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BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AK/AO-01/2016]
________________________________________________________________________
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
M/s. Bonanza Portfolio Ltd.
(PAN: AAACB0764B)
________________________________________________________________________
FACTS OF THE CASE
1
Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an inspection of
the books of accounts and other records of the stock broker M/s. Bonanza Portfolio Ltd. (hereinafter
referred to as ‘the Noticee/Bonanza’) to examine inter alia investor grievance handling mechanism
and whether adequate steps for redressal of investor grievance were being taken by the Noticee
and availability of adequate infrastructure for the same. The inspection was conducted based on
analysis of samples and test checking of investor grievances, related books of accounts and other
records of the Noticee as well as written/ oral submissions of the Noticee. Inspection noted that the
client base of the Noticee consisted of retail, HNI, Corporate & Institutions with turnover of Rs.
12,74,427 crores for the FY 2012-13 and turnover of Rs. 2,11,092.58 for the period April 2013 to
May 2013 from 51,321 clients. The inspection covered a period of FY 2012-13 and FY 2013-14 till the
date of inspection i.e. June 19, 2013 (hereinafter referred to as ‘the inspection period’).
2
Based on the aforesaid inspection, it was observed that the Noticee had violated the provisions
under Regulation 6A(1)(e) of the SEBI (Stock Brokers & Sub Brokers) Regulation, 1992 and theprovisions of clause A (1), (2) and (5) as specified in Schedule II read with Regulation 7 of the SEBI
(Stock Brokers & Sub Brokers) Regulation, 1992 (hereinafter referred to as the ‘Broker Regulation’).
The aforesaid alleged violations by the Noticee, if established, make it liable for penalty under
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Section 15HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI
Act’).
APPOINTMENT OF ADJUDICATING OFFICER
3
The undersigned was appointed as the Adjudicating Officer vide Order dated July 03, 2014 under
section 15-I of SEBI Act read with rule 3 of SEBI (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘SEBI Rules’) to inquire
into and adjudge under Section 15HB of SEBI Act for the alleged violation committed by the
Noticee.
SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING
4
A Show Cause Notice (hereinafter referred to as ‘SCN’) Ref. No. EAD-6/AK/6838/2015 dated
March 04, 2015 was issued to the Noticee under rule 4(1) of SEBI Rules communicating the
alleged violation of Regulation 6A(1)(e) and the provisions of clauses A (1), (2) and (5) of code of
conduct specified under Schedule II read with Regulation 7 of the Brokers Regulation.
5
The Noticee vide letter dated April 13, 2015 while denying the violation of the aforesaid
provisions of the Brokers Regulations inter alia submitted as under:
That they have a strong Investor Grievance Mechanism & proper grievance redressal policy and
they are constantly making efforts to improve their investor grievance redressal system;
That given the size of their operations, their rate of grievances is very less and it reflects
sophistication of their operations;
That inspection of books of accounts carried out by SEBI was limited only to investor grievances
and nothing else. As such, Show Cause Notice is bad under law for invoking a wrong provision. The
only allegation in the SCN being delay in resolution of Investor grievances, section 15HB of SEBI Act
cannot be invoked for any alleged violation of non-redressal of investor grievances, when a specificsection 15C is present in the Act which prescribes certain processes and criteria for charging a
person/ entity for non- redressal of investor grievances;
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That the section 15C mandates that the Board should first call upon the Noticee in writing to
redress any grievance and if the Noticee fails to redress any grievance in such stipulated time, the
Noticee are liable for such penalty. However, no such procedure has been followed in their case;
That since the present allegations squarely pertain only to non-redressal of investor grievance, no
other provision of law which is generic in nature like Section 15HB can be invoked against them. It
amounts to circumventing the process stipulated in section 15C;
That although complaints were received in Financial Year 2012-2013 & Financial Year 2013-2014,
the transaction period / trading period for most of the complaints was Financial Year 2011-2012 &
period prior to that. The Noticee provided the following table reflecting the transaction period of
unauthorized complaints:
Unauthorised Trades Upto 2011-2012 Upto 2012-2013 2012-2013 Total
Direct Complaints 24 6 31 61
Exchange Complaints 32 5 20 57
Common Complaints 10 1 12 23
pertaining to commodity - - - 1
Total 119
That the following table provides the details of total number of clients, active clients, total
turnover, retail turnover and proprietary turnover during the following financial years:
(Rs. Crore)
Financial
Year
Total
Turnover
Retail
Turnover
Proprietary
Turnover
% of Retail
Turnover
Active
clients
Total
Clients
2011-2012 11,46,197.77 8,88,570.62 2,57,627.14 77.52 66,182 2,73,025
2012-2013 12,74,429.04 9,79,454.85 2,94,974.19 76.85 51,321 2,85,637
2013-2014 9,42,098.98 5,79,783.05 3,62,315.93 61.54 40,848 3,02,531
That the number of complaints must be viewed in relation with the total number of retail clientele.
Therefore 257 complaints against the total active retail clients amount to 0.50%, and against the
total retail clients amount to 0.08%, which is quite low;
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That out of the total 288 complaints (i.e. 257 complaints received + 31 at the beginning of the
year), 265 Complaints were resolved i.e. the grievance resolution rate was around 92% of the total
complaints received. Further bonafide efforts were made to resolve 15 more complaints and they
were ultimately referred to arbitration. Out of 15 Arbitrations, only 4 awards were against the
Noticee. The Arbitral awards that went against the Noticee were honored and corrective steps on
the findings of the said awards were initiated;
That around 46% of the total complaints received were categorized as unauthorized trades in
nature. However, the classification of unauthorised trades is based on “tick” marked by the
complainant in the Complaint form, which may or may not be unauthorized. Certain percentage of
trades do not actually fall in the category of unauthorized trading as the complainants file their
complaints in exchanges, where the complainant had not even entered into a single transaction,
and therefore are closed immediately to the satisfaction of the complainants. In F.Y 2012-2013,
there were 9 complaints filed in BSE under the category of unauthorized trades, whereas the
complainant had not even entered into any single transaction in BSE. Therefore 9 complaints which
constitute 7.56% of the total unauthorized complaints cannot even be termed as complaints;
That from the Turnover perspective, the turnover during the relevant period was Rs. 11,46,197
crore and the total claim amount under various complaints was Rs. 1.70 crore, which constitute
0.0014% of the total turnover;
That most of the complaints for unauthorised trading are not entirely genuine in nature as most of
the client book losses in a bearish market and later resort to this kind of disputes with a view to
recoup their losses. It is evident from the arbitration cases wherein 75% of the cases where the
allegations were of unauthorized trades, were outright rejected by the Arbitral panel and awards
were given in the Noticee’s favour. Further, most of the complaints registered during the
inspection period pertained to the transactions during financial Year 2011-2012 and period prior to
it;
That out of 51,321 active clients (Total 2,85,637), the Noticee had only 9 complaints of non-receipt
of documents which constitute less than 0.02%. Similarly, complaints relating to delay/ non receipt
of funds/ securities constitute less than 0.04%. When it comes to IPO related complaints, it is
almost nil, with only a solitary complaint which was resolved to the satisfaction of the
complainant;
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That inspection observation that the maximum number of complaints received pertained to un-
authorised trades and accounted for 46.30% is correct only with reference to total number of
complaints received. However, 119 complaints constitute only 0.22% when compared to total
number of active clients during the relevant period. Likewise service related complaints constitute
0.09% of the total active clients;
That though there is no statutory stipulation of considering the Grievance of clients in Board
meetings, the Noticee had devised their own internal systems and processes for resolution of
grievances. The very fact that the investor grievances were part of Board agenda in a structured
manner is a factor to be considered in the Noticee’s favour;
That the pending complaints were always discussed in the Board meetings under the agenda, more
in a freelance way and appropriate oral instructions were given to the concerned for resolution,
