TaxTMI 
TaxTMI 
2025 (6) TMI 1894
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.... (hereinafter referred to as "inspection period" / "IP") with respect to its stock broking activities. The findings/ observations made during the course of inspection were communicated to the Noticee by SEBI vide letter dated March 06, 2023. After examining the reply submitted by the Noticee vide letter dated March 21, 2023 and email dated August 18, 2023, it was observed that the Noticee had allegedly violated various provisions of SEBI (Stock Brokers) Regulations, 1992 (hereinafter referred to as "Stock Brokers Regulations,1992") and applicable SEBI Circulars. The summary of violations alleged to have been committed by the Noticee and the corresponding provisions of Stock Brokers Regulations, 1992 and SEBI Circulars are given in the table below: Table 1 Sr. No. Alleged Violations Regulatory Provisions 1 Segregation of client's funds and securities Clause 2.4.2 of Annexure to the SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 on Enhanced supervision of Stock Brokers/DPs 2 Monthly / Quarterly settlement of Funds and Securities Clause 8.1 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016,....
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....n terms of Regulation 26 of the SEBI (Intermediaries) Regulations, 2008, regulatory censure may be issued to the Noticee." 6. The DA report was forwarded to the Noticee in terms of Regulation 27(1) of the Intermediaries Regulations vide Show Cause Notice (hereinafter referred to as "SCN") dated October 15, 2024. It was stated in the said SCN that if the Noticee wishes to file any submission/information along with any supporting documents, it may do so within 21 days from receipt of the said SCN and pursuant thereto, the matter would be proceeded with in accordance with Regulation 27(5) of the Intermediaries Regulations. 7. I note that the SCN was delivered to the Noticee and pursuant to the same, the Noticee, vide its letter dated November 05, 2024 filed its preliminary reply and requested for inspection of documents. The inspection of documents was done by the ARs of the Noticee on November 14, 2024. Pursuant thereto, the Noticee filed its reply vide letter dated December 13, 2024. 8. Subsequently, upon the request of the Noticee, an opportunity of personal hearing was also provided to the Noticee and the same was conducted on January 14, 2025 which was attended to by the....
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....o meet client margin obligations, within the purview of the norms of SEBI and such an arrangement to maintain adequate margin obligations of clients is adopted for the purpose of ease of doing business, while safeguarding client interests, ensuring that no client faces delays in pay- outs or adverse impacts on their obligations. ii. There is no evidence to suggest that clients' funds transferred to proprietary accounts via settlement account were being misused to meet proprietary obligations or debit client obligations. iii. The mere act of transferring funds from clients' accounts to proprietary accounts, via settlement account, does not constitute a failure of segregation in the absence of evidence indicating that such funds were misused by the Noticee stock broker. iv. It is submitted that the intent of the Enhanced Supervision Circular is to prevent the misuse of client funds for proprietary purposes or to meet obligations of debit clients and to ensure that clients' funds are only utilised for the benefit of such clients. In the present case, it is submitted that the Noticee has not utilised the clients' funds hence the Noticee has fully complied wit....
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....r dated June 20, 2019. Reporting and short collection of Margin i. The alleged instances of incorrect EOD margin reporting has arisen only in 6.4% of the sampled instances (125 instances across 125 sample dates for 125 unique clients) and constitute a mere 0.016% of the total of Rs. 15,000 crores worth of total margins reported by the Noticee during the investigation period from April 01, 2021 to November 30, 2023. ii. Such minor instances of incorrect reporting have occurred due to inadvertent clerical error and have not adversely impacted the interests of the Noticee's clients. The Noticee has taken all corrective measures to ensure that no errors in reporting arise in the future. The DA has also recognised and recorded the fact that there has been no mis-utilisation of clients' funds due to incorrect margin reporting of enhanced supervision of data. Client Registration Process (KYC and KRA Process) i. Such discrepancies in taking running account authorisations, occurred only in 5 Unique Client Codes which is only 0.22% of the client base of approximately 3,600 client codes the Noticee was managing during the inspection period. ii. All su....
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.... passing of Adjudication Order dated September 26, 2024 whereby the Adjudicating Officer imposed a penalty of Rs.9,00,000 on the Noticee. The Noticee had filed an appeal against the said Order before Hon'ble SAT who by way of an interim direction, stayed the recovery of penalty from the Noticee subject to the Noticee depositing 50% of the penalty amount i.e. Rs. 4.5 lakhs with SEBI. The Noticee had remitted the said amount. However, it is noted that the scope and purpose of the present proceedings and the Adjudication proceedings is entirely different. In terms of section 11(1) of the SEBI Act (contained in Chapter IV), SEBI is empowered to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Further, Chapter VI of the SEBI Act, 1992, empowers SEBI to adjudicate and impose penalty, by appointment of an adjudicating officer, for violation of provisions of SEBI Act and/or Rules and Regulations made under it. Furthermore, Section 12(3) of the SEBI Act, 1992 empowers SEBI, to suspend or cancel a certificate of registration, by order, granted to any registered intermediary in such ma....
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....5,00,000 01/03/2022 30,00,000 05/03/2022 80,00,000 Total 9,49,00,000 17. Thus, it was alleged that substantial amount of funds ranging from Rs.10 Lakhs to Rs.1.14 crores (total Rs. 9.49 Crores) have been transferred from Client Account to Proprietary Bank account via Settlement Account during 15 sample dates. Further, as alleged, the Noticee was not maintaining proper daily reconciliation statement. In this regard, the DA has observed that the Noticee had violated Clause 2.4.2 of Annexure to the SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 on Enhanced supervision of Stock Brokers/DPs which inter alia provides that transfer of securities between 'Stock Broker -Client Account' to 'Stock Broker-Proprietary Account' is permitted only for legitimate purposes, such as, recovery of brokerage, statutory dues, funds shortfall of debit balance clients which has been met by the stock broker, etc. For such transfer of funds, stock broker shall maintain daily reconciliation statement clearly indicating the amount of funds transferred. In this context, the Noticee has submitted that all the transfers made by it were legitimate and for the purpose....
