TaxTMI 
TaxTMI 
2025 (8) TMI 725
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....RESPECT TO REPORTING AND SHORT COLLECTION OF MARGIN ........................27 E.5. ALLEGATIONS WITH RESPECT TO CLIENT REGISTRATION PROCESS ............. 29 E.6. ALLEGATIONS WITH RESPECT TO NET WORTH VERIFICATION ....................... 33 E.7. ALLEGATIONS WITH RESPECT TO VERIFICATION OF WEEKLY HOLDING STATEMENT ........ 35 E.8. ALLEGATIONS WITH RESPECT TO VERIFICATION OF UNIQUE CLIENT CODE (UCC)..... 37 E.9. ALLEGATIONS WITH RESPECT TO MEMBER ENGAGED AS A PRINCIPAL OR EMPLOYEE IN A BUSINESS OTHER THAN THAT OF SECURITIES INVOLVING PERSONAL FINANCIAL LIABILITY ..... 39 E.10. ALLEGATIONS WITH RESPECT TO TRADING IN MINOR'S ACCOUNTS ............45 E.11. ALLEGATIONS WITH RESPECT TO DEALING WITH UNREGISTERED CONSTITUENTS ............. 47 E.12. ALLEGATIONS WITH RESPECT TO CYBER SECURITY AND CYBER RESILIENCE .................50 E.13. ALLEGATIONS WITH RESPECT TO NON CO-OPERATION WITH INSPECTION TEAM .........53 F. CONCLUSION ................................. 56 G. ORDER ........................................................................59 A. BACKGROUND 1. The present proceedings have emana....
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....ting and short collection of Margin SEBI Circular No. CIR/DNPD/7/2011 dated August 10, 2011 read with Clause (iii) of Annexure to SEBI Circular No. SEBI/HO/MRD2/DCAP/ CIR/P/2020/127 dated July 20, 2020. (v) Client registration process SEBI Circular CIR/MIRSD/16/2011 dated August 22, 2011 and SEBI circular CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated June 20, 2019; Sub-clauses (b) and (c) of Clause 13 of Annexure 6 of SEBI Circular CIR/MIRSD/16/2011 dated August 22, 2011 read with SEBI circular CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated June 20, 2019; BSE Circular Notice No. 20210727-6 dated July 27, 2021 read with Sub-clause (5) of Clause A in Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992. (vi) Net worth verification Sub-clause (j) of clause 6.1.1 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/ CIR/P/2016/95 dated September 26, 2016. (vii) Verification of weekly holding statement Clause 3 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016. (viii) Verification of Unique Client Code ("UCC") Sub-clause (B) of clause 2 of SEBI Circular CIR/MIRSD/15/2011 dated August 02, 201....
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.... been taken by the Noticee after inspection and the payment of full penalty levied by SEBI under adjudication proceedings for same violations, the DA recommended issuance of regulatory censure to the Noticee. C. PROCEEDINGS BEFORE THE WHOLE TIME MEMBER 7. Vide letter dated December 16, 2024, the Enquiry Report was forwarded to the registered addresses of the Noticee in terms of sub-regulation (1) of regulation 27 of the Intermediaries Regulations wherein the Noticee was called upon to make written submissions within 21 days as to why measures recommended by the DA or any other action in terms of the Intermediaries Regulations, be not taken against it. The Noticee did not make any written submission within 21 days' period. However, vide letter dated January 10, 2025, the Noticee submitted its written reply and further sought an opportunity of personal hearing. Personal hearing in the matter was granted. However, the Noticee sought adjournment of hearing on several occasions and finally the ARs of the Noticee appeared before me for personal hearing on March 26, 2025. 8. During the hearing, the ARs of the Noticee reiterated the written submissions made vide reply dated Januar....