which is not recorded in the minutes, since the minutes are not reflective of verbatim reproduction
of the deliberations of the Board. The issues relating to the complaints were always discussed in
the Board meetings;
With regard to allegation that conclusions of the Board meetings appeared stereotype, the Board
minutes are reflective of the fact of a discussion and not the minute details of the discussion. In an
endeavor to examine the status of the Complaints, the Noticee had devised a system of
deliberations in the Board meeting, which had automatically brought seriousness into the
grievance redressal mechanism. In regular Board meetings, the matters related to investor
Grievances were discussed and evaluated appropriately, but, the same were not reflected in
minutes at length;
With regard to allegation that Board in each of the meetings had made conflicting observations,
whereby on one hand the Board had expressed satisfaction with regard to grievance redressal
system and on the other hand had also suggested that the number of complaints be brought down,
it is submitted that the satisfaction was with regard to the nature of resolution of the complaints
and the suggestion with regard to bringing down the number of complaints is with regard to
unresolved complaints. There was no conflict as alleged in the Show Cause Notice by the Inspection
team;
With regard to allegation that Board appeared to have expressed satisfaction of the redressal
mechanism without evaluating the efficiency of the same, it is submitted that the expression of
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satisfaction was with regard to the quality of resolution, and after evaluation of number of
resolutions in the relevant period, it was decided that the number had to be brought down. In view
of the above, it is denied that the Board expressed satisfaction of the redressal mechanism without
evaluating the efficiency;
that upon evaluation and examination, the Board had initiated several corrective steps such as,
Installing Voice loggers across branches, trade Confirmation through tele-calling on random basis,
telephonic verification of Email Id, mobile no & other details at the time of account opening,
quarterly settlement of funds, net trade confirmation via SMS at the end of the trading session,
Periodical branch Inspection & review of the findings, giving real time MTM alerts & alert for debit
clearance through Short Messenger Service. The initiative of SEBI to communicate the trade details
by way of SMS directly by Exchanges and by the Broking houses has also been implemented;
That with the introduction of the above mentioned processes, the number of complaints have
drastically reduced by more than 50% in Financial Year 2014-15 and only one client has filed
arbitral claim against the Noticee;
The first corrective step was to percolate the issues related to overall compliances & Investor
Grievances down the line to HODs of every department, Zonal Heads & Regional Heads and strict
instructions were given to make efforts to minimize the complaints, address & route the
complaints through proper channels, strictly adhere to Guidelines Rules, Regulations of Regulators;
With reference to allegation that the Noticee had decentralized control despite of their operations
and also with respect to the investor grievances redressal, it is submitted that the Noticee had
proper grievance redressal policy and strong investor grievance mechanism. All complaints
received whether directly or through exchanges/regulator are recorded and attended in an
expeditious manner;
With reference to allegation that the Noticee failed to adhere to the complaints within the
stipulated time in violation of regulation 6A(1)(e) of Broker Regulations, it is submitted that the
Noticee had substantially complied with the time lines of resolution. That the Noticee had acted
upon 204 of 280 complaints within 30 days, which constitute 72% of the Complaints. Even with
respect to the complaints received from exchanges, the resolution amounted to 87.50% of the
complaints;
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That with regards to 54 direct complaints and 12 complaints received through regulators; it has
been submitted that certain complaints involve elaborate examination of facts, retrieval and
compilation of data, verifications of facts and coordination with clients and liasoning with
branches. This process is required to appropriately address the complaints to the satisfaction of the
Complainant and the Exchanges. Hence delay if any, was not very significant given the facts of the
each case and was not deliberate on their part;
That as per the recent SEBI circular, they are not only trying to reply to the complaints in speedy
manner, but, also trying to resolve the grievances to the satisfaction of complainants within
stipulated time period;
That with reference to allegation that no proper records had been maintained, it has been
submitted that direct complaints were handled by Head office as well as other offices
simultaneously at the relevant time, and therefore there was a scope of some manual errors with
respect to maintenance of records;
That they had initiated the process of addressing the Complaints through new software, which
enabled them to maintain the records in a centralized manner with minimum manual interference.
As of today all complaints received directly are channelized through the said new software, which
is in turn supervised and monitored by the Senior Vice President cum Compliance Officer;
With regard to the allegation that they did not have a proper grievance redressal policy and had a
weak grievance redressal mechanism not commensurate with the size of the operation, it is stated
that they had duly complied with all the Rules & Regulations with respect to maintaining proper
Register giving details about date of receipt, nature of complaint, identity of client (client code),
date of action taken and resolution. However, source of receipt of complaint was immediately
incorporated on the suggestion of the Inspection Team;
That complainants had various modes of approaching with their complaint, such as by way of
sending letter through post/courier, hand delivered at our branches, through emails, as well as
through telecommunication;
That there was no reference to unauthorized trades in the Administrative Warning letter, which
was not punitive in nature;
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That in Financial year 2013 -14 & Financial year 2014-15, only 8% of the complaints received had
escalated to the regulators, and only one client have opted for arbitration during Financial Year
2014-15;
That they maintained high standards of integrity, promptitude and fairness in the conduct of all his
business. Only a miniscule 0.50% of clients expressed their grievances, out of which 92% have been
resolved.
6
In accordance with the principle of natural justice and in order to provide a fair chance to the
Noticee to put forth its case, an opportunity of personal hearing was granted to the Noticee on
September 23, 2015 vide hearing notice dated September 04, 2015. Advocate Mr. K.R.C.V
Sheshachalam and Ms. Mugdha Modi, appeared as Authorized Representatives (hereinafter
referred to as ‘ARs’) on behalf of the Noticee on September 23, 2015. The ARs reiterated the
submission made vide letter dated April 13, 2015 and submitted the following judgments viz.
Finquest Securities Pvt Ltd vs. SEBI, RR Chokhani Stock Brokers Pvt. Ltd. vs. SEBI and JK Cotton
Spinning & Weaving Mills Co. Ltd. vs State of UP. The ARs were inter alia advised to provide in
respect of 11 complaints for which no action taken information was provided to inspection,
details of action taken subsequent to inspection and its current status. The ARs were inter alia
also advised to submit violations of SEBI Act and Regulations and action taken by SEBI in the past,
if any, against the Noticee. The ARs sought two weeks time for making further submissions by
October 09, 2015.
7
Pursuant to the personal hearing, vide letter dated October 07, 2015, the Noticee while
reiterating their earlier submissions, inter alia made the following further submissions:
that when a specific section 15C is available for penalizing for non-redressal of investor
grievances, no other provision, which is generic in nature can be invoked. In this regard, it was
submitted that the Hon’ble Supreme Court in the matter of The J. K. Cotton Spinning &
Weaving v/s The State Of Uttar Pradesh & Ors (1961 AIR 1170) had held as under:
“The rule that general provisions should yield to specific provisions is not an arbitrary principle
made by lawyers and judges but springs from the common understanding of men and women
that when the same person gives two directions one covering a large number of matters in
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general and another to only some of them his intention is that these latter directions should
prevail as regards these while as regards all the rest the earlier direction should have effect. In
Pretty v. Solly (1) (quoted in Craies on Statute Law at p. 205, 5th Edition) Romilly, M.R.
mentioned the rule thus:"The rule is, that whenever there is a particular enactment and a
general enactment in the same statute and the latter, taken in its most comprehensive sense,
would overrule the former, the particular enactment (1) (1859) 26 Beav. 606, 610.”
