BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ ADJUDICATION ORDER NO. EAD-2/DSR/RG/ 319/2014 ]
________________________________________________________________

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
Keynote Capital Limited
___________________________________________________________________

1.

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

conducted an inspection into the books of accounts of Keynote Capital Limited
(hereinafter referred to as "the Noticee"), a SEBI registered stock broker and a
member of the Bombay Stock Exchange Limited (BSE), the National Stock
Exchange (NSE) and the Multi Commodity Exchange of India Limited (MCX), to
examine whether it had complied with the provisions of the SEBI Circulars and
various Rules and Regulations with respect to the segregation of funds and
securities for the period from April 01, 2011 to August 31, 2012.

2.

Upon inspection, the following was observed with respect to the nonsegregation of funds of clients with that of the Noticee's own:
(a) Working Capital arrangement: Funds were transferred from NSE/BSE Client
account to Overdraft (OD) against FD Account No. 36290 and again from the
said OD against FD A/c to

NSE/BSE Clients account. There was no

segregation of funds of clients with that of the Noticee's own funds and
therefore, it was observed that the Noticee had not complied with the provisions
of SEBI Circular dated November 18, 1993.
(b) Instances of Non-client funds being accounted in Client Accounts: It was
observed that the money received / paid from / to one Shivraj Sales Pvt. Ltd
and Mr. Karthik Sankaran were accounted for in Clients Accounts. The said two
entities were not registered clients with the Noticee.
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(c) Instances of transactions with respect to expenses accounted from Client

Accounts: Many transactions with respect to expenses A/c were accounted in
Clients Accounts. It was noted that large number of such entries (NSE Client
A/c-71 entries, BSE Client A/c-6 entries) accounted in clients account spread
from April 2012 to February 2013.
(d) Transactions relating to OD-Intra Account No. 30542 in NSE Client Account:
It was observed that the Noticee had transferred Rs. 72,00,000 from NSE
Client A/c to OD Infra A/c No. 30542 on May 11, 2012.
(e) Transactions relating to OD-demat A/c in NSE Client A/c: It was observed
that the Noticee had transferred Rs. 48,00,000 on April 04, 2012 and Rs.
36,00,000 on May 11, 2012 from NSE Client A/c to OD- Demat A/c.
3.

SEBI has, therefore, initiated Adjudication proceedings against the Noticee for
violating the SEBI circular bearing No. SMD/SED/CIR/93/23321 dated November
18, 1993 (herein after referred to as the 'SEBI circular dated November 18, 1993')
and Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under
Schedule II read with Regulation 9(f) of the SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992, (herein after referred to as the 'Broker Regulations') for the
aforesaid violations with respect to the segregation of funds and securities of
clients.

APPOINTMENT OF ADJUDICATING OFFICER

4.

I have been appointed as the Adjudicating Officer vide order dated January 17,
2014 under Section 15-I of the SEBI Act, 1992 (hereinafter referred to as the
Act) read with Rule 3 of the SEBI ( Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the
said Rules) to inquire into and adjudge under Section 15HB of the Act, the
alleged violation of provisions of law by the Noticee.

NOTICE, REPLY AND PERSONAL HEARING

5.

The Noticee was issued a Show Cause Notice dated April 09, 2014
(hereinafter referred to as SCN) under Rule 4(1) of the said Rules to show
cause as to why an inquiry should not be held and w h y penalty be not
imposed on it for the aforesaid violations. However, the said SCN was returned
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undelivered. Therefore, vide letter dated April 23, 2014, the said SCN was sent
for affixture at the last known address of the Noticee. During the affixture, the
Noticee's other address was provided and accordingly, vide letter dated April
28, 2014, the SCN was sent to the new address by "Hand Delivery". The said
SCN was duly delivered at the said address and the proof of delivery is on
record. Vide letter dated May 12, 2014, the Noticee submitted its reply to the
SCN. Thereafter, in the interest of natural justice and in order to conduct an
inquiry as per Rule 4(3) of the said Rules, an opportunity of personal hearing
was granted to the Noticee on July 08, 2014. The Authorized Representatives
(ARs) appeared on the scheduled date and made oral submissions by
reiterating the submissions made by the Noticee vide its reply dated May 12,
2014. Further, the ARs requested one weeks' time to file additional
submissions in the matter. Accordingly, the Noticee was advised to file the
same on or before July 15, 2014 and vide letter dated July 14, 2014, the
Noticee submitted its additional reply in the matter.

CONSIDERATION OF EVIDENCE AND FINDINGS

6.

I have carefully perused the charges leveled against the Noticee in the SCN,
written submissions made by the Noticee and the documents available on
record. In the instant matter, the following issues arise for consideration and
determination :a.

Whether the Noticee has violated the provisions of the SEBI circular
dated November 18, 1993 and Clauses A (1), A (2) and A(5) of the
code of conduct as specified under Schedule II read with Regulation
9(f) of the Broker Regulations?

b.

Whether the Noticee is liable for monetary penalty as prescribed

under Section 15 HB of the SEBI Act for the aforesaid violation?

c.

7.

If so, what should be the quantum of monetary penalty?

