UNDER SECTION15-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: SATCO Capital Markets Ltd., In the matter of Vertex Spinning Ltd., BACKGROUND
1. Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an investigation in the scrip of Vertex Spinning Limited (hereinafter referred to as VSL) for any possible violation of the provisions of Securities and Exchange Board of India Act 1992 (hereinafter referred to as the SEBI Act) and various Rules and Regulations made there under for the period from March 29, 2006 to onwards till March 28, 2007 (hereinafter referred to as Investigation Period) by SATCO Capital Markets Limited (hereinafter referred to as SATCO / Noticee) in the scrip of Vertex Spinning Limited. The scrip of Vertex is listed on Bombay Stock Exchange.
2. During the course of investigation, it was, inter-alia, observed from the KYC of one of its clients of the Noticee, Ram Sharan Yadav that the client had monthly income of ` 3,500 whereas from the ledger account of the client ` 3,00,000 was credited in his client account. On further verification, it was observed that the said amount of ` 3,00,000 was a third party payment given to the Noticee by another connected client of VSL namely, Ram Kumar Sidhar. In this regard, during the investigation SATCO was asked to give reason for accepting third party payment and not showing due diligence while executing trades, worth lacs of rupees, on behalf of a client ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., whose monthly income is ` 3,500 and failure to report suspicious transactions to Financial Intelligence Unit-India. Mr. Rajendra Babani, Director of SATCO could not offer any justifiable explanation for these irregularities and lack of due diligence. Therefore it was alleged that SATCO had violated the provisions of SEBI Circular No. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003 (for third party payment) and SEBI Circular No.ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006 (for not reporting suspicious transactions to FIU, New Delhi). APPOINTMENT OF ADJUDICATING OFFICER
3. Pursuant to investigation, SEBI initiated Adjudication Proceedings against the Noticee and appointed Ms Anita Kenkare as the Adjudicating Officer vide Order dated June 18, 2014 under Section 19 read with Sub-section (1) of Section 15-I of the SEBI Act and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as Adjudicating Rules) to inquire into and adjudge under Section 15 HB of the SEBI Act for the alleged violation of provisions of SEBI (Stock Brokers & Sub-brokers) Regulations, 1992, SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 (for third party payment), SEBI Circulars Nos., ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006 by the Noticee.
4. Pursuant to internal restructuring, the undersigned has been appointed as Adjudicating Officer vide Order dated May 18, 2017. SHOW CAUSE NOTICE, REPLY AND HEARING
5. A Show Cause Notice (hereinafter referred to as SCN) bearing ref. no. EAD/PJ/VP/15039/2015 dated May 29, 2015 was issued to the Noticee ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., under Rule 4 of I Adjudicating Rules to show cause as to why an inquiry be not held against it in terms of Rule 4 of the Adjudication Rules and penalty be not imposed under section 15 HB of SEBI Act, 1992 against the Noticee for the violation alleged to have been committed by it.
6. The Noticee vide its letter dated June 15, 2015 submitted as its reply, which is under: ...Ram Sharan Yadav had opened a Trading Account with the Noticee and mentioned the name of his Bank as Syndicate Bank, Nariman Point branch. These details were mentioned and taken on record in his trading account. During the course of his dealing, he had given 3 cheques of Rs 1 lac each to Noticee drawn on the same bank and same branch that was mapped in his account. The client name was not printed on the cheques given by the client as at that time many banks had not started the practice of printing the names of the clients on the cheques. -the Noticee had at that point of time in 2006-07 no software to check compliance with the above Circular and the checking in this regard was done manually. -since the cheques were drawn from the same bank and the same branch that was mapped into the clients trading account, the Noticee had in good faith without doubting the same as third party cheques, credited the same to his trading account. It subsequently transpired that these were third party cheques and were in violation of the above circular. The Noticee further submitted that it had in good faith and routine business missed out the compliance with the above Circular and accepted the payment and it subsequently transpired that it was third party payment. This inadvertence on its part is sincerely regretted. Since the Noticee has installed software to track whether the payments made by the clients are from the same bank accounts that have been mapped into their respective trading accounts and third party payments are ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., automatically and strictly rejected. The above error in question had occurred while it was in manual system and clients name was also not mentioned on the cheques. None of the subsequent inspections by the Stock Exchange/SEBI have pointed out any such irregularity in this regard. In the circumstances, the Noticee has regretted the omission and humbly seek its condonation. -With respect to the alleged violation of provisions of SEBI Circular No. ISD/CIR/RR/AML/1 And 2/06 dated January 18 and March 20, 2006, for reporting of suspicious transactions to FIU, New Delhi the Noticee has submitted that its client Ram Sharan Yadav had purchased in all 33,645 shares and sold 11,890 shares during the investigation. The value of the both buys and sale transaction works out to ` 10,09,350/- and ` 3,56,700/- respectively. The client in his account opening form had stated that his annual income was between ` 1 lac and ` 5 lacs. The Noticee had no information that the clients monthly income was ` 3500/-. Keeping in view of clients annual income of ` 1 Lac and ` 5 Lacs, the transactions done by that client cannot be considered as excessive and beyond his known sources of income or means. It never felt that these transactions were suspicious and required reporting to FIU. This may be view as procedural lapse not intentional and grave as submitted by the Noticee.
