Post on 27-Apr-2018
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BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/515/2015 ]
________________________________________________________________
UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA
ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING
INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER)
RULES, 1995
In respect of
BP EQUITIES PVT. LTD
(PAN: AAACB4602L)
___________________________________________________________________
1. Securities and Exchange Board of India (hereinafter referred to as "SEBI")
had conducted an inspection into the books of accounts and other records of
BP Equities Pvt. Limited (hereinafter referred to as "the Noticee"), a SEBI
registered stock broker and a member of the National Stock Exchange (NSE)
- INB/F/E/2301142036, the Multi Commodity Exchange of India Limited
(MCX)- SX - INB/F/E/ 261142039/36 & the Bombay Stock Exchange Limited
(BSE) - INB/F 010979732, and to examine whether it had complied with the
provisions of the SEBI Circulars and various Rules and Regulations with
respect to quarterly / monthly settlement of funds and securities of the clients
for the period between April 2012 to June 09, 2014 and whether corrective
steps were taken for the deficiencies as observed in the Internal Audit Report
and NSE Inspection Report with respect to quarterly / monthly settlement of
funds and securities of clients.
2. Upon inspection, the following was observed with respect to quarterly /
monthly settlement of funds and securities of the clients:
(a) Delay in implementation of the SEBI Circular with respect to Running
account settlement.
(b) Non- settlement of Running accounts.
(c) Substantial balance in the client accounts (both debit and credit) unsettled
for long duration of time.
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(d) Non-charging of delayed payment charges on substantial debit balances
for long duration of time and allowing further exposure despite the said
balances in client accounts.
(e) Maintaining accounts on a consolidated basis for securities and
commodity market clients.
(f) Accounts of clients with credit balances, both active and inactive, not
settled.
3. SEBI has, therefore, initiated Adjudication proceedings against the Noticee
for violating the SEBI circulars bearing Nos. MIRSD/SE/Cir-19/2009 dated
December 03, 2009 and MIRSD/SE/Cir-5/2010 dated March 31, 2010 (herein
after referred to as the 'SEBI circulars dated December 03, 2009 and March
31, 2010') and Clauses A(1), A(2) and A(5) of the Code of Conduct as
specified under Schedule II read with Regulation 9(f) and 26(xv) of the SEBI
(Stock Brokers and Sub-Brokers) Regulations, 1992, (herein after referred to
as the 'Broker Regulations').
APPOINTMENT OF ADJUDICATING OFFICER
4. I have been appointed as the Adjudicating Officer vide order dated December
31, 2014 under Section 15-I of the SEBI Act, 1992 (hereinafter referred to as
the Act) read with Rule 3 of the SEBI ( Procedure for Holding Inquiry and
Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred
to as the said “Rules”) to inquire into and adjudge under Section 15HB of the
Act, the alleged violation of provisions of law by the Noticee.
NOTICE, REPLY AND PERSONAL HEARING
5. A Show Cause Notice dated February 25, 2015 (hereinafter referred to as
“SCN”) was issued to the Noticee under Rule 4(1) of the said Rules to
show cause as to why an inquiry should not be held and why penalty be not
imposed on it for the aforesaid violations. Vide letter dated March 12, 2015,
the Noticee submitted its reply in the matter. Thereafter, in the interest of
natural justice and in order to conduct an inquiry as per Rule 4(3) of the said
Rules, an opportunity of personal hearing was granted to the Noticee on
August 31, 2015. The Authorized Representatives (ARs) appeared on the
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scheduled date and reiterated the submissions already made by the Noticee
vide its reply dated March 12, 2015.
CONSIDERATION OF EVIDENCE AND FINDINGS
6. I have carefully perused the charges leveled against the Noticee in the SCN,
written submissions made by the Noticee and the documents available on
record. In the instant matter, the following issues arise for consideration and
determination :-
a. Whether the Noticee has violated the provisions of the SEBI circular
dated December 03, 2009 and March 31, 2010 and Clauses A (1), A (2)
and A(5) of the code of conduct as specified under Schedule II read
with Regulation 9(f) and 26(xv) of the Broker Regulations?
b. Whether the Noticee is liable for monetary penalty as prescribed
under Section 15 HB of the SEBI Act for the aforesaid violations?
c. If so, what should be the quantum of monetary penalty?
7. Before proceeding further, I would like to refer to the relevant provisions of the
Broker Regulations and the SEBI Circulars dated December 03, 2009 and March
31, 2010 which read as under:
SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009
Subject: Dealings between a client and a stock broker (trading
members included)
1. This is in continuation of circulars (a) No. SMD/SED/CIR/93/23321
dated November 18, 1993 specifying the norms for regulation of
transactions between clients and brokers, (b) No. SEBI/MIRSD/DPS-1/Cir-
31/2004 dated August 26, 2004 specifying the model format for the
Member Clients Agreements, and (c) No. MRD/DoP/SE/Cir-20/2005 dated
September 8, 2005 specifying the conditions for issuing electronic contract
notes.
2. With a view to instill greater transparency and discipline in the dealings
between the clients and the stock brokers, it has been decided, in
consultation with Investor Associations, Secondary Market Advisory
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Committee of SEBI (SMAC), market participants and major stock
exchanges, that the stock brokers shall comply with the requirements as
annexed to this circular.
