BEFORE THE ADJUDICATING OFFICER SECURITIES AND … · ead-2/dsr/rg/ 319/2014 ] _____ under section...

Page 1 of 24

BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA

[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/ 319/2014 ] ________________________________________________________________

UNDER SECTION 15-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 Keynote Capital Limited

___________________________________________________________________

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") had

conducted an inspection into the books of accounts of Keynote Capital Limited

(hereinafter referred to as "the Noticee"), a SEBI registered stock broker and a

member of the Bombay Stock Exchange Limited (BSE), the National Stock

Exchange (NSE) and the Multi Commodity Exchange of India Limited (MCX), to

examine whether it had complied with the provisions of the SEBI Circulars and

various Rules and Regulations with respect to the segregation of funds and

securities for the period from April 01, 2011 to August 31, 2012.

2. Upon inspection, the following was observed with respect to the non-

segregation of funds of clients with that of the Noticee's own:

(a) Working Capital arrangement: Funds were transferred from NSE/BSE Client

account to Overdraft (OD) against FD Account No. 36290 and again from the

said OD against FD A/c to NSE/BSE Clients account. There was no

segregation of funds of clients with that of the Noticee's own funds and

therefore, it was observed that the Noticee had not complied with the provisions

of SEBI Circular dated November 18, 1993.

(b) Instances of Non-client funds being accounted in Client Accounts: It was

observed that the money received / paid from / to one Shivraj Sales Pvt. Ltd

and Mr. Karthik Sankaran were accounted for in Clients Accounts. The said two

entities were not registered clients with the Noticee.

Page 2 of 24

(c) Instances of transactions with respect to expenses accounted from Client

Accounts: Many transactions with respect to expenses A/c were accounted in

Clients Accounts. It was noted that large number of such entries (NSE Client

A/c-71 entries, BSE Client A/c-6 entries) accounted in clients account spread

from April 2012 to February 2013.

(d) Transactions relating to OD-Intra Account No. 30542 in NSE Client Account:

It was observed that the Noticee had transferred Rs. 72,00,000 from NSE

Client A/c to OD Infra A/c No. 30542 on May 11, 2012.

(e) Transactions relating to OD-demat A/c in NSE Client A/c: It was observed

that the Noticee had transferred Rs. 48,00,000 on April 04, 2012 and Rs.

36,00,000 on May 11, 2012 from NSE Client A/c to OD- Demat A/c.

3. SEBI has, therefore, initiated Adjudication proceedings against the Noticee for

violating the SEBI circular bearing No. SMD/SED/CIR/93/23321 dated November

18, 1993 (herein after referred to as the 'SEBI circular dated November 18, 1993')

and Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under

Schedule II read with Regulation 9(f) of the SEBI (Stock Brokers and Sub-Brokers)

Regulations, 1992, (herein after referred to as the 'Broker Regulations') for the

aforesaid violations with respect to the segregation of funds and securities of

clients.

APPOINTMENT OF ADJUDICATING OFFICER 4. I have been appointed as the Adjudicating Officer vide order dated January 17,

2014 under Section 15-I of the SEBI Act, 1992 (hereinafter referred to as the

Act) read with Rule 3 of the SEBI ( Procedure for Holding Inquiry and Imposing

Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the

said “Rules”) to inquire into and adjudge under Section 15HB of the Act, the

alleged violation of provisions of law by the Noticee.

NOTICE, REPLY AND PERSONAL HEARING 5. The Noticee was issued a Show Cause Notice dated April 09, 2014

(hereinafter referred to as “SCN”) under Rule 4(1) of the said Rules to show

cause as to why an inquiry should not be held and why penalty be not

imposed on it for the aforesaid violations. However, the said SCN was returned

Page 3 of 24

undelivered. Therefore, vide letter dated April 23, 2014, the said SCN was sent

for affixture at the last known address of the Noticee. During the affixture, the

Noticee's other address was provided and accordingly, vide letter dated April

28, 2014, the SCN was sent to the new address by "Hand Delivery". The said

SCN was duly delivered at the said address and the proof of delivery is on

record. Vide letter dated May 12, 2014, the Noticee submitted its reply to the

SCN. Thereafter, in the interest of natural justice and in order to conduct an

inquiry as per Rule 4(3) of the said Rules, an opportunity of personal hearing

was granted to the Noticee on July 08, 2014. The Authorized Representatives

(ARs) appeared on the scheduled date and made oral submissions by

reiterating the submissions made by the Noticee vide its reply dated May 12,

2014. Further, the ARs requested one weeks' time to file additional

submissions in the matter. Accordingly, the Noticee was advised to file the

same on or before July 15, 2014 and vide letter dated July 14, 2014, the

Noticee submitted its additional reply in the matter.