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....osing of the proceedings without any adverse action; (ii) cancellation of the certificate of registration; (iii) suspension of the certificate of registration for a specified period; (iv) prohibition of the noticee from taking up any new assignment or contract or launching a new scheme for such the period as may be specified; (v) debarment of an officer of the noticee from being employed or associated with any registered intermediary or other person associated with the securities market for such period as may be specified; (vi) debarment of a branch or an office of the noticee from carrying out activities for such period as may be specified; (vii) issuance of a regulatory censure to the noticee: Order 27. (1) ....... (5) After considering the facts and circumstances of the case, material on record and the written submission, if any, the competent authority shall endeavor to pass an appropriate order within one hundred and twenty days from the date of receipt of submissions under subregulation (2) or the date of personal hearing, whichever is later. SEBI (Stock Brokers) Regulations, 1992 Conditions o....
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....xchanges B- Aggregate value of collateral deposited with clearing corporations and/or clearing member (in cases where the trades are settled through clearing member) in form of Cash and Cash Equivalents (Fixed deposit (FD), Bank guarantee (BG), etc.) (across Stock Exchanges). Only funded portion of the BG, i. e. the amount deposited by stock broker with the bank to obtain the BG, shall be considered as part of B. C- Aggregate value of Credit Balances of all clients as obtained from trial balance across Stock Exchanges (after adjusting for open bills of clients, uncleared cheques deposited by clients and uncleared cheques issued to clients and the margin obligations) D- Aggregate value of Debit Balances of all clients as obtained from trial balance across Stock Exchanges (after adjusting for open bills of clients, uncleared cheques deposited by clients, uncleared cheques issued to clients and the margin obligations) E- Aggregate value of proprietary non-cash collaterals i.e. securities which have been deposited with the clearing corporations and/or clearing member (across Stock Exchanges) F- Aggregate value of Non-funded part of the BG ac....
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....h the Stock Exchanges as collateral deposit, as follows: Principle: The sum of Proprietary funds and securities i.e. (G + E + F) lying with the clearing corporation/clearing member should be greater than or equal to Proprietary margin obligations (P) If value of G is positive (i.e. A+B > C), then proprietary funds are lying with the clearing corporation/clearing member and/or client bank accounts along with the clients funds to the extent of positive value of G. The sum of the proprietary funds (positive value of G), the value of proprietary securities (E) and the non-funded portion of bank guarantee (F) available in the Stock Exchanges is compared with the Proprietary margin obligations (P). If P > (G+E+F), then Stock Exchange shall calculate the difference I, which is the amount of proprietary margin obligation funded from clients assets. I = P - (G+E+F) If G is negative, then, value of G is considered as 0, as there is no proprietary funds lying with the stock exchange. The value of I indicates the extent of funds and securities of clients which is possibly utilised towards proprietary margin obligations. This value ....
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....s shall also maintain records of such clarifications sought and details of such inspections. The aforesaid calculations are illustrated in tabular format in Table 1, 2 & 3 given at the end of the annexure. 3.5. Stock Exchanges shall put in place the aforesaid monitoring mechanism within three months from the date of this circular and carry out the monitoring of clients' funds for all stock brokers, except for those who are carrying out only proprietary trading and/or only trading for institutional clients. 3.6. Stock Brokers shall ensure due compliance in submitting the information to the Exchanges within the stipulated time. 6.1.1. Monitoring criteria for Stock Brokers - (j) In case stock broker shares incomplete/wrong data or fails to submit data on time. 7. Uploading clients' fund balance and securities balance by the Stock Brokers on Stock Exchange system 7.1.2. End of day securities balances (as on last trading day of the month) consolidated ISIN wise (i.e., total number of ISINs and number of securities across all ISINs). 8. Running Account Settlement 8.1. In partial modification of circular on runnin....
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....ective client margin available with the TM/CM at EOD. b) Peak margin obligation of the client, across the snapshots, shall be compared with respective client peak margin available with the TM/CM during the day. Higher of the shortfall in collection of the margin obligations at (a) and (b) above, shall be considered for levying of penalty as per the extant framework. Clause 13(b) and 13(c) of Annexure 6 of SEBI Circular CIR/MIRSD/16/2011 dated August 22, 2011: 13. In case you have given specific authorization for maintaining running account, payout of funds or delivery of securities (as the case may be), may not be made to you within one working day from the receipt of payout from the Exchange. Thus, the stock broker shall maintain running account for you subject to the following conditions: (b) The actual settlement of funds and securities shall be done by the stock broker, at least once in a calendar quarter or month, depending on your preference. While settling the account, the stock broker shall send to you a 'statement of accounts' containing an extract from the client ledger for funds and an extract from the register of securities d....