As regards 54 complaints which were alleged to have been acted upon after 30 days, of which 42
complaints were received directly, 15 complaints were replied upon before 15 days & 6
complaints were replied upon before 30 days;
With regard to 11 complaints, where no action was reported, it was submitted that all these 11
complaints were acted upon immediately and it was not captured in the inspection report. Out
of these 11 complaints, 7 were replied within 15 days & in 3 complaints action was taken within
15 days;
That they had substantially complied with the time lines of resolution. Considering the revised
data, 151 complaints out of 281 i.e. approx 54% of the complaints had been replied, acted upon
within 15 days, and 81 out of 281 complaints were replied between 16-30 days;
Also 12 out of 96 complaints received from Exchanges were replied after 30 days;
That as per the revised details, they had acted upon 232 of 281 complaints within 30 days which
constitute 82.56% of the Complaints. Even the complaints received from exchanges the
resolution amounted to 87.50% of the complaints;
that they had initiated the process of addressing the Complaints through software – “Talisma”
which enabled the Noticee to maintain the records in centralized manner with minimum manual
interference. As of today all complaints received directly are channelized through “Talisma” ,
which is in turn supervised and monitored by the Senior Vice President cum compliance officer.
With the introduction of Talisma, the process is now completely centralized & scope of non
maintenance of records & manual errors is almost negligible;
That the violations, if any, are very technical and venial in nature and there is no loss to any
investor and the minor infractions, if any, have been rectified immediately;
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That in the Order passed by the Hon’ble Securities Appellate tribunal in the matter of R. R.
Chokhani Stock Brokers Pvt. Ltd. (Appeal No. 217 of 2012Date of Decision: 25.09.2013) , it was
held inter alia as under:
“In view of above said discussion of law, facts and precedent cited above, in present case also we
are convinced that a mistake of venial nature has inadvertently occasioned. Moreover, error has
been rectified immediately on being brought to notice of appellant. In these circumstances, when
the lapse is technical, unintentional, and does not involve monetary loss to any party in our
opinion, on facts of present case, it would have been just and proper to warn the appellant to be
more diligent in complying regulatory norms prescribed by SEBI instead of imposing penalty ”;
That further in the matter of Finquest Securities Pvt. Ltd (Appeal No. 119 of 2013 Date of
Decision: 25.09.2013), it was held inter alia as under:
“Since the error has been rectified immediately on being brought to notice of the appellant and
accordingly, in these circumstances, when the lapse is technical, unintentional, and does not
involve monetary loss to any party in our opinion, on facts of present case, it would have been
just and proper towards appellant to be more diligent in complying regulatory norms prescribed
by SEBI, instead of imposing a penalty .” ;
That the issue of earlier violations, if any, may not be taken as an aggravating factor since the
same was not put in the SCN.
8
Pursuant to the Noticee’s submissions and the hearing held on September 23, 2015, vide letter
dated November 04, 2015, the Noticee was informed that the present adjudication proceedings
have been initiated pursuant to the findings of inspection conducted by the SEBI inspection team.
It was observed during inspection that the Noticee had failed to take steps to redress the investor
complaints received through the exchange as well as directly from the investor within one month
as stipulated under Regulation 6A(1)e of the Brokers Regulations. From a reading of Section 15C
of SEBI Act, it becomes clear that the section would apply to matters where SEBI upon receivingcomplaint(s) from investor(s) has formally communicated to the stock broker in writing to redress
the complaint(s), and the stock broker has failed to do so within the stipulated time. In the extant
case, adjudication proceedings were initiated against the Noticee for the alleged violation of
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Regulation 6A(1)(e) and the provisions of Clause A(1), (2) and (5) of the Code of Conduct specified
under Regulation 7 of Brokers Regulations, based on the Inspection finding that the Noticee had
taken more than 30 days to reply/ act upon 54 out of total of 281 complaints i.e. 19% of the
complaints were replied/ acted upon only after 30 days, thereby failing to adhere to the
stipulated time period of one month in one out of every five complaints received. Hence, for the
aforesaid violation observed during Inspection, Section 15HB was invoked and the Noticee has
been made liable for penalty under Section 15HB of the SEBI Act. In case the Noticee had any
further comments/submissions to offer in the matter, the Noticee was advised to submit the
same by November 20, 2015.
9
The Noticee vide letter dated November 18, 2015 sought two weeks time to make its submission
in the matter and the same was acceded to vide email dated November 19, 2015. Vide letter
dated December 01, 2015, the Noticee inter alia further submitted as follows:
That the inspection was conducted for the limited purpose of verifying resolution of investor
grievances only and nothing else. If any violation could be attributed to the Noticee from the said
inspection, it can only relate to resolution of investor grievances. Any allegation of any
transgression with regard to non-resolution of investor grievances should be limited to the
contours of the said section 15C and no provision else. When the violation does not fall under the
contours of section 15C, it cannot be treated as violation at all since the field with regard to
violation called “non-resolution of investor grievances” has already been occupied by the said
section 15C;
that the interpretation that 15C is invoked “wher e SEBI upon receiving complaint(s) from
investor(s) has formally communicated to the stock broker in writing to redress the said
complaint( s) and the stock broker has failed to do so within the stipulated time” is incorrect and
it is not flowing from the plain reading of the said section. When the law is plain and simple, no
additional language should be added to it to give a different meaning;
that in the presence of a specific section 15C in the SEBI Act, which prescribes certain process and
criteria for charging a person/ entity for non-redressal of investor grievances, no other provision
can be invoked;
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that the said section 15C, which is a complete code in itself regarding penalizing non-redressal of
investor grievances, has the following components:
a.
An intermediary should first be called upon by the Board to redress the investor grievances,
b.
Board should specify the time within which the such grievances have to be resolved,
c.
If an intermediary shall resolve the grievances within the said time specified by the Board,
d.
If an intermediary fails to resolve the grievances in that specified period, he is liable for
penalty;
that no such procedure had been followed in their case. They had not been issued any notice by
the Board calling upon to resolve any complaints in any specified time as mandated in the
section. It is the duty of SEBI to follow the procedure/ manner as specified in the above section;
that in Dr. R.D. Lodhi Vs. Chairman, Lucknow Development Authority, Lucknow & Others, the
Hon'ble Supreme Court held that when law requires something to be done in a particular
manner, things done otherwise are prohibited.
That in Dhananjaya Reddy Vs. State of Karnataka 2001 (4) SCC 9 in para 23 of the judgment
the Hon'ble Supreme Court held:
“It is a settled principle of law that where a power is given to do a certain thing in a certain
manner, the thing must be done in that way or not at all.”
That in Commissioner of Income Tax, Mumbai Vs. Anjum M.H. Ghaswala 2002 (1) SCC 633 , it
was held by the Hon'ble Supreme Court that:
“ It is a normal rule of construction that when a statute vests certain power in an authority to be
exercised in a particular manner then the said authority has to exercise it only in the manner
provided in the statute itself.”
