Adjudication Order in The Matter of M/s Hedge Equities Ltd.

BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AK/AO-116/2015]
________________________________________________________________________
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. Hedge Equities Ltd.
(PAN: AABCH9516N)
________________________________________________________________________
FACTS OF THE CASE
Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an inspection to
look into the books of accounts, records and other documents maintained by M/s Hedge Equities
Ltd. (hereinafter referred to as the Noticee'/'Hedge Equities'), a trading member in Cash, F&O and
Currency Derivatives (CD) segments of National Stock Exchange of India Ltd. (hereinafter referred to
as NSE), Cash and F&O segments of Bombay Stock Exchange Ltd. (hereinafter referred to as BSE)
and CD segments of MCX Stock Exchange Ltd. (hereinafter referred to as MCX-SX). The inspection
was carried to examine whether the provisions of SEBI circular no. MIRSD/SE/Cir-19/2009 dated
December 03, 2009 and SEBI circular no. SEBI/MIRSD/Cir/01/2011 dated May 13, 2011 with
reference to quarterly/monthly settlement of funds and securities of clients have been complied
with. The inspection period comprised of Financial Years (FY) 2012-2013 and 2013-2014 till
December 31, 2013.
The major alleged findings of inspection, which are in the nature of violations of the Rules,
Regulations and Circulars governing the matter of mandatory monthly/quarterly settlement of
clients accounts, are as given below:
_____________________________________________________________________________
Adjudication Order in the matter of M/s.Hedge Equities Ltd.
Page 1 of 23
a) That the mandatory quarterly settlement of accounts was not carried out by the Noticee in respect
of new clients who got registered in the quarter period for which the mandatory settlement was
done;
b) That in each quarter, mandatory settlement of accounts was not being done by the Noticee for
clients in respect of whom request pay-outs had been made in the quarter;
c) That the mandatory settlement of accounts of the clients was being done by the Noticee only by
means of cheques, even though the payouts at other times were being done by other modes such as
RTGS/NEFT etc.;
d) That the Noticee did not carry out the reversal of issued cheques on lapse of validity period, on the
grounds that it involves a cost in the form of bank charges for issuance of stop payment
instructions to the banks for such lapsed cheques;
e) Inspection observed instances where the mandatory quarterly settlements were deemed to have
not been done on account of the following:
Non realisation of pay-out cheques issued within its period of validity;
Non reissuance of cheques in lieu of mandatory pay-out cheques which had not been realised
and had become time barred;
adjustment of the subsequent debit balances against the cheque amount which had become
time barred, instead of re-issuing of such cheques;
f) Inherent deficiencies were observed in the statement of account being issued after the mandatory
settlement of clients accounts, in as much as the same did not contain the details of securities
retained by the Noticee, the purpose for which retained etc.
In view of the above observations, adjudication proceedings were initiated against the Noticee for
the alleged violation of the provisions of SEBI circular no. MIRSD/SE/Cir-19/2009 dated December
03, 2009 and SEBI circular no. SEBI/MIRSD/Cir/01/2011 dated May 13, 2011 and Clause A(1), A(2)
and A(5) as specified in Schedule II read with regulation 7 of the SEBI (Stock Brokers and Subbrokers) Regulations, 1992 (hereinafter referred to as Brokers Regulations).
_____________________________________________________________________________
Page 2 of 23
APPOINTMENT OF ADJUDICATING OFFICER

4
The undersigned was appointed as the Adjudicating Officer vide Order dated April 23, 2014 under
section 15-I of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 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 the SEBI Act for the alleged violation committed by the Noticee.
SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING

5
A Show Cause Notice (hereinafter referred to as SCN) Ref. No. EAD-6/AK/26077/2014 dated
September 03, 2014 was issued to the Noticee under rule 4(1) of SEBI Rules communicating the
alleged violation of SEBI circular dated December 03, 2009 and May 13, 2011 and Clause A(1), A(2)
and A(5) as specified in Schedule II read with regulation 7 of the Brokers Regulations.
The Noticee vide letter dated September 29, 2014 inter-alia submitted as follows:
A. As regards not carrying out the mandatory quarterly settlement in respect of new clients who
had registered in the quarter period for which the mandatory settlement was done, it has been
stated that:
they had made the necessary modifications in their systems from 01 March, 2014 to consider all
client accounts, including the newly opened accounts while settling the accounts on
monthly/quarterly basis;
B. As regards not carrying out mandatory settlement of client accounts in the quarter in respect of
clients for whom request pay-outs have been made in the quarter, it has been stated that:
from March 01, 2014 onwards a statement of account of Funds and Securities is provided to the
clients whenever a normal full payout is given to them;
C. As regards mandatory settlement of accounts of the clients being done only by means of
cheques, even though payouts at other times were being done by other modes such as
RTGS/NEFT etc., it has been stated that:
_____________________________________________________________________________
Page 3 of 23
they allot dates for compulsory settlement to each branch at the beginning of the quarter,
which, in turn, is informed by the branches to the clients. Settlement in case of clients who opt
for fund transfer/RTGS are processed accordingly and remaining clients are issued payout
through cheques;
D. As regards not carrying out the reversal of issued cheques on lapse of validity period, on the
ground that it involves a cost in the form of bank charges for issuance of stop payment
instructions to the banks for such lapsed cheques, it has been stated that:
subsequent to inspection they had initiated measures to sort out the issue of lapsed cheques or
cheques which remained unclear for long periods and to re-issue the same. As on March 31,
2014, they had reversed all stale payout cheques in FY 2014-15 and they had introduced a
monitory system to reverse the stale cheques in every four months, if any;
E. As regards cases where the mandatory quarterly settlements were deemed to have not been
done on account of non realization of pay-out cheques issued within its period of validity; nonreissuance of cheques in lieu of mandatory pay-out cheques which had not been realized and
had become time barred; and adjustment of the subsequent debit balances against the cheque
amount which had become time barred instead of reissuing the cheques, it has been stated
that:
subsequent to inspection they had introduced a monitory system to reverse the stale cheques
every four months;
F. As regards the statement of account being issued along with the mandatory settlement of
accounts having inherent deficiency since it did not contain the details of securities retained by
the Noticee, the purpose for which retained etc., it has been stated that:
they have incorporated both funds and securities retained while sending the statement of
account along with compulsory settlement of account. Further they have also intimated their
back office vendor regarding some more modifications in the retention statement, which will be
updated in the next edition of their software.
_____________________________________________________________________________
Page 4 of 23
Further to the aforesaid reply, the Noticee vide letter dated October 01, 2014 requested for a
personal hearing in the matter. In accordance with the principle of natural justice and in order to
provide a fair chance to the Noticee to put forth their case, an opportunity of personal hearing
was granted to the Noticee on November 10, 2014 vide hearing notice dated October 17, 2014.
Mr. Bobby Jose, Director of the Noticee appeared as Authorized Representatives (hereinafter
referred to as AR) on behalf of the Noticee. The AR reiterated the submission made vide letter
dated September 29, 2014. During the hearing, the AR was inter alia advised to submit the details
of credit/debit balance of the new client accounts, request pay-out accounts that were unsettled
during the quarter, amount of cheques that were not realized, not presented etc.
Consequent upon the personal hearing, vide letter dated November 20, 2014 the Noticee
reiterated the submissions made vide letter dated September 29, 2014 and submitted the details
that were already provided at the time of Inspection.
Vide email dated December 14, 2015, the Noticee was given an opportunity to make additional
written submissions, if any, in the matter. The Noticee was assured that all the earlier written
submissions made vide its letters and submissions made during personal hearing shall be given
due consideration in the matter. In response, the Noticee vide email dated December 14, 2015 reforwarded the copy of the submission sent vide letter dated November 20, 2014 and annexures
sent therewith for reference in the matter.
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 allegations against the Noticee is
that:
a. Whether the Noticee has violated/not complied with the provisions of SEBI circular no.
MIRSD/SE/Cir-19/2009 dated December 03, 2009 and SEBI circular no. SEBI/MIRSD/Cir/01/2011
dated May 13, 2011 during the period from April 01, 2012 to December 31, 2013?
b. Whether further the Noticee has failed to adhere the prescribed code of conduct in respect of
high standard of integrity, promptitude, fairness, due skill, care and diligence, and thereby did
_____________________________________________________________________________
Page 5 of 23
not abide by the Act, rules and regulations in term of Regulation 7 read with clauses A (1), (2) and
(5) of the Brokers Regulations?
c. Does the violation, 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 provisions of the SEBI circular no.
MIRSD/SE/Cir-19/2009 dated December 03, 2009 and SEBI circular no. SEBI/MIRSD/Cir/01/2011
dated May 13, 2011 and Clause A(1), A(2) and A(5) as specified in Schedule II read with regulation
7 of the Brokers Regulations, which reads as under:
The relevant portion of SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009 is
provided below:
.......
Running Account Authorization
12. Unless otherwise specifically agreed to by a Client, the settlement of funds/securities shall be
done within 24 hours of the payout. However, a client may specifically authorize the stock broker
to maintain a running account subject to the following conditions:
a. ............
b. ............
c. ...........
d. ...........
e. The actual settlement of funds and securities shall be done by the broker, at least once in a
calendar quarter or month, depending on the preference of the client. While settling the account,
the broker shall send to the client a statement of accounts containing an extract from the client
ledger for funds and an extract from the register of securities displaying all
receipts/deliveries of funds/securities. The statement shall also explain the retention of
funds/securities and the details of the pledge, if any.
.............
The relevant portion of SEBI Circular No. SEBI/MIRSD/Cir/01/2011 dated May 13, 2011 is
provided below:
1. This is with reference to SEBI circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009
wherein the stock brokers were directed to comply with the requirements as annexed to the
aforesaid circular.
2. Subsequent to the issuance of the aforesaid circular, SEBI has received representations from
market participants expressing difficulties in implementation of the requirements pertaining to
_____________________________________________________________________________
Page 6 of 23
renewal of Running Account Authorization once in a year as prescribed in clause 12(a) read with
clause 12(c) of the Annexure to the aforesaid circular.
3. Hence, in consultation with the major stock exchanges, the above requirements have now
been modified as follows:
i. Clause 12(a) of the aforesaid annexure pertaining to renewal of authorization stands
deleted.
ii. Clause 12(c) of the aforesaid annexure is revised and shall read, as under:
The authorization shall be dated and shall contain a clause that the clients may revoke the
authorization at any time. The stock brokers, while sending periodical statement of accounts to
the clients, shall mention therein that their running account authorization would continue until it
is revoked by the clients.
The above modifications would simplify and rationalize the requirements while protecting the
interest of investors.
4. The Stock Exchanges are directed to bring the provisions of this circular to the notice of the
stock brokers and also disseminate the same on their websites. The stock exchanges
shall also make necessary amendments to the relevant bye-laws, rules and regulations for the
implementation of the above decision.
........
Clause A(1), A(2), and A(5) of the Code of Conduct specified under Schedule II read with
Regulation 7 of the SEBI (Stock Brokers & Sub brokers) Regulations, 1992, read as under:
Stock brokers to abide by Code of Conduct.
7. The stock broker holding a certificate shall at all times abide by the Code of Conduct as
specified in 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
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.
(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.
_____________________________________________________________________________
Page 7 of 23
12
We will now examine the allegations against the Noticee. I note that the Inspection findings are
based on analysis of books of accounts, records and other documents maintained in the manner
specified by the provisions of the Securities Contracts (Regulation) Act, 1956, SEBI Act, the Rules,
the Regulations and the Circulars made thereunder.
A.
Non-inclusion of new client accounts in the mandatory quarterly settlement of client accounts
on grounds of non completion of one full quarterly period of trading:
i. Inspection observed that while carrying out the mandatory quarterly settlement of clients
accounts, new clients who had joined in the currency of the quarter for which settlement was
being done, were excluded from the settlement, irrespective of their date of joining in the
month and irrespective of the quantum of credit balances available in their account as on date
of the mandatory settlement. The details of number of new accounts excluded by the Noticee
from the mandatory quarterly settlement every quarter for FY 2012-13 and 2013-14 (till the
date of inspection) as per the aforesaid practice is as given below:
Table 1 : Mandatorily settled and non settled cases of new clients joined in a quarter
Qtr ended
No. of
new
clients
regd.
No. of
new
clients
traded
No. of
new
client
accounts
settled
Amount
settled
(Rs.)
Jun 30,2012
768
400
Sep 30,2012
640
304
Dec 31,2012
733
346
Mar 31,2013
556
Jun 30,2013
No. of new
accounts not
settled in the
quarter
Above
Below
Rs. 1000 Rs. 1000
Amount retained in
respect of such client
accounts
(in Rs.)
Above
Below Rs.
Rs. 1000
1000
69
101
11,18,321
24,406
58
84
10,14,592
15438
71
100
10,05,218
26,592
282
42
93
4,20,100
24,001
565
305
24
91
2,17,461
22,287
Sep 30,2013
498
269
30
69
6,82,234
15,319
Dec 31,2013
546
250
58
165
10,54,498
39,102
_____________________________________________________________________________
Page 8 of 23
ii. Vis-a-vis the same, the Noticee vide letter dated February 24, 2014 had inter alia informed SEBI
that as per the system that was in place, the Noticee did not settle the accounts of new clients
who had opened their accounts in the particular quarter, however, from March 01, 2014
onwards they would be settling all clients, except only those who have opened accounts one
week prior to settlement dates.
iii. From the same, Inspection had alleged that the Noticee by not including in the mandatory
quarterly settlement, the new clients who had joined in the last month of the quarter, had
contravened the provisions of SEBI Circular dated December 03, 2009, and thereby violated the
provisions of Clause A(5) of the Brokers Regulations. Inspection had further observed that the
number of such new accounts excluded from the mandatory quarterly settlement of client
accounts on grounds of non completion of one full quarterly period of trading was almost 50%
of the number of new clients who had been registered in the quarter and had traded in the
quarter.
iv. I find that in the submissions made pursuant to the issue of SCN, the Noticee has stated that
they had made the necessary modifications in their systems from 01 March, 2014 to consider all
client accounts, including the newly opened accounts while settling the accounts on
monthly/quarterly basis. However, I note that NSE vide circular No. 144/ 2012 dated September
07, 2012 based on representations and queries received from its members, had put out the
Frequently Asked Questions (hereinafter referred to as FAQ) on Actual Settlement of Funds
and Securities. I find that at para (3) of the said FAQ, it was inter alia clarified that in case of new
clients who are registered at the end of a month / quarter, no settlement would be required to
be done in the first month / quarter respectively in which the client is registered. Stock brokers
were advised to take note of the FAQ and comply accordingly.
v. Hence referring to table (1) at para 6 (A) (1) of the SCN, the Noticee was advised vide email
dated December 21, 2015 to provide details of clients, if any, who were registered in the last
month of the quarter and whose accounts were not settled in that quarter. Vide return email of
the same date, the Noticee provided the same data that was observed by Inspection and
included in the SCN, and which was also submitted by the Noticee earlier vide its letter dated
_____________________________________________________________________________
Page 9 of 23
November 20, 2014. The said data was with respect to new client accounts registered in the
quarter and not settled.
vi. Hence vide another email dated December 21, 2015, it was explained to the Noticee that the
details sought were of the number of new accounts registered in last month of the quarter and
which were not settled along with the corresponding unsettled amount, and not the number of
new accounts registered during quarter and not settled, which was already a part of the SCN.
Vide return email dated December 21, 2015, the Noticee provided quarter end-wise the number
of new accounts registered in the last month of the quarter that were not settled along with the
corresponding amount that was retained in respect of such client accounts. The details so
provided are as hereunder:
Qtr ended
No. of
new
clients
regd.
No. of
new
clients
traded
No. of new accounts

