BEFORE THE ADJUDICATING OFFICER SECURITIES … · securities and exchange board of india [...

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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/515/2015 ]

________________________________________________________________

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

BP EQUITIES PVT. LTD

(PAN: AAACB4602L)

___________________________________________________________________

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

had conducted an inspection into the books of accounts and other records of

BP Equities Pvt. Limited (hereinafter referred to as "the Noticee"), a SEBI

registered stock broker and a member of the National Stock Exchange (NSE)

- INB/F/E/2301142036, the Multi Commodity Exchange of India Limited

(MCX)- SX - INB/F/E/ 261142039/36 & the Bombay Stock Exchange Limited

(BSE) - INB/F 010979732, and to examine whether it had complied with the

provisions of the SEBI Circulars and various Rules and Regulations with

respect to quarterly / monthly settlement of funds and securities of the clients

for the period between April 2012 to June 09, 2014 and whether corrective

steps were taken for the deficiencies as observed in the Internal Audit Report

and NSE Inspection Report with respect to quarterly / monthly settlement of

funds and securities of clients.

2. Upon inspection, the following was observed with respect to quarterly /

monthly settlement of funds and securities of the clients:

(a) Delay in implementation of the SEBI Circular with respect to Running

account settlement.

(b) Non- settlement of Running accounts.

(c) Substantial balance in the client accounts (both debit and credit) unsettled

for long duration of time.

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(d) Non-charging of delayed payment charges on substantial debit balances

for long duration of time and allowing further exposure despite the said

balances in client accounts.

(e) Maintaining accounts on a consolidated basis for securities and

commodity market clients.

(f) Accounts of clients with credit balances, both active and inactive, not

settled.

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

for violating the SEBI circulars bearing Nos. MIRSD/SE/Cir-19/2009 dated

December 03, 2009 and MIRSD/SE/Cir-5/2010 dated March 31, 2010 (herein

after referred to as the 'SEBI circulars dated December 03, 2009 and March

31, 2010') and Clauses A(1), A(2) and A(5) of the Code of Conduct as

specified under Schedule II read with Regulation 9(f) and 26(xv) of the SEBI

(Stock Brokers and Sub-Brokers) Regulations, 1992, (herein after referred to

as the 'Broker Regulations').

APPOINTMENT OF ADJUDICATING OFFICER

4. I have been appointed as the Adjudicating Officer vide order dated December

31, 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. A Show Cause Notice dated February 25, 2015 (hereinafter referred to as

“SCN”) was issued to the Noticee 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. Vide letter dated March 12, 2015,

the Noticee submitted its reply in the matter. 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

August 31, 2015. The Authorized Representatives (ARs) appeared on the

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scheduled date and reiterated the submissions already made by the Noticee

vide its reply dated March 12, 2015.

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 December 03, 2009 and March 31, 2010 and Clauses A (1), A (2)

and A(5) of the code of conduct as specified under Schedule II read

with Regulation 9(f) and 26(xv) 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 violations?

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 Circulars dated December 03, 2009 and March

31, 2010 which read as under:

SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009

Subject: Dealings between a client and a stock broker (trading

members included)

1. This is in continuation of circulars (a) No. SMD/SED/CIR/93/23321

dated November 18, 1993 specifying the norms for regulation of

transactions between clients and brokers, (b) No. SEBI/MIRSD/DPS-1/Cir-

31/2004 dated August 26, 2004 specifying the model format for the

Member Clients Agreements, and (c) No. MRD/DoP/SE/Cir-20/2005 dated

September 8, 2005 specifying the conditions for issuing electronic contract

notes.

2. With a view to instill greater transparency and discipline in the dealings

between the clients and the stock brokers, it has been decided, in

consultation with Investor Associations, Secondary Market Advisory

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Committee of SEBI (SMAC), market participants and major stock

exchanges, that the stock brokers shall comply with the requirements as

annexed to this circular.

3. The stock brokers shall take necessary steps to implement this circular

immediately and ensure its full compliance in respect of all clients –

existing or new – at the latest by 31st March 2010.

4. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers

and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and

regulations for the implementation of the above decision in co-ordination

with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the provisions

of this circular in their Monthly Development Reports.

5. This circular is issued in exercise of powers conferred under Section

11(1) of the Securities and Exchange Board of India Act, 1992 to protect

the interests of investors in securities and to promote the development of,

and to regulate the securities markets.

Annexure A

Requirements relating to dealings between a Client and Stock

Broker

Client Registration Procedure

1. The stock broker shall register a client by entering into an agreement

with him. For this purpose, the stock broker shall make available a folder

/book containing all the documents required for registration of a client.

