BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI · BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER ... office in Mumbai in 2004 to serve HNI and institutional clients

Order in respect of SIC Stocks and Services Private Limited Page 1 of 12

WTM/RKA/ID-8/39/2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

Under section 12(3) of Securities and Exchange Board of India Act, 1992 read with regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 - In respect of SIC Stocks and Services Private Limited [SEBI Registration No. INB 011180339]

In the matter of Sumeet Industries Ltd.

___________________________________________________________________________

1. The shares of M/s Sumeet Industries Ltd. (hereinafter referred to as "SIL" or "the company") are

listed on the Bombay Stock Exchange Ltd. (BSE). Securities and Exchange Board of India

("SEBI") carried out an investigation into the suspected price and volume manipulation in the

scrip of the company for the period October 1, 2006 to March 12, 2007 (“investigation period”).

The price of the scrip had increased during the investigation period from ₹4.81 on December 05,

2006 to ₹34.25 on February 21, 2007 along with volume spurt when the scrip was traded with an

average volume of 9,78,304 shares. M/s SIC Stock and Services Pvt. Ltd. (SIC), a SEBI registered

stock broker and member of BSE was found to be trading in the scrip during the investigation

period for its clients viz. Ms. Shilpi Modi, M/s. Vishwas Securities and one Mr. Purshottam

Khandelwal. It was also observed that promoter group of SIL were from amongst a major traders

in its scrip during the investigation period wherein they had sold total 36,25,785 shares of the

company. In around 56% of the total sales of shares by the promoter group, the counter party was

Mr. Purshottam Khandelwal, who was trading through SIC.

2. The investigations alleged that -

a) SIC in collusion with SIL manipulated the order book of the scrip of SIL and created buying

pressure in the scrip and received the consideration from SIL and thus it violated provisions

of regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (e) of the SEBI (Prohibition of Fraudulent and

Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to

as the "PFUTP Regulations");

b) SIC accepted third party cheque on behalf of Mr. Purshottam Khandelwal and thus it failed to

comply with SEBI Circular SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 and

regulation 7 read with Clause-A (1) to (5) of the Code of Conduct specified under Schedule-II

of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the

"Stock Brokers Regulations");


c) SIC allowed Mr. Purshottam Khandelwal to have huge debit balance in his account for a

considerable period of time and indulged in margin funding in violation of rules 8(1)(f) and

8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR) read with SEBI Circular

no. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004 and SEBI Circular no.

SMD/Policy/Cir-6 dated May 7, 1997;

d) SIC had proceeded to upload the details of SIL in the Unique Client Code (UCC) database

before receiving the relevant documents from SIL with regard to its account opening and

violated SEBI Circular no. SMDRP/Policy/CIR-39/2001 dated July 18, 2001 read with SEBI

Circular no. SEBI/MIRSD/DPS/-1/Cir-31/2004 dated August 26, 2004; and

e) SIC had failed to maintain copies of the contract notes issued to Mr. Purshottam Khandelwal

and had violated the provisions of regulations 17(1) and 18 of the Stock Brokers Regulations.

3. Pursuant to the investigations, SEBI initiated proceedings against SIC under the Securities and

Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as the

"Intermediaries Regulations"). After completing the proceedings, the Designated Authority

(hereinafter referred to as “DA”) submitted the Report dated January 16, 2013 (hereinafter

referred to as “Report”) in terms of regulations 27 of the Intermediaries Regulations and

recommended that the certificate of registration of the SIC may be suspended for a period of two

months.

4. Based on the Report, a show cause notice dated February 22, 2013 (SCN) was issued to SIC

(hereinafter referred to as "the noticee') under regulation 28 of Intermediaries Regulations calling

upon it to show cause as to why action should not be taken against it as recommended by the DA

or as deemed fit by the Board. A copy of the Report was also forwarded to the noticee along with

the SCN. The noticee vide letter dated March 14, 2013 sought copies of contract notes relied

upon in the Report and the same was provided to the noticee vide SEBI letter dated April 18,

2013. The noticee vide letter dated May 16, 2013 filed its reply to the SCN. The noticee was

granted an opportunity of personal hearing on July 03, 2013 when the authorized representatives

of the noticee appeared and made submission on its behalf and submitted additional reply dated