registered in the last month
of the respective quarter and
not settled in the quarter
Above
Below
Rs. 1000
Rs. 1000
Amount retained in
respect of such client
accounts
(in Rs.)
Above
Below
Rs. 1000
Rs. 1000
Jun 30,2012
768
400
16
12
3,51,974.46
3,943.94
Sep 30,2012
640
304
68,918.77
2,466.08
Dec 31,2012
733
346
18
21
3,20,434.38
4,649.15
Mar 31,2013
556
282
12
10
1,05,385.36
2,264.42
Jun 30,2013
565
305
11
66,959.48
2,239.71
Sep 30,2013
498
269
47,243.42
1,452.53
Dec 31,2013
546
250
12
39
3,81,150.98
8,917.75
vii. In view of SEBI Circular dated December 03, 2009 read with the aforesaid clarification by NSE, I
find that the allegation against the Noticee of not carrying out the mandatory quarterly
settlement in respect of new clients who had joined at the end of the respective quarter and
for which settlement was not done, as brought out above, does not stand. However, in respect
of the remaining new clients whose accounts were not settled as at the end of the quarter, the
_____________________________________________________________________________
Page 10 of 23
Noticee has admittedly not complied with SEBI circular dated December 03, 2009 and circular
dated May 13, 2011 with respect to running account settlement. Further, the Noticee by
violating SEBI circular dated December 03, 2009 and circular dated May 13, 2011 in respect of
such new client accounts have also violated the provisions of clauses A(1), A(2) and A(5) as
specified in Schedule II read with regulation 7 of Broker Regulations.
B.
Non-inclusion in the mandatory settlement of accounts, those client accounts who had
received request pay-out in the quarter:
i. Inspection observed that the Noticee apart from making the mandatory quarterly settlement of
accounts to its clients, also released pay-outs to its clients either in full or in part as requested by
the clients, as and when requests were received from the clients for such payments, as part of
their normal clientele transactions. In such cases, Inspection observed that the pay-outs were
released after taking into account the dues, if any, of the client to the Noticee. Further, while
making such pay-outs, Inspection observed that the Noticee invariably did not provide any
statement of account of funds and securities to the clients, whereas the same was being done in
case of mandatory quarterly settlement. It was also observed that in case of such pay-outs that
were made on request, only the funds were released, but, the securities held with the Noticee
were not released simultaneously, until and unless specifically requested for. Thus, it was noted
that the Noticee was not issuing statement of account to the clients as mandated vide circular
dated December 03, 2009 at the time of request pay-outs. It was also noted that the Noticee
was settling only the funds, but, not the securities at the time of such request pay-outs.
However, despite the same, the Noticee was excluding such clients who had already received
request pay-outs in that particular quarter, from the mandatory settlement of client accounts
being carried out for that quarter. The following are the details of the number of clients
accounts excluded by the Noticee every quarter during the financial years 2012-13 and 2013-14
(till end of December 2013) by following the aforesaid practice:
_____________________________________________________________________________
Page 11 of 23
Table 2: Clients accounts not included for mandatory settlement on grounds of receiving full pay-out in a Quarter on requests:
Quarter
Ended
No. of
clients
traded
No. of
clients
request
settled
7,003
No. of
clients
requested
for
voluntary
pay-out
during the
quarter
130
Jun 30, 2012
Amount
settled as
voluntary
pay-out
(in Rs.)
No. of Voluntary pay-out accounts excluded