CONSIDERATION OF EVIDENCE AND FINDINGS

6. I have carefully perused the charges leveled against the Noticee in the SCN,

written submissions made by the Noticee and the documents available on

record. In the instant matter, the following issues arise for consideration and

determination :-

a. Whether the Noticee has violated the provisions of the SEBI circular dated November 18, 1993 and Clauses A (1), A (2) and A(5) of the code of conduct as specified under Schedule II read with Regulation 9(f) of the Broker Regulations?

b. Whether the Noticee is liable for monetary penalty as prescribed

under Section 15 HB of the SEBI Act for the aforesaid violation?

c. If so, what should be the quantum of monetary penalty?

7. Before proceeding further, I would like to refer to the relevant provisions of the

Broker Regulations and the SEBI Circular dated November 18, 1993 which read as

under:

Page 4 of 24

Stock brokers to abide by Code of Conduct. 9(f). The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II.

Schedule II

Code Of Conduct For Stock Brokers

[Regulation 9(f)]

A. General (1) Integrity : A stock Broker, shall maintain high standards of integrity,

promptitude and fairness in the conduct of all his business.

(2) Exercise of due skill and care : A stock broker, shall act with due

skill, care and diligence in the conduct of all his business.

.....

(5) Compliance with statutory requirements : A stock broker, shall

abide by all the provisions of the Act and the rules, regulations issued by

the Government, the Board and the Stock Exchange from time to time as

may be applicable to him.

SEBI Circular dated November 18,1993

1. It shall be compulsory for all Member brokers to keep the money of the clients in 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

Page 5 of 24

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: Provided that when a Member broker receives a cheque or draft representing in part money belonging to the client and in part money due to the Member, he shall pay the whole of such cheque or draft into the clients account and effect subsequent transfer as laid down below in para D (ii).

C] What moneys to be paid into "clients account". No money shall be paid into clients account other than -

i. money held or received on account of clients; ii. such money belonging to the Member as may be necessary for the purpose of opening or maintaining the account; iii. money for replacement of any sum which may by mistake or accident have been drawn from the account in contravention of para D given below; iv. a cheque or draft received by the Member representing in part money belonging to the client and in part money due to the Member.

D] What moneys to be withdrawn from "clients account". No money shall be drawn from clients account other than -

i. money properly required for payment to or on behalf of clients or for or towards payment of a debt due to the Member from clients or money drawn on client’s authority, or money in respect of which there is a liability of clients to the Member, provided that money so drawn shall not in any case exceed the total of the money so held for the time being for such each client; ii. such money belonging to the Member as may have been paid into the client account under para 1 C [ii] or 1 C [iv] given above; iii. money which may by mistake or accident have been paid into such account in contravention of para C above.

E] Right to lien, set-off etc., not affected. Nothing in this para 1 shall deprive a Member broker of any recourse or right, whether by way of lien, set-off, counter-claim charge or otherwise against moneys standing to the credit of clients account.

2. It shall be compulsory for all Member brokers to keep separate accounts for client’s securities and to keep such books of accounts, as may be necessary, to distinguish such securities from his/their own securities. Such accounts for client’s securities shall, inter-alia provide for the following:-

Page 6 of 24

a. Securities received for sale or kept pending delivery in the market;

b. Securities fully paid for, pending delivery to clients;

c. Securities received for transfer or sent for transfer by the Member, in the name of client or his nominee(s);

d. Securities that are fully paid for and are held in custody by the Member as security/margin etc. Proper authorization from client for the same shall be obtained by Member;

e. Fully paid for client’s securities registered in the name of Member, if any, towards margin requirements etc.;

f. Securities given on Vyaj-badla. Member shall obtain authorization from clients for the same.

3. Member Brokers shall make payment to their clients or deliver the securities purchased within two working days of pay-out unless the client has requested otherwise. Stock Exchange shall issue a Press Release immediately after the pay-out.

4. Member Brokers shall buy securities on behalf of client only on receipt of margin of minimum 20 percent on the price of the securities proposed to be purchased, unless the client already has an equivalent credit with the broker. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII’s.

5. Member brokers shall sell securities on behalf of client only on receipt of a minimum margin of 20 percent on the price of securities proposed to be sold, unless the member has received the securities to be sold with valid transfer documents to his satisfaction prior to such sale. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII’s.

6. Member brokers shall issue the contract note for purchase/sale of securities to a client within 24 hours of the execution of the contract.

7. In case of purchases on behalf of clients, Member brokers shall be a liberty to close out the transactions by selling the securities, in case the client fails to make the full payment to the Member Broker for the execution of the contract within two days of contract note having been delivered for cash shares and seven days for specified shares or before pay-in day (as fixed by Stock Exchange for the concerned settlement period), whichever is earlier; unless the client already has an equivalent credit with the Member. The loss incurred in this regard, if any, will be met from the margin money of that client.