The folder/book shall have an index page listing all the documents

contained in it and indicating briefly significance of each document. Once

signed, a copy of the same shall be made available to the client.

2. The folder/book shall have two parts: (a) Mandatory and (b) Non-

mandatory.

Mandatory Documents

3. The mandatory documents are:

a. Member Client Agreement (MCA)/Tripartite Agreement in case sub-

broker is associated,

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b. Know Your Client (KYC) Form

c. Risk Disclosure Document (RDD)

These shall be executed in the format as prescribed by SEBI.

4. The Client shall indicate the stock exchange as well as the market

segment where he intends his trades to be executed. He shall do so in the

KYC form in his own hand and sign against these.

5. The KYC form shall capture the identity and the address of the

introducer instead of his MAPIN/UID. The KYC form shall be modified to

this extent.

6. The stock broker shall have documentary evidence of financial details

provided by the clients who opt to deal in the derivative segment. In

respect of other clients, the stock broker shall obtain the documents in

accordance with its risk management system.

7. The Stock Broker shall also capture details of action taken against a

client by SEBI or other authorities during the last 3 years.

8. There shall be a mandatory document dealing with policies and

procedures for each of the following under appropriate headings:

a. refusal of orders for penny stocks,

b. setting up client’s exposure limits,

c. applicable brokerage rate,

d. imposition of penalty/delayed payment charges by either party,

specifying the rate and the period (This must not result in funding by

the broker in contravention of the applicable laws),

e. the right to sell clients’ securities or close clients’ positions, without

giving notice to the client, on account of non-payment of client’s dues

(This shall be limited to the extent of settlement/margin obligation),

f. shortages in obligations arising out of internal netting of trades,

g. conditions under which a client may not be allowed to take further

position or the broker may close the existing position of a client,

h. temporarily suspending or closing a client’s account at the client’s

request, and

i. deregistering a client.

Non-mandatory Documents

9. Any term or condition other than those stated in the mandatory part

shall form part of non-mandatory documents.

10. The clauses in the non-mandatory part shall not be in contravention of

any of the clauses in the mandatory documents, as also the Rules,

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Regulations, Articles, Byelaws, circulars, directives and guidelines of SEBI

and Exchanges. Any such contravening clause shall be null and void.

11. Any authorization sought in non-mandatory part shall be a separate

document and shall have specific consent of the client.

Running Account Authorization

12. Unless otherwise specifically agreed to by a Client, the settlement of

funds/securities shall be done within 24 hours of the payout. However, a

client may specifically authorize the stock broker to maintain a running

account subject to the following conditions:

a. The authorization shall be renewed at least once a year and shall be

dated.

b. The authorization shall be signed by the client only and not by any

authorised person on his behalf or any holder of the Power of Attorney.

c. The authorization shall contain a clause that the Client may revoke

the authorization at any time.

d. For the clients having outstanding obligations on the settlement date,

the stock broker may retain the requisite securities/funds towards such

obligations and may also retain the funds expected to be required to

meet margin obligations for next 5 trading days, calculated in the

manner specified by the exchanges.

e. The actual settlement of funds and securities shall be done by the

broker, at least once in a calendar quarter or month, depending on the

preference of the client. While settling the account, the broker shall send

to the client a ‘statement of accounts’ containing an extract from the

client ledger for funds and an extract from the register of securities

displaying all receipts/deliveries of funds/securities. The statement

shall also explain the retention of funds/securities and the details of the

pledge, if any.

f. The client shall bring any dispute arising from the statement of

account or settlement so made to the notice of the broker preferably

within 7 working days from the date of receipt of funds/securities or

statement, as the case may be.

g. Such periodic settlement of running account may not be necessary:

i. for clients availing margin trading facility as per SEBI circular

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ii. for funds received from the clients towards collaterals/margin in the

form of bank guarantee (BG)/Fixed Deposit receipts (FDR).

h. The stock broker shall transfer the funds / securities lying in the

credit of the client within one working day of the request if the same are

lying with him and within three working days from the request if the

same are lying with the Clearing Member/Clearing Corporation.

i. There shall be no inter-client adjustments for the purpose of

settlement of the ‘running account’.

j. These conditions shall not apply to institutional clients settling trades

through custodians. The existing practice may continue for them.