from mandatory settlement of accounts for
the quarter
No. of
Amt
No. of
Amt.
accts
settled accts not retained
settled
settled
***
130
1,22,28,431
Nil
Nil
130
***
Sep 30, 2012
6,353
83
83
58,21,659
Nil
Nil
83
***
Dec 31, 2012
6,701
124
124
74,79,794
Nil
Nil
124
***
Mar 31, 2013
6,655
69
69
77,65,573
Nil
Nil
69
***
Jun 30, 2013
5,593
76
76
1,01,04,486
Nil
Nil
76
***
Sep 30, 2013
5,066
39
39
22,19,662
Nil
Nil
39
***
Dec 31, 2013
5,078
31
31
18,17,472
Nil
Nil
31
***
*** The client accounts are settled in batches everyday branch-wise. Therefore, the amount retained at the end of the quarter may not give the true
and correct picture about the amount retained in respect of these clients only, as the same would also include clients whose credit balance have
been retained because of being new clients, credit balance being less than Rs.1000/- etc. and therefore, the same have not been shown in the last
column above. However, the fact remains that the policy of the Noticee is not to settle the clients accounts mandatorily in a quarter, where the
clients have received a request pay out.
ii. However, the following are some of such individual instances observed during inspection:
Quarter ended
Client code
Date of voluntary payout
Ledger balance at the

