason for the clients complaints to SEBI was non delivery of shares and non payment of ledger credits. Sunchan did not have anything to pay the clients as all the funds and shares were given to SMC as collaterals. The clients of Sunchan were left with no choice but to file arbitration against Sunchan. The clients of Sunchan have suffered tremendously due to the wrongful acts of SMC. The clients started filing arbitration only after the SEBI order was passed on 30.1.2009. There are innumerable cases of arbitration in BSE and NSE which is the outcome of the actions of SMC. It was after the wrongful acts of SMC and their subsequent actions which have thrown Sunchan out of business.”

4. The Enquiry Officer had considered the replies of the stock broker and thereafter, submitted the Report with his findings and recommendation. As stated above, the stock broker has not specifically controverted the findings of the Enquiry Officer in its reply. Having noticed so, I would proceed in the matter on merits.

5. One of the findings is that the stock broker had contravened SEBI Circulars dated November 18, 1993 and August 26, 2004 and Clause A(4) of Code of conduct for stock brokers specified in the Schedule II of the Stock Brokers Regulations. This was because the stock broker had allegedly misused the clients’ securities and funds for its own obligations and also the obligations of its directors. It was also alleged that the stock broker had not accounted for clients securities worth over `5 crores. SEBI, vide Circular dated November 18, 1993 set out certain guidelines for the regulation of transactions between clients and brokers. The relevant guidelines from the said Circular are reproduced herein below:

“1.It shall be compulsory for all Member brokers to keep the money of the clients in a separate account and their own money in a separate account. No payment for transactions in which the Member broker is taking a position as a principal will be allowed to be made from the client’s account. The above principles and the circumstances under which transfer from client’s account to Member broker’s account would be allowed are enumerated below. A] Member Broker to keep Accounts: Every member broker shall keep such books of accounts, as will be necessary, to show and distinguish in connection with his business as a member - i. Moneys received from or on account of each of his clients and, ii. the moneys received and the moneys paid on Member’s own account. ……. ……. ………… ………… 2. It shall be compulsory for all Member brokers to keep separate accounts for client’s securities and to keep such books of accounts, as may be necessary, to distinguish such securities from his/their own securities. Such accounts for client’s securities shall, inter-alia provide for the following:- a. Securities received for sale or kept pending delivery in the market; b. Securities fully paid for, pending delivery to clients; c. Securities received for transfer or sent for transfer by the Member, in the name of client or his nominee(s);

d. Securities that are fully paid for and are held in custody by the Member as security/margin etc. Proper authorization from client for the same shall be obtained by Member; e. Fully paid for client’s securities registered in the name of Member, if any, towards margin requirements etc.; f. Securities given on Vyaj-badla. Member shall obtain authorization from clients for the same. 3. Member Brokers shall make payment to their clients or deliver the securities purchased within two working days of pay-out unless the client has requested otherwise. Stock Exchange shall issue a Press Release immediately after the pay-out. …… ……..” 6. The said requirement was also reiterated by SEBI in a subsequent Circular dated August 26, 2004 and in the relevant clauses of the model ‘Member Clients Agreement’, annexed thereto. Thus, a stock broker is required to segregate the money and securities of the clients from that of his. I note that the stock broker, in its reply to the Enquiry Officer stated that it had submitted the party ledger trial balance and client ledgers as on February 23, 2009 to NSE.

It was further submitted that it had to recover `32.60 crores from debtors as against the payment of `15 crores to its creditors and was taking steps for the recovery of the same. On perusal of the party ledger trial balance, it was observed that the creditors (clients) of the stock broker had a balance of `21.55 crores (excluding the credit balance of the stock broker and its directors) and that the debtors (clients) of the stock broker had a balance amounting to `32.45 crores (excluding the debit balance of the stock broker and its directors). Since the credit balance was shown as `21.55 crores (as found from the records), it appeared that the stock broker had understated the credit balance by `6.55 crores. The Enquiry Officer having perused the trial balance of the stock broker, had observed that it contains certain deposit accounts, car installment account, legal and professional fee payable account, salary payable accounts etc. It was further observed that, after excluding the said accounts, the creditor clients had balances amounting to `13 crores and debtor clients had balances amounting to `32.14 crore.