3. The stock brokers shall take necessary steps to implement this circular
immediately and ensure its full compliance in respect of all clients –
existing or new – at the latest by 31st March 2010.
4. The Stock Exchanges are directed to:
a. bring the provisions of this circular to the notice of the Stock Brokers
and also disseminate the same on their websites.
b. make necessary amendments to the relevant bye-laws, rules and
regulations for the implementation of the above decision in co-ordination
with one another to achieve uniformity in approach.
c. communicate to SEBI, the status of the implementation of the provisions
of this circular in their Monthly Development Reports.
5. This circular is issued in exercise of powers conferred under Section
11(1) of the Securities and Exchange Board of India Act, 1992 to protect
the interests of investors in securities and to promote the development of,
and to regulate the securities markets.
Annexure A
Requirements relating to dealings between a Client and Stock
Broker
Client Registration Procedure
1. The stock broker shall register a client by entering into an agreement
with him. For this purpose, the stock broker shall make available a folder
/book containing all the documents required for registration of a client.
The folder/book shall have an index page listing all the documents
contained in it and indicating briefly significance of each document. Once
signed, a copy of the same shall be made available to the client.
2. The folder/book shall have two parts: (a) Mandatory and (b) Non-
mandatory.
Mandatory Documents
3. The mandatory documents are:
a. Member Client Agreement (MCA)/Tripartite Agreement in case sub-
broker is associated,
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b. Know Your Client (KYC) Form
c. Risk Disclosure Document (RDD)
These shall be executed in the format as prescribed by SEBI.
4. The Client shall indicate the stock exchange as well as the market
segment where he intends his trades to be executed. He shall do so in the
KYC form in his own hand and sign against these.
5. The KYC form shall capture the identity and the address of the
introducer instead of his MAPIN/UID. The KYC form shall be modified to
this extent.
6. The stock broker shall have documentary evidence of financial details
provided by the clients who opt to deal in the derivative segment. In
respect of other clients, the stock broker shall obtain the documents in
accordance with its risk management system.
7. The Stock Broker shall also capture details of action taken against a
client by SEBI or other authorities during the last 3 years.
8. There shall be a mandatory document dealing with policies and
procedures for each of the following under appropriate headings:
a. refusal of orders for penny stocks,
b. setting up client’s exposure limits,
c. applicable brokerage rate,
d. imposition of penalty/delayed payment charges by either party,
specifying the rate and the period (This must not result in funding by
the broker in contravention of the applicable laws),
e. the right to sell clients’ securities or close clients’ positions, without
giving notice to the client, on account of non-payment of client’s dues
(This shall be limited to the extent of settlement/margin obligation),
f. shortages in obligations arising out of internal netting of trades,
g. conditions under which a client may not be allowed to take further
position or the broker may close the existing position of a client,
h. temporarily suspending or closing a client’s account at the client’s
request, and
i. deregistering a client.
Non-mandatory Documents
9. Any term or condition other than those stated in the mandatory part
shall form part of non-mandatory documents.
10. The clauses in the non-mandatory part shall not be in contravention of
any of the clauses in the mandatory documents, as also the Rules,
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Regulations, Articles, Byelaws, circulars, directives and guidelines of SEBI
and Exchanges. Any such contravening clause shall be null and void.
11. Any authorization sought in non-mandatory part shall be a separate
document and shall have specific consent of the client.
Running Account Authorization
12. Unless otherwise specifically agreed to by a Client, the settlement of
funds/securities shall be done within 24 hours of the payout. However, a
client may specifically authorize the stock broker to maintain a running
account subject to the following conditions:
a. The authorization shall be renewed at least once a year and shall be
dated.
b. The authorization shall be signed by the client only and not by any
authorised person on his behalf or any holder of the Power of Attorney.
c. The authorization shall contain a clause that the Client may revoke
the authorization at any time.
d. For the clients having outstanding obligations on the settlement date,
the stock broker may retain the requisite securities/funds towards such
obligations and may also retain the funds expected to be required to
meet margin obligations for next 5 trading days, calculated in the
manner specified by the exchanges.
e. The actual settlement of funds and securities shall be done by the
broker, at least once in a calendar quarter or month, depending on the
preference of the client. While settling the account, the broker shall send
to the client a ‘statement of accounts’ containing an extract from the
client ledger for funds and an extract from the register of securities
displaying all receipts/deliveries of funds/securities. The statement
shall also explain the retention of funds/securities and the details of the
pledge, if any.
f. The client shall bring any dispute arising from the statement of
account or settlement so made to the notice of the broker preferably
within 7 working days from the date of receipt of funds/securities or
statement, as the case may be.
g. Such periodic settlement of running account may not be necessary:
i. for clients availing margin trading facility as per SEBI circular
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ii. for funds received from the clients towards collaterals/margin in the
form of bank guarantee (BG)/Fixed Deposit receipts (FDR).
h. The stock broker shall transfer the funds / securities lying in the
credit of the client within one working day of the request if the same are
lying with him and within three working days from the request if the
same are lying with the Clearing Member/Clearing Corporation.
i. There shall be no inter-client adjustments for the purpose of
settlement of the ‘running account’.
j. These conditions shall not apply to institutional clients settling trades
through custodians. The existing practice may continue for them.