Authorization for Electronic Contract Notes

13. The stock broker may issue electronic contract notes (ECN) if

specifically authorized by the client subject to the following conditions:

a. The authorization shall be in writing and be signed by the client only

and not by any authorised person on his behalf or holder of the Power

of Attorney.

b. The email id shall not be created by the broker. The client desirous of

receiving ECN shall create/provide his own email id to the stock broker.

c. The authorization shall have a clause to the effect that that any

change in the email-id shall be communicated by the client through a

physical letter to the broker. In respect of internet clients, the request for

change of email id may be made through the secured access by way of

client specific user id and password.

General

14. All the documents in both the mandatory and the non-mandatory parts

shall be printed in minimum font size of 11.

15. A copy of all the documents executed by client shall be given to him,

free of charge, within 7 days from the date of execution of documents by

the client. The stock broker shall take client’s acknowledgement for receipt

of the same.

16. The stock brokers having own web-sites shall display all the

documents executed by a client, client’s position, margin and other related

information, statement of accounts, etc. in the web-site and allow secured

access by way of client-specific user id and password.

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17. No term of the agreement, other than those prescribed by SEBI, shall

be changed without the consent of the client. Such change needs to be

preceded by a notice of 15 days.

18. The stock broker shall frame the policy regarding treatment of inactive

accounts which should, inter-alia, cover aspects of time period, return of

client assets and procedure for reactivation of the same. It shall display

the same on its web site, if any.

19. As on 31st March of every year, a statement of balance of Funds and

Securities in hard form and signed by the broker shall be sent to all the

clients.

SEBI Circular No. MIRSD/SE/Cir-5/2010 dated March 31, 2010

Subject: Clarification on dealings between a client and a stock

broker

1. This is with reference to SEBI circular No. MIRSD/SE/Cir-19/2009

dated December 3, 2009 in terms of which the stock brokers were directed

to take necessary steps to implement the circular immediately and ensure

its full compliance in respect of all clients - existing and new - latest by

March 31, 2010.

2. Subsequent to the issuance of the aforesaid circular, SEBI has received

representations from market participants expressing difficulties in

implementation of the circular and requesting extension of time. Hence, in

consultation with the major stock exchanges, it has been decided to

extend the time line.

3. The stock brokers are now directed to ensure the full compliance of the

said circular dated December 3, 2009 in respect of all clients-existing and

new - latest by June 30, 2010.

4. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers

and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and

regulations for the implementation of the above decision in co-ordination

with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the provisions

of this circular in their Monthly Development Reports.

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5. This circular is issued in exercise of powers conferred under Section

11(1) of the Securities and Exchange Board of India Act, 1992 to protect

the interests of investors in securities and to promote the development of,

and to regulate the securities markets.

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.

8. I find from the SCN that the Noticee is a registered stock broker with SEBI

and a member of NSE, BSE and MCX-SX and was incorporated in the year

1997. During inspection, in response to a questionnaire by the inspection

team with respect to the quarterly / monthly settlement of funds / securities of

clients, the Noticee vide its letter dated January 13, 2014 and revised

submission vide email dated June 20, 2014 had confirmed that actual

settlement of funds and securities, either monthly or quarterly, were being

carried out from April 01, 2012 onwards. Also, the Noticee was advised to

submit its reply as to why no actual settlement of funds and securities, either

monthly or quarterly, was being done by it. The Noticee, vide its email dated

July 22, 2014, had stated that initially, the concept of settlement of funds and

securities was not clear and therefore, it was doing the settlement of funds

and securities after manual calculations. The Noticee further submitted that it

took time to develop the system of settlement through the software, which

even as on date is not fully automated. Further, it submitted that the new

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system reasonably assists it in settling the accounts as a result of which it is

in a position to better implement the settlement of accounts. It was, therefore,

alleged in the SCN that the Noticee was doing the actual settlement of funds

and securities of the clients, either monthly or quarterly, only from April 01,

2012 onwards i.e. with a delay of one year and nine months from the date of

implementation and thus, remained non-compliant with Point No. 12 of the

SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009 and

SEBI Circular No. MIRSD /SE/Cir-5/2010 dated March 31, 2010 with respect

to quarterly / monthly settlement of funds and securities of clients.