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....ading members that do not provide any services online and do not open accounts online may not be required to offer online closure of trading accounts. Clause 2(B) of SEBI Circular CIR/MIRSD/15/2011 dated August 02, 2011: 2. As an additional measure, it has now been decided in consultation with the major stock exchanges and market participants that the stock exchanges shall send details of the transactions to the investors, by the end of trading day, through SMS and E-mail alerts. This would be subject to the following guidelines: B. Uploading of mobile number and E-mail address by stock brokers i. Stock exchanges shall provide a platform to stock brokers to upload the details of their clients, preferably, in sync with the UCC updation module. ii. Stock brokers shall upload the details of clients, such as, name, mobile number, address for correspondence and E-mail address. iii. Stock brokers shall ensure that the mobile numbers/E-mail addresses of their employees/sub-brokers/remisiers/authorized persons are not uploaded on behalf of clients. iv. Stock Brokers shall ensure that separate mobile number/E-mail addre....
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....in such format and with effect from such date as may be notified by the Exchange. Every Trading Member shall be responsible to furnish particulars of Unique Client Codes of each of his Constituents to the Exchange in such form, manner, at such intervals and within such time as may be specified by the Exchange from time to time. Web-link of SEBI circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018: https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/dec2018/1543839622652.pdf#page=9&zoom=page-width,-16,563 Web-link of SEBI/HO/MIRSD/TPD/P/CIR/2022/80 dated June 07, 2022: https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/jun-2022/1654606353820.pdf#page=1&zoom=page-width,-15,842 SEBI (Stock Brokers) Regulations, 1992 Obligations of stock-broker on inspection by the Board. 21. (1) It shall be the duty of every director, proprietor, partner, officer and employee of the stock-broker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to the transactions ....
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....t collateral and the records should be periodically reconciled with the actual collateral deposited with the stock broker to prevent misuse of client collateral. 13. During the course of proceedings before the DA, the Noticee submitted the following with respect to allegations of non-reconciliation of clients' securities: (a) Out of the 3 instances, 1 instance of 1,30,000 shares is that of own account of the Noticee pertaining to Bohra Industries Ltd (listed on NSE SME Platform and suspended from trading w.e.f. December 29, 2021). Thus, the difference in respect of clients is merely on 2 instances of 10.53 shares/units, wherein 10 shares pertain to Indian Link Chain Manufactures Limited and 0.53 pertains to Mutual Fund units viz. Nippon Life India, totaling to amount of INR 8,280/-. (b) With respect to difference of 1,30,000 shares pertaining to Bohra Industries Ltd., the Noticee submitted as under: (i) The said 1,30,000 shares pertained to Stock Broker's own account only. (ii) The reason for difference as per DP statement and Stock Broker's books was due to Corporate Action on part of the Company on July 25, 2022 wherein there was 100% capita....
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....of clients in timely manner to prevent any misuse of clients securities. Therefore, the DA held that the Noticee has failed to reconcile the back-office holdings of client's securities with actual stocks lying in clients DP accounts and found that the Noticee was in violation of the provisions of Clause 2.3 of SEBI Circular MRD/DoP/SE/Cir-11/2008 dated April 17, 2008. 15. During the course of proceedings before me, the Noticee reiterated the submissions made before the DA and further submitted that the SEBI Circular dated April 17, 2008 pertains to "Collateral deposited by clients with brokers" whereas the alleged violation pertains to "Stock Reconciliation" and not actual "Collateral Reconciliation". The Noticee contended that since there is no allegation with respect to non-reconciliation of "collaterals" deposited by clients with the Noticee, clause 2.3 of SEBI Circular dated April 17, 2008 has not been violated. 16. Having gone through the aforesaid allegations, the DA report and submissions made by the Noticee in response to the Enquiry Report, I do not find merit in the submission of the Noticee that the SEBI Circular dated April 17, 2008 pertains to "Collateral deposit....