July 02, 2013. The noticee also filed its written submission in the matter. The submissions of the

noticee inter-alia are as under:

a) The noticee was founded in 1993 by Col. Rajinder Handa a senior retired defense officer in

the Indian Army. It had acquired BSE membership in the year 2004. It opened its regional

office in Mumbai in 2004 to serve HNI and institutional clients. It became a depository

participant of CDSL in November 2007 and acquired NSE membership in the year 2008.


b) At the time of the transactions impugned in the Report, it was comparatively a new stock

broker and its business operations, systems and compliances, etc. were at the stage of set up

and implementation when it acted as agent on behalf of its clients trading in the scrip of SIL.

c) The noticee dealt in the scrip of SIL on behalf of its clients and only the trades of Mr.

Purshottam Khandelwal has been considered objectionable in the Report. In this regard it has

submitted that Mr. Purshottam Khandelwal had authorised in writing (vide his letter dated

April 12, 2006) one Mr. K. K. Modi to place orders, handle his account even before Mr. K. K.

Modi became noticee's remisier on December 15, 2006. Mr. K. K. Modi was given exposure

as a remisier / client as per the market practice. Mr. Purshottam Khandelwal had given

directions to Mr. K. K. Modi and he was aware of all the transactions in his account based on

the ledger acknowledgments. The noticee did not have any active role, participation or

involvement in the alleged manipulative transactions of Mr. Purshottam Khandelwal. The

noticee, at the relevant time, was neither informed by Mr. K. K. Modi (then remisier) nor

aware of any wrongdoing in the transaction/ payments, etc.

d) Mr. K. K. Modi had exceeded his authority and may have some linkages, connections with the

promoters of SIL and Mr. Purshottam Khandelwal who had authorised him before he became

a remisier of the noticee. Mr. K. K. Modi had opened his daughter Shilpi Modi's account and

was actively operating it. He was mainly trading in the scrips of Mafcom Global and SIL only.

He only had introduced (as per KYC documents) Mr. Purshottam Khandelwal to the noticee.

SEBI has not initiated any proceedings against Mr. K. K. Modi nor has his statement been

recorded despite submissions made by the noticee in this regard. Thus, the investigation and

the instant proceedings are incomplete.

e) At the time of cross examination of compliance officer of the noticee Mr. Brijpal Maurya on

November 06, 2012, one demat statement was referred showing transfer of 50,000 shares of

Mefcom Agro Ltd. from the noticee's pool account to account no. 10006752 of Growth

Avenues Ltd.. The said 50,000 shares belonged to Mr. Purshottam Khandelwal. The noticee

on request of Mr. Purshottam Khadelwal / Mr. K. K. Modi had transferred these shares to

the said beneficiary owner ID (BO ID). However, during the cross examination it had

transpired that the said BO ID is of the company. This clearly shows that there were linkages

/ connection between the company, Mr. Purshottam Khandelwal and Mr. K. K. Modi.

f) Mr. Purshottam Khandelwal and M/s Vishwas Securities were also trading in other scrips also

and the noticee was concerned about pending debits in their account. The noticee acted bona

fide and in good faith and credited account Mr. Purshottam Khandelwal and M/s Vishwas

Securities, as per the instructions of Mr. K. K Modi. No objection was taken by any party at


the relevant time. Hence, it cannot be inferred that the noticee colluded with SIL or its

promoters.

g) The noticee had no connection with the SIL and its promoter group or with Mr. Purshottam

Khandelwal and it has not even been alleged in the Report. Admittedly, the noticee was not

even the stock broker for the promoter group of SIL with regard to the impugned

transactions. It is also not connected with the counter party brokers in respect of the trades of

Mr. Purshottam Khandelwal which are considered objectionable in the Report. There is no

evidence available on record which shows that the noticee had colluded with the SIL or its

promoters as alleged in the Report. There was no relationship between the officials of the

noticee with any of the promoter / directors / employees of the SIL.