9. I further find that the inspection team had selected a sample of 39 clients for

verification of the Running Accounts settlement analysis. Upon analysis, it

was noted that the Noticee had obtained authorization for maintaining of

running accounts and settlement of funds and securities from its clients in

writing. Brief analysis of the sample data submitted by the Noticee pertaining

to clients for settlement purpose is detailed below:

Sr no

Quarter Not Applicable

A

Settled

B

Not Settled

C

Considered Settled on

account of debit in Commodities

D

Percentage Not settled (C+D/39-A)

1 Jun 2012 8 21 7 3 32.26%

2 Sept 2012 5 23 8 3 32.35%

3 Dec 2012 2 21 13 3 43.24%

4 Mar 2013 1 23 12 3 39.47%

5 Jun 2013 1 26 8 4 31.58%

6 Sept 2013 1 25 9 4 34.21%

7 Dec 2013 1 24 10 4 36.84%

8 Mar 2014 1 21 13 4 44.74%

10. From the sample analysis, it was noted that for all the quarters about

30 - 40 % of client accounts were not being settled. As the said observation

was made by the inspection team, during inspection, the Noticee was asked

to provide data pertaining to settlement schedule of all its clients. The data as

was submitted by the Noticee is as under:

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Quarterly settlement

Total number of active

clients during inspection

period

No of clients required to be

settled*

No. of clients settled

No. of clients

unsettled

Percentage of clients

unsettled

Jun-12 3818 10554 7333 3221 30.52%

Sep-12 3931 10585 7184 3401 32.13%

Dec-12 4335 10736 7057 3679 34.27%

Mar-13 3997 10854 7085 3769 34.72%

Jun-13 3450 12878 10408 2470 19.18%

Sep-13 3303 10387 7362 3025 29.12%

Dec-13 3808 13266 9882 3384 25.51%

Mar-14 3915 10977 10180 797 7.26%

* The clients which are having funds / stocks in their account during the quarter and required to be

settled.

11. From the above analysis, on an average, it was alleged that the Noticee had

not settled about 27% of the accounts required to be settled for all quarters

during the inspection period.

12. Further, the Noticee was also advised to submit information pertaining to total

amounts (debit and credit) not settled for all quarters. The Noticee had

submitted the data as mentioned below:


No. of clients unsettled

Amount of credit

balance not settled

(Rs)

Amount of debit balance not

settled (Rs)

Jun-12 3221 68,37,046.75 44,49,744

Sep-12 3401 75,99,138.91 43,15,961

Dec-12 3679 74,50,440.27 47,33,290

Mar-13 3769 73,08,645.48 32,81,767

Jun-13 2470 91,10,066.2 19,88,011.52

Sep-13 3025 27,97,250.92 10,91,497.5

Dec-13 3384 34,21,309.05 7,50,412.32

Mar-14 797 47,58,703.9 31,61,534

13. From the said data, it was observed that the total debit balance amount not

settled by the Noticee for all the quarters during the inspection period ranged

between ` 7,00,000 to ` 47,00,000 and the credit balance unsettled ranged

between ` 27,00,000 to ` 91,00,000.

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14. Further, analysis was done for clients having substantial credit balance,

unsettled for long duration of time. The observation of the same was as

under:

Outstanding Ageing Report as on 31/03/2014-Creditors

Sl No Clients Outstanding

(Rs)

Code Name 271 - 360 days

1. 33005 SANGITA A SHAH 577126.81

2. VI017 HEMLATA PARAG KHANDRAY

83641.83

3. DJ134 BHARAT SHAH 57784.4

4. HY024 YUGANDHAR VEMULAPALLI

42427.46

5. ACS19 NRUPAL NARESHCHANDRA RAJA

32358.49

6. TN051 PRABHA JACOB NAINAN 11036.73

7. BN004 JAGDISH BABUBHAI MONAPARA

10650.73

15. From the above analysis, it was noted that 7 clients had continuous credit

balance of more than `10, 000/- which was not settled for 271-360 days as

on 31/03/2014.

16. Analysis was also done for clients having substantial debit balance, unsettled

for long duration of time. The observation of the analysis was as follows:

Outstanding Ageing Report as on 31/03/2014-Debtors

Sl No. Clients Outstanding

(Rs)

Code Name 360 - Above

days

1. AHO2809 SAMJUBEN DHIRUBHAI

VEKARIYA

3936930.83

2. AHO2815 NIRBHAY DHRUVBHAI DAVE 3134424.74

3. AHO2814 MANSUKHLAL TARSHIBHAI

VEKARI

2386298.8

4. AHO2808 DHIRUBHAI BHIKHABHAI

VEKARIY

2381978.47

5. RAK003 HIMANSHU ASHOKBHAI

BHARADHVA

1962602.45

6. AHO2813 GAURIBEN BACHUBHAI 766408.86

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TOGADIYA

7. JP210 ANITA JAIN 755874.62

8. 6042 VIREN RAMESH THAKKAR 661103.93

9. JP817 RAMLAL MALI 538646.48

10. ADV09 SHANTABEN NAVNITBHAI

PATEL

511557.93

17. From the above, it was noticed that the above 10 clients had continuous debit

balances of more than ` 50,000/- which were not settled for more than 360

days as on 31/03/2014.