end of the quarter
in (Rs) Cr. / ( Dr. )
Jun 30,2012
KL1210118
26/06/2012
0.00
KL1050123
29/06/2012
26.10
KL1060152
15/06/2012
0.00
KL1060021
21/04/2012
425.03
KL1350078
28/06/2012
61.04
_____________________________________________________________________________
Page 12 of 23
Quarter ended
Client code

end of the quarter
in (Rs) Cr. / ( Dr. )
Sep 30,2012
Dec 31,2012
Mar 31,2013
Jun 30, 2013
KL1070150
20/07/2012
0.03
KL3390010
18/08/2012
25.28
KL1370071
25/09/2012
258.51
KL1150282
03/08/2012
0.45
KL1380087
08/08/2012
(84.27)
KL1070528
20/11/2012
(84.27)
KL1280064
20/10/2012
(83.62)
KL3690013
10/12/2012
0.00
KL1150009
22/12/2012
(0.56)
KL1390136
09/11/2012
(80.90)
KL1070079
09/03/2013
(96.52)
KL3550030
20/03/2013
0.00
KL3510090
24/01/2013
0.00
KL1110206
18/01/2013
(86.08)
KL3140071
09/01/2013
1,226.99
KL3160006
13/06/2013
0.00
KL1670081
10/05/2013
586.34
KL1150122
04/05/2013
(84.27)
KL1070290
11/06/2013
98.45
KL1090321
24/06/2013
0.69
_____________________________________________________________________________
Page 13 of 23
Quarter ended
Client code

end of the quarter
in (Rs) Cr. / ( Dr. )
Sep 30,2013
Dec 31,2013
IT7000148
28/08/2013
0.00
KL1190140
20/08/2013
99.70
KL1010142
14/08/2013
0.00
KL1080508
27/08/2013
689.17
KL1070857
30/08/2013
91.15
KL3090115
21/12/2013
0.79
KL1430139
14/12/2013
500.38
KL3510149
01/11/2013
44.68
KL1150477
16/12/2013
425.31
KL3610115
13/11/2013
148.80
Note: The instances cited above are only illustrative and not exhaustive and further the same is shown only to highlight that the Noticee as a policy does not
mandatorily settle a clients account in a quarter, if the client had received a voluntary pay out and not that the aforesaid accounts were not settled because either
the accounts had a zero balance or debit balance.
iii. Vis-a-vis the same, the Noticee vide letter dated February 24, 2014 had inter alia informed SEBI
that as per the system that was in place, the Noticee did not again settle in the quarterly
settlement process, those accounts in respect of whom full payouts were made by it based on
voluntary requests. However, Noticee vide the said letter had assured SEBI that from March 01,
2014, it would ensure that when a normal full payout is given to the clients, they are provided
with the statement of account of fund and securities.
iv. Inspection had noted that the Noticee had categorically admitted to non-compliance of the
provision of circular dated December 03, 2009, without even furnishing any reason for such nonsettlement. From the same, Inspection had alleged that the Noticee had contravened the
provisions of Clause 12 (e) of Annexure to SEBI Circular dated December 03, 2009, and thereby
violated the provisions of Clause A(5) of the Brokers Regulations.
_____________________________________________________________________________
Page 14 of 23
v. I find that in the submissions made pursuant to the issue of SCN, the Noticee has stated that
that from March 01, 2014 onwards a statement of account of Funds and Securities is provided
to the clients whenever a normal full payout is given to them.
vi. From the above, I note that the request pay outs that were made by the Noticee during the
Inspection period could have been considered as compliance with mandatory quarterly
settlement, provided the Noticee had sent a statement of account to the clients in compliance
with circular dated December 03, 2009. In the absence of issuance of such statement at the time
of the request settlement, such request pay outs made by the Noticee cannot be considered as
mandatory quarterly settlement, nor, can it be considered in lieu of such mandatory quarterly
settlement. I find that the credit balances as at the end of the quarter as observed by Inspection
in few instances of voluntary pay out cases brought out above are negligible. However, the fact
remains that in respect of client accounts brought out at Table (2) above which were not
settled at the end of the quarter in view of voluntary request pay outs made, the Noticee has
not complied with circular dated December 03, 2009 with respect to running account
settlement. Further, the Noticee by violating circular dated December 03, 2009 and circular
dated May 13, 2011 had thereby also violated the provisions of clauses A(1), A(2) and A(5) as
C.
Non realization, non presentation and reversal of pay out cheques issued:
i. Inspection observed that mandatory pay outs were done by the Noticee only by means of
cheques, while the normal pay-outs were being done by any of the modes viz. cheques, RTGS
and NEFT transfers. Further, it was observed that as on date of inspection, around 128 cheques
worth over Rs.5.23 lacs whose validity period of three months had lapsed long ago and
remained unrealized had not been reversed by the Noticee. The following are some such
instances as observed by Inspection:
_____________________________________________________________________________
Page 15 of 23
S.No Issued Date