It was observed by the Enquiry Officer that the stock broker did not have the requisite funds in its designated client bank accounts to meet its liability towards its creditor clients and that as per the trial balance submitted by the stock broker, it had only `12,425.37/-credit balance available in its various designated clients’ bank accounts. This has been explained in detail in the Enquiry Report and the same has not been disputed by the stock broker. The Enquiry Officer had also observed that the clients’ bank accounts were overdrawn to an extent of `1.92 crores and that the stock broker had issued cheques to the clients without having adequate balance in the respective client bank accounts. It was also observed that, as per the inspection report of BSE, the total value of the dishonoured cheques would amount to approximately `28,64,635/-. Thus, it indicates that the financial position of the stock broker was very weak and that it did not have the requisite funds to meet the obligation towards its clients. The Enquiry Officer had also observed that there were many trading accounts in the name of the stock broker and its directors and that the balances in the said accounts indicate that the final figure from the said accounts was a debit balance of `1.07 crores, which appeared to have been funded from the clients’ funds.

The stock broker had submitted that it could not recover its receivables, as NSE had shutdown its trading terminals on November 12, 2008 and that the unlawful liquidation by SMC had also resulted in heavy losses to itself and was therefore unable to pay the creditors and meet its obligations. The said submissions have no merit as, the SEBI Circular dated November 18, 1993, had mandated stock brokers to keep the money of their clients in separate accounts and that no payment for transactions in which the member broker is taking a position as a principal would be allowed to be made from the clients’ accounts. Further, Clause D of the said circular specifies the “moneys to be withdrawn from clients account”. The stock broker is required to segregate own funds and the funds of its clients. Clients’ fund should be used only for specified purposes. It therefore follows that the stock broker should, at all times, deposit the moneys payable to the clients in separate client bank accounts. The stock broker has not made cogent submissions as to why money from the clients’ accounts has been withdrawn.

As already observed, the stock broker does not have the client dues in the clients’ bank accounts. It is apparent that the said funds have been withdrawn by the stock broker and the same is clearly a misuse and in contravention of the SEBI Circular dated November 18, 1993.

7. I also note that the stock broker had submitted before the Enquiry Officer that it had provided the securities of its clients to SMC for the purpose of providing exposure to its clients. The stock broker in its reply dated June 28, 2010 has submitted that it had entered into an arrangement with SMC. According to the stock broker, but for the unilateral and unjustified curtailment of its limit by SMC, it would not have incurred any loss. In the Enquiry Report, it is mentioned that, BSE, during its inspection of the stock broker had found that the stock broker had pledged shares with SMC and that SMC had liquidated the pledged shares, which included securities worth `14.23 crore belonging to the clients of the stock broker. It was also found that the stock broker has not accounted for clients’ securities worth over `5.00 crores due to its clients and that the same were not available in the depository accounts of the stock broker. It has been brought out in the Enquiry Report that maximum loss occurred in the proprietary trading account and the trading account of the directors of the stock broker.

It is also noted that the securities of the clients kept with SMC had been liquidated to cover up for the said losses. It was further observed by the Enquiry Officer that NSE in its inspection report had observed that no records were produced by SMC regarding the use of exposure provided by it on the pledged securities of the stock broker’s clients. Therefore, it can be inferred that the securities of the clients of the stock broker held with SMC were kept as margin for the proprietary trades of the stock broker and that of its directors. In this regard, I refer to the provisions of SEBI Circular dated August 26, 2004 and the ‘Model Agreement between Stock Broker and Client’ prescribed under the aforesaid circular. In terms of clause 6 of the agreement, “The stock broker agrees that the money/securities deposited by the client shall be kept in a separate account, distinct from his/its own account or account of any other client and shall not be used by the stock broker for himself/itself or for any other client or for any purpose other than the purposes mentioned in SEBI Rules and Regulations circulars/guidelines/Exchanges Rules/Regulations/Bye-laws and circulars.” [Emphasis supplied].