Before proceeding further, I would like to refer to the relevant provisions of the
Broker Regulations and the SEBI Circular dated November 18, 1993 which read as
under:
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Stock brokers to abide by Code of Conduct.

9(f). The stock broker holding a certificate shall at all times abide by the
Code of Conduct as specified in Schedule II.
Schedule II
Code Of Conduct For Stock Brokers
[Regulation 9(f)]
A. General
(1) Integrity : A stock Broker, shall maintain high standards of integrity,
promptitude and fairness in the conduct of all his business.
(2) Exercise of due skill and care : A stock broker, shall act with due
skill, care and diligence in the conduct of all his business.
.....
(5) Compliance with statutory requirements : A stock broker, shall
abide by all the provisions of the Act and the rules, regulations issued by
the Government, the Board and the Stock Exchange from time to time as
may be applicable to him.
SEBI Circular dated November 18,1993
1. It shall be compulsory for all Member brokers to keep the money of the
clients in a separate account and their own money in a separate account.
No payment for transactions in which the Member broker is taking a
position as a principal will be allowed to be made from the clients
account. The above principles and the circumstances under which
transfer from clients account to Member brokers account would be
allowed are enumerated below.
A] Member Broker to keep Accounts: Every member broker shall keep
such books of accounts, as will be necessary, to show and distinguish in
connection with his business as a member i. Moneys received from or on account of each of his clients and,
ii. the moneys received and the moneys paid on Members own account.
B] Obligation to pay money into "clients accounts". Every member broker
who holds or receives money on account of a client shall forthwith pay
such money to current or deposit account at bank to be kept in the name
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of the member in the title of which the word "clients" shall appear
(hereinafter referred to as "clients account"). Member broker may keep
one consolidated clients account for all the clients or accounts in the
name of each client, as he thinks fit: Provided that when a Member
broker receives a cheque or draft representing in part money belonging to
the client and in part money due to the Member, he shall pay the whole
of such cheque or draft into the clients account and effect subsequent
transfer as laid down below in para D (ii).
C] What moneys to be paid into "clients account". No money shall be paid
into clients account other than i.
money
held
or
received
on
account
of
clients;
ii. such money belonging to the Member as may be necessary for the
purpose
of
opening
or
maintaining
the
account;
iii. money for replacement of any sum which may by mistake or accident
have been drawn from the account in contravention of para D given
below;
iv. a cheque or draft received by the Member representing in part money
belonging to the client and in part money due to the Member.
D] What moneys to be withdrawn from "clients account". No money shall
be drawn from clients account other than i. money properly required for payment to or on behalf of clients or for or
towards payment of a debt due to the Member from clients or money
drawn on clients authority, or money in respect of which there is a
liability of clients to the Member, provided that money so drawn shall not
in any case exceed the total of the money so held for the time being for
such
each
client;
ii. such money belonging to the Member as may have been paid into the
client account under para 1 C [ii] or 1 C [iv] given above;
iii. money which may by mistake or accident have been paid into such
account in contravention of para C above.
E] Right to lien, set-off etc., not affected. Nothing in this para 1 shall
deprive a Member broker of any recourse or right, whether by way of
lien, set-off, counter-claim charge or otherwise against moneys standing
to the credit of clients account.
2. It shall be compulsory for all Member brokers to keep separate
accounts for clients securities and to keep such books of accounts, as
may be necessary, to distinguish such securities from his/their own
securities. Such accounts for clients securities shall, inter-alia provide for
the following:-

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a. Securities received for sale or kept pending delivery in the market;

b. Securities fully paid for, pending delivery to clients;
c. Securities received for transfer or sent for transfer by the Member, in
the name of client or his nominee(s);
d. Securities that are fully paid for and are held in custody by the
Member as security/margin etc. Proper authorization from client for the
same shall be obtained by Member;
e. Fully paid for clients securities registered in the name of Member, if
any, towards margin requirements etc.;
f. Securities given on Vyaj-badla. Member shall obtain authorization from
clients for the same.
3. Member Brokers shall make payment to their clients or deliver the
securities purchased within two working days of pay-out unless the
client has requested otherwise. Stock Exchange shall issue a Press
Release immediately after the pay-out.
4. Member Brokers shall buy securities on behalf of client only on receipt
of margin of minimum 20 percent on the price of the securities proposed
to be purchased, unless the client already has an equivalent credit with
the broker. Member may not, if they so desire, collect such a margin from
Financial Institutions, Mutual Funds and FIIs.
5. Member brokers shall sell securities on behalf of client only on receipt
of a minimum margin of 20 percent on the price of securities proposed to
be sold, unless the member has received the securities to be sold with
valid transfer documents to his satisfaction prior to such sale. Member
may not, if they so desire, collect such a margin from Financial
Institutions, Mutual Funds and FIIs.
6. Member brokers shall issue the contract note for purchase/sale of
securities to a client within 24 hours of the execution of the contract.
7. In case of purchases on behalf of clients, Member brokers shall be a
liberty to close out the transactions by selling the securities, in case the
client fails to make the full payment to the Member Broker for the
execution of the contract within two days of contract note having been
delivered for cash shares and seven days for specified shares or before
pay-in day (as fixed by Stock Exchange for the concerned settlement
period), whichever is earlier; unless the client already has an equivalent
credit with the Member. The loss incurred in this regard, if any, will be
met from the margin money of that client.
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8. In case of sales on behalf of clients, Member broker shall be at liberty

to close out the contract by effecting purchases if the client fails to deliver
the securities sold with valid transfer documents within 48 hours of the
contract note having been delivered or before delivery day (as fixed by
Stock Exchange authorities for the concerned settlement period),
whichever is earlier. Loss on the transaction, if any, will be deductible
from the margin money of that client.

