TaxTMI 
TaxTMI 
2023 (1) TMI 1507
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....ni, Murgesh Devashrayi, Prosperous Vyapaar Pvt. Ltd., Polo-Setco Tie Up Pvt. Ltd. and Parton Commercial Pvt. Ltd .. The directions issued in the Interim Order are reproduced below: - i. "BRH Wealth Kreators Ltd. (formerly BMA Wealth Creators Ltd.), Shiv Kumar Damani, Anubhav Bhatter, Murgesh Devashrayi, BRH Commodities Private Ltd. (formerly BMA Commodities Pvt. Ltd.), Prosperous Vyapaar Pvt. Ltd., Polo-Setco Tie Up Pvt. Ltd. and Parton Commercial Pvt. Ltd. are restrained from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, either directly or indirectly, or being associated with the securities market in any manner whatsoever, till further directions; ii. The aforesaid Noticees shall cease and desist from undertaking any activity in the securities market, directly or indirectly, in any manner whatsoever till further directions; iii. The aforesaid Noticees are directed not to dispose of or alienate any assets, whether movable or immovable, or to create or invoke or release any interest or charge in any of such assets except with the prior permission of National Stock Exchange of India Ltd. ....
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....20. The period covered under the audit was from April 01, 2016, to September 30, 2019 (Some data sets in the audit were extracted and analysed for the period beyond September 30, 2019). SEBI, along with BSE, NSE, CDSL and NSDL, had also earlier inspected the books of accounts and other records of BRH between October 01, 2018, and October 05, 2018, for the period April 01, 2017 to July 25, 2018. Similarly, SEBI, along with MCX and NCDEX, inspected the books of accounts and other records of BRHCPL between November 26, 2018, and November 28, 2018, covering the period April 01, 2017, and October 30, 2018. 6. SEBI, thereafter, issued a Show Cause Notice ("SCN") dated October 29, 2021, alleging the following: - a) Misutilisation of clients' securities. i. Pledging of clients' securities by BRH and BRHCPL. ii. Diversion of funds by BRH and BRHCPL through loan against securities ("LAS"). b) Misutilisation of clients' funds by BRH. c) Misutilisation of clients' funds by BRHCPL. d) Misutilisation and diversion of client securities and funds by BRH through Related Parties. e) Discrepancies in Email ids and Mobil....
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....silent on the transactions between BRH and group entities of the Agarwalla Family up to September 2018. f. It was submitted that even though the FAR was submitted by NSE to SEBI on March 03, 2020, they failed to supply a copy of the FAR to the Noticees despite repeated requests. g. The SCN wrongly alleges that there was a substantial increase in pledged securities from INR 169 Crore in the quarter ended June 2018 to INR 448 Crore as on the quarter ended December 2018, that the debtors' balance was INR 156 Crore in the quarter ended December 2018 and that the securities pledged as on the quarter ended December 2018 were more than clients' indebtedness to BRH which amounted to INR 292 Crore. h. While looking at the pledge positions of BRH, it should be appreciated that BRH provided combined exposure together with default funding to the clients on the various trading platforms, including on the F&O segment of NSE. While the clients having credit balance otherwise when dealing on the F&O segment did not maintain cash securities as mandated by NSE, and this was provided by BRH out of the credit facilities availed by pledging their shares. i. The actua....
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....ons when immediately the documents were not located. However, whenever any such request was made in the course of an inspection, the same was duly complied with by the Compliance Team. On the closure of business in September 2019, almost all employees had left the company, and thus, it was difficult to readily supply all documents in the course of inspection by the Forensic Auditor. This, however, cannot raise a presumption that the POA of 48 clients was unavailable. p. It was denied any purported discrepancy in POA had been used as a method for misuse of funds /securities of clients by BRH /BRHCPL. q. In respect of the allegation in the SCN regarding the diversion of funds to related parties, it was submitted as under: - i. AB Investments was a client of BRH, and a copy of the ledger of transactions undertaken by it with BRH was submitted before SEBI. It was argued that from a perusal of the ledger, it would be evident that no excess amount was paid to AB Investment by BRH as alleged by NSE. BRH had only made payment of the amounts due to AB Investments on account of its trading balance. ii. Polo Setco Tie Up Pvt Ltd. ("Polo") is a non-banking f....
