M/s. Alka Securities Ltd vs Securities and Exchange Board of India on 9 December 2009

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

Appeal No. 234 of 2009

Date of Decision : 9.12.2009

M/s. Alka Securities Ltd. 203, Anupam Building, Dadabhai Cross Road no. 2, Andheri (W), Mumbai. …Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai.

…Respondents

Mr. Sean Wassoodew, Advocate for the Appellant. Mr. Shiraz Rustomjee, Advocate with Ms. Chloris John, Advocate for the Respondent.

Coram : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral)

The appellant before us is a stock broker registered with the Securities and Exchange Board of India (for short the Board) and a member of the National Stock Exchange of India Limited (NSE). The Board carried out inspection of the books of accounts and other records of the appellant during March, 2003 and noticed certain irregularities committed by the appellant. It initiated enquiry proceedings in accordance with the provisions of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. The enquiry officer in his report dated May 31, 2005 found that the appellant had violated section 12 of the Securities and Exchange Board of India Act, 1992 (fort short the Act) and different circulars issued by the Board. The enquiry officer recommended that the certificate of registration of the appellant be suspended for a period of two months. A notice dated June 15, 2005 was then issued

by the Board calling upon the appellant to show cause why appropriate penalty including the penalty as recommended by the enquiry officer be not imposed against it. The appellant filed its reply and was thereafter granted an opportunity of hearing. On a consideration of the material collected during the inspection and the enquiry, the whole time member by his order dated October 30, 2009 found the appellant guilty of serious irregularities and suspended its certificate of registration as a stock broker for a period of two months. It is against this order that the present appeal has been filed.

We have heard the learned counsel for the parties. The first charge that has been established against the appellant is that it dealt with an unregistered sub broker which is prohibited under the Act. It is not in dispute that the appellant had entered into an agreement on August 14, 1998 with Optima Securities India Pvt. Ltd. in which the latter was described as a management associate of the appellant. By virtue of this agreement, the appellant practically handed over its entire business of stock broking alongwith its membership card of NSE to the associate which was not a registered entity with the Board. Reference in this regard may be made to the relevant clauses of the agreement which are reproduced hereunder :

“2. It is agreed between the Company and the Associates that from the date of execution of these presents the Associates alone shall be entitled to develop, carry on and execute the W.D.M. Operations on the N.S.E. Card of the Company as Associates of the Company in accordance with the terms of this Agreement.

3. It is agreed and confirmed by the Associates as under:-

i. ………….

ii. Associates will develop, carry on and execute W.D.M. Operations and/or business on the N.S.E. card of the Company.

iii. …………..

4. The Company do hereby agree, confirm and covenant with the Associate as under:

i. The Company will not carry on any W.D.M. operations or business directly or indirectly on its N.S.E. Card and Associate alone shall be entitled to carry on such operations and business in the name of and on behalf of the company.”

It is, thus, clear that the entire business in the securities market was being carried on by the associate which was not a registered entity and the appellant undertook not to carry on the business. Such practices have been cautioned against by the Board through its Regulations and several circulars. The danger from such practices is obvious as the security of the market is jeopardized. This apart, handing over stock broking business to an unregistered sub broker / agent violates section 12 of the Act and also the Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992 and Rule 3 of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992 which was then in force. The Act was enacted to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of and to regulate the securities market. With a view to regulate the market, section 12 of the Act requires every intermediary to get itself registered with the Board and if the registered intermediaries like the appellant were to be allowed to handover the business to unregistered and unregulated entities / agents, the very purpose of the Act would be frustrated and the Board will not be able to regulate the market effectively. Moreover, the associate by itself may not be an intermediary of the market but nevertheless it is an agent of the appellant and in that capacity it can only be described as a sub broker. The charge that the appellant acted through an unregistered sub broker stands established and the irregularity committed is rather serious.

The other and perhaps a more serious charge that has been levelled against the appellant is that as a stock broker it had mis-utilized the funds of its clients for its own purposes. It is on record, as pointed out by the enquiry officer, that the appellant through cheques had drawn money from its clients accounts to pay the equated monthly installments for the cars purchased by the promoters of the appellant company. Payment was also made to a group company from the clients’ funds. This is clear misappropriation of funds even though they are said to have been replaced by the appellant. The Board has emphasized time and again that the stock brokers should segregate the funds of the clients from their own funds and not allow the clients’ funds to be used for any purpose other than trading in securities for the

clients and allied purposes. The fact that the clients funds were used for the appellant’s own purposes is not in dispute before us. What is contended by the learned counsel for the appellant is that the amounts were spent inadvertently and that they were replaced soon thereafter when the error came to their notice. This plea cannot be accepted. When a stock broker is required to maintain the clients accounts separately, there is no reason why monies from these accounts be spent by the stock broker for his own purpose. It is, indeed, a very serious irregularity / illegality which cannot be condoned. If this were to be allowed, it would not only jeopardise the interest of the investors but also erode their confidence in the securities market. Confidence of the investors in the market is of paramount importance.

Apart from the aforesaid irregularities, the enquiry officer has found some other discrepancies as well in the working of the appellant. Proper books of accounts and records had not been maintained as found by the Board during the course of the inspection and the learned counsel for the appellant did not address any arguments in this regard. For the reasons recorded above, we find no merit in the appeal which stands dismissed with no order as to costs. The order dated 18.11.2009 by which the operation of the impugned order had been stayed shall, however, continue to operate till January 11, 2010 to enable the appellant to approach the Supreme Court.

Sd.

Justice N. K. Sodhi

Presiding Officer

Sd/-

Samar Ray

Member

9.12.2009 Prepared and compared by: msb/-