Page 7 of 24

8. In case of sales on behalf of clients, Member broker shall be at liberty to close out the contract by effecting purchases if the client fails to deliver the securities sold with valid transfer documents within 48 hours of the contract note having been delivered or before delivery day (as fixed by Stock Exchange authorities for the concerned settlement period), whichever is earlier. Loss on the transaction, if any, will be deductible from the margin money of that client.

8. I find that the Noticee is a SEBI registered intermediary carrying out the

business of a Stock Broker in the Cash and Future & Option Segments of the

National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The

Noticee is also a member MCX-SX in cash, equity derivative and currency

derivative segment. I further find from the SCN that upon inspection, it was

observed that in reply to the inspection questionnaire, the Noticee had, vide

letter dated January 14, 2013, stated that it had opened separate bank and

demat accounts for segregation of its own and client’s funds and securities. List

of Bank accounts maintained by the Noticee are on record and the list of demat

accounts for client securities and proprietary securities is as under:

S.no Demat A/c no. DP name Purpose 1 1202430000010560 Keynote Capitals Ltd. BSE Client Margin A/c 2 1202430000000081 Keynote Capitals Ltd. NSE Client Margin A/c 3 1202430000010581 Keynote Capitals Ltd. NSE FO Client Margin A/c 4 1202430000009882 Keynote Capitals Ltd. OWN A/c

9. Further, vide letter dated January 14, 2013, the Noticee had submitted that all

the proceeds of funds payout were transferred to client bank account and then

payout of client were made from the same account. All receipts from clients get

deposited only in designated client bank account for respective exchange and

segment, thereof. The Noticee also submitted that the Client Bank a/c was only

used to meet respective client’s margin/pay-in requirements and/or payout

remittance to the respective client. In regard to its own funds, the Noticee had

stated that all the funds transferred from and to Client a/c towards own

utilizations were made from working capital and brokerages of the company.

Page 8 of 24

10. With respect to the client’s securities, the Noticee had submitted that all

securities payout from respective exchange are initially transferred to clients

margin demat a/c and then payout to clients are made from the same account

subject to risk policy & procedure. Further, it was stated that outward transfer of

securities from Clients Margin demat a/c was only made in case of respective

client’s securities pay-in obligation and/or transfer to client’s own demat a/c

and/or transfer to clearing member/exchange towards respective client’s margin

utilization. Also, that the Noticee's own securities are transferred to designated

own demat a/c only. Further, it was submitted that client’s securities were not

transferred to its own demat a/c under any circumstances.

11. Vide letter dated May 17, 2013, write up on Advance Client Deposit, Working

Capital arrangement and securities pay-in/pay-out process was provided by the

Noticee. From the said letter, it was observed that in order to have seamless

trading system and settlement of funds pay-in and payout on T+2 day with

exchanges and clients respectively, the Noticee had infused enough working

capital for day to day operation. Further, the Noticee had deployed funds

(` 15 crores approx.) towards working capital with the respective exchanges

towards margin in the form of cash and fixed deposits (FDs). Also, the Noticee

had converted the referred working capital in the form of FDs with the banks

and had obtained over draft (OD) facility against the same to save on cost of

funds. As a daily routine practice, the Noticee used to transfer excess idle

money lying in all bank accounts at the end of the day to the said own/overdraft

against FD A/c and on the following working day the Noticee was transferring

the requisite funds to the respective bank accounts. Further, vide letter dated

July 18, 2013, the Noticee had clarified that Axis Bank offered products like

Bank Guarantee. The bank offered overdraft facility with a margin of 50%

against Fixed Deposit and as per mutual discussions the Noticee utilized 100%

of OD limit for making further FD, which shall be under Bank’s lien towards

margin requirement. To save further cost of OD, as a daily routine practice, the

Noticee transfers (through automated process) excess idle money lying in all

respective bank accounts held with Axis bank at the end of the day to the said

OD against FD A/c (i.e. A/c no. 004010300036290) and on the following day

requisite funds get transferred to the respective bank Accounts through an

Page 9 of 24

automated process at the Axis Bank’s end under the mandate already given to

the bank.