8.

I find that the Noticee is a SEBI registered intermediary carrying out the
business of a Stock Broker in the Cash and Future & Option Segments of the
National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The
Noticee is also a member MCX-SX in cash, equity derivative and currency
derivative segment. I further find from the SCN that upon inspection, it was
observed that in reply to the inspection questionnaire, the Noticee had, vide
letter dated January 14, 2013, stated that it had opened separate bank and
demat accounts for segregation of its own and clients funds and securities. List
of Bank accounts maintained by the Noticee are on record and the list of demat
accounts for client securities and proprietary securities is as under:

S.no
1
2
3
4

9.

Demat A/c no.

1202430000010560
1202430000000081
1202430000010581
1202430000009882

DP name
Keynote Capitals Ltd.
Keynote Capitals Ltd.
Keynote Capitals Ltd.
Keynote Capitals Ltd.

Purpose
BSE Client Margin A/c
NSE Client Margin A/c
NSE FO Client Margin A/c
OWN A/c

Further, vide letter dated January 14, 2013, the Noticee had submitted that all
the proceeds of funds payout were transferred to client bank account and then
payout of client were made from the same account. All receipts from clients get
deposited only in designated client bank account for respective exchange and
segment, thereof. The Noticee also submitted that the Client Bank a/c was only
used to meet respective clients margin/pay-in requirements and/or payout
remittance to the respective client. In regard to its own funds, the Noticee had
stated that all the funds transferred from and to Client a/c towards own
utilizations were made from working capital and brokerages of the company.

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10. With respect to the clients securities, the Noticee had submitted that all
securities payout from respective exchange are initially transferred to clients
margin demat a/c and then payout to clients are made from the same account
subject to risk policy & procedure. Further, it was stated that outward transfer of
securities from Clients Margin demat a/c was only made in case of respective
clients securities pay-in obligation and/or transfer to clients own demat a/c
and/or transfer to clearing member/exchange towards respective clients margin
utilization. Also, that the Noticee's own securities are transferred to designated
own demat a/c only. Further, it was submitted that clients securities were not
transferred to its own demat a/c under any circumstances.

11. Vide letter dated May 17, 2013, write up on Advance Client Deposit, Working
Capital arrangement and securities pay-in/pay-out process was provided by the
Noticee. From the said letter, it was observed that in order to have seamless
trading system and settlement of funds pay-in and payout on T+2 day with
exchanges and clients respectively, the Noticee had infused enough working
capital for day to day operation. Further, the Noticee had deployed funds
(` 15 crores approx.) towards working capital with the respective exchanges
towards margin in the form of cash and fixed deposits (FDs). Also, the Noticee
had converted the referred working capital in the form of FDs with the banks
and had obtained over draft (OD) facility against the same to save on cost of
funds. As a daily routine practice, the Noticee used to transfer excess idle
money lying in all bank accounts at the end of the day to the said own/overdraft
against FD A/c and on the following working day the Noticee was transferring
the requisite funds to the respective bank accounts. Further, vide letter dated
July 18, 2013, the Noticee had clarified that Axis Bank offered products like
Bank Guarantee. The bank offered overdraft facility with a margin of 50%
against Fixed Deposit and as per mutual discussions the Noticee utilized 100%
of OD limit for making further FD, which shall be under Banks lien towards
margin requirement. To save further cost of OD, as a daily routine practice, the
Noticee transfers (through automated process) excess idle money lying in all
respective bank accounts held with Axis bank at the end of the day to the said
OD against FD A/c (i.e. A/c no. 004010300036290) and on the following day
requisite funds get transferred to the respective bank Accounts through an
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automated process at the Axis Banks end under the mandate already given to
the bank.

12. Vide email dated July 25, 2013, the Noticee also submitted that it had obtained
the above referred OD facility in the month of October 2008. In support of the
said submission, the Noticee had provided scanned copies of Axis Banks letter
dated October 29, 2008 conveying the sanction of credit facilities to it and the
Noticee's letter dated December 11, 2008 requesting the bank, in order to
reduce the interest on overdraft, to transfer funds from 3 clients account (NSE
Client A/c no. 004010200012647, BSE Client A/c no. 004010200020402 &
F&O Client A/c no. 004010200027025) to said OD account everyday in the
evening and transfer back the funds the very next day in the morning from the
said OD account to any of the said accounts in case of any shortfall in the
respective accounts. It was also observed that vide letter dated May 19, 2011,
the Noticee had given standing instructions (irrevocable authorization) to the
bank for transfer of funds from OD A/c No. 36290 to A/c Nos. 12647 (NSE
Client A/c) and 20402 (BSE Client A/c) every morning and that this irrevocable
authorization was to be in effect till further instruction in writing. Further, the
said authorization also stated that Axis Bank can transfer entire clear balance in
excess of ` 2,00,000/- (in multiple of ` 50,000/-) from 7 bank accounts
(including said 2 NSE/BSE clients A/cs) held by you to OD A/c No. 36290.

