Order in the matter of Vrise Securities Pvt. Lt

WTM/GM/EFD/58/2019–20 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER REGULATION 28(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008. IN RESPECT OF – NOTICEE M/S VRISE SECURITIES PVT LTD (FORMERLY KNOWN AS M/S VISHESH CAPITAL PVT. LTD.) STOCK BROKER, BSE & NSE [SEBI REGN NOS. INF011288934 & INF231288938]

BACKGROUND – 1. M/s Vrise Securities Pvt. Ltd. (formerly known as M/s Vishesh Capital Pvt. Ltd.) (“VSL

/ Noticee”) is a SEBI registered stock broker, having membership of the Bombay Stock

Exchange (BSE) and the National Stock Exchange (NSE).

2. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), on receipt of an e-mail alleging running of dabba trading activities at Gold Crest Business Center, 514, 5th Floor, Opp. Manubhai Jewellers, L.T. Road, Borivali (W), Mumbai – 400092 by one

Mr. Jatin Mehta (hereinafter referred to as “Jatin”) by using the terminals allotted by VSL, directed the BSE and the NSE to conduct surprise inspection at the said Order in respect of Vrise Securities Private Limited premises for finding any possible illegal trading by VSL. NSE officials conducted informal visit on June 11, 2014 and observed that the notice board of VSL was displayed at the said location. NSE further observed that Jatin was present at the said location and he informed the team that he was associated with VSL. However, NSE found that the said location was not reported to Exchange. Since there were terminals observed at the location of visit, the inspection team once again visited the said location on June 12, 2014 along with an inspection intimation letter. Jatin, being an employee of VSL, refused to accept the inspection intimation letter and did not allow inspection officials to enter the said office premises. Thereafter, the Inspecting officers contacted compliance officer of VSL i.e. Mr. Ankit Chheda to facilitate inspection at the said location. However, VSL failed to ensure the conduct of inspection. A spot inspection of the site was carried out by BSE on September 03, 2014 and it was observed that the said location was closed.

3. NSE informed SEBI that the said location was not reported to the NSE by the Noticee as a location of its dealer’s office doing trading in its pro-account. As per the NSE’s records, Jatin was reported to be CTCL dealer operating at 520, Gurukripa, S.V.P. Road, Opera House, Mumbai – 400004, whereas the said terminal was actually being operated at Gold Crest Business Center, 514, 5th Floor, Opp. Manubhai Jewellers, L.T. Road, Borivali (W), Mumbai – 400092. It was reported by the Noticee that Jatin was a jobber with the Noticee from July, 2012 till termination of his services after the said inspection. Mr. Rakesh Kakadia, Chairman and Managing Director of the Noticee, stated on November 28, 2014 during the statement recording before SEBI that he had allowed Jatin to trade through its terminal allotted to him in pro-account.

4. Based on the above, it was alleged that VSL had not uploaded correct CTCL terminal details to the exchange, had allowed use of its pro-account trading terminal from a location other than its office which de facto operated as its branch office and had failed to have control over the branch and had failed to ensure the conduct of NSE inspection. Hence, VSL by not correctly uploading CTCL terminals, had allegedly violated the provisions of NSE’s circular nos. NSE/MEMB/3574 dated August 29, 2002, NSE/MEMB/3635 dated September 25, 2002 and NSE/MA/22732 dated February 13, 2013. Further, VSL by not cooperating with NSE for conducting inspection, had allegedly violated the provisions of Regulation 7.3 of Capital Market and F&O Regulations of the NSE. Further, by failing to have control over its branch activities, VSL had allegedly violated the provisions of Regulation 4.5 of Capital Market Regulations of the NSE and the NSE circular nos. NSE/MEM/275 dated June 12, 1997 and NSE/INSP/3685 dated October 17, 2002.

5. Pursuant to the completion of inspection by NSE and BSE and findings thereof, Inspection Report (IR) was submitted to SEBI. Based on the IR, it was alleged that VSL had violated the provisions of Clauses A(1), (2) & (5) of the code of conduct as specified under schedule II read with Regulation 9(f) and the provisions of Regulation 9(b) read with Regulations 27 (viii), (xv), (xvi), (xvii) of the SEBI (Stock Brokers & Sub Brokers) Regulations, 1992 (hereinafter referred to as “Brokers Regulations”) and provisions of SEBI circular No. SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003. In view of the same, Enquiry Proceedings were initiated against the Noticee under the provisions of SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as "Intermediaries Regulations") for the abovementioned alleged violations. Accordingly, a Designated Authority (DA) was appointed in the matter who upon a consideration of the facts before him and after granting an opportunity of hearing, found the Noticee to be in violation of the abovementioned provisions of the Brokers Regulations and the said SEBI Circular. Accordingly, the DA, vide his report dated December 31, 2018 submitted under Regulation 27 of the Intermediaries Regulations, recommended that the Noticee may be prohibited from registering new fresh / new clients for a period of one year.

SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING – 6. A Show Cause Notice dated January 25, 2019 (post–enquiry SCN) under Regulation 28(1) of the Intermediaries Regulations was issued by SEBI calling upon the Noticee to show cause as to why action as recommended by the DA or any other penalty, as deemed fit by the Competent Authority, should not be imposed on it.