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....obligation which is required to be entered manually in the back-office. (b) However, the said error was identified and subsequently rectified. Also, the pay-in and pay-out obligations of clients were being correctly processed. The Noticee further submitted that the outward of the said 1,500 shares of SBI were shown correctly in demat account and in the Register of Securities. The Noticee also furnished a copy of relevant extracts of demat account of PJS Securities LLP. (c) Further, the Noticee submitted that it doesn't have software to import SLBM transactions as the same is very complicated by nature and very few clients were trading on this segment. So, the Noticee was making manual entries in stock register of SLBM segment and doing reconciliation of client stock with DP, on daily basis. The Noticee also submitted that as on date, there is no requirement to report stocks in client's accounts. 21. The DA in its report has stated that the Noticee accepted the allegation with respect to incorrect reporting of holding to the Exchanges since the Noticee admitted that 15,000 shares were incorrectly reported instead of 1,500 shares of SBI. However, the said err....
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....er 2021 onwards in violation of SEBI guidelines applicable from the month of August 2021. The Noticee was alleged to have not complied with the provisions of sub-clause (e) of clause 12 of Annexure-A of SEBI Circular SEBI/MIRSD/SE/Cir19/2009 dated December 03, 2009 read with Clause 8.1 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 and Clause 5.4. of SEBI Circular SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated June 16, 2021. 26. In terms of the relevant provisions of SEBI Circular SEBI/MIRSD/SE/Cir-19/2009 dated December 03, 2009, the actual settlement of funds and securities shall be done by the stock broker, at least once in a calendar quarter or month, depending on the preference of the client. Similarly, SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 provides that the stock broker shall ensure that there must be a gap of maximum 90/30 days (as per the choice of client viz. Quarterly/Monthly) between two running account settlements. Further, SEBI circular SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated June 16, 2021 provides that for the clients having credit balance, who have not done any transaction in the 30 calendar days....
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....T beyond the specified timelines. Thus, the Noticee failed to settle the funds of said 25 inactive clients amounting to INR 14,79,071/- on monthly basis. (d) The Noticee has accepted the allegation that monthly settlement of funds was not done for 55 clients who had not traded in last 30 calendar days from the month of September 2021 onwards. Hence, the Noticee failed to settle the accounts of said 55 inactive clients amounting to INR 9,17,845/- on monthly basis in terms of provisions of SEBI circular dated June 16, 2021. 29. During the course of proceedings before me, the Noticee reiterated the submissions made before the DA and further submitted that the alleged instances of non-settlement are miniscule in terms of number and value considering the size of its operations. Further, as on date there are no instances of non-settlement of non-active clients. Additionally, there are no client complaints with respect to non-settlement of funds. 30. Having gone through the aforesaid allegations, the DA report and submissions made by the Noticee in response to the Enquiry Report, I note that most of the instances of non-settlement of funds have been admitted by the Noticee.....
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.... (b) 6 instances for client codes VMl 12, VSS4, VSS5, VSSl, VG72 & VMl10 (For EOD Margin and Peak margin). There was an OFS of Axis Bank on May 20, 2021 (Thursday) for retail category (value up to INR 2 Lakhs). All the clients transferred INR 2 Lakhs on May 19, 2021 and bid on May 20, 2021 and received the allotment for the same. However, due to some accounting error on its part, the client's ledger got debited on May 20, 2021. The Noticee came to know about the said error only on May 21, 2021 (late night) when client called for wrong debit entries. As May 21, 2021 was a Friday, The Noticee could give reversal credit of INR 28,49,715 only on May 24, 2021 i.e. on Monday. Therefore, only due to some accounting errors, the said ledgers generated margin shortfall EOD on May 21, 2021. There was no mala fide intention on its part. (c) The calculation of short margin alleged in the SCN in incorrect since the short margin already reported by the Noticee has not been considered and there are only 2 instances of incorrect EOD margin reporting amounting INR 49,143/-. (d) The Exchange has levied and collected EOD penalty for all 10 instances as stated above and furnished ....