13. Following were the instances wherein the Noticee had failed to segregate the
client accounts:
(A) INSTANCES OF NON-CLIENTS FUNDS BEING ACCOUNTED IN CLIENT
ACCOUNT:
(i) The Noticee had submitted that the Bank Account No. 004010200012647
(NSE Client A/c) held with Axis Bank is generally used for accounting clients
funds. From examination of the said Bank Account No. 004010200012647
(NSE Client A/c), it was observed that there were entries/transactions related to
two entities viz. Shivraj Sales Pvt. Ltd. and Karthik Sankaran appearing in the
said Bank Account. However, the said two names are not appearing in the list
of registered clients as per the list provided by the Noticee vide email dated
March 01, 2013. Therefore, the said 2 entities are not registered clients of the
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Noticee, however, bank transactions relating to them were appearing in NSE

Client A/c. Accounts of Shivraj Sales Pvt.Ltd and Karthik Sankaran as
appearing in the Noticee's ledger are as follows:

SHIVRAJ SALES PVT.LTD.

Voucher
Date

Entry
Details

Amount
Debit

Amount
Credit

Running
Balance

DrCr

SHIVRAJSALESPVTLTD

OpeningBalance
130612 AXISBANKLTDNSECASHCLIENTA/C

0.00

0.00 Cr
7500000.00

7500000.00 Cr

RTGSDLXBH12165000481/SHIVRAJSALES
PVTLTD

180612 AXISBANKLTDNSECASHCLIENTA/C

0.00

5000000.00 12500000.00 Cr

Cheque#:RTGSdated18/06/12

RTGSDLXBH12170000325/SHIVRAJSALES
PVTLTD

A/CNOTOPEN

190612 AXISBANKLTDNSECASHCLIENTA/C

0.00

5000000.00 17500000.00 Cr

Cheque#:RTGSdated19/06/12

RTGSDLXBH12171000442/SHIVRAJSALES
PVTLTD

210612 AXISBANKLTDNSECASHCLIENTA/C

0.00

9000000.00 26500000.00 Cr

RTGSDLXBH12173000638/SHIVRAJSALES
PVTLTD

260612 AXISBANKLTDNSECASHCLIENTA/C

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0.00 11000000.00 37500000.00 Cr

RTGSDLXBH12178000349/SHIVRAJSALES
PVTLTD

030712 AXISBANKLTDNSECASHCLIENTA/C

0.00

2500000.00 40000000.00 Cr

RTGSDLXBH12185000831/SHIVRAJSALES
PVTLTD

260712 AXISBANKLTDNSECASHCLIENTA/C

Cheque#:199008dated26/07/12

BEINGCHEQUERECDAGSTA/C

TransactionTotals

ClosingBalance

0.00

1000000.00 41000000.00 Cr

0.00 41000000.00

41000000.00 Cr

(ii) From the above table, it can be noted that the Noticee had received
payments (on different dates) totaling to `4.10 crores from Shivraj Sales Pvt.
Ltd. However, as mentioned earlier, the name of the entity does not appear in
the client master list maintained and provided by the Noticee.

KARTHIK SANKARAN
200910

Voucher
Date

Entry
Details

KARTHIKSANKARAN

Amount
Debit

Amount
Credit

Running
Balance

DrCr

OpeningBalance

0.00 Cr

060509 AXISBANK[NSECLIENTA/C]

0.00

3000000.00

3000000.00 Cr

Cheque#:301966dated05/05/09

HDFCBKCHURCHGATEONA/C

TransactionTotals

0.00

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3000000.00

ClosingBalance

201011

Voucher
Date

Entry
Details

Amount
Debit

Amount
Credit

Running
Balance

DrCr

KARTHIK
SANKARAN

[DEPOSIT
FROM
PARTIES]

OpeningBalance

TransactionTotals

ClosingBalance

201112

Voucher
Date

Entry
Details

Amount
Debit

Amount
Credit

Running
Balance

DrCr

KARTHIK
SANKARAN

[DEPOSIT
FROM
PARTIES]

OpeningBalance

TransactionTotals

ClosingBalance

201213

Voucher
Date

Entry
Details

Amount
Debit

Amount
Credit

Running
Balance

DrCr

0.00

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3000000.00 Cr
0.00

0.00

0.00

0.00

3000000.00 Cr

3000000.00 Cr
0.00

0.00

0.00

3000000.00 Cr

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3000000.00 Cr

KARTHIK
SANKARAN

[DEPOSIT
FROM
PARTIES]

OpeningBalance

310113 AXISBANKLTDNSECASHCLIENTA/C

3000000.00

3000000.00 Cr
0.00

0.00 Cr

Cheque#:230418dated31/01/13

(beingchissuedtowardsrefundof
deposit)

TransactionTotals

3000000.00

ClosingBalance

0.00

0.00 Cr

(iii) From the above table, it can be seen that the Noticee had received payment
of ` 30 lakh from Mr. Karthik Sankaran on May 06, 2009. No transactions were
observed during 2010-11 and 2011-12. The said amount was paid back to
Mr. Karthik Sankaran on January 31, 2013 with narration showing as being
cheque issued towards refund of deposit. However, it is observed that name of
Mr. Karthik Sankaran does not appear in the client master list maintained /
provided by the Noticee.

