sebi:SMD/DBA-I/Enq/AM/23836/2002

SEBI · SEBI · G.N. Bajpai, Chairman, SEBI

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

Facts / Headnote

Certificate of registration No. INB 231075830 of M/s Sumedha Fiscal Services Ltd. suspended for a period of four months, effective three weeks from date of order.

Provisions invoked

• s. 11

Regulations

• Reg. 4
• Reg. 7
• Reg. 6
• Reg. 13(2)
• Reg. 13
• Reg. 3
• Reg. 17
• Reg. 5
• Reg. 17(1)
• Reg. 17(1)(k)
• Reg. 17(1)(a)

Parties

• M/s Sumedha Fiscal Services Ltd.

Holding

The Chairman held M/s Sumedha Fiscal Services Ltd. guilty of multiple violations of SC(R)R, SEBI Stock Brokers Regulations, SEBI circulars and NSE Regulations and ordered suspension of its certificate of registration No. INB 231075830 for four months.

Full text

ii) Non maintenance of sauda book Even though the trades of Alok Khetan operating from a terminal are duly reflected on a said broker’s counter and confirmed on daily basis, nevertheless, it does not obviate the need to maintain the sauda book which is a statutory requirement. Non maintenance of the same is not in compliance with Rule 15(1) Securities Contracts (Regulation) Rules, 1957[SC(R)R]and Regulation 17(1) of the said Regulations. The practice of the said broker in routing certain transaction through miscellaneous accounts and entering the client details at the end of the day is irregular. The explanation of the said broker that this practice was adopted to save paper work is not satisfactory. However, taking into account the total volume of transactions which is Rs.10 lakhs annually as against the total turnover of 1,95,800 lakhs i.e. .05% of the turnover, the matter may not be viewed seriously. iii) Non issuance of contract notes to two clients Contract note is a primary document evidencing the contract between the parties. In the absence of a proper contract note, the client does not have any recourse in law to enforce the obligations arising out of the transaction. There would be difficulties in resolving the disputes in the absence of a valid contract note or for reference of dispute to the arbitration by the stock exchange. Even if the client has asked the said broker not to issue the contract note as claimed in the case of Alok Khetan, it is the duty of the said

In three instances (Ashok Kumar Bong, Archana Ray, Saroj Bajaj), the clients are stated to be non active and in one instance (Amal Krishna Kundu) the deficiency "was being rectified". In the case of Sangeeta Parekh, the explanation of the said broker has been found to be satisfactory in view of the details of her husband who is also a client of the said broker. That the clients are not active does not obviate the need to maintain the client registration forms and client agreement forms in order. Infact, before registering a client, all the particulars of the clients are required to be obtained. This is a condition precedent for executing any transaction in securities on behalf of the clients. Client identification is important since that makes it easier for the audit trail to identify the clients behind the transactions. Details like bank account, PAN number, introducer photograph, proof of residence etc would establish the credentials of the clients and would be relevant to determine whether the said broker had acted in good faith and without negligence before doing business for a client. Not filling up of the client registration forms properly or non maintenance of the same is in contravention of SEBI Circular SMD-1/ 23341 dated 18th November,1993, SMD/POLICY/IECG/1-97 dated 11th February, 1997 and SMD/POLICY/Cir/5-97 dated 11th April, 1997. vii) Delay in transfer of securities The explanation of the said broker with regard to delay in transfer of securities beyond the perm

and it is not in order for the said broker to meet other expenses which are not client related from such account. The funds in the client’s account cannot be applied for any purpose other than what is permissible under SEBI Guidelines. The objective of opening and maintaining a separate account for the client’s funds is to segregate and identify them separately and to prevent its misuse so that they are beyond the reach of the broker. The broker has met his office expenditure like computers, gratuity to staff etc. from this account, which is highly irregular. This is in violation of SEBI Circular SMD/SED/CIR/93/23321 dated 18th November, 1993. xii) Non collection of margin from clients As regards the allegation that the said broker was not colleting any upfront margins from the clients including from Alok Khetan and Sureka Investments who were his top most clients, the reply of the said broker that the margins were not collected as per the industry practice is not satisfactory. Margins are imposed by the exchange/ SEBI as an important tool for risk containment measures. Non collection of the same on the ground that clients were not paying margins or that it is an industry practice is highly irregular. It may be noted that the broker had not collected any margin from Alok Khetan and Sureka Investments who occupy the top two slots and contribute about 50% of the trading turnover with the said broker for the years 1999-2000 and 2000-2001. Collection of margins as prescribed by S

Source: SecMarx — sebi:SMD/DBA-I/Enq/AM/23836/2002. 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.