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.... (b) For Mandatory Document: Annexure for "DO's & Don't" contains the words "settlement of securities", which is currently not applicable. (c) The Noticee did not provide the facility of online closure of accounts on its website. 41. In view of the above, the Noticee was alleged to have not complied with the provisions of sub-clauses (b) and (c) of Clause 13 of Annexure 6 of SEBI Circular CIR/MIRSD/16/2011 dated August 22, 2011 read with SEBI circular CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated June 20, 2019 and BSE Circular Notice No. 20210727-6 dated July 27, 2021 read with sub-clause (5) of Clause A in Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992. 42. In terms of the relevant provisions of SEBI Circular CIR/MIRSD/16/2011 dated August 22, 2011, the formats relating to trading account opening have to be followed by the stock brokers/trading members. Further, SEBI circular CIR/HO/MIRSD/DOP/CIR/P/ 2019/75 dated June 20, 2019 provides that stock broker is required to transfer the clients' securities received in payout to clients demat account within one working day. It further stipulates that the provisions with regard ....
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....e, the Noticee is following the above methodology, which is also followed by other Stock Brokers as well. The Noticee also furnished a copy of snapshot of website showing account closure form. 46. The DA in its report has stated that: (a) With regard to allegations of words 'Settlement of Securities' contained in Running Account Authorization and 'DO's & Don'ts, the Noticee should have modified the Annexure for "DO's & Don't" which contained the words "settlement of securities". (b) With regard to Running Account Authorization format, SEBI circulars lay down the guidelines to be followed by the stock brokers and it may not always specify the deletion of words to be done by stock brokers. Stock brokers are expected to make the consequential changes to their forms/ undertaking based on the instructions, directions and guidelines specified under SEBI circulars. Thus, the Noticee should have modified the Running Account Authorization format. (c) With regard to online closing of trading accounts, the Noticee was required to provide the facility of online closure of trading accounts through its website, however, the Noticee provided only closure form on its ....
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.... of assets. Therefore, the Noticee was alleged to have not complied with the provisions of sub-clause (j) of clause 6.1.1 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016. 52. In terms of the relevant provisions of SEBI Circular SEBI/HO/ MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, stock broker is required to submit the complete and correct data with respect to net worth to the Exchange. 53. With respect to aforesaid allegations, the Noticee, inter alia, submitted the following during the course of proceedings before the DA: (a) The non-allowable asset considered by the inspection team included (i) IPO Brokerage receivable; (ii) Amount receivable from certain related parties; and (iii) Advance given to Vendors totalling to 17.89 Lakhs which a miniscule amount of 0.44% of reported figure. (b) In respect of Advance to vendors of INR 8,59,943/-, the Noticee submitted that amount has been considered as non-allowable under the head of "Prepaid Expenses, Losses". However, Sr. No. 7 of Annexure -A of NSE Circular dated March 08, 2021 bearing reference no. NSE/COMP/47555 and Circular dated July 10, 2021 bearing referen....
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....t complied with the provisions of Clause 3 of Annexure of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016. 59. SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 provides for monitoring of clients' funds lying with the stock broker by the stock exchanges. It further provides that stock exchanges shall put in place a mechanism for monitoring clients' funds lying with the stock broker to generate alerts on any misuse of clients' funds by stock brokers. 60. With respect to aforesaid allegations, the Noticee, inter alia, submitted the following: (a) With respect to non-reconciliation of 1,30,000 shares pertaining to Bohra Industries Ltd pertains, the Noticee submitted as follows: (i) The said 1,30,000 shares pertained to Stock Broker's own account only. (ii) The reason for difference as per DP statement and Stock Broker's books was due to Corporate Action on part of the Company on July 25, 2022 wherein there was 100% capital reduction. (iii) The said Corporate Action was not taken into account in Stock Broker's books as there was no mechanism for auto updating of Corporate Action and the same was....