7. Pursuant to receipt of post–enquiry SCN, the Noticee submitted its reply vide letter dated February 18, 2019. Further, an opportunity of personal hearing was granted to the Noticee on July 18, 2019 which was attended by it. The Noticee vide letter dated February 18, 2019 and during the personal hearing has submitted inter alia the following:

(a) The Noticee is a law abiding company having 16 branches and 192 employees. The Noticee has alsways complied with all applicable rules and regulations. The purported violation in question was only a one-off isolated incident for which the Noticee has already been penalized twice i.e. by SEBI (adjudication proceedings) as well as by the stock exchange (Disciplinary Action Committee Proceedings by NSE). (b) The instant proceedings also amount to res judicata and estoppel since adjudication proceedings by SEBI against the Noticee in relation to the very same facts and issues have already been concluded wherein a monetary penalty of Rs. Two Lakh was imposed on the Noticee. The Noticee has already paid the penalty amount to SEBI. Further, the NSE Disciplinary Action Committee (NSE-DAC) has also imposed a fine of Rs.1 Lakh on the Noticee for non-uploading of the CTCL locations as per the rules. The said imposition of penalty also arises from the same facts and circumstances and with respect to the same violations. The said fine has already been deposited by the Noticee with NSE. Therefore, the Noticee has already suffered penalties twice on account of same misdemeanor and thus, the instant proceedings should be dropped.

(c) The Noticee has duly complied with both the orders passed with respect to the same incident, which has been found to be a bonafide mistake on part of the Noticee. Neither SEBI nor the stock exchange has found any malafide objective or illegal gain having accrued to the Noticee on account of the alleged misdemeanor. (d) Despite the above penalties and the bonafide nature of the misdemeanor, in case the enquiry proceedings are proceeded with and is not dropped, the same will spell a death knell for the Noticee, all its employees and other stake holders and would result in a complete stand-still for the business of the Noticee. The imposition of such a harsh penalty is not warranted in the instant case and proceedings should be dropped. (e) As submissions on facts, the Noticee submits that Mr. Rakesk Kadakia had allowed Jatin to operate from outside the designated office as a jobber, only on the basis of humanitarian grounds and on the basis of having known Jatin fot about 35 years. There was no deliberate or malafide objective. (f) There has been no gain or unfair advantage which has resulted on account of the said terminal operating outside the designated office.

Further, no loss has been caused to the investor and the default is not repetitive in nature. Further, the turnover from the said terminal was also not too substantial.

(g) The Noticee, on being made aware of the situation, immediately contacted Jatin to ask him for his compliance, which he agreed to. However, by that time, the officials had already left. Immediately after the incident, the Noticee summoned Jatin to its office and terminated his association with the Noticee. This resulted in a minor scuffle as well. Thereafter, the Noticee filed a police complaint against Jatin. (h) The Noticee has ensured that appropriate action is taken against the erring jobber and the said violation never occurred thereafter. The Noticee has reassured SEBI that it would be very careful in monitoring locations and usage of all its terminals and in fact, there has been no violation thereafter. (i) As regards the inspection by NSE, since there was no prior notice before the said inspection, there was no violation of any instructions or regulations and the report prepared in furtherance of the purported inspection is liable to be ignored. (j) The penalty recommended by the Designated Authority is too harsh and is not commensurate with the violations committed. The said violation is the only instance in respect of which the Noticee has faced any regulatory intervention. Considering the totality of the circumstances, a lenient view may be taken in the matter. In several matters in the past, SEBI has considered issuance of warning as reasonable and commensurate penalty for similar violations.

8. Subsequent to the personal hearing, the Noticee vide email dated July 29, 2019 has further submitted inter alia the following:

(a) There was no conscious violation of law by the Noticee. It allowed Jatin to use its terminal on humanitarian ground since the trading in NOW terminal had just commenced on NSE. It was of bonafide belief that the new system could be used from any place and since Jatin was ailing with ill-health, he was allowed to operate outside office. However, the Noticee did not have any knowledge or information about his activities as he acted on his own volition without the Noticee’s knowledge. As soon as the Noticee became aware of the event that transpired with NSE officials, the terminal provided to Jatin was deactivated on same date itself. Even a complaint was made to Police authorities. The Noticee also reprimanded Jatin and has cut-off all the relationship with him. (b) Due to a venial lapse by an erring individual, the entire organization ought not to be guillotined. The Noticee is a small sized broker and is slowly taking baby-steps in the stock market. Over the last three years, it had a steady growth of new clients and sub-brokers getting associated with it. A heavy punishment of non-acceptance of fresh clients for period of one year, as recommended by the DA would be a striking blow to its business activities for no fault of theirs. (c) SEBI should take a lenient view since the Noticee has taken corrective measures and strengthened its systems to avoid any such event. It shall be careful and vigilant that no such inadvertent lapse occurs in future.

9. The Noticee has also submitted a number of case laws in support of its contention that issuance of warning in this matter may be considered as reasonable and commensurate penalty.