Even if one were to accept the argument that there was an agreement between the stock broker and its clients, wherein the client would provide his securities for pledging the same with SMC and thereafter share profits, what was observed in the present case is that the stock broker had misused the clients funds and securities by keeping them with SMC for more exposure and using that exposure for trading in its own and its directors’ accounts, which is against the spirit of the legal provisions mentioned above. This conduct is unacceptable and has to be stopped. Therefore, I am in agreement with the finding with the Enquiry Officer that the stock broker misused the clients’ securities and funds for its trade obligations and also the trade obligations of its directors and that the stock broker had not accounted for clients securities worth over ` 5 crores. The fact that the stock broker took more exposure in securities market not commensurate with its own financial soundness and utilizing the securities of its clients to take such exposure through SMC is a conduct against the interest of its clients.

In view of the above reasons, I have no hesitation in finding the stock broker guilty of contravening the provisions of SEBI Circulars dated November 18, 1993, and August 26, 2004 and Clause A(4) of the Code of Conduct prescribed for stock brokers in Schedule II read with Regulation 7 of the Stock Brokers Regulations.

8. The next allegation against the stock broker is that by trading on behalf of different clients in its proprietary trading account, it has acted as an unregistered portfolio manager in violation of Section 12(1) of SEBI Act. The Enquiry Officer has found the stock broker to have acted as an unregistered portfolio manager for the following reasons:

a. The stock broker had taken general authorization from all the clients for maintaining their shares as collateral with the clearing member. b. The stock broker and its directors were trading in their own names against exposure received by pledging clients’ securities with SMC and was sharing the profits with clients.

c. The stock broker had in its letter dated August 28, 2009, admitted that they were operating a “Loan Scheme”, where securities were accepted from the clients on profit sharing basis.

The said findings remained uncontroverted before me. I note that the stock broker had submitted before the Enquiry Officer that it never traded in its name against the exposure received by pledging clients’ securities with SMC unless the shares have been allocated to it under a loan scheme. It therefore follows that the stock broker has been operating a loan scheme as observed by the Enquiry Officer. Further, it has been submitted that it either gave advisory services to its clients or took shares from them on loan and gave them a certain percentage of profits as compensation for the use of their shares. According to the stock broker, the same would not tantamount to being an unregistered portfolio manager. Even as per the stock broker, it had extended advisory services to its clients and has shared profits with those clients whose securities were used for trading in the securities market. Further, the stock broker was also operating a “loan scheme” and had used the securities procured under the said scheme for taking exposure. The said conduct would fit within the ambit of the definition of the expression “portfolio manager” in terms of Regulation 2(cb) of the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993. Admittedly, the stock broker is not a registered portfolio manager. As the stock broker has not registered itself with SEBI for providing portfolio management services, it has indeed contravened Section 12(1) of the SEBI Act.

9. Another finding by the Enquiry Officer against the stock broker is that it had violated Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 and the SEBI Circular No. SMD/POLICY/CIR-6/97 dated May 7, 1997, for the reason that it involved in fund based activities. According to the Enquiry Officer, it was observed from the trial balance as on March 31, 2009 that certain clients were having debit balances amounting to `32.14 crores (excluding debit balances of directors and related parties) and that many clients have debit balances to the tune of `10 lakhs or more. The Enquiry

Officer has observed that the stock broker has allowed those clients to trade even after they had debit balance and therefore, had funded the clients to trade. No submissions have been made by the stock broker in its reply dated June 28, 2010 in respect of this charge. Before the Enquiry Officer, I note that the stock broker has submitted “….we use to give leverage to the clients after considering and testing the risk management policies and after considering clients strength to observe the exposure. We have at all times even reduced the allowable exposure in the event the client’s creditability is under doubts”. Thus, the stock broker had accommodated his clients for the transactions in securities without collecting the obligations from them and funded these transactions, which is not permissible under the aforesaid SEBI Circular and therefore, I find the stock broker guilty of contravening the provisions of law as alleged.