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....clients' securities by BRH through these entities as alleged or at all. r. In respect of the allegation that there was a mismatch in the data reflected in its books and the demat statements, it was submitted that the CDSL data showing the total pledge of BRH for approximately INR 175 Crore was the correct figure and numbers reflected in the BRH office record was incorrect due to a software error. s. As regards the allegation in the SCN that the Noticee had not cooperated with the audit and inspections teams and it had failed to redress investor grievances, it was stated that it was made known to NSE and the Forensic Auditor that after the closure of business September 30, 2019, there was massive chaos in their offices when almost all employees left. However, despite that, support was provided to NSE and the Forensic Auditor. t. It was also denied that there was non-redressal of grievances of investors by BRH, and it was stated that the compliance team provided full support and resolved all grievances of the investors in 2017-18. Noticee 4 - Shiv Kumar Damani a. It was submitted by Noticee 4 that prior to joining BRH, he had worked with S....
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.... a. It was submitted that the Noticee was a separate legal juristic entity having no management connection with BRH. Noticee was only one of the clients /customers of BRH. b. In the usual course of business, for the purpose of availing margin, they had transferred their shares to the general pool account of BRH, apart from providing cash security. c. The allegation that an excess sum of INR 5 Crores or any part thereof was transferred to them was denied. d. It was submitted that they have only been paid amounts earned from trading on the stock exchanges. A copy of the ledger account and trading accounts were submitted. e. It was submitted they are yet to receive INR 2,50,32,278/- from BRH and this is also reflected in the ledger statement that was submitted before SEBI. f. It was further submitted that the Forensic Auditor has in a causal manner picked up a figure from the accounts of BRH and tried to paint a picture that they have been paid excess amounts by BRH. g. The Noticee submitted that it cannot be held liable for the source of fund used by BRH to make payment of its liability towards it. Noticee 8 - Polo-Setco ....
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....by BRH to the Noticee as on 20.05.2016 and it was against such dues, a sum of INR 1.80 Crore was paid by BRH on 20.05.2016. Noticee further submitted that just after receiving the said amount from BRH, in view of their intention to carry on the trading, they had once again paid a sum INR 1.80 Crores to BRH. d. Noticee was not aware of the source of funds of BRH from where their dues were paid. Noticee 11 - Bluesnow Supplier Pvt. Ltd. a. It was submitted that the Noticee was a separate juristic entity having no connection with the business dealings of BRH. b. Noticee owned a commercial space which was leased to BRH for a monthly license fee of INR14,93,380. c. The money transferred to Noticee by BRH were payments towards dues under the agreement. CONSIDERATION 9. I am now moving to consider the issues on merit. I propose to take up the allegation in the SCN pertaining to the Misutilisation of Client Securities by BRH and BRHCPL and diversion of client securities and funds to related parties together. a. Misutilisation of Client Securities by BRH and BRHCPL. b. Misuse and diversion of client securities and funds by ....
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....-Client Account" to "Name of 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." 13. As per the pledge information submitted by BRH, there was a substantial increase in pledge during the quarter ended ("QE") December 2018. The clients' securities that were pledged, which stood at INR 169 Crore at the end of QE June 2018, increased to INR 448 Crore by the end of December 2018. The corresponding debit balance, which was owed by its clients, was only INR 156 Crore in QE December 2018. This mismatch of INR 292 Crore (INR 448 Crore - INR 156 Crore) between the client securities pledged and clients having debit balance indicated that BRH was pledging securities of clients not having any debit balance. The pledge details for two sample dates (September 28, 2018 and September 30 2019) is extracted from the FAR and reproduced below: September 28, 2018 ● Securitie....
