UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 Against M/S MANSUKH SECURITIES AND FINANCE LIMITED, Depository participant with NSDL PAN: AAACM1701D BRIEF FACTS OF THE CASE:
1. M/s Mansukh Securities and Finance Limited (hereinafter referred to as MSFL or the Noticee or DP) is registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) as a Depository Participant (DP) of National Securities Depository Limited (NSDL) under the category of stock broker, vide SEBI registration numbers IN-DP-NSDL-140-2000 which was granted registration on May 23, 2000. It is also registered as NSE member and its group concern, Uttam Financials is Depository participant of Central Depository Securities Limited and all services are being provided in the same premises as that of MSFL. MSFL has its corporate office at 306, Pratap Bhavan, 5, Bahadur Shah Zafar Marg, New Delhi- 110002. Earlier the Depository participant Module (DPM) of MSFL was installed at 416, Pratap Bhavan, 5, Bahadur Shah Zafar Marg, New Delhi- 110002. The DP has a total of 6597 beneficial owner accounts (BO accounts), of which there are 6490 individual accounts, 104 corporate and HUF accounts and
3 clearing member accounts.
2. SEBI conducted an inspection of the various books of accounts, documents and records furnished by the Noticee for the period April 2002 to September 2004 during October, 2004.
3. The following have been ascertained from the Inspection Report: Firstly, no Chinese wall segregation has been observed in the Noticees depository participant operations, broking operations and other such activities because even though separate areas have been assigned to each of their activities, including separate work area, back office for activities pertaining to the depository operations such as account opening, dematerialization, debit instructions etc, the Front office was used for all the operations, be it broking, DP (both CDSL and NSDL) or commodities and the employees of broking also involved in DP activities. The Noticee has not been maintaining any register for the complaints received from the investors. No details of complaints were made available during inspection like the date of complaint, BO id, nature of complaint, remarks etc and there is no system to record the complaints received through phone, walk-in customers, e-mails etc, which is in violation of Regulation 20 (2) (e)1 of the SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as the SEBI DP Regulations). The Noticee has mixed and co-mingled the securities of various clients including that of its own directors and thus, violated Regulation 42 (1)2 of the SEBI DP Regulations of 1996. It has used the beneficiary account to retain clients margin and their securities on instruction or in case of those clients having debit balances, house their securities in the broking accounts. In such instances the movement of securities from these accounts should ideally take place either to the respective Client account or Members pool account in case of the securities sold by the client. It was also observed that a number of clients securities were warehoused in one account and securities have moved from one beneficiary account of the Noticee to another account of the Noticee and when asked about the same, the Noticee was unable to answer to this aspect. The Noticee was also found to have violated SEBI circular no. SMDRP/POLICY/CIR-36/2000 dated August 4, 2000 regarding account opening procedure for beneficial owners account and the following discrepancies have been figured, viz., in most of the accounts proof of identity of the clients was not obtained and all the accounts were opened upon the verification by the existing account holders and it was further observed that the employees of the Noticee have invariably verified the identity of a number of clients. In other instances viz., accounts with ids 10026850 and 10026809, the residence proof of the applicants was not obtained.
1 Reg.20 (2) (e): the participant shall redress the grievances of beneficial owners within thirty days of the date of the receipt of the complaint and keep the depository informed about the number and the nature of redressals.