10. The Enquiry Officer had also found the stock broker to have contravened Regulation 21(1) of the Stock Brokers Regulations by not co-operating with the inspection team of NSE during their course of inspection by not providing them the documents sought from it. According to the Enquiry Officer, the stock broker could not provide the following details and documents which were demanded by the NSE inspection team during the course of inspection despite reasonable time given for producing the same:

“…… a) Client wise break-up of securities pledged with SMC Global towards margin in their demat account No: 1201910100000391 maintained with CDSL b) Client wise break-up of securities lying in Client Beneficiary account no: 1203770000000093 as on 04-12-2008. c) Statement of accounts for securities from SMC Global Securities Limited d) Ledger accounts in soft copies for the all the clients having debit or credit balances from 01- 04-2008 till 16-12-2008. e) Reasons for the client securities pledged with SMC Global Securities Limited in respect of the clients having credit balances and not having any margin requirement. f) Reasons for use of Clients Securities for PRO Trading and Trading in Family accounts. g) Declaration in respect of NEAT and CTCL Terminals. h) Aging analysis of Clients having Debit Balances. i) Copy of Client registration documents of parties with Top 30 Credit and debit balances. j) Client wise Scrip wise Register of Securities in the required format”

The finding of the Enquiry Officer has not been refuted by the stock broker in its aforesaid reply. In terms of Regulation 21(1) of the Stock Brokers Regulations, it shall be the duty of the stock broker, who is being inspected, to produce to the inspecting authority such records in its custody and furnish statements/information relating to the transactions in securities within such time as the said officer may require. The Enquiry Officer has observed “SSL did not produce the documents to NSE with in the time period of 7 days which was quite reasonable. It is observed that after substantial delay SSL has provided most of documents to NSE in installments in the subsequent months…….” In the absence of submissions to the contrary from the stock broker, I agree with the findings of Enquiry Officer in respect of this charge.

11. The next finding by the Enquiry Officer is that the stock broker by not taking steps to resolve the pending complaints against it, had contravened Regulation 6A(1)(e) of the Stock Brokers Regulations. I note that the Enquiry Officer, having relied upon a letter from NSE, had come to a conclusion that majority of investor complaints have not been resolved. The relevant portion from the Enquiry Report detailing the number and nature of the complaints against the stock broker has been reproduced herein below:

“NSE vide letter dated April 16, 2009 stated that 171 investor complaints pertaining to non payment of dues amounting to Rs. 3,93,82,594 are pending against SSL as on April 13, 2009. It has been submitted that the terms of settlement were agreed between SSL and complainants in respect of 58 investor complaints amounting to Rs. 21,90,966/-. Out of these, 54 complaints were for claim amount below Rs. 1,00,000/- and only 4 complaints had claim amount exceeding Rs. 1,00,000/-. It has further been observed that in most cases SSL has given post dated cheques (dated up to next two years) to these complainants. Further, 113 investor complaints amounting to Rs. 3,71,91,628/- were still pending at NSE. It was observed that settlement has been reached with complainants for approx. 5.56 % of the claimed amount and complaints constituting approx. 94.44% of the claimed amount are still pending. As per BSE inspection report, there were 96 complaints (including 17 arbitrations) amounting to Rs. 4.45 crores pending against SSL as on January 23, 2009.”