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....NIQUE CLIENT CODE (UCC) 65. It was observed that single e-mail ID was mapped to multiple clients i.e. 27 e-mail ID were mapped against 75 clients and single mobile number was mapped to multiple clients i.e. 24 mobile number were mapped against 117 clients. Therefore, the Noticee was alleged to have not complied with the provisions of sub-clause (B) of clause 2 of SEBI Circular CIR/MIRSD/15/2011 dated August 02, 2011. 66. In terms of the relevant provisions of SEBI Circular CIR/MIRSD/15/2011 dated August 02, 2011, Stock Brokers shall ensure that separate mobile number/e-mail address is uploaded for each client. However, under exceptional circumstances, the stock broker may, at the specific written request of a client, upload the same mobile number/e-mail address for more than one client provided such clients belong to one family. 'Family' for this purpose would mean self, spouse, dependent children and dependent parents. 67. With respect to above allegations, the Noticee inter alia submitted the following during the course of proceedings before the DA: (a) The common Email IDs and mobile numbers are that of family members. The same is allowed vide Para 1 of NSE Cir....
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.... (3) of rule 8 of SCR Rules and NSE circular No. NSE/COMP/50957 dated January 07, 2022. 73. In terms of the relevant provisions of SCR Rules, a member of stock exchange shall not engage either as a principal or as an employee in any business other than that of securities or commodity derivatives except as a broker or agent not involving any personal financial liability. 74. With respect to allegations of investment in associate company, the Noticee, inter alia submitted the following during the course of proceedings before the DA: (a) The associate company i.e. Rikhav Insurance Broker Private Limited ("RIBPL") was incorporated with an objective of carrying on the business of insurance broker but the business activities did not start. (b) Noticee's investments in RIBPL is from its own surplus funds. Further, the Noticee has not provided loan to RIBPL but invested in the equity shares of RIBPL, which is a private limited company. Its equity stake in RIBPL is only 20%. (c) The said investment amount is already deducted while calculating the Net worth. (d) Further, the Noticee submitted that there is no bar in investing in listed or unlisted pr....
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....d spontaneity with presence of mind to buy and sell at the spur of the moment. Being a very specialized skill, the arbitragers are generally paid incentive. The incentive is determined after considering the transaction cost and cost of finance. (iii) In this regard, an agreement or Memorandum of Understanding (MoU) or Term Sheet is entered into them outlaying the Terms and conditions in respect of dealings or arrangement with them. (b) Submissions with respect to agreements or MoU or Term Sheet (collectively known as Agreement) with arbitragers: (i) Whenever an arbitragers/ jobber approaches, after all its due diligence, the Noticee takes an appropriate sum of amount as interest free security deposits. In the agreement as submitted by it by letter dated December 07, 2022, it is mentioned that "The Jobber shall simultaneously on the execution of this Agreement, deposit and keep deposited with the Company as and by way of interest free deposit for the entire period of this Agreement for the due observance and performance of the terms of this Agreement by the Jobber." (ii) The Noticee is in charge of risk management, strategies to be adopted, guidan....
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.... that "......borrowing and lending of funds, by a trading member, in connection with or incidental to or consequential upon the securities business, would not be disqualified under clause (f) of sub-rule (1) of rule 8 and clause (f) of sub-rule (3) of rule 8". Hence the said transactions are not disqualified under clause (f) of sub-rule (3) of rule 8 of SCR Rules. (f) The validity of circular dated January 07, 2022 bearing reference no. NSE/COMP/50957 which pertains to clarification to the clause (f) of sub-rule (1) of rule 8 of SCR Rules and clause (f) of sub-rule (3) of rule 8 of SCR Rules, which is the subject matter of present email September 18, 2024, is under challenge before the Hon'ble Bombay High Court. (g) Petition (L) No. 32739 of 2023 and said Writ Petition is admitted on July 24, 2024. The outcome of the said Writ Petition will have direct bearing on the subject matter of present proceedings. 78. The DA, in its report, has stated that: (a) With regard to violation of clause (f) of sub-rule (3) of rule 8 of SCR Rules, the investments in associate company, arrangement to borrow funds and entering into arrangement with arbitragers to exte....