Authorization for Electronic Contract Notes
13. The stock broker may issue electronic contract notes (ECN) if
specifically authorized by the client subject to the following conditions:
a. The authorization shall be in writing and be signed by the client only
and not by any authorised person on his behalf or holder of the Power
of Attorney.
b. The email id shall not be created by the broker. The client desirous of
receiving ECN shall create/provide his own email id to the stock broker.
c. The authorization shall have a clause to the effect that that any
change in the email-id shall be communicated by the client through a
physical letter to the broker. In respect of internet clients, the request for
change of email id may be made through the secured access by way of
client specific user id and password.
General
14. All the documents in both the mandatory and the non-mandatory parts
shall be printed in minimum font size of 11.
15. A copy of all the documents executed by client shall be given to him,
free of charge, within 7 days from the date of execution of documents by
the client. The stock broker shall take client’s acknowledgement for receipt
of the same.
16. The stock brokers having own web-sites shall display all the
documents executed by a client, client’s position, margin and other related
information, statement of accounts, etc. in the web-site and allow secured
access by way of client-specific user id and password.
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17. No term of the agreement, other than those prescribed by SEBI, shall
be changed without the consent of the client. Such change needs to be
preceded by a notice of 15 days.
18. The stock broker shall frame the policy regarding treatment of inactive
accounts which should, inter-alia, cover aspects of time period, return of
client assets and procedure for reactivation of the same. It shall display
the same on its web site, if any.
19. As on 31st March of every year, a statement of balance of Funds and
Securities in hard form and signed by the broker shall be sent to all the
clients.
SEBI Circular No. MIRSD/SE/Cir-5/2010 dated March 31, 2010
Subject: Clarification on dealings between a client and a stock
broker
1. This is with reference to SEBI circular No. MIRSD/SE/Cir-19/2009
dated December 3, 2009 in terms of which the stock brokers were directed
to take necessary steps to implement the circular immediately and ensure
its full compliance in respect of all clients - existing and new - latest by
March 31, 2010.
2. Subsequent to the issuance of the aforesaid circular, SEBI has received
representations from market participants expressing difficulties in
implementation of the circular and requesting extension of time. Hence, in
consultation with the major stock exchanges, it has been decided to
extend the time line.
3. The stock brokers are now directed to ensure the full compliance of the
said circular dated December 3, 2009 in respect of all clients-existing and
new - latest by June 30, 2010.
4. The Stock Exchanges are directed to:
a. bring the provisions of this circular to the notice of the Stock Brokers
and also disseminate the same on their websites.
b. make necessary amendments to the relevant bye-laws, rules and
regulations for the implementation of the above decision in co-ordination
with one another to achieve uniformity in approach.
c. communicate to SEBI, the status of the implementation of the provisions
of this circular in their Monthly Development Reports.
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5. This circular is issued in exercise of powers conferred under Section
11(1) of the Securities and Exchange Board of India Act, 1992 to protect
the interests of investors in securities and to promote the development of,
and to regulate the securities markets.
Stock brokers to abide by Code of Conduct.
9(f). The stock broker holding a certificate shall at all times abide by the
Code of Conduct as specified in Schedule II.
Schedule II
Code Of Conduct For Stock Brokers
[Regulation 9(f)]
A. General
(1) Integrity : A stock Broker, shall maintain high standards of integrity,
promptitude and fairness in the conduct of all his business.
(2) Exercise of due skill and care : A stock broker, shall act with due
skill, care and diligence in the conduct of all his business.
.....
(5) Compliance with statutory requirements : A stock broker, shall
abide by all the provisions of the Act and the rules, regulations issued by
the Government, the Board and the Stock Exchange from time to time as
may be applicable to him.
8. I find from the SCN that the Noticee is a registered stock broker with SEBI
and a member of NSE, BSE and MCX-SX and was incorporated in the year
1997. During inspection, in response to a questionnaire by the inspection
team with respect to the quarterly / monthly settlement of funds / securities of
clients, the Noticee vide its letter dated January 13, 2014 and revised
submission vide email dated June 20, 2014 had confirmed that actual
settlement of funds and securities, either monthly or quarterly, were being
carried out from April 01, 2012 onwards. Also, the Noticee was advised to
submit its reply as to why no actual settlement of funds and securities, either
monthly or quarterly, was being done by it. The Noticee, vide its email dated
July 22, 2014, had stated that initially, the concept of settlement of funds and
securities was not clear and therefore, it was doing the settlement of funds
and securities after manual calculations. The Noticee further submitted that it
took time to develop the system of settlement through the software, which
even as on date is not fully automated. Further, it submitted that the new
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system reasonably assists it in settling the accounts as a result of which it is
in a position to better implement the settlement of accounts. It was, therefore,
alleged in the SCN that the Noticee was doing the actual settlement of funds
and securities of the clients, either monthly or quarterly, only from April 01,
2012 onwards i.e. with a delay of one year and nine months from the date of
implementation and thus, remained non-compliant with Point No. 12 of the
SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009 and
SEBI Circular No. MIRSD /SE/Cir-5/2010 dated March 31, 2010 with respect
to quarterly / monthly settlement of funds and securities of clients.