18. Considering the substantial debit balances for long duration of time, during

the inspection, the inspection team had sought information from the Noticee

for 13 such clients with respect to delayed payment charges (DPC) and

further exposure on debit balances. The Noticee had submitted that if there is

a delay on the part of client in fulfilling his/her margin obligation or settlement

obligations, then the Noticee may levy interest at the rate of 2% p.m. or part

thereof on such shortage amount. From the data submitted by the Noticee

(vide email dated 26/08/2014) with respect to DPC and further exposure on

debit balance, the following analysis was done:

Sl. No.

Client Code

Name DPC charged

(Y/N)

Noticee's response to further exposure given on debit balance during the quarter

1 AHO2815 NIRBHAY DHRUVBHAI DAVE

No The exposure was given in Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given

2 AHO2808 DHIRUBHAI BHIKHABHAI VEKARIY

No The exposure was given in Jul-Sep 12, Oct-Dec 12 and Jan-Mar 13. After this quarter, there was no further exposure given

3 AHO2813 GAURIBEN BACHUBHAI TOGADIYA


4 AHO2809 SAMJUBEN DHIRUBHAI VEKARIYA


5 AHO2814 MANSUKHLAL TARSHIBHAI VEKARI


6 RAK003 HIMANSHU ASHOKBHAI BHARADHVA


7 JP210 ANITA JAIN No No

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8 6042 VIREN RAMESH THAKKAR No No

9 JP817 RAMLAL MALI No No

10 ADV09 SHANTABEN NAVNITBHAI PATEL

No No

11 PRD46 SANTOSH KAILASHCHANDRA SHARM

No The exposure was given in Apr-Jun 13 and Jul-Sep 13. In Jan-Mar 14, only once the exposure was given

12 PRD01 VINOD SHANTILAL VORA No No

13 ACS04 JIGAR PRABODHBHAI BHOW

No The exposure was given in Apr-Jun. After this quarter, there was no further exposure given

19. From the above, it was noted that out of the selected 13 clients having

substantial debit balance for long duration of time, exposure was given in 8

cases. Further, in deviation to its policy on DPC, no DPC was collected in the

instant 13 cases. Thus, it was alleged in the SCN that the Noticee had not

collected DPC but allowed further exposure without recovering debit

balances in the clients' accounts.

20. I further find from the SCN that out of the sample 39 clients (as mentioned in

para no. 9), there were a total of 5 clients for whom the Noticee was

maintaining accounts on a consolidated basis for securities market and

commodity market. On further analysis, it was noted that out of the sample 39

clients, for 3 clients in the Financial Year 2012-13 and for 4 clients in the

Financial Year 2013-14, the accounts were being maintained on a

consolidated basis. Further, during inspection, the Noticee was advised to

submit the total number of clients for whom it was maintaining accounts in a

consolidated basis for securities and commodity markets. The Noticee, vide

email dated July 22, 2014, had submitted that for a total of 34 clients, the

accounts were being maintained on a consolidated basis. The Noticee further

submitted that its clients are also registered clients of its sister concern viz.

BP Comtrade Pvt. Ltd. (member of MCX and NCDEX) and for operational

convenience, its clients have instructed the Noticee to maintain the accounts

in a consolidated basis, taking into account, the balances of both companies

together. Therefore, upon specific instructions of its clients, the accounts

were being treated as settled considering the balance in commodity segment.

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21. The quarter wise analysis of accounts maintained in a consolidated basis,

taking into account the balances of both companies together, is as follows:

Quarters Apr-Jun

12

Jul-Sep

12

Oct-

Dec 12

Jan-

Mar 13

Apr-

Jun 13

Jul-

Sep 13

Oct-

Dec 13

Jan-

Mar 14

Total

instances

No. of

clients

32 32 32 32 33 33 33 33 260

22. It was observed that there were 260 instances during the inspection period,

wherein the accounts of the 34 clients were being treated as settled

considering the balance in commodity segment by the Noticee. In view of the

same, the inspection team had further advised the Noticee to respond as to

why it was maintaining accounts on a consolidated basis for securities and

commodity markets clients and whether any amount was transferred to/from

the client account to commodities account at the time of settlement. The

Noticee, vide email dated July 25, 2014, had submitted that it had not

transferred any amount to/from its equity arm to its commodities arm. As

there was a debit balance in commodities account of the common clients, it

had considered balance lying in the trading account to be settled. Thus, the

Noticee in its own reply has stated that there were 260 instances where

actual settlement of funds and securities (monthly/ quarterly) were being

carried out for 34 clients considering the debit balance in commodities

account which was allegedly to be in violation of the SEBI Circular dated

December 03, 2009.