2 Reg.42 (1): Separate accounts to be maintained. Clause 1 of this regulation states that separate accounts shall be opened by every participant in the name of each of the beneficial owners and the securities of each beneficial owner shall be segregated, and shall not be mixed up with the securities of other beneficial owners or with the participants own securities. It has been observed that photograph of the investor was stapled and not pasted, which is prone to misuse. This has been found in the BO ids 10026413 and 10026317. The Noticee was also found to have violated Regulation 413 of the SEBI (DP) Regulations of 1996 by not entering into agreement with the clients at the time of registration. There was a time gap of three months found between the date of opening account and the date of agreement and thus the Noticee has allowed the BO accounts to be operated without entering into the agreements, following are some of the instances wherein this violation has triggered: Ben ID Date of account opening Date of agreement Date of first transaction Difference in terms of days
1 10005378 18/09/2000 24/11/2000 04/10/2000 68
2 10005345 12/09/2000 24/11/2000 04/09/2001 74
3 10005337 13/09/2000 24/11/2000 25/09/2000 73
4 10005248 14/09/2000 24/11/2000 14/09/2000 72
5 10005152 09/09/2000 24/11/2000 06/10/2000 77
6 10005064 04/09/2000 24/11/2000 04/10/2000 82 It was also noticed that signatures of the account holders of the accounts 10000095 and 10000420 were not properly scanned and that neither the maker nor checker verified the signatures properly at the time of releasing securities from these accounts. It was further brought out in the inspection that most of the agreements were not dated ie., the date of entering into agreement was not mentioned and thus, it is difficult in such cases to comment on whether the DP has entered into agreement with client at the time of registration or subsequent to it. Thus it is essential to safeguard clients assets for which a valid agreement is of utmost importance. It has been further observed that for the beneficial account nos, 10005353 and 10004949, the Director of the Noticee Virendra Mansukhani has verified the identity of the account holders. Further, the photo of same person was found to have been pasted for two different persons. On account no. 10005353, Ms. Tanuja Karia and for account no. 10004949, Ms. Pragya Mansukhani, it may be noted here that Ms. Pragya Mansukhani is wife of the Director of the Noticee Mr.Virendra Mansukhani. Thus, the DP was found to have not acted diligently in this regard.
3 Reg.41: Agreement by participant. It states that every participant shall enter into an agreement with a beneficial owner before acting as a participant on his behalf, in a manner specified by the depository in its bye-laws. As regards the dematerialization, the Noticee was found to have violated Regulation 54 (4)4 of the SEBI (DP) Regulations, 1996 by not forwarding the DRFs to the issuer company/RTA within 7 days of the receipt. The following are such instances: No. DRN No. Date entered by the client on DRF Date of dispatch Delay beyond
07 days
1 22795 26/06/2004 5/7/2004 1
2 15615 6/11/2003 17/11/03 4
3 22794 26/04/2004 5/7/2004 1
4 22809 24/06/04 5/7/2004 3
5 15617 6/11/2003 17/11/03 4
6 22914 10/7/2004 19/07/04 2
7 15618 6/11/2003 17/11/03 4
8 15619 6/11/2003 17/11/03 4
9 22966 5/7/2004 26/07/04 14
10 22973 18/07/04 27/07/04 2
11 15620 6/11/2003 17/11/03 4
12 22981 30/06/2004 27/07/04 20
13 15623 14/10/03 17/11/03 27
14 22982 30/06/2004 27/07/04 20
15 15624 17/10/03 17/11/03 24
16 15630 5/11/2003 17/11/03 5
17 22983 30/06/2004 27/07/04 20
18 15648 4/11/2003 17/11/03 6
19 22984 30/06/04 27/07/04 20
20 15649 4/11/2003 17/11/03 6
21 22985 30/06/2004 27/07/04 20
22 15658 4/11/2003 17/11/03 6
23 22986 30/06/2004 27/07/04 20
24 15651 4/11/2003 17/11/03 6
25 22987 30/06/2004 27/07/04 20
26 15652 4/11/2003 17/11/03 6
27 22988 30/06/2004 27/07/04 20
28 15653 7/10/2003 17/11/03 34
29 23115 27/07/04 10/8/2004 7
30 15655 7/10/2003 17/11/03 34
31 15659 6/11/2003 17/11/03 4
32 23127 29/07/04 10/8/2004 5
33 15600 6/11/2003 17/11/03 4
34 23128 9/7/2003 10/8/2004 24
35 15661 6/11/2003 17/11/03 4
36 23183 28/07/03 16/08/04 12
37 15662 6/11/2003 17/11/03 4
4 Reg. 54: Manner of surrender of certificate of security. Clause 4 of this regulation states that the participant shall, within seven days of the receipt of certificate of security referred to in sub-regulation (1) furnish to the issuer details specified in sub-regulation (2) along with certificate of security.