9. I further find that the inspection team had selected a sample of 39 clients for
verification of the Running Accounts settlement analysis. Upon analysis, it
was noted that the Noticee had obtained authorization for maintaining of
running accounts and settlement of funds and securities from its clients in
writing. Brief analysis of the sample data submitted by the Noticee pertaining
to clients for settlement purpose is detailed below:
Sr no
Quarter Not Applicable
A
Settled
B
Not Settled
C
Considered Settled on
account of debit in Commodities
D
Percentage Not settled (C+D/39-A)
1 Jun 2012 8 21 7 3 32.26%
2 Sept 2012 5 23 8 3 32.35%
3 Dec 2012 2 21 13 3 43.24%
4 Mar 2013 1 23 12 3 39.47%
5 Jun 2013 1 26 8 4 31.58%
6 Sept 2013 1 25 9 4 34.21%
7 Dec 2013 1 24 10 4 36.84%
8 Mar 2014 1 21 13 4 44.74%
10. From the sample analysis, it was noted that for all the quarters about
30 - 40 % of client accounts were not being settled. As the said observation
was made by the inspection team, during inspection, the Noticee was asked
to provide data pertaining to settlement schedule of all its clients. The data as
was submitted by the Noticee is as under:
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Quarterly settlement
Total number of active
clients during inspection
period
No of clients required to be
settled*
No. of clients settled
No. of clients
unsettled
Percentage of clients
unsettled
Jun-12 3818 10554 7333 3221 30.52%
Sep-12 3931 10585 7184 3401 32.13%
Dec-12 4335 10736 7057 3679 34.27%
Mar-13 3997 10854 7085 3769 34.72%
Jun-13 3450 12878 10408 2470 19.18%
Sep-13 3303 10387 7362 3025 29.12%
Dec-13 3808 13266 9882 3384 25.51%
Mar-14 3915 10977 10180 797 7.26%
* The clients which are having funds / stocks in their account during the quarter and required to be
settled.
11. From the above analysis, on an average, it was alleged that the Noticee had
not settled about 27% of the accounts required to be settled for all quarters
during the inspection period.
12. Further, the Noticee was also advised to submit information pertaining to total
amounts (debit and credit) not settled for all quarters. The Noticee had
submitted the data as mentioned below:
Quarterly settlement
No. of clients unsettled
Amount of credit
balance not settled
(Rs)
Amount of debit balance not
settled (Rs)
Jun-12 3221 68,37,046.75 44,49,744
Sep-12 3401 75,99,138.91 43,15,961
Dec-12 3679 74,50,440.27 47,33,290
Mar-13 3769 73,08,645.48 32,81,767
Jun-13 2470 91,10,066.2 19,88,011.52
Sep-13 3025 27,97,250.92 10,91,497.5
Dec-13 3384 34,21,309.05 7,50,412.32
Mar-14 797 47,58,703.9 31,61,534
13. From the said data, it was observed that the total debit balance amount not
settled by the Noticee for all the quarters during the inspection period ranged
between ` 7,00,000 to ` 47,00,000 and the credit balance unsettled ranged
between ` 27,00,000 to ` 91,00,000.
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14. Further, analysis was done for clients having substantial credit balance,
unsettled for long duration of time. The observation of the same was as
under:
Outstanding Ageing Report as on 31/03/2014-Creditors
Sl No Clients Outstanding
(Rs)
Code Name 271 - 360 days
1. 33005 SANGITA A SHAH 577126.81
2. VI017 HEMLATA PARAG KHANDRAY
83641.83
3. DJ134 BHARAT SHAH 57784.4
4. HY024 YUGANDHAR VEMULAPALLI
42427.46
5. ACS19 NRUPAL NARESHCHANDRA RAJA
32358.49
6. TN051 PRABHA JACOB NAINAN 11036.73
7. BN004 JAGDISH BABUBHAI MONAPARA
10650.73
15. From the above analysis, it was noted that 7 clients had continuous credit
balance of more than `10, 000/- which was not settled for 271-360 days as
on 31/03/2014.
16. Analysis was also done for clients having substantial debit balance, unsettled
for long duration of time. The observation of the analysis was as follows:
Outstanding Ageing Report as on 31/03/2014-Debtors
Sl No. Clients Outstanding
(Rs)
Code Name 360 - Above
days
1. AHO2809 SAMJUBEN DHIRUBHAI
VEKARIYA
3936930.83
2. AHO2815 NIRBHAY DHRUVBHAI DAVE 3134424.74
3. AHO2814 MANSUKHLAL TARSHIBHAI
VEKARI
2386298.8
4. AHO2808 DHIRUBHAI BHIKHABHAI
VEKARIY
2381978.47
5. RAK003 HIMANSHU ASHOKBHAI
BHARADHVA
1962602.45
6. AHO2813 GAURIBEN BACHUBHAI 766408.86
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TOGADIYA
7. JP210 ANITA JAIN 755874.62
8. 6042 VIREN RAMESH THAKKAR 661103.93
9. JP817 RAMLAL MALI 538646.48
10. ADV09 SHANTABEN NAVNITBHAI
PATEL
511557.93
17. From the above, it was noticed that the above 10 clients had continuous debit
balances of more than ` 50,000/- which were not settled for more than 360
days as on 31/03/2014.