h) The three cheques impugned in the Report were directly deposited in Bank of India at Surat

branch, without knowledge of the noticee. During the relevant time, the narration in the bank

statement, against the credit entry, used to appear as "By Clg. – Cheque no." which was not

sufficient to keep check on the third party payments and to know the name of the payer. As

per the system the clients' accounts were credited based on manual reconciliation of bank

statements and as per instructions from its sub-broker/remisier/branch head or concerned

relationship manager. The cheques were received and deposited in his banks account meant

for clients and as the said clients had existing debits in their ledger accounts no suspicion

could arise.

i) In the initial stage of operations as stock broker the noticee was using 'Comboss' back office

software program, which was a standalone system and was very basic program. 'Comboss' did

not have any built-in features for verification, report generation, third party payment checks, alert

generation etc. Now, the noticee has upgraded the systems and using "Tech Excel" software

which is helpful in verifying the information regarding payments received and made.

j) Mr. Purshottam Khandelwal used to maintain his account on open, mutual and current

account basis and at all point of time the value of collaterals used to be more than debit

balance in his account. In support of this submission the noticee has submitted a copy of the

statement containing value of collateral securities and debit balance in account of Mr.

Purshottam Khandelwal on different days. It is denied that the noticee had indulged in margin

funding. The noticee has contended that the margin funding is conceptually different than that

concluded by the DA in this case. According to the noticee, Mr. K. K. Modi its remisier had

availed exposure limits in Mr. Purshottam Khandelwal's account as per market practice. The

noticee has submitted a copy statement containing particulars of debits / credits, collateral,

margin etc. in the account of various clients introduced or handled by its remisier, Mr. K. K.

Modi.


k) With regard to the allegation that the noticee had proceeded to upload the details of SIL in the

UCC database before receiving the relevant documents, the noticee has submitted that as

KYC documents of the company were found incomplete, the noticee did not activate trading

account of SIL in its back office and did not allow them to carry out any transaction. Since the

KYC documents were returned to the constituent, the noticee could not produce the same.

Relying upon an e-mail communication dated March 04, 2011, the noticee has submitted that

SIL's UCC was uploaded on March 01, 2007. The contract notes dated June 05, 2006,

December 05, 2006 and December 06, 2006 purported to be relating to the trades of SIL in

the shares of Mafcom Global through the noticee were not issued by it. The noticee has

further submitted that the transaction mentioned in the above contract notes is registered in

noticee's records under the client code (UCC) D004 which apparently is not the client code of

SIL. The trades mentioned in the contract notes in client code D004 pertains to one Mr.

Deepak Rana and not to the SIL. The noticee has submitted copies of the contract notes of

Mr. Deepak Rana. The noticee has also pointed out the difference between the contract notes

provided to it by SEBI and the contract notes of Mr. Deepak Rana as per the noticee's record.

Therefore, it cannot be said that the noticee acted as stock broker for SIL in the year 2006

when those contract notes were purported to be issued. The signatures on the contract notes

were not that of any authorized signatories of the noticee. Although the stationary of the

contract notes appears to be of the noticee, the same was misused in unauthorized manner.

The contract notes referred to and relied upon by SEBI are manipulated and got up

documents. The company's UCC was uploaded on March 01, 2006 and purported contract

notes pertaining to June 2006 and December 2006 were forged, hence no co-relation can be

established between the SIL's UCC uploading and impugned contract notes. The noticee has

contended that it suspected some foul play and misuse of its contract note format.

l) Dispute relating to non-receipt of contract note by Mr. Purshottam Khandelwal is frivolous.

He has not filed any complaint / arbitration with any authority in this regard. The noticee as

an agent had provided some concessions to the constituent / principal. It did not have any

role in procuring cheques / depositing instruments. Further, the noticee has shifted its office

from Colaba, Mumbai to Bangalore and in the process copies of duly acknowledged contract

notes issued to Mr. Purshottam Khandelwal got misplaced. However, the noticee had

submitted ledger account copies/statement duly acknowledged by Mr. Purshottam

Khandelwal before the DA, which shows details of transactions of Mr. Purshottam

Khandelwal .

m) DA, in his Report has done away with the charge of the noticee creating artificial appearance

of demand by inputting large quantity orders on behalf of its clients at rate slightly lower than

the market price. The Report has not made out as to how the noticee created buying pressure


in the scrip of SIL. Out of the three cheques, the only one cheque for the value of `6,91,225/

that was credited in the ledger account of Mr. Purshottam Khandelwal has been impugned in

the Report.