38 15279 21/10/03 4/11/2003 7
39 15663 6/11/2003 17/11/03 4
40 15271 23/10/2003 4/11/2003 5
41 15664 6/11/2003 17/11/03 4
42 15148 18/10/03 4/11/2003 10
43 15665 6/11/2003 17/11/03 4
44 15320 18/10/03 4/11/2003 10
45 15666 6/11/2003 17/11/03 4
46 15319 14/10/03 4/11/2003 14
47 15667 6/11/2003 17/11/03 4
48 15318 14/10/03 4/11/2003 14
49 15668 5/11/2003 17/11/03 5
50 15317 14/10/03 4/11/2003 14
51 15669 6/11/2003 17/11/03 4
52 15316 14/10/03 4/11/2003 14
53 15670 6/11/2003 17/1/03 4
54 15045 20/10/03 4/11/2003 8
55 15673 8/11/2003 17/11/03 2
56 15044 20/10/2003 4/11/2003 8
57 15674 8/11/2003 17/11/03 2
58 15675 8/11/2003 17/11/03 2
59 15676 8/11/2003 17/11/03 2
60 15933 19/11/03 28/11/03 2
61 15677 8/11/2003 17/11/03 2
62 15678 8/11/2003 17/11/03 2
63 18004 6/12/2003 6/1/2004 24
64 15679 8/11/2003 17/11/03 2
65 18005 6/12/2004 6/1/2004 24
66 18035 27/12/03 6/1/2004 4
67 18048 29/12/04 6/1/2004 1 It has been observed during the scrutiny of the rejected DRNs that there were instances of DRN rejections due to mistakes committed at the Noticees end. Though this issue has not been addressed exactly in law, it needs to be viewed seriously as the same is akin to delay in dematerialization and thus results in opportunity loss to the investors as they might not be able to sell their holdings at the desired time. The following are the instances: Reason for Rejection No of instances Incorrect ISIN 79 Certificates details mismatched 27 Mis-match in the details of share certificates 37 Share certificate forwarded to the wrong / incorrect RTA 31 Incorrect holders name pattern 81 It has been further observed that even though the employees engaged in the DP operations were adequately informed about the circulars issued by SEBI and NSDL from time to time, so many lapses and irregularities have been observed in DPs functioning which shows that the compliance officer has not done his job properly. Last but not the least, the Noticee was found to have violated Clause 4 of the Code of Conduct specified in the Third Schedule r/w Regulation 20A5 of the SEBI (DP) Regulations.
4. As MSFL has allegedly violated Regulations 41, 42 (1), 20A, 20 (2) (e) and
54 (4) of the said DP Regulations and the SEBI Circular No. SMDRP/POLICY/CIR-36/2000 dated August 4, 2000 (hereinafter referred to as the said circular), MSFL is allegedly liable for monetary penalty under Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act). APPOINTMENT OF THE ADJUDICATING OFFICER
5. Ms. Babita Rayudu has been appointed as the Adjudicating Officer vide order of SEBI dated February 22, 2007 under section 15i of the sebi 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 Adjudication Rules) to inquire into and adjudge section 15hb of the sebi act the violation of the provisions of the SEBI (Depositories and Participants) Regulations, 1996.
6. Consequently, the then Adjudication Officer Ms. Babita Rayudu was sent on deputation and thereafter, the undersigned was appointed as the Adjudicating Officer in the instant matter vide SEBI order dated November 23, 2007. NOTICE, REPLY AND PERSONAL HEARING
7. A Show Cause Notice dated October 3, 2008 under Rule 4 of the Adjudication Rules was issued to the Noticee to show cause as to why an inquiry should not be held against them and penalty imposed under section 15hb of the sebi act for their failure to enter into agreement as mandated under Regulation 41 of the said Regulations and the violation of Regulations 42 (1) and 54 (4) of the said Regulations and the said SEBI Circular. The Noticee has filed a detailed reply vide letter dated December 24, 2008. Prior to commencing the adjudication proceedings
5 Reg.20A: Participants to abide by the code of conduct. clause 4 of the III Schedule states that a participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of the dematerialization request form, rematerialization request form and execution of debit instruction slip and in all other activities undertaken by him on behalf of the beneficial owners. against the entity by SEBI a Notice dated December 23, 2004 has been issued by the operational department in SEBI communicating the findings observed by SEBI, asking the Noticee to provide their comments within 14 days from the date of receipt of the notice. A reply dated February 15, 2005 was filed by the Noticee and they requested for a personal hearing as well.