23. While perusing the outstanding ageing report of the clients of the Noticee, the

inspection team had observed that substantial amount of credit balance was

lying with the Noticee. Accordingly, further data was sought form the Noticee

and it was observed that the Noticee had inactive clients with unsettled credit

balances. The analysis of these accounts is as follows:

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Total number of active clients during

inspection period

No. of clients

required to be settled

No. of clients settled

No. of clients

unsettled

No. of clients

unsettled-inactive

No. of clients

unsettled-inactive-

with Credit balance

Jun-12 3818 10554 7333 3221 2780 77

Sep-12 3931 10585 7184 3401 2996 84

Dec-12 4335 10736 7057 3679 3238 83

Mar-13 3997 10854 7085 3769 3315 70

Jun-13 3450 12878 10408 2470 2030 64

Sep-13 3303 10387 7362 3025 2687 75

Dec-13 3808 13266 9882 3384 3041 83

Mar-14 3915 10977 10180 797 518 79

24. From the above analysis, it was noticed that in each quarter, about 60-80

clients accounts had unsettled credit balances lying with the Noticee.

Therefore, information was sought for the total credit balance lying with the

Noticee for the active clients as well as inactive clients. The Noticee, vide its

email dated July 25, 2014, had submitted the following information:

Active Clients with credit balances


No of active clients

unsettled

No of active clients unsettled - Having credit balance

Total Amount - Consolidated from all

clients

Jun-12 441 38 21,78,568

Sep-12 405 47 32,70,627

Dec-12 441 59 37,93,232

Mar-13 454 61 34,26,155

Jun-13 440 43 27,99,414

Sep-13 338 28 15,44,244

Dec-13 343 33 23,83,048

Mar-14 279 29 23,51,123

From the above analysis, it was observed that on an average, about 40

active clients were having a total credit balance of ` 27,00,000 which was

allegedly not settled by the Noticee in each quarter.

Inactive Clients with credit balances

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No. of inactive clients unsettled-with Credit balance

Total Amount - Consolidated from all clients

Jun-12 77 46,58,479

Sep-12 84 43,28,512

Dec-12 83 36,57,208

Mar-13 70 38,82,490

Jun-13 64 63,10,652

Sep-13 75 12,53,007

Dec-13 83 10,38,261

Mar-14 79 24,07,581

From the above analysis, it was observed that on an average, about 75

inactive clients were having a total credit balance of ` 34,00,000 which were

not settled by the Noticee in each quarter. As the analysis showed that the

amount of unsettled credit balance for inactive accounts was substantial in all

quarters during the inspection period, it was alleged that the Noticee had not

taken effective steps to settle these accounts.

25. In view of the above, it was alleged in the SCN that the Noticee, by not

adhering to the quarterly / monthly settlement of funds/ securities of clients,

had violated the SEBI Circular Nos. MIRSD/SE/Cir-19/2009 dated December

03, 2009 and MIRSD/SE/Cir-5/2010 dated March 31, 2010 and also had

violated Clauses A(1), (2) and (5) of the code of conduct as specified under

schedule II read with Regulation 9(f) and 26(xv) of the Broker Regulations.

Reply:

26. Vide letter dated March 12, 2015, the Noticee submitted its reply to the SCN.

The Noticee submitted that it is a stock broking company having membership

of multiple Exchanges and Segments. It stated that it caters to more than

20000 registered clients and executes trades in excess of ` 93,500 Crores

annually. With respect to the allegation of settlement of client accounts only

from April 01, 2012 onwards, the Noticee submitted that it has been settling

accounts of most of its clients even before April 2012 and there is no case of

large credit balance being retained by it. The Noticee submitted that the

requirement of settlement had brought a sea of change in the manner in

which the business of the Noticee was being carried out and resulted in major

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changes in the software and processes which took some time. However, the

Noticee stated that all the process has now been streamlined and it has been

100% compliant in the said requirement post the inspection.

27. With respect to the 39 sample instances of non-settlement of accounts, the

Noticee submitted that as a policy, the Noticee does not settle dormant

accounts as these accounts face a higher risk of fraud. The settlement of

these accounts was only done on specific requests after confirming the

credentials of the client. As a result, some of the accounts have remained

unsettled. Further, the Noticee mentioned that there are certain accounts

which are treated as non-settled on account of debit balances. It is the case

of the Noticee that these accounts should not be treated as unsettled as the

Noticee cannot derive any undue benefit from the balance of these clients,

which is the primary purpose for bringing in the requirement of settlement of

accounts. With respect to the allegation of unsettled client accounts having

debit and credit balance, the Noticee submitted that a large number of

accounts claimed to be unsettled have small amount of debit and credit

balance. Further, only 7 such instances where credit is in excess of ` 10,000

for a long duration has been observed. Further, the Noticee stated that out of

the large number of unsettled accounts, many of the accounts have debit

balance or are inactive where the Noticee does not settle the account for the

safety of the client. The Noticee mentioned that large number of unsettled

accounts have drastically reduced in the last quarter.

28. Further, the Noticee submitted that the total balance across all clients whose

accounts have not been settled is too miniscule. The average balance of one

client across the total debit and credit balance is a miniscule of ` 3000/-. i.e.

23746 clients (total number of clients) having a total of ` 7,30,54,819 debit

and credit balance. With respect to the clients having substantial credit

balance unsettled for a long duration of time, the Noticee submitted that only

7 clients had a credit balance in excess of ` 10,000 outstanding for a long

time, two of which are marginally above ` 10,000 and all but 1 is less than

` 1,00,000. Further, with respect to the clients having substantial debit

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balance unsettled for a long duration of time, the Noticee submitted that it

does not charge any Delayed Payment Charges or interest to its clients. The

Noticee stated that it has been working on recovering the debit balances.

29. With respect to the allegation of not collecting delayed payment charges and

giving further exposure to clients with debit balances for long duration of time,

the Noticee submitted that it obtains consent from the clients for charging the

delayed payment charges @ 2% per month. The Noticee stated that it did not

collect any delayed payment charges from its clients as it never intended to

indulge in fund based activity or making money from the debit balances of the

clients. Further, the Noticee submitted that it has not allowed the clients to

take further exposure in 5 instances out of the 13 instances mentioned in the

SCN. No further exposure was allowed after March 2013 in all but 2 cases.

The exposure was allowed very selectively based on specific request from

the clients after confirming the client's credentials and credibility. It is the case

of the Noticee that the regulatory requirement and the agreement with the

clients do not mandate charging of interest but only allows the trading

member to do so at its discretion and hence, there is no deviation from the

policy.

30. With respect to the allegation of maintaining accounts on consolidated basis

for security and commodity market clients, the Noticee submitted that the

clients have issued specific requests to settle the accounts after considering

balances across Equity and Commodity segment. The said practice is

followed only in case of specific request and not for all clients. The Noticee

submits that it has now done away with the said practice.

31. The Noticee submitted that out of client base of more than 20000 and of

more than 10000 accounts required to be settled, only about 115 clients

accounts are not settled in spite of having credit balance. The average credit

balance across all clients is about 61 lakhs. The Noticee submits that the

debit balance of the clients is also not vey high (about ` 30 lakhs per quarter).

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Findings:

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

and the submissions made by it. With respect to the charge of settlement of

client accounts only from April 01, 2012 onwards, I find that the Noticee had,

during the inspection, vide its letter dated January 13, 2014 and revised

submission vide email dated June 20, 2014, confirmed that actual settlement

of funds and securities, either monthly or quarterly, were being carried out

from April 01, 2012 onwards. Also, the Noticee, vide its reply dated March 12,

2015 to the SCN has admitted that as a result of major changes in the

software and processes required to comply with the requirement of

settlement of client accounts, it took time to settle the client accounts and the

settlement of client accounts has now been streamlined by it. In view of the

same, I conclude that, admittedly, there was a delay on the part of the

Noticee to settle the funds and securities in the client accounts, either

monthly or quarterly, and started doing the same only from April 01, 2012

onwards which is in violation of SEBI Circular dated December 03, 2009 and

March 31, 2010.

33. Further, I find from para nos. 9 and 10 above that upon analysis of the 39

client accounts, it was noted that for all the quarters about 30-45 % of client

accounts were not being settled by the Noticee. Also, I find that as per the

settlement schedule provided by the Noticee, it had not settled about 27% of

the client accounts required to be settled for all quarters during the inspection

period. The Noticee has submitted that as a policy, it did not settle dormant

accounts and the settlement of these accounts was done only on specific

requests after confirming the credentials of the client. As a result of the said

internal policy, some of the accounts have remained unsettled. I find from the

submission of the Noticee that it has admitted that the client accounts have

been unsettled. Further, I do not find merit in the contention of the Noticee

that due to the internal policy adopted by the Noticee, the client accounts

which are/were dormant are kept unsettled. I find that the stock broker has to

frame appropriate internal policies in accordance with the Circulars, Rules

and Regulations framed by SEBI. Adopting policies which are not in line with

the statutory requirements cannot be a ground to deviate from the same.