That in Competent Authority Vs. Barangore Jute Factory & others : 2005 (13) SCC 477 , it was
held that:
“It is settled law that where a statute requir es a particular act to be done in a particular manner,
the act has to be done in that manner alone. Every word of the statute has to be given its due
meaning”
That in State of Jharkhand & others Vs. Ambay Cements & another 2005 (1) SCC 368 in para 26
of the judgment, the Court held :
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“It is the cardinal rule of interpretation that where a statute provides that a particular thing
should be done, it should be done in the manner prescribed and not in any other way.”
that invoking section 15HB was only a subterfuge to get over the rigors of section 15C, by trying
to do something indirectly, which cannot be done directly;
that the provisions of SEBI Act cannot be circumvented by doing something indirectly which
cannot be done directly;
that since the present allegations squarely pertain only to non-redressal of investor grievance, no
other provision of law, which is generic in nature like Section 15HB can be invoked against the
Noticee;
that it amounts to circumventing the process stipulated in section 15C. ( Hon’ble Supreme Court
in the matter of the J. K. Cotton Spinning & Weaving v/s The State of Uttar Pradesh & Ors
(1961 AIR 1170))
CONSIDERATION OF ISSUES
10
I have carefully perused the written submissions made by the Noticee, the submissions put forth
during the hearing and the documents available on record. The issues that therefore arise for
consideration in the present case are:
a.
Whether the Noticee has violated the provisions of Regulation 6A(1)(e) of the Broker
Regulation?
b.
Whether the Noticee has violated the provisions of clause A (1), (2) and (5) as specified in
Schedule II read with Regulation 7 of the Broker Regulation?
c.
Does the violations, if any, attract monetary penalty under Section 15HB of SEBI Act?
d.
If so, what would be the monetary penalty that can be imposed taking into consideration the
factors mentioned in Section 15J of SEBI Act?
FINDINGS
11
Before moving forward, it is pertinent to refer to the relevant provisions of Regulation 6A(1)(e) of
Broker Regulation and of clauses A (1), (2) and (5) of code of conduct specified under Schedule II
read with Regulation 7 of the Broker Regulation, which reads as under:
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6A. (1) Any registration granted by the Board under regulation 6 shall be subject to the following
conditions, namely –
(a) ………….
(b) …………;
(c) …………..;
(d) ………….; and
(e) he shall take adequate steps for redressal of grievances of the investors within one month of
the date of receipt of the complaint and keep the Board informed about the number, nature and
other particulars of the complaints received from such investors.
Stock-Brokers to abide by Code of Conduct
The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at
Schedule II.
SCHEDULE II
SECURITIES AND EXCHANGE BOARD OF INDIA
(STOCK BROKERS AND SUB-BROKERS) REGULATIONS, 1992
CODE OF CONDUCT FOR STOCK BROKERS
(Regulation 7)
A. GENERAL
(1) INTEGRITY: A stock-broker, shall maintain high standards of integrity, promptitude and fairness inthe 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.
(3) ……………
(4) …………….
(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.
12
Before we examine the allegation in the extant matter, I find that the Noticee has in its
submissions stated that Section 15 HB cannot be invoked against it for non-redressal of investor
grievances, in the presence of a specific Section 15C in the SEBI Act, which prescribes certain
processes and criteria for charging a person/entity for non-redressal of investor grievances. The
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Noticee has submitted that the only allegation against it in the SCN is that there is a delay in the
resolution of investor grievances, therefore, the SCN is bad in law for invoking a wrong provision.
13
I note here that Section 15C of the SEBI Act reads verbatim as under:
“15C.Penalty for failure to redress investors' grievances. - [If any listed company or any person who
is registered as an intermediary, after having been called upon by the Board in writing, to redress
the grievances of investors, fails to redress such grievances within the time specified by the Board,
such company or intermediary shall be liable to a penalty of one lakh rupees for each day during
which such failure continues or one crore rupees, whichever is less.]”
14
I note from the Inspection Report, a copy of which was provided to the Noticee, that the focus of
the inspection was to verify investor grievance handling mechanism of the stock broker and
whether adequate steps for redressal of investor grievance were being taken by the stock broker
and availability of adequate infrastructure for the same. The inspection findings are based on
analysis of samples and test checking of investor grievances, related books of accounts and other
records of the Noticee as well as written/ oral submissions of the Noticee. During Inspection
conducted as such, based on certain instances, it was noted that the Noticee took more than one
month’s time in dealing with some of the investor complaints. These complaints included
complaints received directly, or, through Exchange/ SEBI. It was inter alia further observed that
the Noticee did not have a strong, effective and efficient investor grievance mechanism
commensurate with its operations, so as to comply with the timelines stipulated vide Regulation
6A(1)(e) of Brokers Regulations for redressal of grievances of the investors. It was inter alia also
observed that there was no proper supervision and monitoring in respect of investor complaints.
It is in this context, it was alleged that the Noticee had violated the provisions of Regulation
6A(1)(e) of the Brokers Regulations and the provisions of clauses A(1), (2) and (5) of Code of
Conduct specified under Schedule II read with Regulation 7 of the Brokers Regulations.
15
It may be noted that Section 15C of the SEBI Act would apply to matters where SEBI upon
receiving complaint/(s) from investor/(s) had formally communicated to the Noticee in writing to
redress the said complaint/(s) and the Noticee had failed to do so within the stipulated time. On
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the other hand, in the extant case, the focus of Inspection was to verify the investor grievance
handling mechanism of the Noticee and whether adequate steps had been taken by the Noticee
for redressal of investor grievances. Hence, I find it was only right on the part of SEBI to appoint
an Adjudication Officer to adjudicate under Section 15HB of the SEBI Act, the alleged violations
committed by the Noticee, and not under Section 15C of SEBI Act as argued by the Noticee.
16
I find here that the Noticee has drawn attention to various case judgments viz. Dr. RD Lodhi v.
Chairman Lucknow Development Authority Lucknow & Others, Dhananjaya Reddy v. State of
Karnataka 2001 (4) SCC 9, Commissioner of Income Tax, Mumbai v. Anjum MH Ghaswala 2002
(1) SCC 633, Competant Authority v. Bangalore Jute Factory & Others 2005 (13) SCC 477, State of
Jharkhand & others v. Ambay Cements & another 2005 (1) SCC 368 and J. K. Cotton Spinning &
Weaving v/s The State of Uttar Pradesh & Ors (1961 AIR 1170) wherein the Courts have inter
alia held that when a statute vests certain power in an authority to be exercised in a particular
manner, then the said authority has to exercise it only in the manner provided in the statute itself.
Also that whenever there is a particular enactment and a general enactment in the same statute,
and the latter, taken in its most comprehensive sense, would overrule the former, the particular
enactment must be operative, and the general enactment must be taken to affect only the other
parts of the statute to which it may properly apply. In view of the same, the Noticee has inter alia
argued that the provisions of SEBI Act cannot be circumvented by doing something indirectly
which cannot be done directly.
17
In the matter, I note that the Hon’ble Supreme Court in Reserve Bank of India v. Peerless General
Finance and Investment Co. Ltd., 1987 SCR (2) 1 had held as thus in the matter of interpretation
of statutes: "Interpretation must depend on the text and the context. They are the basis of
interpretation. One may well say if the text is the texture, context is what gives the colour. Neither
can be ignored. Both are important. That interpretation is best which makes the textual
interpretation match the contextual. A statute is best interpreted when we know why it was
enacted. With this knowledge, the statute must be read, first as a whole and then section by
section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the
context of its enactment, with the glasses of the statute-maker, provided by such context, its
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scheme, the sections, clauses, phrases and words may take colour and appear different than when
the statute is looked at without the glasses provided by the context. With these glasses we must
look at the Act as a whole and discover what each section, each clause, each phrase and each
word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute
and no word of a statute can be construed in isolation. Statutes have to be construed so that every
word has a place and everything is in its place."