I find that the stock broker has not made any submissions in respect of the above observations in its reply dated June 28, 2010. From the Enquiry Report, I note that the stock broker has submitted that the total amount involved in such complaints was duplicated at the exchange level since the said clients have filed complaints with NSE and BSE for similar claim and vice versa. According to the stock broker, the complaints for a claim of `76.72 lakhs have been duplicated in BSE as the said clients have filed complaints/arbitration in NSE and that complaints for `182.79 lakhs in BSE are not valid as they are either loan entries or such complaints where there can be no claim on BSE. Further, the complaints claiming `10.75 lakhs have been made by clients whose ledger or family members ledger is in debit. It has been submitted that similarly at NSE complaints amounting to `7.75 lakhs are duplicated and complaints amounting to `81.97 lakh have been made by clients whose ledger or family members ledger in debit. In this regard, I note that the Enquiry Officer has observed “Even after considering the above, the fact remains that large number of complaints are still outstanding and that SSL has not redressed the complaints within 30 days as stipulated. As discussed above, the complaints which have been claimed to be redressed are all of small amounts and against which post dated cheques have been issued.” As stated above, the stock broker has not refuted this finding. In terms of Regulation 6A(1)(e) of the Stock Brokers Regulations, registration granted by SEBI under Regulation 6 of the Stock Brokers Regulations shall be subject inter alia to the condition that the stock broker shall take adequate steps for redressal of grievance of the investors within one month of the date of receipt of the complaint. The stock broker having failed to redress the same and also failing to submit adequate proof that the grievances have been settled, has to be found guilty of contravening the provisions of Regulation 6A(1)(e) of the Stock Brokers Regulations. This violation of one of the conditions of the stock broker’s registration cannot be viewed lightly.

12. The Enquiry Officer has also found the stock broker guilty of having violated Clause A(1) and C(6) of the Code of Conduct prescribed for stock brokers in Schedule II of Regulation 7 of the Stock Brokers Regulations, by taking excessive exposure without having sufficient margin, showing lack of integrity and also submitting wrong information to the stock exchange. I note that the Enquiry Officer has observed “SSL has collected short margins amounting to Rs 14.84 crores and wrongly reported the same as collected. This action compromises the risk management steps taken by NSE and thus increases the market risk. SSL has thus violated the requirement of integrity as mentioned in the code of conduct applicable for brokers. SSL had appointed SMC Global Securities Ltd. as its clearing member in the month of March 2008. As clearing member, SMC was responsible for clearing and settlement of SSL’s trades in the derivatives segment as well as collection of margin from the respective clients. Based on the collateral and credit balances in the client account, the respective clients get the exposure limits to take positions in the derivatives segment.”

13. I note that pursuant to some complaints alleging that the stock broker was availing higher trading exposure, a copy of the stock broker’s account with SMC was forwarded to NSE for comments. NSE had observed that there was a consistent shortfall in the stock broker’s account. As per the Enquiry Report, NSE vide its letter dated April 1, 2009 had revealed non-reporting of margin and non collection of dues in time. The Enquiry Report also observed:

“It appears that SSL was confirming collection of full margin to SMC and NSE. Similarly SMC was also confirming collection of full margin to NSE while actually there was a shortfall in SSL’s account. SSL in its statement provided to SEBI during the course of meeting held on February 09, 2009 stated that SMC had been providing an exposure of double the amount given as fixed deposit / securities after the hair-cut. It was also stated that this was an informal arrangement between SSL and SMC and that the shortfall was financed by SMC at a certain interest charge. As per the statement of margin shortfall in SMC provided by the complainants, it is observed that SSL did not have full margin for most of the days during the period March 25, 2008 to November 12, 2008 but had reported full collection to clearing corporation/exchange.” (Emphasis supplied) 14. In view of the above, the Enquiry Officer had found that the stock broker had contravened Clause A(1) and C(6) of the Code of Conduct prescribed for stock brokers in Schedule II of Regulation 7 of Broker Regulations. In this regard, I find that the stock broker has not made any submissions refuting the finding of the Enquiry Officer in respect of this charge.