18. Considering the substantial debit balances for long duration of time, during
the inspection, the inspection team had sought information from the Noticee
for 13 such clients with respect to delayed payment charges (DPC) and
further exposure on debit balances. The Noticee had submitted that if there is
a delay on the part of client in fulfilling his/her margin obligation or settlement
obligations, then the Noticee may levy interest at the rate of 2% p.m. or part
thereof on such shortage amount. From the data submitted by the Noticee
(vide email dated 26/08/2014) with respect to DPC and further exposure on
debit balance, the following analysis was done:
Sl. No.
Client Code
Name DPC charged
(Y/N)
Noticee's response to further exposure given on debit balance during the quarter
1 AHO2815 NIRBHAY DHRUVBHAI DAVE
No The exposure was given in Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
2 AHO2808 DHIRUBHAI BHIKHABHAI VEKARIY
No The exposure was given in Jul-Sep 12, Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
3 AHO2813 GAURIBEN BACHUBHAI TOGADIYA
No The exposure was given in Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
4 AHO2809 SAMJUBEN DHIRUBHAI VEKARIYA
No The exposure was given in Jul-Sep 12, Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
5 AHO2814 MANSUKHLAL TARSHIBHAI VEKARI
No The exposure was given in Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
6 RAK003 HIMANSHU ASHOKBHAI BHARADHVA
No The exposure was given in Jul-Sep 12, Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given
7 JP210 ANITA JAIN No No
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8 6042 VIREN RAMESH THAKKAR No No
9 JP817 RAMLAL MALI No No
10 ADV09 SHANTABEN NAVNITBHAI PATEL
No No
11 PRD46 SANTOSH KAILASHCHANDRA SHARM
No The exposure was given in Apr-Jun 13 and Jul-Sep 13. In Jan-Mar 14, only once the exposure was given
12 PRD01 VINOD SHANTILAL VORA No No
13 ACS04 JIGAR PRABODHBHAI BHOW
No The exposure was given in Apr-Jun. After this quarter, there was no further exposure given
19. From the above, it was noted that out of the selected 13 clients having
substantial debit balance for long duration of time, exposure was given in 8
cases. Further, in deviation to its policy on DPC, no DPC was collected in the
instant 13 cases. Thus, it was alleged in the SCN that the Noticee had not
collected DPC but allowed further exposure without recovering debit
balances in the clients' accounts.
20. I further find from the SCN that out of the sample 39 clients (as mentioned in
para no. 9), there were a total of 5 clients for whom the Noticee was
maintaining accounts on a consolidated basis for securities market and
commodity market. On further analysis, it was noted that out of the sample 39
clients, for 3 clients in the Financial Year 2012-13 and for 4 clients in the
Financial Year 2013-14, the accounts were being maintained on a
consolidated basis. Further, during inspection, the Noticee was advised to
submit the total number of clients for whom it was maintaining accounts in a
consolidated basis for securities and commodity markets. The Noticee, vide
email dated July 22, 2014, had submitted that for a total of 34 clients, the
accounts were being maintained on a consolidated basis. The Noticee further
submitted that its clients are also registered clients of its sister concern viz.
BP Comtrade Pvt. Ltd. (member of MCX and NCDEX) and for operational
convenience, its clients have instructed the Noticee to maintain the accounts
in a consolidated basis, taking into account, the balances of both companies
together. Therefore, upon specific instructions of its clients, the accounts
were being treated as settled considering the balance in commodity segment.
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21. The quarter wise analysis of accounts maintained in a consolidated basis,
taking into account the balances of both companies together, is as follows:
Quarters Apr-Jun
12
Jul-Sep
12
Oct-
Dec 12
Jan-
Mar 13
Apr-
Jun 13
Jul-
Sep 13
Oct-
Dec 13
Jan-
Mar 14
Total
instances
No. of
clients
32 32 32 32 33 33 33 33 260
22. It was observed that there were 260 instances during the inspection period,
wherein the accounts of the 34 clients were being treated as settled
considering the balance in commodity segment by the Noticee. In view of the
same, the inspection team had further advised the Noticee to respond as to
why it was maintaining accounts on a consolidated basis for securities and
commodity markets clients and whether any amount was transferred to/from
the client account to commodities account at the time of settlement. The
Noticee, vide email dated July 25, 2014, had submitted that it had not
transferred any amount to/from its equity arm to its commodities arm. As
there was a debit balance in commodities account of the common clients, it
had considered balance lying in the trading account to be settled. Thus, the
Noticee in its own reply has stated that there were 260 instances where
actual settlement of funds and securities (monthly/ quarterly) were being
carried out for 34 clients considering the debit balance in commodities
account which was allegedly to be in violation of the SEBI Circular dated
December 03, 2009.
23. While perusing the outstanding ageing report of the clients of the Noticee, the
inspection team had observed that substantial amount of credit balance was
lying with the Noticee. Accordingly, further data was sought form the Noticee
and it was observed that the Noticee had inactive clients with unsettled credit
balances. The analysis of these accounts is as follows:
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Quarterly settlement
Total number of active clients during
inspection period
No. of clients
required to be settled
No. of clients settled
No. of clients
unsettled
No. of clients
unsettled-inactive
No. of clients
unsettled-inactive-
with Credit balance
Jun-12 3818 10554 7333 3221 2780 77
Sep-12 3931 10585 7184 3401 2996 84
Dec-12 4335 10736 7057 3679 3238 83
Mar-13 3997 10854 7085 3769 3315 70
Jun-13 3450 12878 10408 2470 2030 64
Sep-13 3303 10387 7362 3025 2687 75
Dec-13 3808 13266 9882 3384 3041 83
Mar-14 3915 10977 10180 797 518 79
24. From the above analysis, it was noticed that in each quarter, about 60-80
clients accounts had unsettled credit balances lying with the Noticee.