18
In the same vein, I am of the view that a charge cannot be viewed out of context. Thus, I note that
the focus must be on the principal subject matter plus the particular perspective. In the extant
case, I find that the subject matter of Inspection was the investor grievance redressal mechanism
adopted by the Noticee. The perspective was whether adequate steps for redressal of investor
grievances (whether received directly by the Noticee or through Exchange/ SEBI) were being
taken by the Noticee and availability of adequate infrastructure for the same.
19
I find it pertinent to mention here that Section 11(2) of the SEBI Act contains measures available
with SEBI to implement the legislated duty of investor protection. One of such measures includes
undertaking inspection of intermediaries registered with it. Inspection is a part of an evaluation
exercise conducted by SEBI for implementation of an effective compliance program. Delayed
redressal of investor complaints observed in the extant case was a part of finding of such
Inspection conducted by SEBI in 2013, covering a period of FY 2012-13 and FY 2013-14 till the date
of inspection i.e. June 19, 2013. As a result, SEBI alleged that the Noticee had violated Regulation
6A(1)(e) and the provisions of clauses A(1), A(2) and A(5) of Code of Conduct specified under
Schedule II read with Regulation 7 of the Brokers Regulations. Further, SEBI also noted that the
Noticee vide letter dated September 19, 2011, in response to the Administrative Warning issued
to it vide letter dated August 11, 2011 inter alia for not having prudent investor grievance
handling mechanism, had submitted an Action Taken Report stating that the Noticee had inter
alia taken steps to resolve the investor complaints within a short period of time. However despite
the same, it was noted that the violation had recurred.
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20
Further the present Inspection noted that in the instances brought out, the Noticee had either
resolved the grievances of investors after a lapse of one month, or had failed to address the same
even after the expiry of the one month period. And the Noticee had already received such
complaints, either from SEBI or the Stock Exchange or from complainants directly. Under such
circumstances, where the complaints were redressed after lapse of one month, there was no
scope for SEBI to again call upon the Noticee to redress the grievance of investors. Even in cases
where complaints received were pending beyond the stipulated time, there too, I do not find that
there was any need for SEBI to again call upon the Noticee to redress the grievances of investors,
fails to redress such grievances, subsequent to which the Noticee be made liable to a penalty
under Section 15C of SEBI Act.
21
As such, I am of the view that if the contention of the Noticee is accepted, it would only defeat
the larger purpose of investor protection on a mere technicality. It is a settled position that SEBI
Act is pre-eminently a social welfare legislation seeking to protect the interests of small investors,
hence, while interpreting its provisions, its larger objective should be kept in mind. In this regard, I
note that the Hon’ble Supreme Court in SEBI vs Ajay Agarwal, AIR 2010 SC 3466 has laid down
the principle to be adopted while interpreting the SEBI Act as follows: “It is a well known canon of
construction that when Court is called upon to interpret provisions of a social welfare legislation,
the paramount duty of the Court is to adopt such an interpretation as to further the purposes of
law and if possible eschew the one which frustrates it.”
22
By looking fairly at the language used in Section 15C of the SEBI Act, I note that operation of 15C is
limited only to cases where an intermediary fails to redress grievances specifically referred to it by
SEBI, within the stipulated time. It does not cover cases not referred to by SEBI. On the other
hand, the intent of the Inspection was to take a comprehensive view of the investor grievance
handling mechanism of the Noticee. In this context, I find that Section 15HB of SEBI Act applies to
failure to comply with any provision of the Act, the Rules or the Regulations made or directions
issued thereunder, for which no separate penalty has been provided.
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23
Thus, from the detailed discussion above, I am of the considered view that the said violation of
Regulation 6A(1)(e) and of clauses A(1), A(2) and A(5) of Code of Conduct specified under
Schedule II read with Regulation 7 of the Brokers Regulations, does not get covered under the
special provision 15C of the SEBI Act, hence, has to be considered under the general provision
Section 15HB of the SEBI Act.
24
With this in place, we will now examine the allegations against the Noticee. As has been brought
out above, the Inspection Report had alleged that the Noticee did not have a strong, effective and
efficient investor grievance mechanism commensurate with its operation. It is also alleged that
there was no proper supervision and monitoring in respect of investor complaints.
25
The details of the complaints received by the Noticee from clients has been summarized as under:
Mode of
Receipt
Opening
Balance
Inspection Period Complaints Status
Received Resolved Pending Referred
for
arbitration
Cases where
arbitration
awards have
gone against
the Noticee
SEBI/BSE/
NSE
31 96* 75 21 15 4
31
(Resolved
during the
year)
DIRECT - 185* 159 26 - Nil
TOTAL 31 281* 265 47 15 4*24 were common complaints
26
Inspection observed that the Noticee had 31 complaints pending at the beginning of the
inspection period. It had received 281 complaints (96 from BSE/NSE/MCX/ SEBI and 185 directly
from the clients), of which 24 complaints were common i.e. received from the exchanges as well
as directly from the clients during the inspection period. Therefore, in effect the numbers of
complaints were 257 (i.e. 281-24) during the inspection period. The details of 96 complaints
received through exchanges and details of the 185 complaints received directly was provided to
the Noticee along with the SCN. The Noticee informed that 265 complaints, including 31 pending
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complaints at the beginning of the year were resolved during the period and 47 complaints were
pending at the end of the period. Further that during the inspection period, 15 complaints were
referred for arbitration, of which 4 complaints had gone against the Noticee.
27
In the matter, I note that the Noticee has stated inter alia that given the size of their operations,
their rate of grievances is very less. It has been stated that the number of complaints must be
viewed against the fact that 257 complaints amount to 0.50% of the total active retail clients and
0.08% of the total retail clients, which is quite low. Also that from the turnover perspective, the
complaints constituted 0.0014% of the total turnover. I note here that the Noticee has compared
the complaints that could not be redressed within the stipulated one month period as observed
by Inspection through sample and test checking basis, with its total retail and active retail
clientele and from the turnover perspective, to put forth the fact that the rate of grievance was
very low. However, I note here that adjudication proceedings were initiated not because of the
complaints received, but, in view of the fact that Inspection had observed that the Noticee had
taken more than 30 days to reply/ act upon 54 out of 281 complaints i.e. 19% of the complaints
received were replied/ acted upon only after 30 days. It was, hence, alleged that the Noticee had
failed to adhere to the stipulated time period of one month in one out of almost five complaints
received by the Noticee in violation of Regulation 6A(1)(e) of the Brokers Regulations. Besides the
same, it was also noted by Inspection that action taken date was prior to the complaint received
date in 10 of the 281 complaints and in case of 13 of the 281 complaints, action taken date was
not mentioned at all.
28
Here, I find it noteworthy to mention that the number of complaints received is not per se a
relevant figure, but, it is the manner in which the complaints are received and addressed that
demonstrates an important measure of organisation’s commitment to investor satisfaction. It
conveys to the investors that their complaints and concerns are taken into consideration.
However, in the extant case, Inspection observed that in respect of 12 of the 96 complaints
received from the Exchanges, the Noticee had taken more than 30 days time to reply to the
complainant. Further that 13 of the 96 complaints received from the Exchanges were under
process as on the date of inspection and 4 out of the 96 complainants had opted for arbitration.
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As regards the complaints received directly by the Noticee, Inspection had observed that no
proper records had been maintained. Inspection noted that of the 185 complaints received
directly, action in respect of 42 complaints was taken only after 30 days and in respect of 13
complaints, no action taken date had been mentioned. Further that in 10 out of the 185
complaints received directly, action taken date was prior to the date of complaints received.
29
In the matter, I note that the Noticee has stated that of the 42 complaints received directly, 15
complaints were replied upon before 15 days and 6 complaints were replied upon before 30 days.
From the revised data at Exhibit 2 of the written submission filed vide letter dated October 07,
2015 pursuant to hearing, I note from the ‘Remark’ column that except for a couple of cases,
generally in all such instances, the complainants were, however, not satisfied with the replies
provided by the Noticee and had to escalate the complaint to the Exchange. This in itself shows
that the replies were far from satisfactory. In some cases, the Noticee has stated that the date of
receipt of the complaint was wrongly mentioned. This only indicates that the record keeping was
not proper.
30
The Noticee has also stated that in cases where no action taken date was reported, 7 complaints
were replied within 15 days and in 3 complaints, action was taken within 15 days. Here too from
Exhibit 3 of written submission filed vide letter dated October 07, 2015 pursuant to hearing, I note
from the ‘Remark’ column that most of these complaints were forwarded to the concerned
branches, and this date of forwarding to the concerned branch for action has been considered as
action taken date in the column ‘Reply Status’. In most of the cases, date when the branch
actually acted upon the complaints/ resolved the complaint has not been noted. This only
strengthens the poor handling of investor complaints by the Noticee.
31
In the matter, Inspection had also observed that the Noticee did not maintain proper records of
the complaints received directly from the investors. I find that the Noticee has submitted that
direct complaints were handled by Head Office as well as other offices simultaneously at the
relevant time, and, therefore, there was scope for manual errors with respect to maintenance of
records. However, Inspection had observed that the complaint register provided in the excel
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sheet did not even capture the basic details such as nature of complaints, replies provided, basis
of complaints, channel of receipt, date of resolution etc., despite the claim made by the Noticee
to the Inspection team that in the register maintained by the Noticee all details about the nature
of complaint, date of receipt, date of reply, source of complaints etc. are entered. The importance
of proper maintenance of records assumes significance in view of the fact that without a formal
system of recording complaints, the complaints do not get properly addressed or communicated
to the management. In addition, complaints data offer a valuable source of information for the
organization about systemic problems, investors views etc. It is, therefore, that Regulation
6A(1)(e) also requires every stock broker to keep SEBI informed about the number, nature and
other particulars of the complaints received from investors as well.
32
Inspection further observed that the category of complaints received by the Noticee from SEBI,
NSE, BSE and MCX during the inspection period were as follows:
Sl.
No.
Nature of Complaints received No. of
Complaints
Percentage
%
1 Non Receipt Of Documents (Contract Notes,
Agreements, Quarterly Statement etc.) 9 3.50
2 Delays/Non Receipt Of Payments/ Delivery of
Securities 20 7.78
3 Unauthorized Trading/Misappropriation 119 46.30
4 IPO related 1 0.39
5 Service Related:
A. Excess Brokerage 9 3.50
B. Wrong execution of order 3 1.17
C. Non receipts of corporate benefits 1 0.39
D. Other services defaults 42 16.34
E. Closing out /squaring up 4 1.56
6 Others 49 19.07
Total 257 100.00
33
From the above, inspection observed that the maximum number of complaints received pertained
to un-authorized trades which accounted (46.30%), followed by service related complaints
(22.9%) and then by delays/ non-receipt of payments/ delivery of securities (7.78%). In the
matter, I note that the Noticee has inter alia submitted that the aforesaid percentages are correct
only with reference to total number of complaints received. Further that they are miniscule when
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compared to the total number of active clients. Also that most of the complaints registered during
the inspection period pertained to transactions during Financial Year (FY) 2011-12 and period
prior to it.
34
However, Inspection noted that 50% of the complaints had consistently continued to be of
unauthorized trade category over a period from January 2009 onwards as per details given below:
Period No. of Complaints Percentage %
January 2009 to February 2010 (Previous Inspection) 64 49.61
FY 2012-13 and FY 2013-14 (Extant Inspection) 119 46.30
35
In the matter, I note further that the Noticee has stated that 75% of the cases where the
allegation were of unauthorized trade were outright rejected by the Arbitral panel and awards
were given in the Noticee’s favour. However, the same cannot be adopted as a yardstick to
measure the genuineness of the complaints, since there can be reasons such as lack of proper
documentation on the part of investor etc. also for award going in favour of the Noticee. Besides
50% of complaints consistently falling in the unauthorized trade category over a period of time,
definitely indicates that there appears to be a cause of concern about the Noticee’s conduct. In
fact, it is important on the Noticee’s part to carry out a thorough root cause analysis of such
complaints, in order to reduce receiving of similar such complaints in future.
36
In the matter, I note that the Noticee has submitted that classification of unauthorized trades is
based on a “tick” mark by the complainant in the complaint form, which may or may not be
unauthorized. The Noticee has further also submitted that most of the complaints for
unauthorized trades are not entirely genuine in nature, as most of the clients book losses in a
bearish market and later resort to this kind of disputes with a view to recoup their losses. Also
that certain percentages of trades do not actually fall in the unauthorized category, as
complainants file their complaints in Exchanges where the complainant had not entered into a
single transaction, hence, immediately closed to the satisfaction of the complainants. It has been
pointed out that in FY 2012-13, there were 9 such complaints filed under the unauthorized trade
category in BSE, whereas the complainant had not even entered into any single transaction in BSE.
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37
In the matter, complaints that are quickly resolved in a transparent and time bound manner to
the satisfaction of the complainants, helps in enhancing the confidence of the investors and
thereby the integrity of the securities markets. However, the issue under consideration is ofcomplaints that are not resolved quickly and fairly, and, thus, become a cause of concern for the
Regulator. This is because Investor Grievance Redressal Mechanism and protection of small
investors goes hand in hand. It has, hence, been the regulatory objective of SEBI to ensure that
every complaint is managed efficiently and at appropriate level and resolved within the stipulated
time provided under the Regulations.
38
I note here that Inspection observed that the complaints received by the Noticee were reviewed
in the Board meetings by its Board of directors (hereinafter referred to as the ‘BoD’) as regards
their redressal on a half yearly basis. Information compiled by inspection team on the basis of
Minutes of the Board meetings provided by the Noticee is as per the table below:
Half Year Meeting
held
Complaints Gist of the Minutes of the
Board MeetingOpening Received Resolved Pending
Apr 2011
to
Sep 2011
Nov
2011
- 116 68 48 The BoD while being satisfied
suggested that the number of
complaints may be brought
down.
Oct 2011
to
Mar 2012
Jun
2012
48 64 37 75 The BoD while being satisfied
suggested that the number of
complaints may be brought
down.
Apr 2012
to
Sep 2012
Nov
2012
75 27 14 88 The BoD while being satisfied
suggested that the number of
complaints may be brought
down.
Oct 2012
to
Mar 2013
Jun
2013
88 47 22 113 The BoD while being satisfied
suggested that the number of
complaints may be brought
down.
39
Inspection observed from the minutes of meeting of the BoD that pending complaints had never
been a part of consideration in any of its meetings. Further that there was no mention of the
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complaints that had been directly received by the Noticee. Also, inspection observed from the
above that the conclusions of the BoD meetings appeared stereotype. Inspection further
observed that the BoD in each of the meetings had made conflicting observations, whereby on
one hand, they had expressed satisfaction with regard to grievance redressal system, and, on the
other hand, they had also suggested that the number of complaints be brought down.