7. In the interest of natural justice, the Noticee was provided with an opportunity of personal hearing on January 29, 2018, which was attended by the Noticee. During the personal hearing, the Noticee sought time for filing additional reply. Vide letter dated February 2, 2018, the Noticee made additional submissions for the following points, which were raised during the course of personal hearing. (a) Rationale for not carrying out due diligence in terms of KYC of the client Ram Saran Yadav as the client was linked with Vertex and they had the common address. ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., Reply of the Noticee: As per KYC executed by the client the address was: P.O. Dehri Sarai, Plot No. 809, Dist Shar, Sector 5, Pitampur 454755 Necessary due diligence as per compliance stipulations was adhered by the Noticee as submitted by it. The Noticee submitted that it learnt about the above information from SEBI only after receipt of SCN dated May 29, 2015. (b) Demat A/c statement of the client Ram Saran Yadav during the investigation period was submitted by the Noticee. (c) Proof of Annual/Monthly income of the client as mentioned in the KYC. Bank account of Ram Saran Yadav. Reply of the Noticee: Mandate to seek evidence of financial details from clients was first introduced by SEBI vide circular no. MIRSD/SE/Cir- 19/2009 dated December 3, 2009. Therefore, no specific action was initiated by the Noticee in this respect at the time of opening of the clients trading account in the year 2006. (d) Rationale of not taking up the matter to FIU. Reply of the Noticee: As per KYC executed by the client, the client declared income in the range of ` 1 lac to `5 lacs. His cheque deposits with the Noticee were in the denomination of ` 1 lac each. Therefore, since amount deposited in his account were within the income range declared, the transactions did not raise any particular alerts as submitted by the Noticee. The Noticee has further submitted that SATCO has itself been a victim of mis-declarations by the concerned client. ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd.,
8. In view of the above, I am inclined to decide the matter based on the facts /documents made available to me, replies filed by the Noticee, oral and written submission before me. CONSIDERATION OF ISSUES
9. I have taken into consideration the facts and material available on record. I observe that the allegation levelled against SATCO is that it had failed to exercise due diligence for accepting the third party payment and also failed to report to FIU on suspicious transactions. After perusal of the material available on record, I have the following issues for consideration, viz., a. Whether SATCO has violated the SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 (for third party payment), SEBI Circular No.ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006? b. Does the violation, if any, attract monetary penalty under Section 15HB of SEBI Act ? c. If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in Section 15J of SEBI Act? ISSUE- A: Whether SATCO has violated SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003, SEBI Circular No.ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006?
10. The first allegation against the Noticee is that it had accepted third party payments of ` 3 lakhs, through three separate cheques of ` 1 lakh each, from its client Ram Sharan Yadav. These cheques were issued by Ram Kumar Sidhar, who was found to be allegedly connected to VSL. It was ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., also observed that Ram Sharan Yadav shared the same address of VSL, as per the KYC details. In this connection, the Noticee submitted that as per the KYC documents of the client, it was observed that the clinet was holding bank account with Syndicate Bank, Nariman Point branch. Since the three cheques issued were drawn on the same bank account and branch and also that client name was not printed on the cheques, it was unable to identify at the time of accepting cheques that they were third party cheques. Further, it was also submitted that due to manual system of checking, the error occurred which is not likely now as they developed software which automatically rejects third party payments.