FINDINGS – 10. I have considered the report submitted by the DA along with the reply submitted by the Noticee and all the relevant material on record.

11. I note from the records that the Noticee is alleged to have operated his pro-account from a trading terminal which was not located at its corporate office from where it functioned and which was not uploaded and reported to the exchanges, as mandated under various NSE Circulars read with the SEBI Circular no. SEBI/MRD/SE/Cir32/2003/27/08 dated August 27, 2003. The Noticee is also alleged to have failed to exercise control over its branch operations and allow inspection of the same by the NSE. In this regard, I note that the Noticee has already admitted that it had allowed its trading terminals to be operated from outside the designated office and that the said terminals were not uploaded and reported to the exchange i.e. NSE, in breach of CTCL location reporting requirements.

12. Further, I note that though the Noticee has denied that it did not extend co-operation to the NSE team, the facts of the case and the chronology of events clearly establish that the Noticee failed to extend co-operation to the NSE team. I note from the records that at the place of inspection visited by the NSE officials, the trading terminals of the Noticee were found to be located and its Notice Board was found to be displayed. The same clearly indicates that the said place de facto operated as the Noticee’s branch office from which it was running its operations. Further, I note from the records that the NSE officials could not carry out the inspection of the said branch even when they had visited the same on two consecutive days (i.e. June 11, 2014 and June 12, 2014). From the same, it is quite clear that the Noticee had failed to extend cooperation to the NSE officials during the course of inspection and had not allowed inspection of its branch operation. Further, it is also established that the Noticee had also failed to exercise control over its branch operations. In this regard, it is also pertinent to refer to the observations of the NSE DAC in respect of the alleged violations, as quoted in the Noticee’s letter dated June 19, 2018 (submitted to the DA), which clearly state that “DAC concluded that by not allowing access to the premises at GCBC which was deemed office of VCPL as mentioned above, due to location of its terminal, VCPL has failed to comply with the above regulations… … …”

13. From the above, it is clear that the Noticee failed to maintain fairness in the conduct of its business, exercise due skill and care and comply with the statutory requirements. Thus, I agree with the DA’s findings that the Noticee has violated the provisions of Clauses A (1), (2) & (5) of the Code of Conduct as specified under Schedule II read with Regulation 9(f) of the Brokers Regulations. Further, since the Noticee has failed to comply with the provisions of circulars and regulations issued by the NSE in respect of reporting / uploading of pro-account CTCL Terminals, co-operation during inspection and exercise of control over branch operations, I further agree with the DA’s findings that the Noticee has also violated the provisions of Regulation 9(b) of the Brokers Regulations, read with provisions of SEBI circular No. SEBI/MRD/SE/Cir-32/2003/27/08 dated August 27, 2003. The abovementioned violations by the Noticee also amount to violation of the provisions of Regulation 27 (viii), (xv), (xvi) & (xvii) of the Brokers Regulations, which renders the Noticee liable for action under Chapter V of the Intermediaries Regulations.

14. Having concluded as above, I note that in view of the aforesaid violations, the DA, under Regulation 27 of the Intermediaries Regulations, has recommended that the Noticee be prohibited from registering fresh / new clients for a period of one year. In this regard, I note that the Noticee has submitted that the instant proceedings against him amount to res judicata since it has already been penalized by SEBI in an adjudication proceedings for the same violations, where a monetary penalty of Rs.2 Lakh was imposed on it. Further, the NSE DAC has also imposed a penalty of Rs.1 Lakh on the Noticee for the same violation. Thus, the Noticee has prayed for dropping of the instant proceedings. Further, the Noticee has submitted that the penalty recommended by the DA is too harsh for the violation committed. The Noticee has prayed that since the violation committed is only a one-off incident and since the Noticee has already taken corrective steps, a lenient approach may be taken by SEBI in the matter. I note that the Noticee’s contention that the instant proceedings suffer from res judicata and estoppel is not correct. It is well settled position of law that SEBI may initiate multiple proceedings for the same set of violations, and hence, the contention of the Noticee does not have any merit. However, I have considered the Noticee’s plea for lesser penalty than what has been recommended by the DA on the ground that the violations committed by the Noticee are not repetitive in nature and are limited to one incident, that no loss has been caused to any investor due to the default and that the Noticee has already taken corrective steps for addressing the default. Further, I also note that the Noticee has already been penalized monetarily both by SEBI as well as NSE. Considering all these factors in totality, I am inclined to pass an appropriate direction as deemed fit in the facts and circumstances of the instant case. Accordingly, while agreeing with the findings of the DA, I am inclined to impose a prohibition of six months on the Noticee on registering fresh / new clients, as against the prohibition of one year recommended by the DA.

ORDER – 15. I, in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 read with Regulation 28(2) of the Intermediaries Regulations, hereby prohibit the Noticee, viz. Vrise Securities Pvt. Ltd. from registering any new/fresh client for a period of six months from the date of this order.

16. A copy of this Order shall be served on the concerned Stock Exchanges for their information.

Place: Mumbai G. MAHALINGAM Date: January 08, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA