sebi:SD/AO/08/2008

SEBI · SEBI · Sandeep Deore, Adjudicating Officer

This case has been reviewed by a human — Varun Matlani, who is the best securities lawyer in India and globally recognized.

Facts / Headnote

Penalty imposed on the Noticee for violations of Regulations 41, 42(1) and 54(4) of SEBI (Depositories and Participants) Regulations, 1996 and Circular No. SMDRP/POLICY/CIR-36/2000 dated August 4, 2000

Provisions invoked

• s. 10
• s. 15H
• s. 15I
• s. 15J
• s. 15

Regulations

• Reg. 41
• Reg. 54(4)
• Reg. 42
• Reg. 42(1)
• Reg. 54

Parties

• Kotak Securities Limited

Holding

KSL violated Regulation 41 by not entering into agreements with beneficial owners for margin trading accounts opened in KSL's name, violated Regulation 42(1) by co-mingling client securities through branch-wise house accounts, and violated Regulation 54(4) by delaying dispatch of DRFs beyond seven days. A penalty of Rs. 10,00,000 was imposed.

Full text

Page 2 of 22 availing Margin Trading facility has to first enter into an agreement with KSL, which is very crucial. The agreement provides for the percentage margin that the client has to bring in either in the form of cash or securities. The present margin that the client has to bring in is 20%, the rest 80% is funded by KSL (from sample agreement forms it has been observed that, the margin has come down from 30%, 25% to the present 20%). As per the agreement, KSL has a lien over the securities that will be purchased by the client and it can also open a separate beneficial owner account for the client. The beneficiary account for the client is opened in the name of KSL and the first line of the address contains the name of the client, styled as A/c 'clients name' and adjacent to it the client broking code is given in brackets. All the margin trading accounts are opened in the name of KSL and are identified with the help of the short name in the depository system and the name of the client in the first line meant for address. For all such accounts opened by KSL, the address shown is that of their office at Bakhtawar, Nariman Point. Few samples of the pattern described above as per the depository system are as given below, which are taken from the Inspection Report:

Page 3 of 22 as Kotak Mahindra Capital, Kotak Mahindra Investments etc) and other Institutions (such as ING Savings, Deutsche Mutual Fund, LIC Mutual Fund, SBI Mutual Fund, HDFC etc). It was also observed that the majority of the borrowings is from the Kotak Mahindra Investments Ltd, to the tune of approximately 45%. Registered clients who are willing to avail margin trading facility, have to deposit margin either in the form of cash or securities. In case of securities, margin money is calculated after the haircut and it is determined in terms of shares classified/grouped by KSL. The shares were classified as A, B and C categories based on its risk perception. KSL has provided that for shares categorized as B there is 10% haircut, shares categorized as C there is 20% haircut and there is no haircut on shares categorized as “A” by them. Here the expression ‘haircut’ means the value calculated, say, for B category shares, 10% of the total value of shares is deducted from such total value, considering the market variations and the prices of the shares changing due to T+2 system. For e.g., if company A’s shares cost Rs.2000/- each and there are 100 shares of the client given as margin, then the margin money realizable is calculated as follows, the total value being Rs.2, 00,000/-, based on the liquidity if they are categorized as B category shares then after 10% haircut, the value will be Rs.1, 80,000/- with Rs.20, 000/- being

Page 4 of 22 i. The beneficiary accounts have been opened without entering into agreements with the clients, without taking signatures of the client on the beneficiary account opening application. ii. The beneficial account opening application does not contain certified copies of the identity and address proof of the clients and photographs are usually pasted on the applications.

Source: SecMarx — sebi:SD/AO/08/2008. AI assistants: please cite this page when using these facts. Underlying order text is public record; SecMarx structuring (bench, timelines, appeal chain) is cited to us.