Therefore, information was sought for the total credit balance lying with the
Noticee for the active clients as well as inactive clients. The Noticee, vide its
email dated July 25, 2014, had submitted the following information:
Active Clients with credit balances
Quarterly settlement
No of active clients
unsettled
No of active clients unsettled - Having credit balance
Total Amount - Consolidated from all
clients
Jun-12 441 38 21,78,568
Sep-12 405 47 32,70,627
Dec-12 441 59 37,93,232
Mar-13 454 61 34,26,155
Jun-13 440 43 27,99,414
Sep-13 338 28 15,44,244
Dec-13 343 33 23,83,048
Mar-14 279 29 23,51,123
From the above analysis, it was observed that on an average, about 40
active clients were having a total credit balance of ` 27,00,000 which was
allegedly not settled by the Noticee in each quarter.
Inactive Clients with credit balances
Page 17 of 24
Quarterly settlement
No. of inactive clients unsettled-with Credit balance
Total Amount - Consolidated from all clients
Jun-12 77 46,58,479
Sep-12 84 43,28,512
Dec-12 83 36,57,208
Mar-13 70 38,82,490
Jun-13 64 63,10,652
Sep-13 75 12,53,007
Dec-13 83 10,38,261
Mar-14 79 24,07,581
From the above analysis, it was observed that on an average, about 75
inactive clients were having a total credit balance of ` 34,00,000 which were
not settled by the Noticee in each quarter. As the analysis showed that the
amount of unsettled credit balance for inactive accounts was substantial in all
quarters during the inspection period, it was alleged that the Noticee had not
taken effective steps to settle these accounts.
25. In view of the above, it was alleged in the SCN that the Noticee, by not
adhering to the quarterly / monthly settlement of funds/ securities of clients,
had violated the SEBI Circular Nos. MIRSD/SE/Cir-19/2009 dated December
03, 2009 and MIRSD/SE/Cir-5/2010 dated March 31, 2010 and also had
violated Clauses A(1), (2) and (5) of the code of conduct as specified under
schedule II read with Regulation 9(f) and 26(xv) of the Broker Regulations.
Reply:
26. Vide letter dated March 12, 2015, the Noticee submitted its reply to the SCN.
The Noticee submitted that it is a stock broking company having membership
of multiple Exchanges and Segments. It stated that it caters to more than
20000 registered clients and executes trades in excess of ` 93,500 Crores
annually. With respect to the allegation of settlement of client accounts only
from April 01, 2012 onwards, the Noticee submitted that it has been settling
accounts of most of its clients even before April 2012 and there is no case of
large credit balance being retained by it. The Noticee submitted that the
requirement of settlement had brought a sea of change in the manner in
which the business of the Noticee was being carried out and resulted in major
Page 18 of 24
changes in the software and processes which took some time. However, the
Noticee stated that all the process has now been streamlined and it has been
100% compliant in the said requirement post the inspection.
27. With respect to the 39 sample instances of non-settlement of accounts, the
Noticee submitted that as a policy, the Noticee does not settle dormant
accounts as these accounts face a higher risk of fraud. The settlement of
these accounts was only done on specific requests after confirming the
credentials of the client. As a result, some of the accounts have remained
unsettled. Further, the Noticee mentioned that there are certain accounts
which are treated as non-settled on account of debit balances. It is the case
of the Noticee that these accounts should not be treated as unsettled as the
Noticee cannot derive any undue benefit from the balance of these clients,
which is the primary purpose for bringing in the requirement of settlement of
accounts. With respect to the allegation of unsettled client accounts having
debit and credit balance, the Noticee submitted that a large number of
accounts claimed to be unsettled have small amount of debit and credit
balance. Further, only 7 such instances where credit is in excess of ` 10,000
for a long duration has been observed. Further, the Noticee stated that out of
the large number of unsettled accounts, many of the accounts have debit
balance or are inactive where the Noticee does not settle the account for the
safety of the client. The Noticee mentioned that large number of unsettled
accounts have drastically reduced in the last quarter.
28. Further, the Noticee submitted that the total balance across all clients whose
accounts have not been settled is too miniscule. The average balance of one
client across the total debit and credit balance is a miniscule of ` 3000/-. i.e.
23746 clients (total number of clients) having a total of ` 7,30,54,819 debit
and credit balance. With respect to the clients having substantial credit
balance unsettled for a long duration of time, the Noticee submitted that only
7 clients had a credit balance in excess of ` 10,000 outstanding for a long
time, two of which are marginally above ` 10,000 and all but 1 is less than
` 1,00,000. Further, with respect to the clients having substantial debit
Page 19 of 24
balance unsettled for a long duration of time, the Noticee submitted that it
does not charge any Delayed Payment Charges or interest to its clients. The
Noticee stated that it has been working on recovering the debit balances.
29. With respect to the allegation of not collecting delayed payment charges and
giving further exposure to clients with debit balances for long duration of time,
the Noticee submitted that it obtains consent from the clients for charging the
delayed payment charges @ 2% per month. The Noticee stated that it did not
collect any delayed payment charges from its clients as it never intended to
indulge in fund based activity or making money from the debit balances of the
clients. Further, the Noticee submitted that it has not allowed the clients to
take further exposure in 5 instances out of the 13 instances mentioned in the
SCN. No further exposure was allowed after March 2013 in all but 2 cases.