40
In the matter, I find that the Noticee has submitted that though there is no statutory stipulation of
considering the grievance of clients in BoD meetings, they had devised their own internal systems
and process for resolution of grievances. The Noticee has inter alia submitted that the pending
complaints were discussed in Board meetings under the agenda more in a freelance way and
appropriate oral instructions were given to the concerned for resolution, which was not recorded
in the minutes, since the minutes are not reflective of verbatim reproduction of the deliberations
of the Board. Further that upon evaluation and examination, the Board initiated several corrective
steps. As regards the conclusion of the BoD meetings appearing stereotype, the Noticee has inter
alia stated that the Board minutes are reflective of the fact of a discussion and not the minute
details of the discussion. Further that the system of deliberations in the Board meetings had
automatically brought seriousness into the grievance redressal mechanism. As regards the
conflicting observations made by the Board, the Noticee has stated that the satisfaction was with
regard to the nature and quality of resolution of the complaints, and, suggestion for bringing
down the number of complaints was with regard to unresolved complaints.
41
Firstly, I find it surprising that the Board of the Noticee was going on expressing satisfaction half
year after half year, despite the falling redressal rate, which fell from 58% in April to September
2011 to 33% in October 2011 to March 2012, further to 13% in April to September 2012 half year
and to 16% in October 2012 to March 2013 half year, taking into consideration the overall
complaints pending with the Noticee. It was in this context that Inspection had remarked that the
gist of the BoD meetings that: “The BoD while being satisfied suggested that the number of
complaints may be brought down” , which continued to remain unchanged despite such poor
redressal, apparently appeared stereotype in nature. The Board of Directors has to recognize and
accept that complaints are an important part of accountability. It is required to have a
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commitment from the top down to ensure that the investor grievance redressal mechanism does
not fall into disrepair or disrepute. In the extant case, it is not clear on what basis the Board of
Directors of the Noticee were satisfied with the nature and quality of complaints as submitted by
the Noticee, when the redressal rate in the first place was so poor, and was falling half year after
half year. I note here that the Noticee has stated that there is no statutory stipulation of
considering the grievance of clients in BoD meetings. However, I find it pertinent to mention here
that the Board of Directors have an overall responsibility and accountability for the management
and governance of complaints handling. It is, hence, that SEBI too vide circular dated December
18, 2014 on “Redressal of investor grievances through SEBI Complaints Redress System (SCORES)
platform” has inter alia made the Board of Directors/ Proprietor/ Partner of the registered
intermediary responsible for ensuring compliance with the provisions of the said Circular.
42
Inspection also observed that the Noticee had decentralized control in respect of its operations
and also with respect to the investor grievances redressal. The Noticee had stated during the
inspection that there were 4 executives (2 each at the corporate office in Mumbai and Registered
office in New Delhi) attending to the investor grievances and reporting to the Senior Vice
President cum Compliance Officer. However despite the same, from the table below, I note that
the Noticee has not been able to redress more than one-fourth of the complaints received within
the stipulated period of one month:
First Reply/ Action Taken from the date of Complaint
15 days or
less
16-30
days
More than
30 days
Action date prior to the
complaint received date
Action taken date not
mentioned
129 75 54 10 13
43
I note here that the Noticee has submitted that it had a proper grievance redressal policy and
strong investor grievance mechanism. Also that all complaints received whether directly or
through Exchanges/ regulator are recorded and attended in an expeditious manner. However, in
view of the findings discussed in the earlier paras of this Order, it becomes clear that the Noticee
did not have an efficient & effective grievance redressal mechanism during the Inspection period.
I note that the Noticee has stated here that they have acted upon 204 of 280 complaints i.e. 72%
within 30 days, and that even with respect to Exchanges, the resolution amounted to 87.5%. In
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the matter, I find it noteworthy to mention here that the above table reflects the first reply/
Action taken from the date of the complaint, which need not necessarily be resolution of the
complaint. And the fact that Noticee had taken more than a month to act upon more than one-
fourth of the complaints received by the Noticee is definitely a cause of concern from the
Regulator’s point of view.
44
I find that the Noticee has also stated here that the delay, if any, was not very significant
considering that certain complaints inter alia involved elaborate examination of facts, verification
of facts, co-ordination with clients and liasoning with the branches, etc. to appropriately address
the complaints to the satisfaction of the complainant and the Exchanges. Even considering the
same, however, the fact remains that a broker is required to take adequate steps for redressal of
grievances of the investors within one month of the date of receipt of the complaint as stipulated
vide Regulation 6A(1)(e) of the Brokers Regulations.
45
Thus, from all of the above, I find that the Noticee despite its repeated claim of having a strong,
effective and efficient investor grievance mechanism commensurate with its operation and
assurance given to SEBI vide the aforesaid letter dated September 19, 2011, was not able to
comply with the timelines stipulated vide Regulation 6A(1)(e) of the Broker Regulations for
redressal of grievances of the investors. It also appears from the same that there was no proper
supervision and monitoring in respect of the investor complaints. This is strengthened by the
admission made by the Noticee that the direct complaints were handled by many personnel, and,
therefore, there was scope for some manual errors, thus, confirming that there was no proper
framework, guidelines in place, resulting in poor maintenance and handling of investor
complaints, which further aggravated the delay. Therefore, it is established that the Noticee has
failed to take adequate steps for redressal of grievances of the investors within one month of the
date of the receipt of the complaint, thereby violating the provisions of Regulation 6A(1)(e) of
Broker Regulations and the provisions of clauses A (1), (2) and (5) of code of conduct specified
under Schedule II read with Regulation 7 of the Broker Regulation.
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46
The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL
216(SC) held that “In our considered opinion, penalty is attracted as soon as the contravention of
the statutory obligation as contemplated by the Act and the Regulations is established and hence
the intention of the parties committing such violation becomes wholly irrelevant…”.
47
In view of the foregoing, I am convinced that it is a fit case to impose monetary penalty under
Section 15 HB of the SEBI Act, which reads as under:
15HB. Penalty for contravention where no separate penalty has been provided.-
Whoever fails to comply with any provision of this Act, the rules or the regulations made or
directions issued by the Board thereunder for which no separate penalty has been provided, shall
be liable to a penalty which may extend to one crore rupees.”
48
While determining the quantum of monetary penalty under Section 15 HB, I have considered the
factors stipulated in Section 15-J 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.”
49
It is difficult, in cases of such nature, to quantify exactly the disproportionate gains or unfair
advantage enjoyed by an entity and the consequent losses suffered as a result of the default. It is
noted that no quantifiable figures are available to assess the disproportionate gain or unfair
advantage made as a result of such default by the Noticee.
50
I have taken note of the submissions by the Noticee that upon evaluation and examination, its
Board has initiated several corrective steps including percolating the issues related to the overall
compliances and investor grievances down to the line of Head of Departments of every
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department, Zonal Heads and Regional Heads. Also that the Board had given strict instructions to
strictly adhere to the Guidelines, Rules and Regulations of the Regulators, and as a result, the
number of complaints have drastically reduced by more than 50% in FY 2014-15. I have also taken
note of the fact that the Noticee has now initiated a process of addressing the complaints through
software called “Talisma” which enables the Noticee to maintain its records in a centralized
manner with minimum manual interference and which, in turn, is supervised and monitored by
the Senior Vice President cum Compliance Officer.