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....nts, there was a delay in settlement of clients' funds and securities in 104 instances. The summary of aforesaid 9 instances of non-settlement is provided below. S. No. Date of Settlement Quarter Client Code Funds Securities Total funds/ Securities available Total Funds / Securities to be retained Shortfall in Actual Settlement of Funds / Securities 1 12/06/2021 Q1 (2021-22) R029 5503.41 0 5503.41 0 5503.41 2 30/09/2021 Q2 (2021-22) S847 28478337.81 0 28478337.8 2013771.938 26464565.87 3 30/09/2021 Q2 (2021-22) A480 29850349.91 0 29850349.9 1478587.5 28371762.41 4 30/08/2021 Q2 (2021-22) B066 12826166.4 0 12826166.4 4772599.508 8053566.893 5 30/09/2021 Q2 (2021-22) A024 375918.69 0 375918.69 238220.73 137697.96 6 30/09/2021 Q2 (2021-22) R407 33837.58 1373727.58 1407565.16 1373727.58 33837.58 7 30/09/2021 Q2 (2021-22) A156 2213893.89 6825420 9039313.89 8453507.8 585806.09 8 31/01/2022 Q4 (2021-22) R251 734709.63 ....
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....atch alerts : 23. In terms of the provisions of Clause 2.3 of SEBI Circular MRD/DoP/SE/Cir- 11/2008 dated April 17, 2008 read with Clause A(2) & A(5) of the code of conduct and Regulation 9(f) of the SEBI (Stock Brokers) Regulations, 1992, a stock broker is required to maintain proper records of client collateral and such records should be periodically reconciled with the actual collateral deposited with the stock broker. A stock broker is required to act with due skill, care and diligence and abide by all the provisions of SEBI Act, 1992 and rules and regulations thereunder, as applicable to it. As per the provisions of Clause 4.3 of SEBI Circular CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated June 20, 2019, securities kept in the 'client unpaid securities account' shall either be transferred to the demat account of the respective client upon fulfilment of client's funds obligation or shall be disposed of in the market by TM/CM within five trading days after the pay-out. The unpaid securities shall be sold from the Unique Client Code (UCC) of the respective client. Profit/loss on the sale transaction of the unpaid securities, if any, shall be transferred to/adjusted from the respective c....
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....roker to either keep the securities in the 'CUSA' until the client's funds obligation are met or shall be disposed of in the market by TM/CM within five trading days after the pay-out. Securities cannot be kept in the CUSA indefinitely in case the fund obligations are not met. The Stock broker is obligated to dispose of the securities in the market within five trading days after the pay-out. Further, in terms of clause 4.4 of the said Circular, in case the clients' securities are kept in the 'CUSA' beyond seven trading days after the pay-out, the depositories are required to levy appropriate penalties upon such Stock broker(s). 28. For these 4 instances, the Noticee has submitted that for the client with UCC S849, the pay-out dates for the shares purchased by the client were October 25, 2021 and October 26, 2021. Due to non-realization of payment, the shares were transferred to CUSA and subsequently on meeting the fund obligations the shares were transferred to client demat account on October 26, 2021 and October 27, 2021 respectively, i.e. within 5 days from the date of purchase. Further, for the UCC client 058, the shares were first transferred to CUSA and subsequently upon re....
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....visions of SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019/139 dated November 19, 2019. 31. In response to the Enquiry Report, the Noticee has submitted that the alleged instances of incorrect EOD margin reporting have arisen only in 6.4% of the sampled instances (125 instances across 125 sample dates for 125 unique clients) and constitute a mere 0.016% of the total of Rs. 15,000 crores worth of total margins reported by the Noticee during the investigation period from April 01, 2021 to November 30, 2023. Further, such minor instances of incorrect reporting have occurred due to inadvertent clerical error and have not adversely impacted the interests of the Noticee's clients. The Noticee has taken all corrective measures to ensure that no errors in reporting arise in the future. 32. The Noticee has clearly admitted to the contraventions while justifying them as minimal and due to inadvertent clerical error. Thus, the violation of SEBI Circular No. SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019/139 dated November 19, 2019 is established against the Noticee. Client Registration Process (KYC and KRA Process): 33. I note from the Enquiry Report that the following discrepancies ....
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....mpliance(s) noted in the inspection relating to Stock reconciliation and verification of Email ID & Mobile numbers / Unique Client Code (UCC), the DA after careful examination of the replies filed by the Noticee had observed that the violation related to Stock reconciliation and verification of Email ID & Mobile numbers were not established against the Noticee. I have perused the observations of the DA in the Enquiry report along with the material available on record and agree with the DA's findings in that regard. The material available on record also does not warrant any interference at this stage. 37. Thus, to conclude, the violation of the following provisions is established against the Noticee. a) Clause 2.4.2 of Annexure to the SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR /P/2016/95 dated September 26, 2016 on Enhanced supervision of Stock Brokers/DPs b) Clause 8.1 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P /2016/95 dated September 26, 2016, clause 12 of Annexure of SEBI Circular SEBI/MIRSD/SE/Cir-19/2009 dated December 03, 2009 and SEBI Circular No. SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated 16th June 2021 c) Clause 2.3 of SEBI Circular MRD/D....