(iv) In view of the above, it was alleged that the Noticee had accounted for the
funds received from Shivraj Sales Pvt. Ltd. and Mr. Karthik Sankaran in the same
account (i.e A/c no. 004010200012647) which is designated as NSE Client A/c
and maintained to keep Clients funds received/paid from/to or on account of
clients and therefore, in violation of SEBI circular dated November 18, 1993
issued in respect of Regulation of transactions between clients and brokers.

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(B) INSTANCES OF TRANSACTIONS W.R.T. EXPENSE ACCOUNT FROM

CLIENT ACCOUNT:
(i) The Noticee had submitted that Axis Bank Account No. 910020005043882
was for payment of all expenses like authorized person payout, salary and other
expenses. However, transaction pertaining to this account figured in NSE client
A/c and BSE client A/c. In view of the identified transaction as mentioned in the
Annexure to SCN, which shows that transaction relating to regular business
expenses had been accounted in Clients Accounts, it was alleged that the
Noticee had failed to segregate the client accounts and thereby, violated the
provisions of SEBI circular dated November 18, 1993 issued in respect of
Regulation of transactions between clients and brokers.

(C) INSTANCES OF TRANSACTION W.R.T. NSE EXCHANGE DUES IN NSE

CLIENT A/C NO. 004010200012647:
(i) It was submitted by the Noticee that Axis Bank Account No. 004010200616812
was maintained for the purpose of exchange dues. Upon examination, the
following instances of transactions pertaining to NSE Exchange Dues account no.
616812 in NSE Client A/c 004010200012647 were observed.

Date

Branch AccountHead

Cheque#

090412 HO

INTERSEGMENT

BEINGAMTTRFTO02.616812

190412 HO

INTERSEGMENT

TRFTOAXIS616812

150512 HO

INTERSEGMENT

BEINGAMTTRFTO2.616812

010812 HO

INTERSEGMENT letter
(beingamttrfdtoKCLUTI

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Chq.Date Receipts
01Jan
00

Payments

0.00

1000000.00

0.00

1000000.00

0.00

1000000.00

0.00

1000000.00

01Jan
00

01Jan
00

01Aug
12

616812)*

090113 HO

INTERSEGMENT

BEINGAMTTRFTO02.616812

01Jan
00

2000000.00

0.00

1000000.00

22Feb
13

220213 HO

INTERSEGMENT letter

(beingamttrfdtoKCLUTI
616812exchange

duesa/c)*

270213 HO

INTERSEGMENT

BEINGAMTTRFTO02.616812

0.00

01Jan
00

0.00 26000000.00

(ii) Upon perusal of the above table, it was observed that the entries pertaining to
payment of Exchange Due were also figuring in bank account maintained for
Client funds which was not in accordance with the provisions of SEBI circular
dated November 18, 1993.

(D) TRANSACTION RELATING TO AXIS BANK A/C NO. 004010300030542

(OD-INTRA A/C) IN NSE CLIENT ACCOUNT NO. 004010200012647:
(i) As submitted by the Noticee the Account No. 00401010300030542 was
maintained for OD (Overdraft) on Intraday basis. Further, the Noticee had
clarified that at times on emergency fund requirement, bank gives OD against
pending cheque clearing, payout receivables etc. for one day on request.
Following transaction were observed in the NSE Client Account relating to ODIntra A/c no. 30542.

Date

Branch

AccountHead

Chq.Date

110512 HO

INTERSEGMENT

BEINGAMTTRFTO3.30542

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01Jan00

Receipts

Payments

0.00

7200000.00

(ii) The table above shows that OD A/c No. 30542 was maintained for OD
intraday basis. However, it was noted that an amount of ` 72 Lakh was paid from
Clients A/c to the said OD A/c No. 30542. Therefore, it was further alleged that
the Noticee by using Clients A/c to make transaction other than those specified in
the SEBI circular dated November 18, 1993 violated the provisions of the said
SEBI circular.

(E) TRANSACTION RELATING TO AXIS BANK A/C NO. 004010300037332

(OD-DEMAT A/C) IN NSE CLIENT ACCOUNT NO. 004010200012647:
(i) The Noticee had submitted that Axis Bank A/c No. 004010300037332 is for
OD against pledge of its own shares. However, transactions relating to this ODDemat Shares A/c were appearing in NSE Clients A/c No. 004010200012647 as
tabled below:

Date

Branch

AccountHead

Chq.Date

Payments

040412 HO

INTERSEGMENT

BEINGAMTTRFTO3.37332

110512 HO

INTERSEGMENT

BEINGAMTTRFTO3.37332

01Jan00

Receipts

01Jan00

0.00

4800000.00

0.00

3600000.00

(ii) The above table shows that A/c no. 37332 was opened for OD against pledge
of the Noticee's own share. However, it was noticed that there were transactions
showing payment made from clients A/c to said OD against pledge of Noticee's
own share A/c No. 37332. The same shows that the Noticee was using Clients
A/c to make transaction other than those specified in the SEBI circular dated
November 18, 1993 and hence, allegedly had violated the provisions of said
SEBI circular.