12. Vide email dated July 25, 2013, the Noticee also submitted that it had obtained

the above referred OD facility in the month of October 2008. In support of the

said submission, the Noticee had provided scanned copies of Axis Bank’s letter

dated October 29, 2008 conveying the sanction of credit facilities to it and the

Noticee's letter dated December 11, 2008 requesting the bank, in order to

reduce the interest on overdraft, to transfer funds from 3 client’s account (NSE

Client A/c no. 004010200012647, BSE Client A/c no. 004010200020402 &

F&O Client A/c no. 004010200027025) to said OD account everyday in the

evening and transfer back the funds the very next day in the morning from the

said OD account to any of the said accounts in case of any shortfall in the

respective accounts. It was also observed that vide letter dated May 19, 2011,

the Noticee had given standing instructions (irrevocable authorization) to the

bank for transfer of funds from OD A/c No. 36290 to A/c Nos. 12647 (NSE

Client A/c) and 20402 (BSE Client A/c) every morning and that this irrevocable

authorization was to be in effect till further instruction in writing. Further, the

said authorization also stated that Axis Bank can transfer entire clear balance in

excess of ` 2,00,000/- (in multiple of ` 50,000/-) from 7 bank accounts

(including said 2 NSE/BSE clients A/cs) held by you to OD A/c No. 36290.

13. Following were the instances wherein the Noticee had failed to segregate the

client accounts:

(A) INSTANCES OF NON-CLIENTS FUNDS BEING ACCOUNTED IN CLIENT

ACCOUNT:

(i) The Noticee had submitted that the Bank Account No. 004010200012647

(NSE Client A/c) held with Axis Bank is generally used for accounting clients

funds. From examination of the said Bank Account No. 004010200012647

(NSE Client A/c), it was observed that there were entries/transactions related to

two entities viz. Shivraj Sales Pvt. Ltd. and Karthik Sankaran appearing in the

said Bank Account. However, the said two names are not appearing in the list

of registered clients as per the list provided by the Noticee vide email dated

March 01, 2013. Therefore, the said 2 entities are not registered clients of the

Page 10 of 24

Noticee, however, bank transactions relating to them were appearing in NSE

Client A/c. Accounts of Shivraj Sales Pvt.Ltd and Karthik Sankaran as

appearing in the Noticee's ledger are as follows:

SHIVRAJ SALES PVT.LTD.

Voucher Date

Entry Details

AmountDebit

Amount Credit

Running Balance Dr Cr

SHIVRAJ SALES PVT LTD

Opening Balance 0.00 Cr

13‐06‐12 AXIS BANK LTD‐NSE CASH CLIENT A/C 0.00 7500000.00 7500000.00 Cr

RTGS‐DLXBH12165000481/SHIVRAJ SALES PVT LTD


Cheque# :RTGS dated 18/06/12


A/C NOT OPEN


Cheque# :RTGS dated 19/06/12





Page 11 of 24





Cheque# :199008 dated 26/07/12

BEING CHEQUE RECD AGST A/C

Transaction Totals 0.00 41000000.00

Closing Balance 41000000.00 Cr

(ii) From the above table, it can be noted that the Noticee had received

payments (on different dates) totaling to `4.10 crores from Shivraj Sales Pvt.

Ltd. However, as mentioned earlier, the name of the entity does not appear in

the client master list maintained and provided by the Noticee.

KARTHIK SANKARAN

2009‐10

Voucher Date

Entry Details

Amount Debit

Amount Credit

Running Balance Dr Cr

KARTHIK SANKARAN


06‐05‐09 AXIS BANK [NSE CLIENT A/C] 0.00 3000000.00 3000000.00 Cr

Cheque# :301966 dated 05/05/09

HDFC BK CHURCHGATE ON A/C


Page 12 of 24


2010‐11

Voucher Date

Entry Details

Amount Debit

Amount Credit

Running Balance DrCr

KARTHIK SANKARAN

[DEPOSIT FROM PARTIES]


0.00 0.00



2011‐12

Voucher Date

Entry Details

AmountDebit

Amount Credit

RunningBalance DrCr

KARTHIK SANKARAN



0.00 0.00



2012‐13

Voucher Date

Entry Details

AmountDebit

Amount Credit

RunningBalance DrCr

Page 13 of 24

KARTHIK SANKARAN




Cheque# :230418 dated 31/01/13

(being ch issued towards refund of deposit)



(iii) From the above table, it can be seen that the Noticee had received payment

of ` 30 lakh from Mr. Karthik Sankaran on May 06, 2009. No transactions were

observed during 2010-11 and 2011-12. The said amount was paid back to

Mr. Karthik Sankaran on January 31, 2013 with narration showing as “being

cheque issued towards refund of deposit”. However, it is observed that name of

Mr. Karthik Sankaran does not appear in the client master list maintained /

provided by the Noticee.

