JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up with consent of parties.
2. The appellant who was a sub-broker has been visited with an order by SEBI dated 27.12.04 by which the appellant’s registration of certificate as a sub-broker has been suspended for a period of one month. Three weeks time was given for the appellant to file his appeal. The respondent has summed up the charge against the appellant at para 8 and 9 which reads as follows:
“8. I have noted that the enquiry officer found the sub-broker not guilty of following charges
– Non-reporting of off-the floor transactions
– Non maintenance of books of accounts and records
– Non maintenance of deposit of minimum margin by clients
– Delay in delivery/payment to clients
9. Upon considering all the facts of the case, I agree with the findings of the Enquiry Officer that most of the violations are technical in nature but the violation of dealing as unregistered sub-broker and non-segregation of clients’ funds from own funds are serious in nature, since the interest of investors at large is involved. In therefore agree with the recommendation of the enquiry officer for imposing a minor penalty of suspension of registration.”
3. Mr. Chauhan, the learned counsel for the appellant submitted that although the appellant was not a member of the NSE he subsequently became a member of the NSE as a sub-broker and was at the relevant time i.e. between 18.7.2000 to 18.1.2001 was a sub-broker to the Hyderabad Stock Exchange. It was further submitted that as a sub-broker of HSE the appellant was under the impression he could act as a sub-broker of NSE.
4. We are unable to accept the contention of the learned counsel for the appellant that the appellant was under the bonafide impression that he could have acted as a sub-broker of NSE without him being recognised as such. No broker or sub-broker can function on any of the stock exchanges without the broker or Sub-broker being registered with SEBI and with the respective stock exchange. Till the broker or sub-broker is registered with the stock exchange, it cannot deal with the stock exchange.
5. It was also submitted that when the appellant had dealings in NSE his application was pending with NSE.
6. I am afraid that would not be sufficient requirement of law. Till the appellant is officially recognised as a Member of the NSE and registered with SEBI the appellant could not have done any transaction on the NSE.
7. The respondent had imposed a minor penalty of suspension of registration for a period of 3 months.
8. The learned counsel for the appellant relied on the judgment of the Tribunal in Chona Financial Services dated 23.8.2004 and submitted that in similar circumstances the suspension was converted into one of warning. In Chona Financial Services, the Tribunal extracted the nature of penalty imposed by SEBI for different acts of misconduct which resulted only in a warning. The learned counsel for the appellant relied on paragraphs 7 and 8 of the judgement in Chona Financial Services, which reads as follows:
“7. The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.
a) M/s. Bakliwala Investment
Irregularities
– Provision for Tax for the interim period from April 1 to September 30, 2000 not made
– Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
– Broker had not time stamped the order slip/records
– Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
– Contract notes not issued within the specified time.
– Consolidated stamp duty not paid.
– Client Registration forms were not completed
– Order book was not maintained.
– Delay in payment of funds
– Delay in delivery of securities
– One client account being adjusted against another client without any authorization
– Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
– Compliant register not maintained.
– Client account were used for other purposes
– Margin money not collected
– In 10 cases, deals were done outside the NEAT System
Order
– Irregularities are basically technical lapses and do not deserve a substantive punishment.
– Minor Penalty – Warning
b) M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities
– Failure to obtain client registration forms and agreement
– Failed to maintain separate client account.
Order
Warning
c) M/s. Bama Securities
Irregularities
– Contract notes were missing
– Acknowledgement from the clients not obtained
– Not maintaining client registration forms
Order
Warning
8. Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
a) M/s. Ratanbali Capital Markets Ltd.
Irregularities
– Non-maintenance of books of accounts
– Contract notes
– Non-collection of margins from clients
– Misuse of client’s funds
– Share lending/borrowing
– Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange
Order
Warning
b) M/s. Twenty First Century Shares & Securities Ltd.
Irregularities
– Non-maintenance of books of accounts
* Delay in payment to clients
– Misuse of client’s funds
– Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
– Booking payment in different clients account.
– Loan against shares of holding company and loan transaction in clients account.
Order
Warning
c) M/s. Sanjay C. Bakshi
Irregularities
– Not maintaining margin registers
– Dealing with unregistered sub-brokers
– Not entering into agreement with few clients
– Non-segregation of clients funds with own funds
– Dealing with broker of other Stock exchange without getting registered as a sub-broker
– Irregularities in respect of contract notes
– Delay in payment/delivery of funds/shares to clients
Order
Warning
d) M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.
Irregularities
– Non-maintenance of books of accounts
– Dealing with unregistered sub-brokers
– Irregularities in issuance of contract notes
– Non-segregation of clients account with own account, misuse of client’s fund
– Delay on delivery of securities and not reporting off the floor transactions
Order
Warning
e) M/s. Mukesh Sawhany
Irregularities
– Non-maintenance of document registers
– Irregularities in issuance of contract notes
– Non-maintenance of separate client account
– Non-segregation of separate client account with own account
– Not reporting off the floor transactions
– Non redressal of investor complaints
Order
Warning”
9. The object of the exercise in imposing penalty even it be a warning, is only to rehabilitate the broker requiring him to mend his ways. Quoting these proceedings the appellant may have been entitled to a warning.
10. However, the appellant acted unauthorisedly as a sub-broker from 18.7.2000 to 18.1.2001 on the NSE. The amount of commission the appellant would have earned would not be less than Rs. 3 lakhs. This in our view, is unjust enrichment. We feel it appropriate that the appellant should disgorge this commission.
11. Taking into account the facts and circumstances of this case, we modify the penalty of suspension of 3 months and convert it into a penalty of Rs. 3 lakhs. It is also made clear that this penalty will not be treated as a stigma in the facts and circumstances of the present case. The appellant has already deposited a sum of Rs. 10 lakhs by way of interim order. The respondent is requested to refund the excess payment after deducting Rs. 3 lakhs as penalty as expeditiously as possible.
12. This order is passed in public interest as a mere warning would not pinch the pocket of the appellant and penal consequences would in our view, have a greater deterrent effect on the appellant.
13. No order as to costs.