11. I have perused the submissions the Noticee and find that SEBI circular SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003, clearly states that All payments shall be received / made by the brokers from / to the clients strictly by account payee crossed cheques / demand drafts or by way of direct credit into the bank account through EFT, or any other mode allowed by RBI. The brokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. There is no dispute on the fact that Noticee had accepted and also realised three cheques issued by Ram Kumar Sidhar who was not its client and therefore violated the provision of aforesaid circular.
12. I find that the system at the end of Noticee for checking third party payments at the time of accepting them was manual. However, I note that the noticee did not have a proper internal controls to identity and avert acceptance of thirty party cheques. Further, there are no records produced before me to suggest that the Noticee had identified such third party payments, after realisation of cheques. It is thus clear that manual system at the Noticee was not proper and effective to prevent accepting third party payments from the clients. I am of the view that third party payments hints at non transparent and deceptive intent of the client which if not detected will impact the integrity of the market. Therefore, brokers should have proper systems and effective procedures to prevent and also detect third ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., party payments timely and take corrective steps. The Noticee contended that the requirement of obtaining evidence of financial details from clients was first introduced by SEBI vide circular no. MIRSD/SE/Cir-19/2009 dated December 3, 2009. I note that SEBI vide circular ref. no., SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004 had prescribed uniform documentary requirements for trading, which inter-alia mandates the stock broker (trading member) to obtain copies of relevant supporting documents, which includes financial details of the client. Therefore, the contention of the Noticee is ruled out as regards obtaining supporting documents from the clients including financial details. In view of the fact that the Noticee had failed to monitor third party transactions, I hold the Noticee violating the provisions of SEBI Circular ref. no., SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003
13. The second allegation pertain to non-reporting of suspicious transactions of its client Ram Sharan Yadav to FIU, New Delhi as trading was not commensurate to the income levels of the clients.
14. Before moving forward, I would like to dwell upon the significance of PMLA. The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005. As per the provisions of the PMLA, it is obligatory for all Intermediaries registered under Section 12 of SEBI Act to adhere to client account opening procedures and maintain records of such transactions as prescribed by the PMLA and Rules notified there under. SEBI has issued necessary directives vide circulars, from time to time, covering issues related to Know Your Client (KYC) norms, Anti- Money Laundering (AML), Client Due Diligence (CDD) and Combating Financing of Terrorism (CFT), for compliance. The Directives also set out the steps that a registered intermediary or its representatives shall implement to discourage and to identify any money laundering or terrorist financing activities. ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd.,
15. It was alleged that clients monthly income was ` 3,500/-. In this connection, the Noticee submitted that Ram Sharan Yadav had purchased in all 33,645 shares and sold 11,890 shares during the investigation. The value of the both buys and sale transaction works out to ` 10,09,350/- and ` 3,56,700/- respectively. The client in his account opening form had stated that his annual income was between ` 1 lac and ` 5 lacs. It had no information that the clients monthly income was ` 3,500/-, till receipt of SCN in the instant proceedings. As per SEBI Circular dated January 18, 2006, Intermediaries were advised to frame proper policy framework as per the guidelines on Anti Money Laundering standards notified by SEBI.
16. In accordance with aforesaid circular, the Noticee was required to frame appropriate policy and thereafter specify criteria for identifying and reporting of suspicious transactions. I note that the Noticee did not submit the laid down parameters / criteria for reporting suspicious transaction to FIU as per their policy frame work. Further, the Noticee also did not demonstrate that transactions of client Ram sharan Yadav does not fall within that criteria, as per the policy. In the absence of same, I cannot accept the submission of the Noticee that the transactions were within the financial means stated in the KYC. The policy envisages identification and examination of suspicious transactions and thereafter send to FIU. There are no records before me to suggest that the Noticee had framed any policy, identified and processed the transactions as per the policy.