14. In view of the above, it was alleged that funds were being transferred from NSE
/ BSE Client A/cs to the Noticee's OD A/c and from the OD A/c to said Clients
A/cs. It was further alleged that the Noticee had used the NSE / BSE Client A/c

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for purposes other than the ones mentioned in the SEBI Circular dated
November 19, 1993 i.e. using them for Expense A/c and NSE Exchange Dues
A/c, etc. Therefore, the Noticee was alleged to have failed to comply with the
provisions of SEBI Circular dated November 18, 1993 in respect of regulation of
transactions between clients and brokers which inter alia states that it shall be
compulsory for all member brokers to keep the money of the clients in a
separate account and their own money in a separate account. The said SEBI
circular also indicates what moneys to be paid into Clients account and what
moneys to be withdrawn from Clients account.

Reply:
15. The Noticee vide letter dated May 12, 2014 submitted its reply to the SCN. The
Noticee submitted that it has never misused any client funds. The Noticee as a
Stock Broker is entitled to receive brokerage for the trades undertaken. As per
the SEBI Circular, the Noticee submitted that it is legal to keep such brokerage
in a separate account of the Client. The Noticee stated that the SEBI Circular
dated November 18, 1993 at para 1(C)(ii) states that a cheque or a draft
received by by the Member representing in part money belonging to the Client
and in part due to the Member can be de[posited in a clients' Bank Account
belonging to Noticee. In addition, the Noticee stated that none of its clients
have complained about its funds being misused by the Noticee for meeting its
own obligations and therefore, the Noticee denies having misutilised the funds.

16. The Noticee further submitted that the various functions purported to have been
undertaken by the Noticees were activities that the Noticee undertook in the
due course of its business in compliance with the referred Circular in true spirit
with respect to segregation of clients' funds and securities. It submitted that it
had opened separate bank accounts and demat accounts for segregation of
own and clients funds and securities and most of the time the receipts and
payments of the clients were routed through the clients bank account and own
transactions were routed through its own accounts.

17. With respect to the receipts from Shivraj Sales Pvt. Ltd, the Noticee referred to
Point No. 1(C)(ii) and Point No. 1(D)(iii) of the SEBI Circular dated November
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18, 1993 and stated that the same receipt was towards deposit which was
received and accounted for in the Client Bank Account by mistake. The Noticee
submitted that it has duly accounted the same in the account "Deposit from
Parties-Shivraj Sales Pvt. Ltd" in the books of accounts. Further, with respect to
the money received from Mr. Karthik Shankaran, the Noticee submitted that the
said deposit was received in the year 2009-10 and was by mistake deposited in
the Client Bank Account. The said amount was later refunded in the year 201213 from the Client Bank Account only since, the same was inadvertently
received in the Client Account. The Noticee further submitted that the referred
entries in Annexure 7 of the SCN are the entries pertaining to the Noticee's own
funds transferred from Client Account to expenses account out of the accrued
brokerage in the Clients Bank Account and the Noticee's own working capitals
infused by the Noticee for day to day operations. The Noticee denied that the
regular business expenses were accounted for from the clients' bank accounts.

18. With respect to the instances of NSE Exchange dues in NSE Client A/c No.
004010200012647, the Noticee submitted that the said entries pertain to the
Noticee's own funds transferred from Client A/c to Exchange Dues A/c out of
accrued brokerage, accrued transaction charges and other statutory charges
collected from the client in the Client Bank A/c and the Noticee's own working
capital infused by the Noticee for day to day operations. The Noticee further
submitted that the further payments made from the Exchange Dues Account
are normally made to the Exchanges towards Transaction charges collected by
the brokers and the same is received by the Broker in client bank account only.
Therefore, the Noticee denied the said allegation.
19. With respect to the transfer of ` 72 lakh on May 11, 2012 from Client A/c to OD
A/c No. 30542, the Noticee submitted that the same was in fact towards refund
of the same amount of ` 72 Lakh which was transferred from OD A/c No. 30542
to NSE F&O Settlement A/c one day prior i.e. on May 10, 2012 towards clients'
pay-in obligation. The Noticee stated that the same is evident from the copy of
the bank book of the said OD A/c No. 30542. The Noticee further submitted that
the referred transfer of ` 48 Lakh on April 04, 2012 from the Cleint A/c to OD

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A/c No. 37332 was in fact towards refund of the same amount of ` 48 Lakh
which was transferred from the OD A/c No. 37332 to BSE Client A/c No. 20402
one day prior i.e. on April 03, 2012 towards clients' pay-in obligation. Similarly,
the Noticee submitted that the referred transfer if Rs. 36 Lakh on May 11, 2012
from the Client Account to OD A/c No. 37332 was in fact towards refund of the
same amount which was transferred from OD A/c No. 37332 to NSE Settlement
A/c and BSE Settlement A/c one day prior i.e. on May 10, 2012 towards clients'
pay-in obligation.

20. Vide letter dated July 14, 2014 the Noticee submitted its additional reply in the
matter and stated that the activities such as transfer of funds from NSE / BSE
Client Accounts to OD Account and vice versa pursuant to irrevocable
authorization given to Axis Bank to transfer funds as mentioned, has been
stopped since January 2014. Vide letter dated January 06, 2014, the Noticee
has categorically withdrawn the aforesaid irrevocable authorization from Axis
bank. The Noticee further reiterated its submissions made vide its earlier reply
dated May 12, 2014.

Findings:
21. I have carefully perused the charges leveled against the Noticee in the SCN
and the submissions made by it. With respect to non-client funds being
accounted for in client account by the Noticee, I find from the instances that the
Noticee did transfer receipts from two entities i.e. Shivraj Sales Pvt. Ltd. (`4.10
crores) and Mr. Karthik Sankaran (`30 Lakh) in the Client Bank Account despite
they not appearing in the client list as maintained / provided by the Noticee. I
further find that the Noticee in its submissions has stated that the said receipts
were transferred in the client account inadvertently and with respect of the
payment received from Shivraj Sales Pvt. Ltd., the same was reversed and the
monies were transferred to "Deposit from Parties-Shivraj Sales Pvt. Ltd" later.
However, with respect to the receipt of money from Mr. Karthik Sankaran, the
same kept lying in the clients' account till 2012-13. I find that admittedly, on
both the instances, the Noticee did default in accounting non-client funds in

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client accounts and therefore, I conclude that the Noticee did violate the SEBI
Circular dated November 18, 1993.

22. Further, I find that the Noticee did utilize funds from the clients account for
carrying out transaction with respect to Expenses Account. I do not find any
merit in the submissions of the Noticee that the funds lying in the accounts of
the client were Noticee's own funds transferred from Client Account to
expenses account out of the accrued brokerage which was in the Clients Bank
Account. I find that the amounts received from the clients towards brokerage or
accrued brokerage have to be properly segregated and the Broker cannot keep
the amounts received on account of brokerage in the clients account and use it
for the expense accounting. I find from the instance quoted in the Inspection
Report that the Axis Bank A/c No. 910020005043882 was opened by the
Noticee for the specific purpose of payment of all expenses like authorized
person payout, salary and other expenses. However, I conclude that the
Noticee by carrying out the transactions pertaining to the expense account from
the NSE client A/c and BSE client A/c has clearly violated the provisions of the
SEBI Circular dated November 18, 1993.

23. With respect to the transactions with respect to NSE Exchange Dues appearing
in the Client Account, I find that the Noticee has submitted that the funds which
were transferred from the clients' account to the NSE Exchange Due A/c were
its own funds accruing from the brokerage, accrued transaction charges and
other statutory charges collected from the client which were lying in the clients'
account. The said submission is again similar to the submission made with
respect to the transactions carried out for Expense Account from the Client
Account and is not acceptable inasmuch as the SEBI Circular clearly mandates
segregation of client funds from that of the Broker Funds and segregation of
Client Securities with that of the Broker Securities. By utilizing the said client
accounts for any purposes other than for client related transactions, the Noticee
has violated the provisions of SEBI Circular dated November 18, 1993.

24. Further, I note, vide email dated July 25, 2013, the Noticee had submitted that it
had obtained the OD facility (as mentioned in para 12 above) in the month of
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October 2008 from the Axis Bank. In support of the said submission, the
Noticee had provided scanned copies of Axis Banks letter dated October 29,
2008 conveying the sanction of credit facilities to it and the Noticee's letter
dated December 11, 2008 requesting the bank, in order to reduce the interest
on overdraft, to transfer funds from 3 clients account (NSE Client A/c no.
004010200012647, BSE Client A/c no. 004010200020402 & F&O Client A/c
no. 004010200027025) to said OD account everyday in the evening and
transfer back the funds the very next day in the morning from the said OD
account to any of the said accounts in case of any shortfall in the respective
accounts. It was also observed that vide letter dated May 19, 2011 the noticee
had given standing instructions (irrevocable authorization) to the bank for
transfer for funds from OD A/c no. 36290 to A/c Nos. 12647 (NSE Client A/c)
and 20402 (BSE Client A/c) every morning and that this irrevocable
authorization was to be in effect till further instruction in writing. Further, the
said authorization also stated that Axis Bank can transfer entire clear balance in
excess of ` 2,00,000/-

(in multiple of ` 50,000/-) from 7 bank accounts

(including said 2 NSE/BSE clients A/cs) held by the noticee to OD A/c No.
36290.