(iv) In view of the above, it was alleged that the Noticee had accounted for the

funds received from Shivraj Sales Pvt. Ltd. and Mr. Karthik Sankaran in the same

account (i.e A/c no. 004010200012647) which is designated as NSE Client A/c

and maintained to keep Clients funds received/paid from/to or on account of

clients and therefore, in violation of SEBI circular dated November 18, 1993

issued in respect of Regulation of transactions between clients and brokers.

Page 14 of 24

(B) INSTANCES OF TRANSACTIONS W.R.T. EXPENSE ACCOUNT FROM

CLIENT ACCOUNT:

(i) The Noticee had submitted that Axis Bank Account No. 910020005043882

was for payment of all expenses like authorized person payout, salary and other

expenses. However, transaction pertaining to this account figured in NSE client

A/c and BSE client A/c. In view of the identified transaction as mentioned in the

Annexure to SCN, which shows that transaction relating to regular business

expenses had been accounted in Clients Accounts, it was alleged that the

Noticee had failed to segregate the client accounts and thereby, violated the

provisions of SEBI circular dated November 18, 1993 issued in respect of

Regulation of transactions between clients and brokers.

(C) INSTANCES OF TRANSACTION W.R.T. NSE EXCHANGE DUES IN NSE

CLIENT A/C NO. 004010200012647:

(i) It was submitted by the Noticee that Axis Bank Account No. 004010200616812

was maintained for the purpose of exchange dues. Upon examination, the

following instances of transactions pertaining to NSE Exchange Dues account no.

616812 in NSE Client A/c 004010200012647 were observed.

Date Branch Account Head Cheque# Chq.Date Receipts Payments

09‐04‐12 HO INTER SEGMENT 01‐Jan‐

00 0.00 1000000.00

BEING AMT TRF TO 02.616812


00 0.00 1000000.00

TRF TO AXIS 616812


00 0.00 1000000.00


01‐08‐12 HO INTER SEGMENT letter 01‐Aug‐

12 0.00 1000000.00

(being amt trfd to KCL‐UTI‐

Page 15 of 24

616812)*


00 0.00 2000000.00


22‐02‐13 HO INTER SEGMENT letter 22‐Feb‐

13 0.00 1000000.00

(being amt trfd to KCL‐UTI‐616812‐exchange

dues a/c)*


00 0.00 26000000.00


(ii) Upon perusal of the above table, it was observed that the entries pertaining to

payment of Exchange Due were also figuring in bank account maintained for

Client funds which was not in accordance with the provisions of SEBI circular

dated November 18, 1993.

(D) TRANSACTION RELATING TO AXIS BANK A/C NO. 004010300030542

(OD-INTRA A/C) IN NSE CLIENT ACCOUNT NO. 004010200012647:

(i) As submitted by the Noticee the Account No. 00401010300030542 was

maintained for OD (Overdraft) on Intraday basis. Further, the Noticee had

clarified that at times on emergency fund requirement, bank gives OD against

pending cheque clearing, payout receivables etc. for one day on request.

Following transaction were observed in the NSE Client Account relating to OD-

Intra A/c no. 30542.

Date Branch Account Head Chq.Date Receipts Payments

11‐05‐12 HO INTER SEGMENT 01‐Jan‐00 0.00 7200000.00


Page 16 of 24

(ii) The table above shows that OD A/c No. 30542 was maintained for OD

intraday basis. However, it was noted that an amount of ` 72 Lakh was paid from

Clients A/c to the said OD A/c No. 30542. Therefore, it was further alleged that

the Noticee by using Clients A/c to make transaction other than those specified in

the SEBI circular dated November 18, 1993 violated the provisions of the said

SEBI circular.

(E) TRANSACTION RELATING TO AXIS BANK A/C NO. 004010300037332

(OD-DEMAT A/C) IN NSE CLIENT ACCOUNT NO. 004010200012647:

(i) The Noticee had submitted that Axis Bank A/c No. 004010300037332 is for

OD against pledge of its own shares. However, transactions relating to this OD-

Demat Shares A/c were appearing in NSE Clients A/c No. 004010200012647 as

tabled below:

Date Branch Account Head Chq.Date Receipts Payments





(ii) The above table shows that A/c no. 37332 was opened for OD against pledge

of the Noticee's own share. However, it was noticed that there were transactions

showing payment made from clients A/c to said OD against pledge of Noticee's

own share A/c No. 37332. The same shows that the Noticee was using Clients

A/c to make transaction other than those specified in the SEBI circular dated

November 18, 1993 and hence, allegedly had violated the provisions of said

SEBI circular.