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....lated parties, NSE submitted their analysis and observations vide emails dated December 31, 2020, and January 1, 2021. The summary of observations made by NSE is as follows: a) AB Investments - AB Investments was a client of BRH. After examining the records of BRH, it was noted that an amount of INR 2.90 Crore is payable to AB Investments in respect of the transactions undertaken by it on the exchange platform. However, it was observed during the audit that the net outflow of funds from BRH to AB Investments amounted to INR 5.48 Crore. In view of the same, it was noted that an excess amount of INR 2.58 Crore had been transferred to AB Investments by BRH. b) Polo Setco Tie Up Pvt. Ltd- Polo was an NBFC. During the inspection conducted by NSE, it was observed that securities of other clients worth INR 31.10 Crore were misappropriated through Polo. It is also noted from the FAR that Polo had a loss of approximately INR 17 Crore in the F&O segment during the period covered by the forensic audit. However, despite losses in the F&O segment, a net outflow of funds amounting to INR 150.54 Crore (including funds amounting to INR 80.61 Crore from the LAS account) from BRH t....
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....entities were connected to BRH, the details of which are given in the Table below :- Noticee No. Name of the Noticee Basis of Connection 7 Prosperous Vyapaar Pvt. Ltd. ● Received Loan Against Securities (LAS) of Rs. 5 crore ● Debiprasad Ganguly and Uma Bhaduri, who were directors of the company, were the employees of BRH. ● Payments made to them such as advance against Salary, reimbursement of travelling expense, etc. were observed in the books of Noticee no. 1. 8 Polo-Setco Tie Up Pvt. Ltd. ● Received LAS of Rs. 80.61 crore. ● Holds 26.06% shares in Noticee no. 1 and 49% shares in Noticee no. 2. ● Ram Kishore Sharma and Vinay Dujari who were directors of the company, were the employees of BRH. ● Payments made to them such as advance against Salary, reimbursement of travelling expense, etc. were observed in the books of Noticee no. 1. 9 Parton Commercial Pvt. Ltd. ● Received LAS of Rs. 50.67 crore. ● Holds 0.08% shares in Noticee no. 1. ● Vinay Dujari and Netre Thapa who were of the directors of the company, were the employees of BRH. Payments made to them such as ad....
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....Avinash Agarwalla, who along with Noticee 3, were the initial directors of Noticee 1. In this regard, I note that a similar contention was raised by Noticee 3 prior to the passing of the confirmatory order and at that stage, taking into account the same, it was directed in the confirmatory order that :- "The present director of BMA, namely, Noticee no. 3, in his oral submissions made during the hearing, has contended that the said pledge of securities were being undertaken by the erstwhile management of BMA i.e. Mr . Avinash Agarwalla and Mr. Sudhandhu Agarwalla and continued by the present management. Therefore, the stock exchanges, clearing corporations and depositories, are further directed that the forensic audit or appointed by them shall also look into the role of Mr . Avinash Agarwalla and Mr. Sudhandhu Agarwalla, who are non - dominant promoters of Noticee no. 1 and are alleged to be directly or indirectly in control of the companies i.e. Shakti Auto Finance Pvt. Ltd., Bhagwati Syndicate Pvt. Ltd., Snowtex Investment Ltd., Sumee Trading Pvt. Ltd. and Snowtex Securities Ltd., forming the promoter group of Noticee no. 1, as submitted by the Noticee no. 1 to 5 in thei....
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....a separate account and their own money in a separate account. No payment for transactions in which the Member broker is taking a position as a principal will be allowed to be made from the client's account. The above principles and the circumstances under which transfer from client's account to Member broker's account would be allowed are enumerated below. [A] Member Broker to keep Accounts: Every member broker shall keep such books of accounts, as will be necessary, to show and distinguish in connection with his business as a member - i. Moneys received from or on account of each of his clients and, ii. the moneys received and the moneys paid on Member's own account. [B] Obligation to pay money into "clients' accounts". Every member broker who holds or receives money on account of a client shall forthwith pay such money to current or deposit account at bank to be kept in the name of the member in the title of which the word "clients" shall appear (hereinafter referred to as "clients account"). Member broker may keep one consolidated clients account for all the clients or accounts in the name of each client, as he thinks fit: ....