I note that as per the letter of NSE dated March 30, 2009, the value of factual wrong reporting after considering the balances certified by the chartered accountant is to the tune of `14.84 crores. In the absence of any reply or documents by the stock broker, I am constrained to consider the said documents for arriving at a finding. It appears that the stock broker was reporting that it had collected margins to SMC and also to NSE, whereas it did not do so. The only submission is that it had an arrangement with SMC, whereby it would enjoy more exposure from lesser margins and that it was to pay interest for the margin shortfall as a consideration for the said service of SMC in accommodating itself in so far as the margin position was concerned. Thus, it becomes an admitted position that the stock broker was utilizing the facility extended by SMC by getting more exposure even if its margin levels were low. Further, I also note from the Enquiry Report that, as per the statement of margin shortfall of stock broker with SMC as provided by the complainants, it is observed that the stock broker did not have full margin for most of the days during the period between March 25, 2008 and November 12, 2008. Though, it did not maintain adequate margin levels for trading, it reported to have collected full margins to the clearing corporation/stock exchange.

In terms of Clause A(1) of the Code of Conduct for stock brokers, a stock broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. Further, C(6) thereof, requires that a stock broker shall not neglect or fail or refuse to submit the required returns and not make any false or misleading statement on any returns required to be submitted to SEBI and the stock exchange. By reporting falsely that it had collected adequate margins as required, the stock broker has not acted with high standards of integrity and fairness in the conduct of its business, thereby contravening Clauses A(1) and C(6) of the Code of Conduct for Stock Brokers as prescribed in Schedule II read with of Regulation 7 of the Stock Brokers Regulations.

15. The stock broker has also been found guilty of having used multiple client codes in violation of SEBI Circular dated July 18, 2001. In terms of the said circular, it would be mandatory for all stock brokers to use unique client codes for all clients. It has been observed that the stock broker had used more than one client code for self trades and for the trades of its directors. The name of the client and the codes used for their trading by the stock broker is given in the table below:

Name of the Client Segment(NSE) Client Codes Used Sunchan Securities Limited (stock broker)_ F&O BNS001, BNS151, BNS102,BNS155, BNS164, BNS165 Kanchan Mansinghani (Director) F&O BNK001, BNK029 Sunil Mansinghani (Director) F&O BNS117,BNS053 The same have been provided in the Enquiry Report also. The Enquiry Officer had observed that the stock broker had been using multiple client codes for trading purpose. In its reply dated June 28, 2010, the stock broker has submitted that the use of multiple codes by it was pointed out by NSE in its inspections conducted in October 2007. According to the stock broker, the same was discontinued from January 2008. Further, it has been submitted that the said issue was resolved earlier and settled by NSE. The said submission is an admission from the stock broker regarding its use of multiple client codes. In this regard, I also note the following observations from the Enquiry Report, “SSL has accepted in his reply that it used to do proprietary trades in the client codes BNS 001, BNS 102, BNS 151, BNS 155 till January’08. For client codes BNS 164 and BNS 165, SSL claimed that these codes belong to M/s Sunchan Enterprises and M/s Sunchan Equity Trading.

SSL had not provided any documentary proof such as Know Your Client forms, etc. in respect of these entities to prove that the ownership /controlling interest is not held by SSL or its directors. However as it has submitted the SSL PAN while uploading the UCC for these entities, it would be appropriate to infer that these are also proprietary entities. Similarly SSL has accepted that it has allotted multiple client codes for the directors, Ms. Kanchan Mansinghani and Mr. Sunil Mansinghani. Further SSL added that it had stopped using multiple codes but did not provide any documentary proof in this regard. An analysis of the ledger balances reveals that there are outstanding balances against the different client codes of the same entity. If there was no trading in a particular code, the balance should have been nil. The fact that it is not so indicates that SSL and its directors have been trading under multiple client codes.” [Emphasis supplied]. From the aforesaid portion reproduced from the Enquiry Report, it can be noted that the stock broker has admitted that it was allotting multiple codes and that it stopped using the same.