14. In view of the above, it was alleged that funds were being transferred from NSE

/ BSE Client A/cs to the Noticee's OD A/c and from the OD A/c to said Clients

A/cs. It was further alleged that the Noticee had used the NSE / BSE Client A/c

Page 17 of 24

for purposes other than the ones mentioned in the SEBI Circular dated

November 19, 1993 i.e. using them for Expense A/c and NSE Exchange Dues

A/c, etc. Therefore, the Noticee was alleged to have failed to comply with the

provisions of SEBI Circular dated November 18, 1993 in respect of regulation of

transactions between clients and brokers which inter alia states that it shall be

compulsory for all member brokers to keep the money of the clients in a

separate account and their own money in a separate account. The said SEBI

circular also indicates what moneys to be paid into “Clients account” and what

moneys to be withdrawn from “Clients account”.

Reply:

15. The Noticee vide letter dated May 12, 2014 submitted its reply to the SCN. The

Noticee submitted that it has never misused any client funds. The Noticee as a

Stock Broker is entitled to receive brokerage for the trades undertaken. As per

the SEBI Circular, the Noticee submitted that it is legal to keep such brokerage

in a separate account of the Client. The Noticee stated that the SEBI Circular

dated November 18, 1993 at para 1(C)(ii) states that a cheque or a draft

received by by the Member representing in part money belonging to the Client

and in part due to the Member can be de[posited in a clients' Bank Account

belonging to Noticee. In addition, the Noticee stated that none of its clients

have complained about its funds being misused by the Noticee for meeting its

own obligations and therefore, the Noticee denies having misutilised the funds.

16. The Noticee further submitted that the various functions purported to have been

undertaken by the Noticees were activities that the Noticee undertook in the

due course of its business in compliance with the referred Circular in true spirit

with respect to segregation of clients' funds and securities. It submitted that it

had opened separate bank accounts and demat accounts for segregation of

own and clients funds and securities and most of the time the receipts and

payments of the clients were routed through the clients bank account and own

transactions were routed through its own accounts.

17. With respect to the receipts from Shivraj Sales Pvt. Ltd, the Noticee referred to

Point No. 1(C)(ii) and Point No. 1(D)(iii) of the SEBI Circular dated November

Page 18 of 24

18, 1993 and stated that the same receipt was towards deposit which was

received and accounted for in the Client Bank Account by mistake. The Noticee

submitted that it has duly accounted the same in the account "Deposit from

Parties-Shivraj Sales Pvt. Ltd" in the books of accounts. Further, with respect to

the money received from Mr. Karthik Shankaran, the Noticee submitted that the

said deposit was received in the year 2009-10 and was by mistake deposited in

the Client Bank Account. The said amount was later refunded in the year 2012-

13 from the Client Bank Account only since, the same was inadvertently

received in the Client Account. The Noticee further submitted that the referred

entries in Annexure 7 of the SCN are the entries pertaining to the Noticee's own

funds transferred from Client Account to expenses account out of the accrued

brokerage in the Clients Bank Account and the Noticee's own working capitals

infused by the Noticee for day to day operations. The Noticee denied that the

regular business expenses were accounted for from the clients' bank accounts.

18. With respect to the instances of NSE Exchange dues in NSE Client A/c No.

004010200012647, the Noticee submitted that the said entries pertain to the

Noticee's own funds transferred from Client A/c to Exchange Dues A/c out of

accrued brokerage, accrued transaction charges and other statutory charges

collected from the client in the Client Bank A/c and the Noticee's own working

capital infused by the Noticee for day to day operations. The Noticee further

submitted that the further payments made from the Exchange Dues Account

are normally made to the Exchanges towards Transaction charges collected by

the brokers and the same is received by the Broker in client bank account only.

Therefore, the Noticee denied the said allegation.

19. With respect to the transfer of ` 72 lakh on May 11, 2012 from Client A/c to OD

A/c No. 30542, the Noticee submitted that the same was in fact towards refund

of the same amount of ` 72 Lakh which was transferred from OD A/c No. 30542

to NSE F&O Settlement A/c one day prior i.e. on May 10, 2012 towards clients'

pay-in obligation. The Noticee stated that the same is evident from the copy of

the bank book of the said OD A/c No. 30542. The Noticee further submitted that

the referred transfer of ` 48 Lakh on April 04, 2012 from the Cleint A/c to OD

Page 19 of 24

A/c No. 37332 was in fact towards refund of the same amount of ` 48 Lakh

which was transferred from the OD A/c No. 37332 to BSE Client A/c No. 20402

one day prior i.e. on April 03, 2012 towards clients' pay-in obligation. Similarly,

the Noticee submitted that the referred transfer if Rs. 36 Lakh on May 11, 2012

from the Client Account to OD A/c No. 37332 was in fact towards refund of the

same amount which was transferred from OD A/c No. 37332 to NSE Settlement

A/c and BSE Settlement A/c one day prior i.e. on May 10, 2012 towards clients'

pay-in obligation.