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....ker -Client Account" to "Name of 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." 27. As per the inspection report of BRH, on 37 out of 38 sample instances, funds of credit balance clients were misutilised for meeting the obligations of debit balance clients and/or for its own purpose. The amount of misutilisation ranges from INR 1.45 Crore to INR 8.00 Crore. A few instances of the misutilisation of client funds identified in the inspection report is detailed in the table below: - Table 1 Date Total (client bank balance + settlement a/c balance Aggregate value of collaterals (cash/FD/(BG/2)) (INR) Aggregate value of credit balance of all clients (as per trial balance after adjustments) (INR) A+B-C [A] [B] [C] [G] 01.02.2018 3,21,10,105 38,26,00,928 49,47,08,672 -7,99,97,640 02.02.2018 31,99,41,111 38,26,00,928 78,25,39,379 ....
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....lance after adjustments) (INR) (A+B)-C [A] [B] [C] [G] 16-08- 17 2053911.66 88431591.59 163284524.44 -72799021.19 04-09- 17 2312918.53 88431591.59 163729501.45 -72984991.33 18-04- 17 2572072.16 88321591.59 142540078.22 -51646414.47 15-05- 17 3463280.55 88321591.59 141541706.95 -49756834.81 13-06- 17 3553883.22 88321591.59 136085324.21 -44209849.40 07-07- 17 8240858.10 98321591.59 155569627.57 -49007177.88 18-07- 17 1280027.86 88431591.59 160792641.04 -71081021.59 31. I note from the replies of Noticee No. 1 and 2, that they have made similar arguments in respect of this allegation of regarding misutilisation of securities and misutilisation of funds. In view of the same, as already stated in para 18 and 19 of this Order, those contentions are without merit and are liable to be rejected. 32. It can therefore be noted that in the sample analysis it was observed that BRHCPL has misutilised funds of credit balance clients on 20 days with the amount of misutilisation ranging from INR 4.42 Crore to INR 7.30 Crore. In view of the same, I note that BRHCPL has misuti....
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....anges within seven days of such change." v. Clause 3.2 of Annexure of SEBI Circular no. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 provides that "Stock brokers shall submit the following data as on last trading day of every week to the Stock Exchanges on or before the next trading day: A - Aggregate of fund balances available in all Client Bank Accounts including the Settlement Account, maintained by the stock broker across stock exchanges 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 Debi....
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.... the inspection. I note from the records that on verification of the list of DP accounts reported by BRH and BRHCPL to the exchange as of November 5, 2019, with the back office master data, it was observed that 6 DP accounts of BRH, 25 bank accounts of BRH and 11 bank accounts of BRHCPL were not reported to the exchanges. 38. It was also observed during the inspection that BRH has not complied with Risk Based Supervision requirements reported to the Exchange for the year 2017-18. Particular As per Member Submission As per Details provided by the Member Difference NSE BSE Total NSE BSE Total Total no. of Branches 507 332 839 359 228 587 252 Number of Branches Inspected by Member during the FY 2017-18 302 302 604 230 203 433 171 Number of APs Inspected by Member during the FY 2017-18 333 27 360 177 20 197 163 Number of Sub-brokers Inspected by Member during the FY 2017-18 7 1 8 4 1 5 3 Number of branches with voice recording facility 106 106 212 46 80 126 86 Total amount of delayed payment charges collected from the clients (in IN....
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.... BRH did not provide access to finance and operations personnel during the on-site visit of the auditor. j) BRH has taken significant time to provide key data. BRH was unable to provide support for generating reports through its back office vendors. 42. Regulation 21 of the SEBI (Stock Brokers) Regulations, 1992 provides for following obligations of a stock broker on inspection by the Board: "(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 in securities market within such time as the said officer may require. (2) The stock-broker shall allow the inspecting authority to have reasonable access to the premises occupied by such stock-broker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the stock-broker or any other person and also provide copies of documents or other materials which,....