8. Subsequently, the undersigned had given an opportunity of personal hearing on April 13, 2009 to the Noticee at SEBI-NRO, New Delhi. On the scheduled date of hearing, Mr. Virender Mansukhani, Director of the Noticee appeared on behalf of the Noticee and made detailed submissions reiterating the reply filed on December 24, 2008, the contents of which will be discussed in the following paragraphs. WRITTEN SUBMISSIONS/ CONTENTIONS RAISED BY THE NOTICEE:
9. The Noticee, vide its replies dated February 15, 2005 and December 24, 2008 had made detailed submissions. Further, during the personal hearing held on April 13, 2009 by the undersigned the Noticee reiterated the submissions made earlier. The extracts of submissions made by the Noticee along with the contentions so raised, inter alia are stated below: The Noticee denied the alleged violation of clause 4 of the Code of Conduct specified in Third Schedule r/w Regulation 20A of the said DP Regulations, 1996 by the Noticee wherein the signatures have undergone change and do not match fully with the signatures captured in the DPM system. In this regard, the Noticee had quoted an observation from the inspection report, which states that signature for the account holder 1000095 and 10000420 were not properly scanned and it is observed that neither maker nor checker was verifying the signature properly at the time of releasing securities from these accounts. The Noticee stated that going by the literal meaning of this observation, there has been no change in signatures and that the observation has been made regarding the scanning of the signature as captured in the DPM system, which was improper in his view. The screen shots of the captured signatures for the said accounts have been enclosed in the reply. The Noticee also stated that they have installed maker and checker concept compulsorily provided in the Gismo Software given to them by NSDL throughout the DP operations and that both maker and checker verify the signatures of the beneficial owner before releasing the securities from any beneficiary account and that the remarks made by the Inspecting official cannot be the basis for such allegation. As regards the alleged non-compliance of the SEBI circular no.SMDRP/POLICY/36/20006 dated August 4, 2000 by not following the detailed account opening procedure, the Noticee denied the same and reiterated the contents of their reply dated February 15, 2005. It was stated in the inspection report that many accounts were opened with the verification of the existing account holders and without obtaining any additional identity proof from the account holders. The Noticee in its reply dated December 24, 2008, stated in this regard that the same practice has been adopted by virtue of the said SEBI circular dated August 4, 2000 and the quoted the text of it. The reply stated that the provisions contained in the said circular clearly reflect that the identity of the person can be verified in any of the three ways stipulated and the provisions clearly suggests that if the applicants signatures and photographs are authenticated by the existing holder, the same stands as good as if the same are verified from the originals of applicants valid passport, voter id, driving license or PAN card with photograph. As regards the instances where residence proof was not found to have been attached with the account opening forms, the Noticee had stated in its reply that the same existed with the forms and they enclosed the photocopies of the same for BO ID 10026850 and 10026809. As regards the stapling of photographs instead of their pasting is concerned, the Noticee stated that the same is not a general practice and that they have pasted the photographs on the respective forms. As regards the dates not being mentioned on all the agreements, it was stated that dates are invariably mentioned on all the agreements and there is no instance of having entered into agreements with the clients subsequent to the date of registration. As regards the issue about verification of the identity of the account holders done by Mr.Virender Mansukhani, Director of the Noticee, it was stated in the reply that the same has been done by him in his capacity as the beneficiary account holder. As regards the issue about the photograph of the same person being used in two beneficiary accounts for two different persons, it has been stated that this has happened in the case of Mrs. Pragya Mansukhani, whose maiden name is Ms. Tanuja Karia and that there is no question of them not acting diligently in this respect. Last but not the least, it was stated that in cases where it was observed that the Noticees employees/franchisees have invariably verified the identity of a number of clients in their capacity as beneficiary account holders in their DP and not in their capacity as DPs employees/franchisees.