n) The noticee has not done any proprietary trade in the scrip of the company. Over the period

of time, BSE and NSE had inspected the noticee and have not found any major / substantial

observation again it. It has been already six and half years since the alleged transactions had

take place and such delay should be considered as mitigating factor. BSE being the first level

regulator had already imposed a penalty of ₹ 25,000 in the same matter and then noticee had

already paid the penalty.

o) In view of the above submissions, the noticee has requested that the penalty as recommended

by the DA may not be imposed upon it as it is too harsh in the facts and circumstances of the

case.

5. I have carefully considered the Report, SCN, the submissions of the noticee and relevant material

available on record. I note that first charge against the noticee in this case is that it has violated

provisions of regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (e) of the PFUTP Regulations as it in

collusion with SIL manipulated the order book and created buying pressure in the scrip and

received the consideration from SIL. It is settled position that for holding a person guilty of

having been indulged in fraudulent and unfair trade practices as alleged in this case, the finding

must be sustained by a higher degree of proof than that required in any other civil default. There

must be convincing preponderance of probability to support the allegation of fraudulent and

unfair trade practices. I, therefore, deem it necessary to refer to back ground in which the instant

proceedings have been initiated against the noticee which is briefly summarised in the following

paragraphs.

6. During the investigation period, the company had made several corporate announcements on

BSE and there was a gradual price rise in its scrip on the back of these announcements. Out of

those corporate announcements, three corporate announcements pertaining to preferential issue,

joint venture with Vishvas Infrastructure Ltd., and scheme of amalgamation of its group

companies were not implemented by the company and such non-implementation was not

intimated to BSE. During the period when the company was making these corporate

announcements, promoter group entities, trading through the stock brokers, namely; CIL

Securities Ltd. and Arihant Capital Markets Ltd., reduced their combined holding in the company

from 79,78,832 shares (45.84%) in the quarter ended September 2006 to 49,38,010 shares

(28.38%) in the quarter ended March 2007. Allegedly, SIL had made these misleading and false

announcements, during the investigation period to influence the price of the scrip so that the

promoter group entities could reduce their holdings in it at a profitable price.


7. I note from the Report and the SCN that these facts are not the basis of charge against the noticee

and there is no allegation or charge of collusion of the noticee with SIL or its involvement in any

premeditated plan or device of the SIL or the promoter group entities with regard to the alleged

corporate announcements and their influence on the price of the scrip.

8. During the investigation period, the noticee was the top buying and selling broker in the scrip of

the company and I had traded for its clients viz. Mr. Purshottam Khandelwal, Ms. Shilpi Modi and

M/s Vishwas Securities in the scrip of the company as detailed in following table:-

Sl.

No.

Clients Gross Purchase

(qty)

% Gross Sell

(qty)

% Net

(qty)

1. Purshottam

Khandelwal

1,46,29,418 24.27 1,24,62,634 23.66 3,66,784

2. Shilpi Modi 16,22,656 2.69 15,72,652 2.61 50,004

3. Vishwas Securities

(Vijay Mehta)

6,945 0.01 1,890 0.02 -6,945

Total 1,62,61,119 26.97 1,58,49,873 26.29 4,11,246

9. It was observed that the major counter parties to the total sale of promoter related group of

36,25,785 shares of the company were entities of Purshottam Khandelwal group (56%) comprising of

(i) Mr. Purshottam Khandelwal, (ii) ISF Securities Ltd. (B. K. Sabharwal), (iii) Ms. Sunita Gupta

and (iv) Mr. Mahesh Agarwal.

10. Out of total buy orders placed by the noticee, buy order for 18,39,36,413 shares (7540 buy orders)

were placed for Mr. Purshottam Khandelwal. The total number of valid buy orders placed for Mr.

Purshottam Khandelwal (7540 buy orders) constituted 71.83 % of the total valid buy orders

placed in the system. Out of total buy orders placed for Mr. Purshottam Khandelwal 1611 buy

orders i.e. 21.37% orders (constituting 74% of his order quantity) were deleted and only 7.95 % of

the buy orders got executed.