25. From the above, I find that the OD A/c No. 36290 is an account maintained by
the Noticee with Axis Bank to facilitate its stock market business and for
smooth functioning of activities relating to stock market. Axis Bank has
extended credit facilities to the Noticee under pre- agreed terms and conditions.
Further, the Noticee has also given irrevocable authorization to Axis Bank to
transfer funds from said OD A/c 36290 to its 2 Accounts i.e. A/c no.s 12647
(NSE Client A/c) and 20402 (BSE Client A/c) and transfer funds from 7 bank
accounts (including said 2 NSE/BSE clients A/cs) to said OD A/c. The Noticee
has submitted that it stands to save on the cost of funds/OD and it has been
more than 4 years since this system was adopted by it in October 2008.
However, the Noticee in its submissions dated July 14, 2014 has submitted that
the facility has been withdrawn and the irrevocable authorization has been lifted
since January 2014. I further note from the two instances quoted in the
inspection report that the Noticee had carried out transactions relating to Axis
Bank A/c No. 004010300030542 (OD Intra A/c) and Axis Bank A/c No.
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004010300037332

(OD-Demat

A/c)

in

the

NSE

Client

A/c

No.

00401020001267. Both the instances make it abundantly clear that the Noticee
did use the Client A/c to make transactions other than the specified
transactions in the SEBI Circular dated November 18, 1993. In view of the fact
that the funds were being transferred from the NSE/ BSE Client Accounts to the
OD A/c of the Noticee and further from the OD A/c to the said Clients Account, I
conclude that there was a clear violation of the SEBI Circular dated November
18, 1993 by the Noticee.

26. From the foregoing, I find that the Noticee did fail to comply with the standards
of segregation of funds of clients with that of its own on various occasions and
thereby, has not exercised due care and skill in carrying out the business of the
Stock Broker. Therefore, I conclude that the Noticee by transacting in the
manner mentioned in the above paragraphs has violated the SEBI Circular
dated November 18, 1993 and Clauses A(1), A(2) and A(5) of the Code of
Conduct as specified under Schedule II read with Regulation 9(f) of the Broker
Regulations thus, warranting monetary penalty as prescribed under Section
15HB of the Act which reads as under.
Penalty for contravention where no separate penalty has been
provided.
15HB. Whoever fails to comply with any provision of this Act, the rules or
the regulations made or directions issued by the Board there under for
which no separate penalty has been provided, shall be liable to a penalty
which may extend to one crore rupees.
27. At this instant, it is important to quote the observations of the Honble Supreme
Court of India in the matter of SEBI v. Shri Ram Mutual Fund [2006] 68 SCL
216(SC), wherein the court , inter alia, held that: once the violation of statutory
regulations is established, imposition of penalty becomes sine qua non of violation
and the intention of parties committing such violation becomes totally irrelevant.
Once the contravention is established then the penalty is to follow.

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28. While imposing monetary penalty, it is important to consider the factors stipulated
under Section 15J of SEBI Act, which reads as under:

15J - Factors to be taken into account by the adjudicating officer:

While adjudging quantum of penalty under section 15-I, the adjudicating
officer shall have due regard to the following factors, namely:(a) the amount of disproportionate gain or unfair advantage, wherever
quantifiable, made as a result of the default;
b) the amount of loss caused to an investor or group of investors as a result
of the default;
(c) the repetitive nature of the default.
29. I observe, from the material available on record, that any quantifiable gain or
unfair advantage accrued to the Noticee or the extent of loss suffered by the
investors as a result of the default cannot be computed. The defaults on the
part of the Noticee are repetitive in nature. However, I find that the Noticee
being a registered intermediary is required to comply with the various Circulars
and Rules and Regulations as laid down by the Regulator to ensure smooth
and stable functioning of the capital market. The very purpose of the SEBI
Circular dated November 18, 1993 is that it shall be compulsory for all the
member brokers to keep the money of the clients in a separate account and
their own money in a separate account and further also indicates what monies
to be paid into the "Client Account" and what monies to be withdrawn from the
said accounts. Therefore, I conclude that the Noticee has

not exercised

adequate due skill, care and diligence in its operations and failed to comply with
the provisions of Circular dated November 18, 1993 issued by the Board and
also Clauses A(1), A(2) and A(5) of the Code of Conduct as specified under
Schedule II read with Regulation 9(f) of the Broker Regulations Such
wrongdoings and misconduct cannot be ignored and the same deserves &
attract penalty as per law.

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ORDER
30. In view of the above, after considering all the facts and circumstances of the case
and exercising the powers conferred upon me under section 15-I (2) of the SEBI
Act read with Rule 5 of the said Rules, I hereby impose a penalty of `5,00,000/(Rupees Five Lakh Only ) on the Noticee viz.Keynote Capital Limited under
Section 15HB of the Act. In my view, the penalty imposed is commensurate with
the default committed by the Noticee.
31. The above penalty amount shall be paid by the Noticee through a duly crossed
demand draft drawn in favour of SEBI Penalties Remittable to Government of
India and payable at Mumbai within 45 days of receipt of this order. The said
demand draft shall be forwarded to the Division Chief, MIRSD-I, Securities and
Exchange Board of India, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai
- 400021.

32. In terms of the Rule 6 of the said Rules, copy of this order is sent to the Noticee
and also to Securities and Exchange Board of India.

Date: December 18, 2014

D. SURA REDDY

Place: Mumbai

GENERAL MANAGER &

ADJUDICATING OFFICER

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