6 SEBI circular dated August 4, 2000: A beneficiary account must be opened only after obtaining a proof of identity of the applicant. The applicants signature and photograph must be authenticated by an existing account holder or by the applicants bank or after due verification made with the original of applicants valid passport, voter id, driving license or PAN card with photograph. Thus the Noticee stated that no violation of the said SEBI circular can be triggered as the account opening procedure has been strictly followed by the Noticee. As regards the issue pertaining to mixing and co-mingling of each of the beneficial owners securities with the securities of the other beneficial owners, thus allegedly violating Regulation 42 (1) of the SEBI (DP) Regulations, 1996, the Noticee submitted that the issue pertains to their broking operations and not the DP operations, because if the securities were at some other DP, then the issue would not arise. Further, in their capacity as DP, they have segregated the securities as per the BO accounts opened with them. The transfers between various BO accounts in their DP have taken place based upon valid delivery instruction slips (DIS) received from the beneficial account holders and apart from verifying, the transfers are supported by valid DIS and that their operation as DP is confined to this function. That securities in the beneficiary account of Noticee in its capacity as broker are lying with Noticee in its capacity as DP as a custodian of the securities. That in its capacity as stock broker, it is neither feasible nor practical to open a separate demat account for keeping securities of each and every trading client, as the same might run into thousands of beneficiary accounts and thus would be very difficult to handle. That the retention of securities of clients takes place only after due authorization from clients in writing. That a separate stock register in their broking division is maintained to identify the clients to whom the security lying in their beneficiary account belongs to, which has been the accepted market practice. That they have always ensured that their own stock is kept in a separate beneficiary account and that at no point of time did they intermingle with the client stock. The Noticee denied the alleged violation of Reg 54 (4) of the said DP Regulations and reiterated its reply dated February 15, 2005. The Noticee had clarified in its reply that the findings in the inspection report have been made on the basis of delay counted from the date entered by the Client on the DRF rather than the date of receipt of DRF at their office and that the number of days taken to send DRF should have been counted from such date of receipt when the same is acknowledged at their office and the internal control number is given as the reference number for future use to the investor. And the cases of rejection of DRF at their end arose due to various reasons such as the client not filling the required details in the form or filling an invalid ISIN etc. The Noticee vehemently denied the allegations pertaining to the alleged violation of Reg 41 of the said DP Regulations, 1996 by stating that the date of agreement has been wrongly noted in the inspection report and thus the correct dates of agreements have been mentioned and the forms enclosed in the reply. As regards the last allegation about non-maintenance of complaints register, they denied the same and stated that they have been maintaining complaints register containing the details like date of complaint, nature, remarks etc and enclosed a copy of the same in their reply. CONSIDERATION OF THE ISSUES AND FINDINGS THEREOF
10. I have carefully perused the written and oral submissions and documents available on record. The issues that arise for consideration in the present case are: A. Whether MSFL has violated Regulation 41 of SEBI (Depositories and Participants) Regulations by not entering into the agreements with the clients at the time of opening of the accounts and registration B. Whether MSFL has violated SEBI Circular no. SMDRP/POLICY/CIR-36/2000 dated August 04, 2000 by not following the detailed account opening procedure? C. Whether MSFL has violated Regulation 42 (1) of SEBI (Depositories and Participants) Regulations, 1996, by co-mingling, mixing each of the beneficial owners securities with the securities of the other beneficial owners? D. Whether MSFL has violated Regulation 54(4) of SEBI (Depositories and Participants) Regulations, 1996 by delaying the dispatch of the DRF received by them by more than seven days? E. Whether MSFL has violated Regulation 20 (2) (e) of the SEBI (DP) Regulations, 1996, by not maintaining a complaints register containing the relevant details regarding the complaints filed by the investors? F. Whether MSFL has violated the code of conduct stipulated in Clause 4 specified in Third schedule r/w Regulation 20A of the SEBI DP Regulations, 1996? G. Whether the aforesaid issues after consideration call for monetary penalty? If so, what would be the quantum of penalty that could be imposed taking into consideration various factors relating to their violations? Consideration of Issues:
11. Considering the first issue pertaining to violation of Regulation 41 of the SEBI (DP) Regulations, 1996, the Noticee has alleged that they have entered into agreements with their clients at the time of opening of the beneficiary owner accounts and that the inspecting officials have mentioned the incorrect dates and thus the observation is incorrect, whereas it is noticed after perusing the agreements that the inspecting officials have taken the dates on which the agreements have been duly stamped as the relevant dates of having entered into agreements between the Noticee and the clients and therefore agreements though entered into on the date of opening of the accounts, they are not valid as they have not been duly stamped as per the provisions of the Indian Stamp Act, 1899 for nearly two three months after opening of the accounts and the agreements have been executed without the same being duly stamped as per the Stamp Act of 1899 as transactions have been made using those accounts much prior to stamping which is violative of the provisions of Stamp Act, 18997. As per the stamp duty applicable to Delhi given in Schedule IA, all agreements are required to be stamped mandatorily and the rates are provided for therein. Section
17 of the Stamp Act, 1899 states that all instruments chargeable with duty shall be stamped before or at the time of execution, which is significant. Thus, the time of stamping is what is emphasized in the above provision, which has not been adhered to by the Noticee. The following table contains the details of agreements entered into between the Noticee and the clients: Ben ID Date of account opening Date of stamped agreements Date of first transaction Difference in terms of days
1 10005378 18/09/2000 24/11/2000 04/10/2000 68
2 10005345 12/09/2000 24/11/2000 04/09/2001 74
3 10005337 13/09/2000 24/11/2000 25/09/2000 73
4 10005248 14/09/2000 24/11/2000 14/09/2000 72
5 10005152 09/09/2000 24/11/2000 06/10/2000 77
6 10005064 04/09/2000 24/11/2000 04/10/2000 82
12. Thus on perusing the details produced in the above mentioned table, it is quite clear that the agreements have been duly stamped after almost three months later than the date of opening of the accounts and the first
7 17. Instruments executed in India - All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. transactions using the accounts have been made without the duly stamped agreements, for e.g., in Ben ID 10005378, the account has been opened on September 18, 2000 and the first transaction has been done on October 4, 2000, whereas a valid and a duly stamped agreement has come into existence on November 24, 2000, likewise for rest of the beneficiary accounts. As regards the importance of stamping, the Honble Apex Court has dwelled on the subject in detail in some cases that came before it. In Thiruvengadam Pillai v. Navaneethammal8 the Honble Supreme Court on the issue whether an agreement not duly stamped or stamped on a different date which is subsequent to entering into an agreement can be admitted in evidence, has stated that such an agreement can be used as evidence, however, on payment of duty and penalty as required in the provisions. The Honble Supreme Court had stated that the fact that stamp paper of different dates have been used, may certainly be a circumstance that can be used as a piece of evidence to cast doubt on the authenticity of the agreement.