Bank
1
4/23/2012 HDFC Bank
HDFC Bank
2
4/23/2012
HDFC Bank
3
5/2/2012
HDFC Bank
4
5/2/2012
HDFC Bank
5
5/2/2012
6
5/3/2012
The Federal Bank Ltd
7
5/16/2012 The Federal Bank Ltd
8
9
10 5/16/2012 The Federal Bank Ltd
ii.
Account No.
00200340001487
Client Code
KL3170103
Chq No.
13981
Amount (Rs.)
4,351.38
00200340001487
KL3170082
13985
1,726.67
00200340001487
KL1020303
14171
2,548.72
00200340001487
KL1020259
14173
1,401.05
00200340001487
14210200004702
14210200004702
14210200004702
14210200004702
14210200004702
KL1020251
KL3320099
KL3450041
KL3450039
KL3620013
KL3620008
14176
126132
85594
85595
126160
126159
1,214.3
900.00
3,346.56
1,893.15
1,815.29
3,116.87
It was observed from the above that even though the cheques were issued way back in the year
2012 and had lapsed, the same had not been reversed and reissued to the clients by the
Noticee. In the matter, the Noticee informed the Inspection team that they had written several
letters to the clients for calling back the cheques, however, they did not receive any response.
Further that if stop payment instructions were to be issued without recalling the cheques, for
each cheque the Noticee would be required to pay the bank charges, adding to the cost to the
company, hence, the same was not done.
iii.
Also, in respect of the following instances it was observed as on date of Inspection that the
mandatory pay out cheques issued to the clients had not been realized even after one month of
issuance:
S.No
Issued Date
Bank
1
2
3
4
5
6
7
8
9
10
10/23/2013
10/29/2013
11/1/2013
11/12/2013
12/5/2013
12/16/2013
12/17/2013
12/19/2013
12/19/2013
12/19/2013

HDFC Bank
HDFC Bank
HDFC Bank
HDFC Bank
HDFC Bank
HDFC Bank
HDFC Bank
HDFC Bank
Account No.
14210200004702
14210200004702
00200340001487
00200340001487
00200340001487
00200340001487
00200340001487
00200340001487
00200340001487
00200340001487
Client Code
Chq No.
Amount (Rs.)
KL3720008
KL1380017
KL3630020
KL3000196
KL1210050
SI5550674
KL1080263
KL1300140
KL1300139
KL1300075
175391
175418
20610
20635
8004
20731
8027
20781
20780
20777
1,092.74
3,497.00
1,867.07
25,800
9,400
1,999.99
116.6
7,824.23
9,500.88
22,697.57
_____________________________________________________________________________
Page 16 of 23
S.No
Issued Date
Bank
11
12
13
12/19/2013 HDFC Bank