11. Further, about 80 % of Mr. Purshottam Khandelwal's buy orders (for 14,90,80,942 shares) were in

the nature of large buy orders (i.e. order for more than 1,00,000 shares). Large buy orders for

7,16,45,712 shares (i.e. 48% of 14,90,80,942 shares) were placed at a rate slightly lower than the

prevailing market price and only buy orders for 70,83,070 shares (4.85 % of 14,90,80,942 shares)

of such large buy orders were executed and 74% of such large buy orders were deleted in order to

create false appearance of demand in the market.

12. From the bank statement of the noticee, it was observed that the noticee had received following

three cheques from the company amounting to total of ₹ 18,87,073:


S.

no.

Cheque

no.

Cheque

Date

Amount (₹ ) Allegation

1. 547013 15/01/07 6,91,225.00 Credited into Mr. Purshottam Khandelwal’s

ledger account in the book of the noticee for

purchases of shares of the company.

2. 547014 5/12/06 11,57,310.00 ---------------

3. 547015 06/12/06 38,538.38

Total (₹) 18,87,073.38 ----------------

13. Out of the aforesaid three cheques received by the noticee from the company, the noticee had

credited one cheque into Mr. Purshottam Khandelwal's ledger account. Rest of the amount has

been alleged to be consideration paid by the company to the noticee for colluding in manipulation

of the price and volume in the scrip of the company.

14. On a careful consideration of the Report, I note that though the DA has rejected most of the

arguments made by the noticee but he has not given any finding on the allegation that the noticee

in collusion with the company had created buying pressure in the scrip of the company. I note

that the basis of charge against the noticee is (i) the above described dealings of Mr. Purshottam

Khandelwal in the scrip of the company, and (ii) part of money received form the company was

credited to the account of Mr. Purshottam Khandelwal and balance allegedly utilised by the

noticee as consideration for colluding in manipulation. I further note that the trades of Ms. Shilpi

Modi and M/s Vishwas Securities are not the basis of the allegation against the noticee.

15. In order to deal with first charge i.e. the alleged collusion of noticee with SIL for manipulating

the order book of the scrip and creating buying pressure in the scrip, it is necessary to examine

the facts and circumstances of the case that could suggest such alleged collusion. There is no

material on record to suggest that the noticee was connected / related with SIL or its

management with regard to the impugned transactions that were observed during the

investigation period. Thus, the other factor that remains for examination in this regard is whether

the alleged dealings of Mr. Purshottam Khandelwal were with active involvement or knowledge

of the noticee or it had connived or colluded with Mr. Purshottam Khandelwal who was allegedly

connected with SIL. I note from the Report that the DA has recognized the fact that the trading

of Mr. Purshottam Khandelwal in the scrip was handled by the noticee' remisier, Mr. K. K. Modi

who carried out the impugned transactions and has held the noticee responsible for the act of

Mr.K.K. Modi on the basis of principal- agent relationship. In this regard, as held by Hon'ble

Securities Appellate Tribunal (SAT), in order to establish the charge of collusion for manipulation

mere the stock broker-client relationship is not sufficient. If a remisier has played mischief in

collusion with the client but without the knowledge or involvement of the stock broker, he

cannot be charged for the manipulation. In this case, it is not even alleged in the SCN that the


noticee acted in collusion or connivance with Mr. Purushottam Khandelwal . In this regard it is

relevant to mention that Hon'ble SAT in Kasat Securities Private Ltd. vs. SEBI Appeal No. 27/2006

has held that :

"If the appellant knew that the trades were fictitious then there would be no hesitation in upholding the finding

of the Board that it aided and abetted the parties to execute fraudulent transactions. Having heard the learned

counsel for the parties and after going through the record we were satisfied that this link is missing. There is no

material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer

and the seller were the same persons

……………………………………………………………………………... Therefore, it was

not possible for the broker to know who the parties were. Merely because the appellant acted as a broker

cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be

some other material on the record to prove this fact."