13. Regulation 41 of the said Regulations states in clear and mandatory terms, the following: Agreement by participant- Every participant shall enter into an agreement with a beneficial owner before acting as a participant on his behalf, in a manner specified by the depository in the bye-laws.
14. Moreover, as per the provisions of Section 17 of the Indian Stamp Act, 1899, which is cited earlier, an instrument chargeable with duty shall be stamped before or at the time of execution, which is mandatory provision and cannot be evaded. Thus the Noticee has violated the provisions of Regulation 41 of the said DP Regulations by not entering into valid agreements with their clients at the time of opening of the beneficiary owner accounts, as well as the provisions of the Stamp Act, 1899, which is to be viewed seriously. And it was further noticed during inspection that some agreements were not dated. Thus MSFL cannot obliterate itself from entering into valid agreements with the clients, in view of the above mentioned reasons. Thus, the Noticee has violated Regulation 41 clearly.
15. The Noticee-DP has opened around 14 beneficiary accounts in the name of MSFL. And these accounts are used to retain the securities of those clients who have either given such instructions or house securities of the clients who have debit balance in their broking account. It was observed that securities of a number of clients were warehoused in one account and these accounts were also used to retain the margin given by the clients and thus securities of different clients have been mixed with each other. As regards the second issue w.r.t violation of Regulation 42 (1) of
8 (2008) 4 SCC 530 the said Regulations, in respect of the demat accounts, it was observed that these accounts were being used for crediting or debiting the clients obligations of such respective branches and to retain clients securities on their instructions. Further securities have moved from one beneficiary account of the Noticee to another account of the Noticee and the Noticee was not able to give a satisfactory reply to the inspecting official when asked about the same.
16. The above operational procedure adopted by MSFL is in violation of Regulation 42 (1) of SEBI (Depositories and Participants) Regulations, 1996, i.e, securities of different clients have been mixed with each other. Regulation 42 (1) states "Separate accounts shall be opened by every participant in the name of each of the beneficial owners and the securities of each beneficial owner shall be segregated, and shall not be mixed up with the securities of other beneficial owners or with the participants own securities".
17. Though it may be argued by the Noticee-MSFL that this aspect of the operation pertains to their broking entity and not the DP operations and thus not in their knowledge or know how and that if the securities were at some other DP, the issue would not arise. But the fact is that the account has been opened by the DP and it is in its knowledge as to the purpose behind opening such account and the signatories are the same, those who are at the helm of the DP and broking operations. Thus MSFL has violated Regulation 42 (1) of the said Regulations.
18. The third issue at hand pertains to not following the detailed account opening procedure prescribed in the SEBI circular no.SMDRP/POLICY/36/2000 dated August 4, 2000. the first issue relates to verification of the proof of identity of a number of clients done invariably by the employees of the Noticee who are existing account holders, in which case the Noticee has not obtained any document of proof of identity additionally from the clients and cited the circular dated August 4, 2000 in support of their contention. In this regard, I have examined the Circular and also seen that though the verification of proof of identity of number of clients done invariably by employees of the Noticee, they were existing account holders of the Noticee and therefore I do not find any violation of the Circular committed by the Noticee.