Account No.
00200340001487
00200340001487
00200340001487
Client Code
Chq No.
KL1300038
KL1300131
KL3330116
20775
20774
20761
Amount (Rs.)
38,680.41
1,31,263.4
16,428.22
iv. It was, therefore, alleged that quarterly settlement of running accounts cannot be said to have
been done in respect of those client accounts, for which lapsed cheques were not reissued.
v.
Further, Inspection also observed that in many of the cases lapsed cheques were reversed and
adjusted against debit balances that had arisen in the respective client accounts, subsequent to
issuance of cheques that had lapsed. The following are some such instances observed for the FY
2013-14:
Qtly
2013
No. Of No. Of
lapsed clients
cheques
Total
amount
lapsed
(Rs.)
No. of
cheques
reissued
No. Of
clients
to
whom
reissued
Amount
reissued
(Rs.)
No. of
Amount
cases
credited
credited
back to
back to ledger a/c.
ledger
by book
entry (Rs.)
Jun
30
19
19
8,50,428
19
8,50,428
Sep
30
36
36
4,91,510
1,34,691
33
356,819
Dec
31
26
26
6,81,547
8,550
24
672,997
Remarks
Reissue of
cheques
was
not
processed
due
to
debit
balances
that
had
arisen
in
the client
accounts
subsequent
to issue of
lapsed
cheques
vi. Vis-a-vis the above, the Noticee vide reply dated February 24, 2014 had inter alia informed SEBI
that actions had been initiated to sort out the issue of lapsed cheques or cheques which
remained unclear for long periods, and to re-issue of the same at the earliest. It was also
pointed out that there were some cases where cheques were delivered, but, the client had not
_____________________________________________________________________________
Page 17 of 23
presented for clearing. The Noticee vide the said letter sent to SEBI had further stated that from
March 01, 2014 they would closely monitor the realization of compulsory payout cheques, and if
there arise any such instances of non realization within three months, they would transfer the
same through electronic mode.
vii. I find that in the submissions made pursuant to SCN, the Noticee has stated that subsequent to
inspection they had introduced a monitory system to reverse the stale cheques every four
months. However, I find that the Noticee had admitted to SEBI that the reason behind releasing
the mandatory pay out only by way of cheques was for rolling back the quarterly settlement
amount on business perspective. This clearly indicates that the intention of the Noticee was only
to carry out a paper compliance i.e. to create a record for compliance, but, not compliance in
its true spirit. Though the circular dated December 03, 2009 does not mention the manner in
which the mandatory pay outs are to be released, it was the duty of the Noticee to adopt a
reasonable means by which the compliance of the circular provisions could be achieved. I find
that the Noticee has admitted to the lapse on their part and had stated that from March 01,
2014 they introduced a monitory system to reverse the stale cheques. Thus, I conclude that the
Noticee had not actually settled 128 client accounts having value of Rs. 5.23 lacs and thereby
contravened the provisions of SEBI circular dated December 03, 2009, depriving the clients of
their legitimate dues. Also, reversing the lapsed cheques and adjusting against debit balances
subsequently arising in the client accounts cannot be considered as compliance with circular
dated December 03, 2009. The Noticee by violating circular dated December 03, 2009 and
circular dated May 13, 2011 had thereby also violated the provisions of clauses A(1), A(2) and
A(5) as specified in Schedule II read with regulation 7 of Broker Regulations.
D.
Statement of accounts issued to clients not in compliance with Clause 12(e) of SEBI Circular
dated December 03, 2009:
i. In terms of Clause 12(e) of SEBI Circular dated December 03, 2009, every stock broker while
settling the account is required to send to the client a statement of accounts containing an
extract from the client ledger for funds and an extract from the register of securities displaying
_____________________________________________________________________________
Page 18 of 23
all receipts/deliveries of funds/securities. Also as per the circular, the retention of