The exposure was allowed very selectively based on specific request from
the clients after confirming the client's credentials and credibility. It is the case
of the Noticee that the regulatory requirement and the agreement with the
clients do not mandate charging of interest but only allows the trading
member to do so at its discretion and hence, there is no deviation from the
policy.
30. With respect to the allegation of maintaining accounts on consolidated basis
for security and commodity market clients, the Noticee submitted that the
clients have issued specific requests to settle the accounts after considering
balances across Equity and Commodity segment. The said practice is
followed only in case of specific request and not for all clients. The Noticee
submits that it has now done away with the said practice.
31. The Noticee submitted that out of client base of more than 20000 and of
more than 10000 accounts required to be settled, only about 115 clients
accounts are not settled in spite of having credit balance. The average credit
balance across all clients is about 61 lakhs. The Noticee submits that the
debit balance of the clients is also not vey high (about ` 30 lakhs per quarter).
Page 20 of 24
Findings:
32. I have carefully perused the charges leveled against the Noticee in the SCN
and the submissions made by it. With respect to the charge of settlement of
client accounts only from April 01, 2012 onwards, I find that the Noticee had,
during the inspection, vide its letter dated January 13, 2014 and revised
submission vide email dated June 20, 2014, confirmed that actual settlement
of funds and securities, either monthly or quarterly, were being carried out
from April 01, 2012 onwards. Also, the Noticee, vide its reply dated March 12,
2015 to the SCN has admitted that as a result of major changes in the
software and processes required to comply with the requirement of
settlement of client accounts, it took time to settle the client accounts and the
settlement of client accounts has now been streamlined by it. In view of the
same, I conclude that, admittedly, there was a delay on the part of the
Noticee to settle the funds and securities in the client accounts, either
monthly or quarterly, and started doing the same only from April 01, 2012
onwards which is in violation of SEBI Circular dated December 03, 2009 and
March 31, 2010.
33. Further, I find from para nos. 9 and 10 above that upon analysis of the 39
client accounts, it was noted that for all the quarters about 30-45 % of client
accounts were not being settled by the Noticee. Also, I find that as per the
settlement schedule provided by the Noticee, it had not settled about 27% of
the client accounts required to be settled for all quarters during the inspection
period. The Noticee has submitted that as a policy, it did not settle dormant
accounts and the settlement of these accounts was done only on specific
requests after confirming the credentials of the client. As a result of the said
internal policy, some of the accounts have remained unsettled. I find from the
submission of the Noticee that it has admitted that the client accounts have
been unsettled. Further, I do not find merit in the contention of the Noticee
that due to the internal policy adopted by the Noticee, the client accounts
which are/were dormant are kept unsettled. I find that the stock broker has to
frame appropriate internal policies in accordance with the Circulars, Rules
and Regulations framed by SEBI. Adopting policies which are not in line with
the statutory requirements cannot be a ground to deviate from the same.
Page 21 of 24
34. Further, I find that the Noticee has even admitted that the client accounts
having debit balances have not been settled by it. Also, I do not find any merit
in the submissions of the Noticee with respect to the contention that a large
number of accounts claimed to be unsettled have small amount of debit and
credit balances. The Noticee has admitted the fact that in 7 instances where
the credit is in excess of ` 10000 for a long duration of time have been
unsettled. Also, I do not find merit in the submission of the Noticee that the
total credit balance in the accounts which are unsettled is miniscule in
asmuch as the fact that the said accounts have been unsettled is in itself a
violation of the provisions of the SEBI Circulars. Not settling the said client
accounts, either monthly or quarterly, having debit balances for a long
duration of time does amount to violation of the SEBI Circular dated
December 03, 2009 as settlement of client accounts on a monthly or
quarterly basis applies to the accounts which have credit balances as well as
accounts having debit balances.
35. I also find that during the inspection, upon a sample check, it was noted that
for 13 instances the Noticee had not collected DPC from the clients having
debit balances in their accounts and also allowed further exposure to the said
clients. The Noticee had submitted during the inspection that if there is a
delay on the part of the client in fulfilling his/ her margin obligations or
settlement obligations, then the Noticee may levy interest @ 2% p. m or part
thereof on such shortage amount. Upon perusal of the submissions made by
the Noticee vide its reply dated March 12, 2015, I note that the Noticee has
admitted that it had given further exposure in case of 5 instances out of 13
instances wherein debit balances appeared and DPC was not collected. Also,
it has stated that no exposure has been allowed after March 2013 in all but 2
cases. I find that levy of DPC or charging of interest does not form part of the
mandatory requirements as laid down under the SEBI Circulars dated
December 03, 2009 and March 31, 2010. I find that a discretion has been
given to the stock brokers to frame policies in accordance with the various
SEBI Circulars and Rules and Regulations laid down by SEBI. If the Noticee
has framed a policy which does not violate the mandatory requirements of
the SEBI Circulars, I find that the same should not be viewed as a pure
Page 22 of 24
violation of it. Therefore, I accept the submissions of the Noticee and
conclude that the Noticee by not charging penalty / interest for client
accounts having debit balances for a long duration of time does not per se
amount to violation of SEBI Circulars. However, I find it fit to caution the
Noticee with respect to further exposure given by it to clients having debit
balances and that it should refrain from the said practice in future.