Therefore, for the aforesaid reasons, the stock broker is found to have used multiple client codes during the relevant period in contravention of the provisions of SEBI Circular dated July 18, 2001, though it may have stopped this practice later.

16. I note that the Enquiry Officer has also found the stock broker guilty of having contravened the provisions of Regulation 6A(1)(b) of the Stock Brokers Regulations and Clause A(5) of the Code of Conduct for stock brokers as prescribed thereof and SEBI Circular dated April 17, 2008. The Enquiry Officer had noticed that the BSE inspection report mentioned that the stock broker was not sending the statement of funds and securities to its clients on a quarterly basis as stipulated vide BSE Notice 20080527-6 dated May 27, 2008. The said report also stated that the stock broker was not sending the Daily Margin Statements to its clients. The stock broker (vide letter dated February 25, 2009) had submitted during the enquiry proceedings that it was sending the quarterly statement of accounts and holdings to its clients upto the quarter ended June 2008 and had admitted that it has not sent the same for the quarter- July to September 2008. In terms of the SEBI Circular dated April 17, 2008, “Brokers should issue a daily statement of collateral utilization to clients which shall include, inter-alia, details of collateral deposited, collateral utilised and collateral status (available balance / due from client) with break up in terms of cash, Fixed Deposit Receipts (FDRs), Bank Guarantee and securities.” BSE, in its inspection, had found that the stock broker has not issued daily margin statements to its clients.

Further, the stock broker has also been found not to have adhered to a BSE direction (BSE Notice 20080527-6 dated May 27, 2008) by not sending the statement of funds and securities to its clients on a quarterly basis. Regulation 6A(1)(b) of the Stock Brokers Regulations prescribes that a stock broker shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to him. Clause A(5) of the Stock Brokers Regulations stipulates that a stock broker shall abide by the provisions of the SEBI Act and the rules, regulations issued by the Government, SEBI and the stock exchange from time to time as may be applicable to him. The stock broker has not refuted the said allegations. Therefore, the stock broker by not issuing the statement of funds and securities to its clients and by not sending the statement on collateral, for the relevant period, has contravened the provisions of Regulation 6A(1)(b) of the Stock Brokers Regulations and Clause A(5) of the Code of Conduct for stock brokers as prescribed thereof and SEBI Circular dated April 17, 2008.

17. The Enquiry Officer has also found that the stock broker had deliberately submitting wrong details in its original application and annual returns filed with NSE by stating that one Mr. Ajay Janardhan Kotwal was its director, when on the other hand the said person was never a director of the stock broker. For the said reason, the stock broker was found to have contravened the provisions of Clauses A(1) and C(6) of the Code of Conduct prescribed for stock brokers in the Stock Brokers Regulations. In this regard, I note that Mr. Ajay Janardhan Kotwal was shown as a director of the stock broker in the application (filed by the stock broker) dated June 28, 2004 filed with NSE for registering the stock broker as a trading member on the Futures and Options Segment of the said stock exchange. The details of the directors given therein were certified by a chartered accountant. Further, a separate profile of Mr. Ajay Janardhan Kotwal was also filed along with the application stating that the said person was its executive director. Mr. Ajay Janardhan Kotwal’s name appeared as a director of the stock broker in the applications filed by the stock broker with BSE (in 2005).

As the name of Mr. Ajay Janardhan Kotwal reflected in the relevant records as one of the directors of the stock broker, SEBI while issuing an interim ex-parte Order dated January 30, 2009 in the matter, had inter alia directed the said person not to buy, sell or deal in securities, directly or indirectly, in any manner. Thereafter, when the parties concerned were heard, for the purposes of reviewing the interim directions, Mr. Ajay Janardhan Kotwal had contended that he never was appointed as the director of the stock broker. He had also submitted certified copies of Form 20B (annual returns) filed with the Registrar of Companies, Mumbai for the financial years ending March 31, 2005, March 31, 2006, March 31, 2007, to support his argument that his name did not appear as a director of the stock broker. He had also produced a letter from the chartered accountants, who had stated that they had only certified the shareholding and not the details of the directors. I also note that the stock broker had submitted that the name of Mr. Ajay Janardhan Kotwal was erroneously reflected in the papers filed with the stock exchanges and that the said person was never appointed as its director.