19. The fourth issue at hand pertains to alleged violation of Regulation 54 (4) of the said SEBI DP Regulations, which deals with dispatch of dematerialization request forms. Regulation 54(4) of SEBI (Depositories and Participants) Regulations, 1996 states that "The participant shall, within seven days of the receipt of certificate of security referred to in sub- regulation (1) furnish to the issuer details specified in sub-regulations (2) alongwith the certificate of security."
20. Dematerialization: Beneficial owners submit the filled in Dematerialization Request Form (DRF) along with the share/debenture certificate(s) to MSFL for dematerializing their shares. On receipt of the request, the details are verified by the officer on the counter by cross checking the number of certificates, availability of security in demat, ISIN number and names of holders etc. The receipt of the DRF is acknowledged at the counter and the DRF number is given as the reference number for future use to the investor. The DRF is sent to the concerned section for verification and data entry into the back office system and further upload into the depository system (DPM) for generation of the Dematerialisation Request Number (DRN). The certificates along with a covering letter are dispatched to the Issuer company/RTA.
21. Observations regarding the same are given as follows.
22. Delay in Dematerialisation: During inspection it was found that there were many instances of Dematerialisation Request Forms (DRF) which were yet to be dispatched by the Noticee to the respective issuer company/RTA. It was observed that there were 67 instances of delay in dematerialization, wherein the DRFs were not dispatched by the DP within seven days of their receipt, which are there on pages 4-5 of this Order.
23. The plea taken by the Noticee during the personal hearing granted on April 13, 2009, is that the findings of the inspecting officials are based on the fact of counting the delay in number of days from the date entered by the client on the DRF rather than the date of receipt of DRF at the Noticees office.
24. I have carefully examined the plea taken by the Noticee. According to me this is possible in some of the DRFs, however, to support the plea it is the duty of the Noticee to maintain outward register and mention therein specific reason to not to accept the DRF and specifically define lacunae in DRFs. Unless the same is produced and proved the mere oral submission cannot be accepted. I would have appreciated if 3-4 incidents have taken place but what it appeared to me that there were 67 instances where delay was noted ranging from 6 days to 27 days, that too without having any proof on record to show that though the client has sent his DRF on particular date, the same was having some lacunae or the form was incomplete and therefore the same has been intimated to the client with proper communication bearing dispatch number with maintaining appropriate outward register. In the absence of the same, I dont find any merit in the Noticees contention and therefore, I am of the view that the Noticee is in violation of Regulation 54 (4) of the said Regulations.
25. In view of the above, as discussed, I am constrained not to accept the contention of the Noticee for insufficient documentary evidence and therefore find him guilty. Hence I do not find any wrong done by the SEBI inspection team to consider the date of DRF as the date of receipt by the Noticee and counting the delay accordingly.
26. During scrutiny of the rejected Demat Request Norms (DRNs) it was observed that there were higher incidences of DRN rejections due to the mistakes committed at the participants end. Reason for Rejection No of instances Incorrect ISIN 79 Certificates details mismatched 27 Mis-match in the details of share certificates 37 Share certificate forwarded to the wrong / incorrect RTA 31 Incorrect holders name pattern 81
27. Rejection of the DRN, due to the mistakes committed by the DP or its staff results in opportunity loss to the investor, the dematerialization of the shares are delayed, the investor is compelled to spend more time by re-submitting the share certificates for dematerialization and also the investor maybe charged again for dematerialization of the share certificates.
28. This issue has not been addressed in the Act or the Regulations, but rejection of DRN is akin to delay in dematerialization, in view of the reasons already mentioned above.
29. As regards the fifth issue pertaining to alleged violation of Regulation 20 (2) (e) of the said DP Regulations for not maintaining any register for the complaints received from the investors containing details of the complaints, it is noted that the Noticee in its reply dated December 24, 2008, has annexed the complaint register maintained by them as Annexure F, wherein there is an entry made for one complaint received by the Noticee dated June 2, 2004 which involves non-receipt of transaction statements filed by the Complainant Soumitra Sarkar, for which the remarks written against it state that the transaction statements sent to client under the intimation to NSDL, and thus I do not penalize the Noticee for the same.