17. In view of the fact that the Noticee had admittedly accepted three third party payments from the client which was not detected at the time of accepting and also pursuant to realization of cheques, I consider it a fit case to qualify for suspicious transaction and warrants reporting to FIU. All Intermediaries have to strictly implement provisions of anti-money laundering provisions without any leisure approach. In the absence of any documentary evidence to demonstrate that transactions of Ram Sharan Yadav does not quality for suspicious transactions, I hold Noticee violating ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., the provisions of SEBI circulars SEBI Circular No.ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006. ISSUE - B: Does the violation, if any, attract monetary penalty under Section 15HB of SEBI Act.?
18. A registered intermediary is expected to comply with the extant regulatory and statutory requirements. I note that the Noticee had failed to comply with the provisions of circulars issued by SEBI with regard to acceptance of third party cheques and anti-money laundering. In this context, it is relevant to quote the judgement of Honble Supreme Court in the matter of SEBI Vs. Shri Ram Mutual Fund, wherein it was 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.
19. I find it pertinent to refer to observation of the Honble Supreme Court of India in the matter of Gautam Kundu v. Manoj Kumar, Assistant Director, Eastern Region, Directorate of Enforcement (Prevention of Money Laundering Act) Govt. of India (MANU/SC/1453/2015) wherein, the Honble Supreme Court observed money laundering to be a serious threat to the national economy and national interest.
20. Therefore, I am of the considered view that the violation of non-compliance of the circulars issued by SEBI pertaining to non-acceptance of third party cheques and prevention of AML & CFT norms is not merely a violation of procedural requirement, but a serious irregularity in nature. Therefore, I am of the view that monetary penalty needs to be imposed upon the Noticee under Section 15HB of the SEBI Act, the provisions of which are reproduced hereunder. Section 15HB of SEBI Act ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., 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. ISSUE C: If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in Section 15J of SEBI Act?
21. While determining the quantum of penalty under Section 15HB of the SEBI Act,1992, it is important to consider the factors stipulated in Section 15J of the SEBI Act, 1992 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. Explanation: For removal of doubts, it is clarified that the power of an adjudicating officer to adjudge the quantum of penalty under Sections 15A to 15E, Clauses (b) and (c) of Section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.
22. I observe that, from the material available on record, 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. I note that the defaults of the Noticee are not repetitive in nature. ORDER ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd.,
23. 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 of the SEBI Act r/s Rule 5 of Adjudication Rules 1995, I hereby impose a monetary penalty of 2,50,000/-(Rupees Two lakh Fifty Thousands only) on the Noticee viz., SATCO Capital Markets Limited for violation of the following circulars:
a) SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003
b) SEBI Circular No.ISD/CIR/RR/AML/1/06 dated January 18, 2006 and ISD/CIR/RR/AML/2/06 March 20, 2006.
24. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order either by way of Demand Draft in favour of SEBI - Penalties Remittable to Government of India, payable at Mumbai, OR through e-payment facility into Bank Account the details of which are given below: Account No. for remittance of penalties levied by Adjudication Officer Bank Name State Bank of India Branch Bandra-Kurla Complex RTGS Code SBIN0004380 Beneficiary Name SEBI Penalties Remittable To Government of India Beneficiary A/c No 31465271959
25. The Noticee shall forward said Demand Draft or the details / confirmation of penalty so paid through e-payment to the General Manager, Enforcement Department, DRA-IV, SEBI, in the format as given in table below Case Name Name of Payee ______________________________________________________________________________ Adjudication Order in respect of SATCO Capital Markets Limited in the matter of Vertex Spinning Ltd., Date of payment Amount Paid Transaction No Bank Details in which payment is made Payment is made for (like penalties/disgorgement/recovery/Settlement amount and legal charges along with order details)
26. In terms of the Rule 6 of the Adjudicating Rules, a copy of this order is sent to the Noticee viz. SATCO Capital Markets Limited, and to SEBI. Date: February 27, 2018 B J DILIP Place: Mumbai Adjudicating Officer