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.... in the FAR and hold that BRH has failed to redress investor complaints within the stipulated time and thereby contravened Regulation 9(e) of SEBI (Stock Brokers) Regulations, 1992. h. Register of pledge not maintained and details of pledged shares of clients not provided by BRHCPL 48. To ensure that client securities maintained with the stock broker are reflected in the client DP account maintained by it, SEBI has put in place measures for periodic reconciliation of these two accounts. Towards this end, SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, on enhanced supervision provides as under: - "The Stock Exchanges shall put in place a mechanism and ensure that stock brokers upload the following data on a monthly basis for every client onto each Stock Exchange system where the broker is a member 7.1.1. Exchange-wise end of day fund balance as per the client ledger, consolidated across all segments and also net funds payable or receivable by the broker to/from the client across all Exchanges 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 a....
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....xecuted with the client for this purpose that non-receipt of bounced mail notification by the member shall amount to delivery of the contract on email ID of the client. 2.4.3 Log Report for rejected or bounced mails i. The log report shall also provide the details of the contract notes that are not delivered to the client/e-mails rejected or bounced back. ii. Also, the member shall take all possible steps (including settings of mail servers, etc.) to ensure receipt of notification of bounced mails by the member at all times within the stipulated time period under the extant regulations of SEBI/stock exchanges." 52. I note from the records that during the inspection, the records of BRHCPL were inspected on a sample basis and it was observed for the sample that was examined, bounce mail notification was not enabled for contract notes sent electronically to clients. In view of the same, I am constrained to hold that BRH has failed to provide bounce mail notification of electronic contract notes and thus violated SEBI Circular MRD/DoP/SE/Cir-20/2005. 53. Having recorded my findings on the contraventions that have been alleged against Noticees 1, 2 and 7....
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.... manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. Explanation : For the purposes of this section,- (a) "company" means any body corporate and includes a firm or other association of individuals; and (b) "director", in relation to a firm, means a partner in the firm" 54. While addressing the question of the liability of the directors, I cannot lose sight of the fact that Noticee 3 was not just a director of Noticee 1 and 2 right from the year 2004, he also directly /indirectly held significant beneficial interest in both these companies. Noticee 4, I note, was a director of Noticee 1 from the year 2004 itself and therefore cannot avoid liability merely by stating that even though he has been designated as a director he continued to act as an employee and had received remuneration only commensurate to the said role. I note that Noticee 5 and 6 have also made arguments similar to the one made by Noticee 4. It is noted that Noticee 6 was appointed as a director of Noticee 2 with effect from July 01, 2016 and therefore it is noted that he acted as....
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....ate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets. Explanation. - For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market. (2) Dealing in securities shall be deemed to be a manipulative fraudulent or an unfair trade practice if it involves any of t....
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....ver 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 the removal of doubts, it is clarified that the power 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. Section 23 D of the SCRA, 1956: "Penalty for failure to segregate securities or moneys of client or clients. 23D. If any person, who is registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) as a stock broker or sub - broker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one Crore rupees." Section 23J of the SCRA "Factors to be taken into account while adjudging quantum of penalty. 23J. While adjudgi....
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.... being associated with the securities market in any manner whatsoever, for a period of 7 years. b. Noticees 7 to 11 are hereby restrained from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, either directly or indirectly, or being associated with the securities market in any manner whatsoever, for a period of 5 years. c. It is clarified that while calculating the period of debarment as directed above, the period of restraint already undergone pursuant to the Interim Order read with the Confirmatory Order shall be taken into consideration and set off from period mentioned above. d. The following Noticees shall also be liable to pay monetary penalty, as specified hereunder: - NOTICEE PROVISIONS UNDER WHICH PENALTY IMPOSED PENALTY AMOUNT (IN RUPEES) NOTICEE 1 SECTION 15HA OF THE SEBI ACT AND SECTION 23D OF THE SCRA 5 CRORE NOTICEE 2 SECTION 15HA OF THE SEBI ACT AND SECTION 23D OF THE SCRA 5 CRORE NOTICEE 3 SECTION 15HA OF THE SEBI ACT 1 CRORE NOTICEE 7 SECTION 15HA OF THE SEBI ACT 10 LAKHS NOTICEE 8 SECTION 15HA OF THE SEBI ACT 10 LAKHS ....