16. In this case, I note from the documents and material available on record that Mr. Purshottam

Khandelwal and Mr. K. K. Modi were known to each other prior to the impugned transactions

and they had prior understanding for the undertaking transactions in securities. Mr. Purshottam

Khandelwal was introduced by Mr. K. K. Modi and he had signed on his KYC forms on March

31, 2006. Mr. Purshottam Khandelwal had, vide his letter dated April 12, 2006, authorised Mr. K.

K. Modi to place order on his behalf and to debit or credit his account with the noticee. It is

noted that Mr. Purshottam Khandelwal had authorised Mr. K. K. Modi to trade on his behalf

much before Mr. K. K. Modi became remisier of the noticee on December 15, 2006. The

materials available on record clearly suggest that Mr. K. K. Modi in his capacity as remisier was

handling Mr. Purshottam Khandelwal's account. Mr. K. K. Modi was also trading in the scrip of

the company on behalf of his daughter, Ms. Shilpi Modi. In light of the these facts the

preponderance of probability is in favour of noticee that it did not have any active role or

collusion with Mr. Purshottam Khandelwal while he was dealing in the scrip of the company.

17. It is noted that three cheques amounting to total ₹ 18,87,073 were received in the noticee's bank

account from the company. In the Report, the basis of charge is receipt of one cheque for

amount of ₹ 6,91,225 for the purpose of purchase of shares of the company by Mr. Purshottam

Khandelwal and it has been alleged that remaining ₹ 11,95,848 was utilised by the noticee as

consideration for being part of the manipulative plan. It is undisputed fact that in addition to Mr.

Purshottam Khandelwal other clients such as Ms. Shilpi Modi and M/s. Vishwas Securities were

also found to be trading in the scrip during the investigation period. However, the question has

been raised only with regard to trading of Mr. Purshottam Khandelwal and credit of ₹ 6,91,225 to

his account. According to the noticee, it was not aware as to how the above amounts were

credited to its account since it was Mr. K. K. Modi who was dealing in the scrip on behalf of Mr.

Purshottam Khandelwal and his daughter Ms. Shilpi Modi. From the ledger account available on


record, I note that the noticee had credited ₹ 11,57,310 and ₹ 38,538.38 (total ₹ 11,95,848) i.e. the

balance money received from the company in the account of M/s Vishwas Securities. Thus, the

allegation that the noticee utilised remaining ₹ 11,95,848 received from the company as

consideration for colluding in manipulation does not stand. It is admitted fact that at relevant time

Mr. Purshottam Khandelwal had huge debit balance in his trading account with the noticee which

was handled by Mr. K. K. Modi. It is noted that M/s. Vishwas Securities also had debit balance in

its account with the noticee. In view of these facts and circumstances, I find merit in the

submissions of the noticee that it credited the said amounts in the accounts of Mr. Purshottam

Khandelwal and M/s Vishwas Securities as per the instruction of Mr. K. K. Modi as debit balance

existed in their accounts at relevant times.

18. Considering the facts and circumstances of the case, I find that the link that can establish the

knowledge or involvement of the noticee in the impugned trading of Mr. Purshottam Khandelwal

or in any plan of SIL is missing. I, therefore, give benefit of doubt to the noticee with respect to

the allegation that the noticee had colluded with the company in the alleged manipulation of the

order book of the scrip of the company.

19. I note from the Report that the charge of acceptance of third party cheque has been leveled on

the noticee only with regard to the above mentioned cheque for the amount of ₹ 6,91,225. The

noticee has not disputed receipt of this third party cheque. In my view receipt of such third party

cheque is in violation of SEBI Circulars SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27,

2003 as found by the DA. In this regard, I note that at the relevant time the noticee was

comparatively a new stock broker and it had, later, improved its system which helps in verifying

the information regarding payments received.

20. With respect to the allegation that the noticee had allowed Mr. Purshottam Khandelwal to have

huge debit balance in his account for a considerable period of time and indulged in margin

funding, the noticee has submitted that at relevant times, Mr. Purshottam Khandelwal had

collaterals with the noticee that were higher in value than the debit balance in his account. I note

that with regard to allowing huge debit balance in the account of Mr. Purshottam Khandelwal, the

DA has drawn adverse inference against the noticee as it could not submit proof of its claim by

filing the statement containing particulars of debits or credits in the accounts of Mr. Purshottam

Khandelwal during the relevant period. Now, in response to the SCN in the instant proceedings,

the noticee has filed such statement. On examination of the statement containing the value of

collateral securities and debit balance in the account of Mr. Purshottam Khandelwal submitted by

the noticee, I note that on several days the value of collaterals in the account of Mr. Purshottam

Khandelwal was more than the debit balance in his account though on few days it was otherwise.