funds/securities and the details of the pledge, if any, are required to be explained.
ii. Inspection observed that Noticee had retained the credit balances of the clients to the extent of
Rs.1000/- i.e. in case of clients where fund balances were Rs.1000/- and less at the time of
quarterly settlement. Inspection also observed that the Noticee had retained the securities of
the clients whoever had fund dues to it, or, where the clients had requested it to retain the
scrips towards margins, pledge etc. However, on perusal of the statement of accounts issued to
the clients, it was observed that the statements contained only the transaction details of the
client for the quarter for which the settlement was being done. It did not contain the details of
securities of the clients held by the Noticee. It did not also explain the reasons for holding of
certain quantum of funds and also the purpose for which the scrips were withheld, such as on
account of dues of the client to the Noticee, margin purposes, pledge or for any other purposes
etc.
iii. Vis-a-vis the above, the Noticee vide reply dated February 24, 2014 had inter alia informed SEBI
that in future statement of retention of funds and securities would be sent.
iv. I find that in the submissions made pursuant to SCN, the Noticee has stated that they have now
incorporated both funds and securities retained while sending the statement of account along
with compulsory settlement of account. Further that they have also intimated their back office
vendor regarding some more modifications in the retention statement, which will be updated in
the next edition of their software.
v. From the same, I find that the Noticee has admitted that it was not including in the statement
sent to the client, the details of securities of the clients held by the Noticee as also not
explaining the reasons for holding of certain quantum of funds/ purpose for which the scrips
were withheld. The Noticee was, thus, not complying with the provisions of clause 12(e) of
SEBI circular No.MIRSD/SE/Cir-19/2009 dated December 03, 2009 and circular dated May 13,
2011. The Noticee by violating circular dated December 03, 2009 and circular dated May 13,
2011 had thereby also violated the provisions of clauses A(1), A(2) and A(5) as specified in
Schedule II read with regulation 7 of Broker Regulations.
_____________________________________________________________________________
Page 19 of 23
13
Thus from all of the above, in the extant matter, I find that that Noticee has admitted to the
violations observed by Inspection team of SEBI. Further as per the submissions made by the
Noticee, it has made efforts and carried out certain modifications subsequent to Inspection to
comply with the provisions of SEBI circular no. MIRSD/SE/Cir-19/2009 dated December 03, 2009
and SEBI circular no. SEBI/MIRSD/Cir/01/2011 dated May 13, 2011. Hence, I conclude that the
Noticee has admittedly violated SEBI Circular dated December 03, 2009 and May 13, 2011, and
thereby violated Clause A(1), A(2) and A(5) as specified in Schedule II read with regulation 7 of the
Brokers Regulations in the matter.
14
The Honble 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.
15
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.
16
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.
_____________________________________________________________________________
Page 20 of 23
17
In the instant case, 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. Further
from the material available on record, it may not be possible to ascertain the exact monetary loss
to the investors on account of default by the Noticee. I, however, find that the Noticee by not
forwarding statements to its clients in compliance with Clause 12(e) of SEBI Circular dated
December 03, 2009, had admittedly violated SEBI Circular dated December 03, 2009 and circular
dated May 13, 2011 with respect to running account settlement in respect of all its clients during
the entire Inspection period comprising of seven quarters i.e. from quarter ended June 30, 2012
till quarter ended December 31, 2013. Besides, the Noticee was neither issuing statements to the
clients in compliance with circular dated December 03, 2009 and circular dated May 13, 2011 at
the time of voluntary request pay outs made, nor carrying out mandatory quarterly settlement at
the end of the quarter in respect of such clients. The Noticee has also admittedly violated SEBI
Circular dated December 03, 2009 and circular dated May 13, 2011 with respect to running
account settlement in respect of new clients who got registered during the currency of the
quarter (other than those who got registered at the end of the quarter). Further, the Noticee by
not reversing and reissuing cheques in lieu of cheques that had lapsed was merely carrying out
paper compliance i.e. to create a record for compliance, but, not compliance in its true spirit.
Also, instances where the Noticee had reversed the lapsed cheques and adjusted such funds
against debit balances subsequently arising in the client accounts, too were not in compliance
with circular dated December 03, 2009. Further, I find that such violations by the Noticee were
repetitive in nature. Thus, the Noticee by violating circular dated December 03, 2009 and circular
dated May 13, 2011 had thereby also violated the provisions of clauses A(1), A(2) and A(5) as
18
I find that Circular for settling all running accounts atleast once in a calendar quarter or month,
depending on the preference of the client was issued on December 03, 2009. As per the aforesaid
circular, stock brokers were required to ensure its full compliance in respect of all clients (existing
as well as new), latest by 31st March 2010, which was later extended to June 30, 2010. From the
same, it becomes apparent that ample time had been provided to the stock brokers to put their
systems in place to ensure compliance.
_____________________________________________________________________________
Page 21 of 23
19
Further, I note that the checks and balances put in place through the said circular are aimed at
creating a conducive environment for investors in the securities market. Compliance with these
norms ensures proper and smooth functioning of the securities market. The intent of running
account settlement was to put in place a system to instill greater transparency and discipline in
dealings between the clients and stock brokers.
20
I, however, find that the Noticee by its own admission had not complied with circular dated
December 03, 2009 and circular dated May 19, 2011 in its true spirit till December 31, 2013 i.e.
three and a half years from the date when the provisions regarding the settlement of running
accounts came into effect.
ORDER
21
After taking into consideration all the facts and circumstances of the case, I impose a penalty of
Rs. 15,00,000/- (Rupees Fifteen Lac only) on the Noticee viz. M/s. Hedge Equities Ltd. under
Section 15HB of the SEBI Act, 1992 for violation of the provisions of SEBI Circular No.
MIRSD/SE/Cir-19/2009 dated December 03, 2009 and No. SEBI/MIRSD/Cir/01/2011 dated May 13,
2011 and the provisions of clauses A(1), A(2) and A(5) of Code of Conduct for stock Brokers
specified under Schedule II read with Regulation 7 of Broker Regulations, which will be
commensurate with the violations committed by the Noticee.
22
Further, the allegation against the Noticee for not carrying out the mandatory quarterly
settlement in respect of new clients who had joined at the end of the quarter for which
settlement was being done does not stand established in the matter.
23
The Noticee shall pay the said amount of penalty by way of demand draft in favour of SEBI Penalties Remittable to Government of India, payable at Mumbai, within 45 days of receipt of
this order. The said demand draft should be forwarded to The Regional Director, Securities and
Exchange Board of India (SEBI), Overseas Towers, 7th Floor, 756 L, Anna Salai, Chennai - 600 002.
_____________________________________________________________________________
Page 22 of 23
24
In terms of rule 6 of the Rules, copies of this order are sent to the Noticee and also to the
Securities and Exchange Board of India.
Date: December 23, 2015

Place: Mumbai
Anita Kenkare
Adjudicating Officer
_____________________________________________________________________________
Page 23 of 23

Adjudication Order in The Matter of M/s Hedge Equities Ltd.

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Adjudication Order in The Matter of M/s Hedge Equities Ltd.

Uploaded by

Copyright:

Available Formats

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

FACTS OF THE CASE

APPOINTMENT OF ADJUDICATING OFFICER

SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING

No. of new accounts

Jun 30, 2012

No. of Voluntary pay-out accounts excluded

Sep 30, 2012

Dec 31, 2012

Mar 31, 2013

Jun 30, 2013

Sep 30, 2013

Dec 31, 2013

Date of voluntary payout

Ledger balance at the

Date of voluntary payout

Ledger balance at the

Jun 30, 2013

Date of voluntary payout

Ledger balance at the

S.No Issued Date

The Federal Bank Ltd

12/19/2013 HDFC Bank

all receipts/deliveries of funds/securities. Also as per the circular, the retention of

Date: December 23, 2015

You might also like