30. As regards the sixth issue pertaining to violation of Clause 4 of the code of conduct specified in Third schedule read with Regulation 20A of the said DP Regulations, in that the signatures have undergone a change and do not match fully with signatures captured in the DPM system. The signatures were not properly scanned and it is noted that neither the maker nor checker was verifying the signature properly at the time of releasing the securities from the accounts of the account holders 1000095 and 10000420. Further this provision is general in its character to the effect that it includes all the issues discussed so far, as it states that a participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of the dematerialization request form, rematerialization request form and execution of the debit instruction slip and in all other activities undertaken by him on behalf of the beneficial owners. Thus the Noticee has to be prompt and diligent in entering into agreements with the clients at the time of opening of the accounts and not later and also in dispatch of the DRFs within the stipulated time for which the Noticee has not acted promptly and in a diligent manner.
31. It was looked into, whether Noticee-MSFL which is also registered with SEBI as a Member broker of NSE is segregating their broking operations from their depository and other operations.
32. It was observed that separate areas were assigned to each of their activities, including separate work area/counter for front office and back office for activities pertaining to their depository operations such as, account opening, dematerialisation, debit instructions etc,. But it cannot be said that there is a chinese wall segregation in their broking, other activities and depository participant operations.
33. I have perused all the documents forwarded in their written submissions. They have argued taking the plea that they have entered into agreements rightly with their clients as per Regulation 41, however, some agreements have been found to be without any date and the rest have not been duly stamped for almost three months. Thus their plea is not valid.
34. These facts I can not afford to ignore.
35. Therefore, these facts give me enough liberty to impose penalty for non- compliance of the abovementioned provisions of the Depository Participant Regulations of 1996.
36. The Honble Supreme Court of India in the matter of SEBI vs. Shri Ram Mutual Fund9 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.
37. Thus, the aforesaid violations by the Noticee make it liable for penalty u/s. 15HB of the SEBI Act, 1992 which reads thus: 15HB. Penalty for contravention where no separate penalty has been provided. Whoever fails to comply with any provision of this act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
38. While determining the quantum of penalty u/s. 15HB, it is important to consider the factors stipulated in S.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 S.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.
39. In a case of such nature, to quantify exactly the disproportionate gains or unfair advantage by an entity, perhaps, the costs of entering into beneficial owner agreements with the clients, had the Noticee entered into agreements rightly with its clients, should be considered. I have noted that the inspection report also does not dwell on the extent of specific gains made by the Noticee. Suffice to state that keeping in mind the practice of Noticee not entering into agreements with the clients rightly, its costs and the costs incurred by the investors due to delay in processing DRFs needs to be considered. Thus, the same happens to be the significant criterion. Thus, before any direct loss to the investors happens, people who indulge in not following the accepted practices in the securities market should be suitably penalized for the said acts of commissions and omissions. And the nature of default was also repetitive in nature. In this regard, I have taken a serious note that in the
9 (2006) 68SCL 216 (SC) of 18 all the beneficiary owner accounts pertaining to individuals, corporate bodies as well as clearing members, the agreements are not duly stamped before executing. Though there was no direct loss/harm caused to clients of the Noticee the fact of violation of the concerned mandatory provisions of the Regulations cannot be ignored and the Noticee ought to comply with these provisions strictly. ORDER:
40. After taking into consideration all the facts and circumstances of the case and more particularly the non-compliance of the mandatory procedures, I come to conclusion that this is a fit case for imposing the monetary penalty against the aforesaid Noticee. I impose a penalty of Rs. 8,00,000/- (Rupees Eight Lakhs only) on the Noticee viz., Mansukh Securities and Finance Limited in terms of section 15hb of the sebi act, 1992 exercising the powers conferred upon me u/s 15- i (2) of the sebi act for violation of regulations 41, 42 (1), 20a & 54 (4) of the Depository Participant Regulations. I am of the view that the said penalty is commensurate with the violation committed by the Noticee.
41. The penalty shall be paid by way of a duly crossed demand draft drawn in favour of SEBI- Penalties Remittable to Government of India payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to Suresh B Menon, Chief General Manager, Market Intermediaries Regulation and Supervision Department (MIRSD), Division of Policy and Supervision-2 (DPS-2), Securities and Exchange Board of India, Plot no.C4-A, G Block, Bandra Kurla Comlex, Bandra (E), Mumbai- 400 051.
42. In terms of the Rule 6 of the Adjudication Rules, copies of this order are sent to Mansukh Securities and Finance Limited and also to the Securities and Exchange Board of India. The matter is disposed of accordingly. DATE: June 17, 2009 SANDEEP DEORE PLACE: Mumbai ADJUDICATING OFFICER