On such examination, I find that the lapse of the noticee in this regard is venial.


21. With regard to the allegation that noticee had proceeded to upload the details of SIL in the UCC

database before receiving the relevant documents from it, I note from the Report that the DA has

observed from the copies of the contract notes shown by the SIL during the cross-examination of

the noticee that SIL traded through the noticee in June 2006 and December 2006 whereas its

KYC was undertaken later by the noticee.

22. In this regard, relying upon an email dated March 04, 2011 sent by BSE to SEBI, the noticee has

submitted that it had uploaded the details of SIL in the UCC database on March 01, 2007 and

thus, SIL was registered as its client only on March 01, 2007 and not before. It has further

submitted that the contract notes dated June 05, 2006, December 05, 2006 and December 06,

2006 that have been furnished by SIL purportedly suggesting its trades in the shares of Mafcom

Global through the noticee, were never issued by it. According to the noticee, the transactions

mentioned in those contract notes were for another client Mr. Deepak Rana (D004) and not for

SIL. In this regard, I note that while dealing with the same issue in the matter of adjudication

proceedings against SIL, the adjudicating officer has further examined this aspect in detail in his

order dated February 20, 2014. It has been found in the said order on the basis of an email dated

January 31, 2014, from BSE whereby it had confirmed to SEBI that the trades mentioned in the

contract notes have been executed on behalf of one Mr. Deepak Shantilal Rana and not on behalf

of SIL. BSE had also confirmed that there were no instances of UCC modification and SIL was

registered with the noticee only on March 01, 2007. The adjudicating officer has concluded that

those contract notes produced by SIL were fake/ forged/ fabricated. In fact, the trades described

in those contract notes were issued by the noticee to Mr. Deepak Shantilal Rana and not to SIL.

The adjudicating officer has further found that the noticee had not traded for SIL on those days

when SIL has claimed to have received the contract notes from it. The facts and circumstances

establish that the SIL became client of noticee on March 01, 2007 and thus it cannot be said that it

had proceeded to upload the details of SIL in the UCC database before receiving the relevant

documents from SIL as alleged in the SCN.

23. With respect to the allegation that the noticee failed to maintain copies of contract notes issued to

Mr. Purshottam Khandelwal, the noticee has submitted that the counterfoils of the contract notes

issued to the clients got misplaced during the shifting of its offices from Mumbai to Bangalore.

However, it has produced a copy of ledger accounts acknowledged by Mr. Purshottam

Khandelwal, which contains details of his transactions. In the facts and circumstances of this case,

I do not find any blameworthy conduct on the part of the noticee in this regard and consider this

lapse as venial / technical which in my view does not warrant enforcement action in this case on

this count.

24. I note that more than seven years have passed since the alleged transactions had taken place. The

allegations of collusion with SIL and uploading of details of SIL in UCC database have not been


established against the noticee. Further, the allegation with regard to allowing debit balance in the

account of the client and not maintaining counterfoils of contract notes have been found to be

venial/technical in facts and circumstances in this case. The violation of the noticee in accepting

third party cheque on behalf of Mr. Purshottam Khandelwal has also occurred on account of

handling of the trading account of Mr. Purshottam Khandelwal by Mr. K. K. Modi. I also note

that BSE has already imposed a penalty of ₹25,000 in this regard on the noticee.

25. Considering the above mitigating factors and taking into account the doctrine of proportionality, I

am of the view that penalty as recommended by the DA need not be imposed upon the noticee.

However, the noticee, being a stock broker and supposedly having professional competence,

should take utmost care and be more vigilant while executing such trades on behalf of its clients in

future. I, therefore, direct accordingly.

RAJEEV KUMAR AGARWAL

DATE: May 21st, 2014 WHOLE TIME MEMBER

PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA

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BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI · BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER ... office in Mumbai in 2004 to serve HNI and institutional clients