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....under SCR Rules, 1957. Further, in Adjudication Order of Geojit BNP Paribas (Adjudication Order No. EAD-12/ AO/SM/48/2017-18), SEBI observed that "the main purpose of rule 8(3)(f) is to prohibit the brokers to invest the clients' money in other businesses". In Jitendra Pukhraj Jain v. NSE, the Securities Appellant Tribunal (SAT), in its order dated 17th November 2020 observed that "the intention behind the said provision is to prevent negative impact on the balance sheet of a broker and to maintain the safety and integrity of the securities trading ecosystem." 82. In view of the above, I find that has the Noticee has not violated the provisions of clause (f) of sub-rule (3) of rule 8 of SCR Rules sand NSE circular No. NSE/COMP/50957 dated January 07, 2022. E.10. ALLEGATIONS WITH RESPECT TO TRADING IN MINOR'S ACCOUNTS 83. It was observed that Noticee has allowed trading of securities in accounts of minor. Therefore, the Noticee was alleged to have not complied with sub-clause (2) of clause A of Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992 read with SEBI FAQ on demat/trading account for minors dated September 25, 2018. 84. ....
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....ated the provisions of sub-clause (2) of clause A of Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992 read with SEBI FAQ on demat/trading account for minors dated September 25, 2018. 87. During the course of proceedings before me, the Noticee reiterated the submissions made before the DA. 88. Having gone through the aforesaid allegations, the DA report and submissions made by the Noticee in response to the Enquiry Report, I note that the Noticee has submitted that the accounts were opened for the minor in terms of the SEBI FAQ on demat/trading account for minors dated September 25, 2018. However due to inadvertent error the buying limit was not restricted due to which trades happened in minor accounts. I also note that the Noticee has promptly frozen the said minor trading accounts with immediate effect after inspection of SEBI, 89. In view of the above, I find that Noticee has violated the provisions of sub-clause (2) of clause A of Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992 read with SEBI FAQ on demat/trading account for minors dated September 25, 2018. However, I note that th....
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....f INR 15 Lakhs for jobbing. The said deposit was paid jointly from the family members. Instead of crediting the amount to a single arbitrager deposit account of Mr. Thakkar, it was credited to individual account of the family members so that it is easy to identify the same at the time of returning the deposit. However, due to personal and professional difference between Mr. Mehta and Mr. Thakkar it was decided amongst them they will not work together. Mr. Ashish Mehta kept on pursuing Mr. Thakkar to discuss for settlement of their dispute as he was hopeful that the issues would be resolved by discussion. Meanwhile, Mr. Thakkar was insecure of the security deposit and thought that the funds have been mis-used by Mr. Ashish and therefore there is a delay in refunding the deposit. As a result, Mr. Thakkar, instead of approaching Noticee, escalated the matter, resulting in the said complaint. (c) The issues were discussed by the Noticee in a joint meeting with Mr. Ashish Mehta and Mr. Kalpesh Thakkar. Mr. Thakkar agreed to withdraw the complaint when he was explained that Noticee had no issue in refunding the said deposits. Noticee had warned Mr. Ashish Mehta for delaying the ....
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.... to dealing with unregistered constituent is not proved. 97. In view of the above, I find that Noticee has not violated the provisions of Regulation 3.1.4 read with Regulation 3.1.8 of Part A of Capital market Regulation of NSE and Regulation 3.1.19 of Regulations (F&O segment) of NSE read with sub-clause (5) of clause A of Schedule II (Code of Conduct for Stock Brokers) of the SEBI (Stock Brokers) Regulations, 1992. E.12. ALLEGATIONS WITH RESPECT TO CYBER SECURITY AND CYBER RESILIENCE 98. It was observed that Noticee has not obtained Standardization Testing and Quality Certification ("STQC") for off-the-shelf products used by the Noticee (Trading application and Back office application) for core business functionality. Therefore, the Noticee was alleged to have not complied with the provisions of SEBI circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018 and SEBI/HO/MIRSD/TPD/P/CIR/2022/80 dated June 07, 2022. 99. In terms of the relevant provisions of SEBI Circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018, Stock Brokers / Depository Participants should ensure that off the shelf products being used for core business functionality (such as Back off....