20. Vide letter dated July 14, 2014 the Noticee submitted its additional reply in the

matter and stated that the activities such as transfer of funds from NSE / BSE

Client Accounts to OD Account and vice versa pursuant to irrevocable

authorization given to Axis Bank to transfer funds as mentioned, has been

stopped since January 2014. Vide letter dated January 06, 2014, the Noticee

has categorically withdrawn the aforesaid irrevocable authorization from Axis

bank. The Noticee further reiterated its submissions made vide its earlier reply

dated May 12, 2014.

Findings:

21. I have carefully perused the charges leveled against the Noticee in the SCN

and the submissions made by it. With respect to non-client funds being

accounted for in client account by the Noticee, I find from the instances that the

Noticee did transfer receipts from two entities i.e. Shivraj Sales Pvt. Ltd. (`4.10

crores) and Mr. Karthik Sankaran (`30 Lakh) in the Client Bank Account despite

they not appearing in the client list as maintained / provided by the Noticee. I

further find that the Noticee in its submissions has stated that the said receipts

were transferred in the client account inadvertently and with respect of the

payment received from Shivraj Sales Pvt. Ltd., the same was reversed and the

monies were transferred to "Deposit from Parties-Shivraj Sales Pvt. Ltd" later.

However, with respect to the receipt of money from Mr. Karthik Sankaran, the

same kept lying in the clients' account till 2012-13. I find that admittedly, on

both the instances, the Noticee did default in accounting non-client funds in

Page 20 of 24

client accounts and therefore, I conclude that the Noticee did violate the SEBI

Circular dated November 18, 1993.

22. Further, I find that the Noticee did utilize funds from the clients account for

carrying out transaction with respect to Expenses Account. I do not find any

merit in the submissions of the Noticee that the funds lying in the accounts of

the client were Noticee's own funds transferred from Client Account to

expenses account out of the accrued brokerage which was in the Clients Bank

Account. I find that the amounts received from the clients towards brokerage or

accrued brokerage have to be properly segregated and the Broker cannot keep

the amounts received on account of brokerage in the clients account and use it

for the expense accounting. I find from the instance quoted in the Inspection

Report that the Axis Bank A/c No. 910020005043882 was opened by the

Noticee for the specific purpose of payment of all expenses like authorized

person payout, salary and other expenses. However, I conclude that the

Noticee by carrying out the transactions pertaining to the expense account from

the NSE client A/c and BSE client A/c has clearly violated the provisions of the

SEBI Circular dated November 18, 1993.

23. With respect to the transactions with respect to NSE Exchange Dues appearing

in the Client Account, I find that the Noticee has submitted that the funds which

were transferred from the clients' account to the NSE Exchange Due A/c were

its own funds accruing from the brokerage, accrued transaction charges and

other statutory charges collected from the client which were lying in the clients'

account. The said submission is again similar to the submission made with

respect to the transactions carried out for Expense Account from the Client

Account and is not acceptable inasmuch as the SEBI Circular clearly mandates

segregation of client funds from that of the Broker Funds and segregation of

Client Securities with that of the Broker Securities. By utilizing the said client

accounts for any purposes other than for client related transactions, the Noticee

has violated the provisions of SEBI Circular dated November 18, 1993.

24. Further, I note, vide email dated July 25, 2013, the Noticee had submitted that it

had obtained the OD facility (as mentioned in para 12 above) in the month of

Page 21 of 24

October 2008 from the Axis Bank. In support of the said submission, the

Noticee had provided scanned copies of Axis Bank’s letter dated October 29,

2008 conveying the sanction of credit facilities to it and the Noticee's letter

dated December 11, 2008 requesting the bank, in order to reduce the interest

on overdraft, to transfer funds from 3 client’s account (NSE Client A/c no.

004010200012647, BSE Client A/c no. 004010200020402 & F&O Client A/c

no. 004010200027025) to said OD account everyday in the evening and

transfer back the funds the very next day in the morning from the said OD

account to any of the said accounts in case of any shortfall in the respective

accounts. It was also observed that vide letter dated May 19, 2011 the noticee

had given standing instructions (irrevocable authorization) to the bank for

transfer for funds from OD A/c no. 36290 to A/c Nos. 12647 (NSE Client A/c)

and 20402 (BSE Client A/c) every morning and that this irrevocable

authorization was to be in effect till further instruction in writing. Further, the

said authorization also stated that Axis Bank can transfer entire clear balance in

excess of ` 2,00,000/- (in multiple of ` 50,000/-) from 7 bank accounts

(including said 2 NSE/BSE clients A/cs) held by the noticee to OD A/c No.

36290.