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34. Further, I find that the Noticee has even admitted that the client accounts

having debit balances have not been settled by it. Also, I do not find any merit

in the submissions of the Noticee with respect to the contention that a large

number of accounts claimed to be unsettled have small amount of debit and

credit balances. The Noticee has admitted the fact that in 7 instances where

the credit is in excess of ` 10000 for a long duration of time have been

unsettled. Also, I do not find merit in the submission of the Noticee that the

total credit balance in the accounts which are unsettled is miniscule in

asmuch as the fact that the said accounts have been unsettled is in itself a

violation of the provisions of the SEBI Circulars. Not settling the said client

accounts, either monthly or quarterly, having debit balances for a long

duration of time does amount to violation of the SEBI Circular dated

December 03, 2009 as settlement of client accounts on a monthly or

quarterly basis applies to the accounts which have credit balances as well as

accounts having debit balances.

35. I also find that during the inspection, upon a sample check, it was noted that

for 13 instances the Noticee had not collected DPC from the clients having

debit balances in their accounts and also allowed further exposure to the said

clients. The Noticee had submitted during the inspection that if there is a

delay on the part of the client in fulfilling his/ her margin obligations or

settlement obligations, then the Noticee may levy interest @ 2% p. m or part

thereof on such shortage amount. Upon perusal of the submissions made by

the Noticee vide its reply dated March 12, 2015, I note that the Noticee has

admitted that it had given further exposure in case of 5 instances out of 13

instances wherein debit balances appeared and DPC was not collected. Also,

it has stated that no exposure has been allowed after March 2013 in all but 2

cases. I find that levy of DPC or charging of interest does not form part of the

mandatory requirements as laid down under the SEBI Circulars dated

December 03, 2009 and March 31, 2010. I find that a discretion has been

given to the stock brokers to frame policies in accordance with the various

SEBI Circulars and Rules and Regulations laid down by SEBI. If the Noticee

has framed a policy which does not violate the mandatory requirements of

the SEBI Circulars, I find that the same should not be viewed as a pure

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violation of it. Therefore, I accept the submissions of the Noticee and

conclude that the Noticee by not charging penalty / interest for client

accounts having debit balances for a long duration of time does not per se

amount to violation of SEBI Circulars. However, I find it fit to caution the

Noticee with respect to further exposure given by it to clients having debit

balances and that it should refrain from the said practice in future.

36. With respect to the charge of maintaining client accounts on a consolidated

basis for securities and commodity market, I find that out of a sample check

of 39 clients, 5 client accounts were being maintained on a consolidated

basis for securities and commodity market segments. Further, upon analysis

of the data as submitted by the Noticee during the inspection, it was noticed

that over 8 quarters, 260 such instances were noticed wherein the accounts

of 34 clients were being treated as settled considering the balance in

commodity segment. I find that during the inspection, the Noticee had

admitted that there were 260 instances wherein actual settlement of funds

and securities (monthly/ quarterly) were being carried out for 34 clients

considering the debit balance in commodities account. I note that the Noticee

has submitted that only on specific request to settle the accounts after

considering balances across Equity and Commodity segment, it used to

practice settlement of client accounts on consolidated basis and did not

follow the said practice for all the clients. Also, the Noticee has submitted that

it has stopped this practice now. In view of the said admission, I conclude

that the Noticee has violated the SEBI Circular dated December 03, 2009

which specifically mandates maintenance of separate client accounts.

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

provisions of quarterly / monthly settlement of funds and securities of clients

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 Circulars dated December 03, 2009 and March 31, 2010

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

Schedule II read with Regulation 9(f) and 26(xv) of the Broker Regulations

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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.

38. 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.”

39. 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.”

40. 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

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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 Circulars dated December 03, 2009 and March 31, 2010 is that it shall

be compulsory for all the member brokers to settle the running accounts of

the clients on a monthly / quarterly basis so as to promote transparency.

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

Circulars dated December 03, 2009 and March 31, 2010 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 cannot be ignored and the same deserves & attracts penalty as

per law.

ORDER

41. 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.BP Equities Pvt.

Limited under Section 15HB of the Act. In my view, the penalty imposed is

commensurate with the defaults committed by the Noticee.

42. 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, EFD - DRA II, Securities

and Exchange Board of India, SEBI Bhavan, Plot No. C - 4A , 'G' Block, Bandra

Kurla Complex, Bandra (E), Mumbai - 400051.

43. 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: September 28, 2015 D. SURA REDDY

Place: Mumbai GENERAL MANAGER &

ADJUDICATING OFFICER

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