After considering the said submissions, the interim directions issued against Mr. Ajay Janardhan Kotwal was revoked vide an Order dated October 26, 2009. From the Enquiry Report, I note that NSE had confirmed that as per the annual returns for the year 2007-2008, Mr. Ajay Janardhan Kotwal is shown as a director in the stock broker. Before the Enquiry Officer, the stock broker had submitted that it had not filed any Form-32 with the Registrar of Companies in respect of the appointment of Mr. Ajay Janardhan Kotwal as its director. From the above discussions, it can be inferred that the stock broker, carelessly and in a negligent manner, had wrongly mentioned the name of Mr. Ajay Janardhan Kotwal as its director, when the said person was never appointed a director of the stock broker at any point in time. By doing so, the stock broker had submitted/filed false or misleading returns to the stock exchange and had failed to conduct itself in a fair manner, as required in terms of Clauses A(1) and C(6) of the Code of Conduct for stock brokers prescribed under the Stock Brokers Regulations.

18. After finding the stock broker guilty of contravening the aforesaid provisions for the reasons stated in this Order, the next step would be to fix the penalty that would commensurate with the violations found against the stock broker. The Enquiry Officer had recommended that the certificates of registration granted by SEBI to the stock broker, be suspended for a period of five years. Having regard to the seriousness of the findings against the stock broker, SEBI had issued a notice dated April 8, 2010 to the stock broker advising it to show cause as to why the recommended penalty be not enhanced which may extend to the cancellation of its certificate of registration. Though, the stock broker had replied (vide letter dated June 28, 2010) to the notice, the same did not specifically counter the findings in the Enquiry Report and merely explained the arrangement the stock broker had with SMC and the misfortune that befell on it out of the said arrangement. The stock broker further stated in its reply that it failed to understand the need to enhance the penalty and that the basis for such enhancement was not clearly spelt out in the show cause notice.

The said submission is unfounded. The reason for the proposed enhancement in penalty was mentioned in the show cause notice dated April 8, 2010 issued by SEBI to the stock broker. Further, an opportunity of hearing was also provided to the stock broker to make its submissions. As stated above in this Order, it is established that the stock broker had committed violations which are serious in nature. The lapses and the contraventions of the statutory provisions by the stock broker have been discussed and brought out in detail in the paragraphs above. The stock broker should not be allowed to carry on business as such. The seriousness of the same and the conduct of the stock broker would make sufficient grounds for SEBI to cancel all the certificates of registration (as a stock broker) granted to the stock broker. As a matter of fact, the stock exchanges had already expelled the stock broker from its membership. I also note that, pursuant to the expulsion of the stock broker from the membership of NSE and BSE, MCX Stock Exchange Limited had in terms of SEBI Master Circular dated March 17, 2010, declared the stock broker a defaulter and expelled it from the trading membership with effect from May 20, 2010. Therefore, the violations and the lapses of the stock broker have a bearing on all its certificates of registration as a stock broker granted by SEBI.

The present enquiry proceeding is accordingly disposed of as ordered herein below.

19. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby cancel the following certificates of registration granted by the Securities and Exchange Board of India to Sunchan Securities Limited, as a stock broker:

i. Registration Nos. INB/INF 230896533 on the National Stock Exchange of India Limited ii. Registration No. INB 010896539 on the Bombay Stock Exchange Limited iii. Registration No. INB 200896539 on the OTC Exchange of India, and iv. Registration No. INE 260896533 on the MCX Stock Exchange Limited.

20. This Order shall come into effect immediately on expiry of twenty one days from the date of the Order.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: DECEMBER 8, 2010