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....ation of Evaluation Assurance Level 4 i.e. STQC. The DA stated that the Noticee was required to obtain the off-the-shelf products which were STQC compliant (Trading application and Back office application) for core business functionality which it failed to obtain. Accordingly, the DA held that that the Noticee violated the provisions of SEBI circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018 and SEBI/HO/MIRSD/TPD/P/CIR/2022/80 dated June 07, 2022. 102. During the course of proceedings before me, the Noticee reiterated the submissions made before the DA. 103. Having gone through the aforesaid allegations, the DA report and submissions made by the Noticee in response to the Enquiry Report, I note that Noticee has denied the fact that the software used by it was obtained off the shelf. However, it may be noted that in software terminology, off the shelf products are used on license basis also. Hence, the Noticee was was non- compliant with Indian Common criteria certification of Evaluation Assurance Level 4 i.e. STQC. 104. In view of the above, I find that Noticee has violated the provisions of SEBI circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018 an....
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.... Noticee stated that the same was not intentional or deliberate. Noticee further submitted that Noticee had shifted to new premises just 2 days prior to the inspection. Hence, it was difficult to search for the documents. Therefore, the same could not be submitted at that point in time. However, the said agreements with 54 Arbitragers were submitted along with its reply dated December 07, 2022 which was filed in response to the findings of the inspection team. (d) Additionally, below are certain reasons because of which there was delay in submitting the documents/ data: (i) There were approximately 10 tasks between October 15, 2022 to November 30, 2022 that had to be completed as per Exchange Compliance calendar. (ii) Corporate Income Tax Return filing date was November 07, 2022. (iii) GST and TDS Returns filing due date was November 20, 2022. (iv) Also, the inspection was being done closer to Diwali and many of its support staff members were on holiday. (v) As also stated aforesaid, the Noticee had shifted to new office premises just 23 days before the inspection commenced and Noticee was finding it difficult to locate certain ....
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....y in submitting certain data and documents. It is pertinent to note that there is no allegation of non-submission of documents. Hence, the same may not be treated as non-cooperation. 111. Having gone through the aforesaid allegations, the DA report and submissions made by the Noticee in response to the Enquiry Report, I note that due to exceptional circumstances created by compliance calendar, income tax search, shifting of office premises and holiday period, which led to delay in submission of documents. 112. In view of the above, I hold that the Noticee has violated the provisions of Regulation 21 of Securities and Exchange Board of India (Stock Brokers) Regulations, 1992. However, the non-compliance has taken place due to reasons as mentioned above and the documents were submitted subsequently. F. CONCLUSION 113. In view of the findings, and for reasons mentioned in the preceding paragraphs, I find that the Noticee has violated most of the provisions of laws alleged in the Enquiry Report and referred at paragraph 4 above. The Noticee has submitted that the purpose of carrying out inspection is not punitive and the object is to make the intermediary comply with the pr....
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....hat every minor discrepancy/ irregularity found during the course of inspection is not culpable and the object of the inspection could well be achieved by pointing out the irregularities/deficiencies to the intermediary at the time of inspection and making it compliant. While observing the same, Hon'ble SAT has also cautioned that it would also depend on the nature of the irregularity noticed and if any serious lapse is found during the course of the inspection, SEBI should take appropriate punitive action against the delinquent. 116. I further note that Stock Brokers are expected to strictly comply with the provisions of the relevant laws, both in letter and in spirit as they play an important role in participation of retail and small investors in the securities market. For the reasons mentioned in the preceding paragraphs, I find that the Noticee has violated most of the provisions of laws alleged in the Enquiry Report. I also note that an adjudication order dated November 29, 2024 has been passed against the Noticee for violation of the aforesaid provisions wherein, the Adjudicating Officer had imposed a penalty of INR 10 Lakhs on the Noticee and the same has been paid by it.....