25. From the above, I find that the OD A/c No. 36290 is an account maintained by

the Noticee with Axis Bank to facilitate its stock market business and for

smooth functioning of activities relating to stock market. Axis Bank has

extended credit facilities to the Noticee under pre- agreed terms and conditions.

Further, the Noticee has also given irrevocable authorization to Axis Bank to

transfer funds from said OD A/c 36290 to its 2 Accounts i.e. A/c no.s 12647

(NSE Client A/c) and 20402 (BSE Client A/c) and transfer funds from 7 bank

accounts (including said 2 NSE/BSE clients A/cs) to said OD A/c. The Noticee

has submitted that it stands to save on the cost of funds/OD and it has been

more than 4 years since this system was adopted by it in October 2008.

However, the Noticee in its submissions dated July 14, 2014 has submitted that

the facility has been withdrawn and the irrevocable authorization has been lifted

since January 2014. I further note from the two instances quoted in the

inspection report that the Noticee had carried out transactions relating to Axis

Bank A/c No. 004010300030542 (OD Intra A/c) and Axis Bank A/c No.

Page 22 of 24

004010300037332 (OD-Demat A/c) in the NSE Client A/c No.

00401020001267. Both the instances make it abundantly clear that the Noticee

did use the Client A/c to make transactions other than the specified

transactions in the SEBI Circular dated November 18, 1993. In view of the fact

that the funds were being transferred from the NSE/ BSE Client Accounts to the

OD A/c of the Noticee and further from the OD A/c to the said Clients Account, I

conclude that there was a clear violation of the SEBI Circular dated November

18, 1993 by the Noticee.

26. From the foregoing, I find that the Noticee did fail to comply with the standards

of segregation of funds of clients with that of its own on various occasions and

thereby, has not exercised due care and skill in carrying out the business of the

Stock Broker. Therefore, I conclude that the Noticee by transacting in the

manner mentioned in the above paragraphs has violated the SEBI Circular

dated November 18, 1993 and Clauses A(1), A(2) and A(5) of the Code of

Conduct as specified under Schedule II read with Regulation 9(f) of the Broker

Regulations thus, warranting monetary penalty as prescribed under Section

15HB of the Act which reads as under.

Penalty for contravention where no separate penalty has been provided. 15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

27. At this instant, it is important to quote the observations of the Hon’ble Supreme

Court of India in the matter of SEBI v. Shri Ram Mutual Fund [2006] 68 SCL 216(SC), wherein the court , 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.”

Page 23 of 24

28. While imposing monetary penalty, it is important to consider the factors stipulated

under Section 15J of SEBI Act, which reads as under:

“15J - Factors to be taken into account by the adjudicating officer:

While adjudging quantum of penalty under 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.”

29. I observe, from the material available on record, that 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. The defaults on the

part of the Noticee are repetitive in nature. However, I find that the Noticee

being a registered intermediary is required to comply with the various Circulars

and Rules and Regulations as laid down by the Regulator to ensure smooth

and stable functioning of the capital market. The very purpose of the SEBI

Circular dated November 18, 1993 is that it shall be compulsory for all the

member brokers to keep the money of the clients in a separate account and

their own money in a separate account and further also indicates what monies

to be paid into the "Client Account" and what monies to be withdrawn from the

said accounts. Therefore, I conclude that the Noticee has not exercised

adequate due skill, care and diligence in its operations and failed to comply with

the provisions of Circular dated November 18, 1993 issued by the Board and

also Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under

Schedule II read with Regulation 9(f) of the Broker Regulations Such

wrongdoings and misconduct cannot be ignored and the same deserves &

attract penalty as per law.

Page 24 of 24

ORDER

30. 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 (2) of the SEBI

Act read with Rule 5 of the said Rules, I hereby impose a penalty of `5,00,000/-

(Rupees Five Lakh Only ) on the Noticee viz.Keynote Capital Limited under

Section 15HB of the Act. In my view, the penalty imposed is commensurate with

the default committed by the Noticee.

31. The above penalty amount shall be paid by the Noticee through a duly crossed

demand draft drawn in favour of “SEBI – Penalties Remittable to Government of

India” and payable at Mumbai within 45 days of receipt of this order. The said

demand draft shall be forwarded to the Division Chief, MIRSD-I, Securities and

Exchange Board of India, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai

- 400021.

32. In terms of the Rule 6 of the said Rules, copy of this order is sent to the Noticee

and also to Securities and Exchange Board of India.

Date: December 18, 2014 D. SURA REDDY Place: Mumbai GENERAL MANAGER & ADJUDICATING OFFICER

Date post:	02-Aug-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

BEFORE THE ADJUDICATING OFFICER SECURITIES AND … · ead-2/dsr/rg/ 319/2014 ] _____ under section...

Documents