51
However, the fact remains that the Noticee, being a stock broker with a vast clientele, failed to
fulfill its duty of complying with the Brokers Regulation during the Inspection period. It is the duty
of SEBI to ensure speedy resolution of investor grievances, and to further the cause, every Stock
Broker whose registration is granted by SEBI is required to take adequate steps for redressal of
grievances of the investors within the stipulated time. It is of utmost importance that every stock
broker assigns high priority to investor grievances and takes all necessary steps to redress the
grievances of investors at the earliest, which the Noticee failed to do at the relevant point in time.
52
Besides, I note that SEBI had earlier conducted an inspection of the Noticee during September
2010 for the period January 2009 to February 2010. The main observations during the said
inspection were that the Noticee had not been exercising due control over the operations of its
staff, that the Noticee had not been maintaining proper records of complaints received from all
the sources, and lack of control over the complaints received at the outlets level. In response to
the said Administrative Warning, the Noticee vide letter dated September 19, 2011 submitted
therewith an Action Taken Report (ATR) stating that the Noticee had inter alia taken steps to
resolve the investor complaints within a short period of time. The findings of the subsequent
Inspection conducted on June 19, 2013 covering the period FY 2012-13 and FY 2013-14 (till the
date of Inspection i.e. June 19, 2013), which are before me, are, thus, despite the Administrative
Warning issued vide SEBI’s letter dated August 11, 2011 inter alia for not having a prudent
investor grievance handling mechanism pursuant to inspection conducted during the earlier
period viz. January 2009 to February 2010 and the Noticee’s response to the same vide letter
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dated September 19, 2011. Thus, I note that the Noticee’s inability to take appropriate and
adequate steps for redressal of investor grievances has been found to be of repetitive nature.
53
Further the gravity of such repetitive violation by the Noticee, needs to be viewed keeping in
mind the fact that redressal of investor grievances is one of the key components of SEBI’s efforts
to protect the interests of investors in securities. Investors need to have their complaints sorted
out satisfactorily as speedily as possible, and the importance of this basic requirement can never
be under-estimated. It clearly matters a great deal to the investors how long it takes from
registering a complaint to resolution. It is, hence, that SEBI vide Regulation 6A(1)(e) of Brokers
Regulations has stipulated a time line of one month to take adequate steps to redress the
grievance of the investors. A weak investor grievance redressal mechanism also undermines the
integrity and efficiency of the securities market and investor confidence in them.
54
In the matter, I find that the Hon’ble Securities Appellate Tribunal (hereinafter referred to as
‘ SAT ’ ) in S. S. Forgings & Engineering Limited & Others v SEBI, Appeal No. 176 of 2014 (decided
on August 28, 2014) has inter alia observed that – “………………Undoubtedly, an obligation is cast
upon every listed company to redress investors’ grievances in a time bound manner as may be
prescribed by SEBI from time to time………. This Tribunal has consistently held that redressal of
investors’ grievances is extremely important for the Regulator to regulate the capital market. If the
grievances are not redressed within a time bound framework, it leads to frustration among the
investors’ who may not be motivated to further invest in the capital market. Hence the importance
of complaints redressal system initiated by SEBI in June, 2011 cannot be undermined and its
sanctity has to be maintained by all the listed companies…….”
55
The principle laid down by the Hon’ble SAT vide its aforesaid Order that investors grievances need
to be redressed within the time bound framework as prescribed by SEBI, applies to intermediaries
registered with SEBI as well. An effective investor grievance redressal is a timely redressal. Against
the said background, the fact that the Noticee did not take adequate steps for redressing the
grievances of investors, thereby resulting in repeated breach of the timelines set by SEBI for
redressal of grievances of investors, need to be viewed seriously.
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56
In the matter, I note that the Noticee has stated that the violations, if any, were technical and
venial in nature, that there was no loss to any investor, and the minor infractions, if any, have
been rectified immediately. The Noticee has further referred to the Order of Hon’ble SAT in thematter of R. R. Chokhani Stock Brokers Pvt. Ltd. (Appeal No. 217 of 2012 Date of Decision:
25.09.2013) and the Order of Hon’ble SAT in the matter of Finquest Securities Pvt. Ltd (Appeal
No. 119 of 2013 Date of Decision: 25.09.2013), wherein the Hon’ble SAT had inter alia observed
that in the said cases, a mistake of venial nature had inadvertently occasioned, which had been
rectified immediately on being brought to notice. Under these circumstances, the Hon’ble SAT
had held that when the lapse is technical, unintentional, and does not involve monetary loss to
any party, on facts of the said cases, it would have been just and proper to issue a warning to be
more diligent in complying regulatory norms prescribed by SEBI, instead of imposing penalty.
57
On perusal of the said Orders of the Hon’ble SAT, I note that the issue involved in the said two
cases was regarding accepting third party payments. However even in the said Orders, I find that
the Hon’ble SAT has held that the justification that such transactions were miniscule compared to
the appellants’ total transactions and hence inconsequential, is very weak and not convincing.
Further, the Hon’ble SAT has inter alia noted in the said Orders that the transactions have not
been undertaken with intention to defraud anybody or as a matter of willful defiance, but, more
or less technical in nature and appear to be due to inadvertence or oversight. Even the case of
Samkit Share and Stock Brokers Pvt. Ltd. cited by the Hon’ble SAT in the said Orders, SAT had
noted that mistakes were committed inadvertently. It was, hence, that the Hon’ble SAT
considered the lapse as technical, unintentional, not involving monetary loss to any party, and
thereby felt just and proper to warn the appellants to be more diligent in complying with
regulatory norms prescribed by SEBI, instead of imposing a penalty.
58
Unlike the same, I find that in the given case, the Noticee was already warned by SEBI on one
occasion for not having a prudent investor grievance handling mechanism pursuant to inspection.
However, despite the same and assurance given by the Noticee to SEBI vide its letter dated
September 19, 2011 that the Noticee had inter alia taken steps to resolve the investor complaints
within a short period of time, it has been observed that the default had recurred immediately
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thereafter. Besides, I note from the preceding paras of the Order that the delay in resolving the
complaints within the stipulated time was not inadvertent in nature. In fact, in the extant case, I
note that Noticee had taken more than 30 days to reply/ act upon 54 out of 281 complaints i.e.
19% of the complaints received were replied/ acted upon only after 30 days. Thus, I note that the
Noticee had failed to adhere to the stipulated time period of one month in one out of almost five
complaints received by the Noticee, immediately after assuring SEBI that it had taken appropriate
steps in the matter. This can under no standards be considered as “inadvertent”. Thus in the first
place, the argument of the Noticee that the violation was technical or venial in nature, itself does
not stand. Further, I note that nothing has been brought on record to show that facts in the so
referred cases are similar to the facts in the extant case. I note that circumstances and the facts of
the said two cases referred by the Noticee are otherwise different to the facts of the extant case
as has been brought out above in detail. Hence, I conclude that the determination of penalty in
the extant case would depend upon the facts and circumstances of the extant case.
ORDER
59
After taking into consideration all the facts and circumstances of the case, I impose a penalty of
Rs. 20,00,000/- (Rupees Twenty Lac only) on the Noticee viz. M/s Bonanza Portfolio Ltd. under
Section 15HB of the SEBI Act, 1992 for violation of the provisions of Regulation 6A(1)(e) of SEBI
(Stock Brokers & Sub Brokers) Regulations, 1992 and the provisions of clauses A (1), (2) and (5) of
code of conduct specified under Schedule II read with Regulation 7 of the SEBI (Stock Brokers &
Sub Brokers) Regulations, 1992 which will be commensurate with the violations committed
by the Noticee.
60