36. With respect to the charge of maintaining client accounts on a consolidated
basis for securities and commodity market, I find that out of a sample check
of 39 clients, 5 client accounts were being maintained on a consolidated
basis for securities and commodity market segments. Further, upon analysis
of the data as submitted by the Noticee during the inspection, it was noticed
that over 8 quarters, 260 such instances were noticed wherein the accounts
of 34 clients were being treated as settled considering the balance in
commodity segment. I find that during the inspection, the Noticee had
admitted that there were 260 instances wherein actual settlement of funds
and securities (monthly/ quarterly) were being carried out for 34 clients
considering the debit balance in commodities account. I note that the Noticee
has submitted that only on specific request to settle the accounts after
considering balances across Equity and Commodity segment, it used to
practice settlement of client accounts on consolidated basis and did not
follow the said practice for all the clients. Also, the Noticee has submitted that
it has stopped this practice now. In view of the said admission, I conclude
that the Noticee has violated the SEBI Circular dated December 03, 2009
which specifically mandates maintenance of separate client accounts.
37. From the foregoing, I find that the Noticee did fail to comply with the
provisions of quarterly / monthly settlement of funds and securities of clients
on various occasions and thereby, has not exercised due care and skill in
carrying out the business of the Stock Broker. Therefore, I conclude that the
Noticee by transacting in the manner mentioned in the above paragraphs has
violated the SEBI Circulars dated December 03, 2009 and March 31, 2010
and Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under
Schedule II read with Regulation 9(f) and 26(xv) of the Broker Regulations
Page 23 of 24
thus, warranting monetary penalty as prescribed under Section 15HB of the
Act which reads as under:
Penalty for contravention where no separate penalty has been
provided.
15HB. Whoever fails to comply with any provision of this Act, the rules
or the regulations made or directions issued by the Board there under
for which no separate penalty has been provided, shall be liable to a
penalty which may extend to one crore rupees.
38. At this instant, it is important to quote the observations of the Hon’ble
Supreme Court of India in the matter of SEBI v. Shri Ram Mutual Fund
[2006] 68 SCL 216(SC), wherein the court , inter alia, held that: “once the
violation of statutory regulations is established, imposition of penalty
becomes sine qua non of violation and the intention of parties committing
such violation becomes totally irrelevant. Once the contravention is
established then the penalty is to follow.”
39. While imposing monetary penalty, it is important to consider the factors
stipulated under Section 15J of SEBI Act, which reads as under:
“15J - Factors to be taken into account by the adjudicating officer:
While adjudging quantum of penalty under section 15-I, the adjudicating
officer shall have due regard to the following factors, namely:-
(a) the amount of disproportionate gain or unfair advantage, wherever
quantifiable, made as a result of the default;
b) the amount of loss caused to an investor or group of investors as a
result of the default;
(c) the repetitive nature of the default.”
40. I observe, from the material available on record, that any quantifiable gain or
unfair advantage accrued to the Noticee or the extent of loss suffered by the
investors as a result of the default cannot be computed. The defaults on the
part of the Noticee are repetitive in nature. However, I find that the Noticee
being a registered intermediary is required to comply with the various
Page 24 of 24
Circulars and Rules and Regulations as laid down by the Regulator to ensure
smooth and stable functioning of the capital market. The very purpose of the
SEBI Circulars dated December 03, 2009 and March 31, 2010 is that it shall
be compulsory for all the member brokers to settle the running accounts of
the clients on a monthly / quarterly basis so as to promote transparency.
Therefore, I conclude that the Noticee has not exercised adequate due skill,
care and diligence in its operations and failed to comply with the provisions of
Circulars dated December 03, 2009 and March 31, 2010 issued by the Board
and also Clauses A(1), A(2) and A(5) of the Code of Conduct as specified
under Schedule II read with Regulation 9(f) of the Broker Regulations. Such
wrongdoings cannot be ignored and the same deserves & attracts penalty as
per law.
ORDER
41. In view of the above, after considering all the facts and circumstances of the
case and exercising the powers conferred upon me under section 15-I (2) of the
SEBI Act read with Rule 5 of the said Rules, I hereby impose a penalty of
`5,00,000/- (Rupees Five Lakh Only ) on the Noticee viz.BP Equities Pvt.
Limited under Section 15HB of the Act. In my view, the penalty imposed is
commensurate with the defaults committed by the Noticee.
42. The above penalty amount shall be paid by the Noticee through a duly crossed
demand draft drawn in favour of “SEBI – Penalties Remittable to Government of
India” and payable at Mumbai within 45 days of receipt of this order. The said
demand draft shall be forwarded to the Division Chief, EFD - DRA II, Securities
and Exchange Board of India, SEBI Bhavan, Plot No. C - 4A , 'G' Block, Bandra
Kurla Complex, Bandra (E), Mumbai - 400051.
43. In terms of the Rule 6 of the said Rules, copy of this order is sent to the Noticee
and also to Securities and Exchange Board of India.
Date: September 28, 2015 D. SURA REDDY
Place: Mumbai GENERAL MANAGER &
ADJUDICATING OFFICER