M.S. Sahoo, Member

1.0 Background

1.1 M/s. Sunchan Securities Ltd. (SSL), PAN No. AAFCS8953A, a company incorporated under the provisions of the Companies Act, 1956 having its office at 201, Hiren Industrial Estate, Mogul Lane, Mahim (W), Mumbai - 400 016 is registered with SEBI as a broker of Bombay Stock Exchange Ltd. (BSE) (SEBI Registration No. INB 010896539), National Stock Exchange of India Ltd. (NSE) (SEBI Registration No. INB 230896533) and OTC Exchange of India (OTCEI) (SEBI Registration No. INB 200896539). Mr. Sunil Mansinghani (PAN No. - AARPM7113P), Ms. Kanchan Mansinghani (PAN No. - AAQPM1032Q) and Mr. Ajay Janardan Kotwal (PAN No. - AANPK8226F) are the directors of SSL. Mr. Riyaz Ismail Shaikh (PAN No. - AAVPS2375K) is the compliance officer of SSL. SSL is also registered as depository participant (DP) (SEBI registration No. IN-DP-CDSL-284-05) with Central Depository Services (India) Ltd. (CDSL).

1.2 SEBI has received a large number of complaints from investors against SSL during December 2008 - January 2009. They have alleged that SSL has not delivered funds and securities due to them. SEBI has forwarded these complaints to NSE and BSE for taking up the matter with SSL for redressal.

1.3 SEBI, vide letter dated January 22, 2009, addressed to NSE and BSE and telephonic communications with them prior to that, advised them to carry out a special purpose inspection of SSL and submit a factual report at the earliest. SEBI also advised them to take necessary prompt actions in the matter to redress the complaints of the investors and to consider initiation of appropriate remedial measures in view of possibility of the default by SSL. Vide another letter, NSE and BSE were advised to take appropriate action to safeguard the interests of investors.

1.4 NSE has forwarded preliminary findings of a limited inspection of SSL conducted during November - December 2008. BSE has also forwarded preliminary findings of the limited inspection of SSL conducted on January 22, 2009.

2.0 Preliminary findings of limited inspection conducted by NSE The main findings of the limited inspection of SSL conducted by NSE are as under:

2.1 Misuse of clients securities

SSL pledged securities with its clearing member M/s. SMC Global Securities Ltd. (SMC) and used the exposure arising from such pledge for proprietary (own and its directors) trading. As it failed to meet the commitment, SMC liquidated the pledged securities worth Rs. 14.54 crore on October 21, 2008 and worth Rs. 41.07 lakh on November 10, 2008. This included securities worth Rs. 14.23 crore belonging to the clients of SSL.

SSL failed to deliver securities worth Rs. 5.80 crore due to its clients. The same are not available in the demat accounts of SSL.

SSL, vide letter dated January 7, 2009, has stated that it had understanding with the clients that whenever clients did not want trades to be initiated in their trading accounts, trades would be executed on their behalf in its pro-account and that the profits would be shared between SSL and the clients in the agreed ratio.

2.2 Misuse of clients funds As on December 03, 2008, the amount due to clients was approximately Rs. 9.52 crore. This amount was not available either in bank accounts of clients maintained by SSL or with the Exchange or with the Clearing Member.

2.3 Non-collection of margins SSL did not collect requisite margins from clients. However, it reported that it had collected the same. Details on 9 sample days are as under:

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Date Amount of wrong Reporting

(Rs.)

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21-Oct-08 98076758

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3-Nov-08 29268332

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4-Nov-08 26050953

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5-Nov-08 23313131

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6-Nov-08 20056478

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7-Nov-08 7982607

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10-Nov-08 5740384

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11-Nov-08 2218490

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12-Nov-08 662661

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Total 21,33,69,794

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2.4 Use of more than one client code SSL used more than one client code for own trading and trading by its directors. Details of said multiple client codes are given as under:

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Name of the Client Segment Client Codes Used

Sunchan Securities Ltd. NSE F&O BNS001, BNS151,

BNS102, BNS155,

BNS164, BNS165

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Ms. Kanchan

Mansinghani NSE F&O BNK001, BNK029

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Mr. Sunil Mansinghani NSE F&O BNS117, BNS053

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2.5 Large debit balances in clients accounts As on December 03, 2008, the clients had an aggregate debit balance of Rs. 36,10,62,259. SSL, vide its letter dated January 07, 2009 to NSE, submitted age-wise balance of debits of clients. This stood at Rs. 81.49 crore of which more than 50% of the amount was outstanding for 90 days or more.

2.6 Non Cooperation with Inspection Team

SSL did not provide the required details and documents which were demanded during the inspection. Though it was granted 7 days to submit the same, it did not do so.

SSL did not co-operate with the inspection team.

3.0 Preliminary findings of limited inspection conducted by BSE The main findings of the limited inspection of SSL conducted by BSE are as under:

3.1 Misuse of client funds and securities

SSL pledged securities worth Rs. 9.14 crore belonging to clients, with its clearing member, SMC and used the exposure arising from such pledge for proprietary (own and its directors) trading as well as trades of other clients on NSE.

SSL utilized securities and funds of some clients for meeting pay-in obligations of SSL/other clients.

3.2 Other requirements

SSL did not send statements of accounts of funds and securities to clients within prescribed time limit.

SSL did not issue statements of margin/collateral utilization to clients.

SSL allowed over leverage to its clients.

SSL issued fake contract notes.

4.0 Complaints/Claims against SSL

4.1 SEBI, NSE and BSE have received a large number of complaints from investors as indicated below:

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Received by No. of complaints

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SEBI 161

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NSE 98

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BSE 77

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4.2 As on January 20, 2009, 98 investor complaints with claims for an amount of Rs. 1,83,14,451 and 9 arbitration cases with claims for an amount of Rs. 9,76,07,518 (including SMC Arbitration case claiming Rs. 8.16 crore) are pending against SSL at NSE. As on January 23, 2009, 77 investor complaints with claims for an amount of Rs. 2,88,48,662 and 19 arbitration cases with claims for an amount of Rs. 1,56,57,804 are pending against SSL at BSE. 4.3 A summary of claims against/dues from SSL as on January 27, 2009 is as under:

(Rs. lakh)

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Dues to NSE BSE OTCEI

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Clients 343.21 445.05 0.00

(Investor complaints and (Investor complaints and

arbitration claims as on arbitration claims as on

20/01/2009) 23/01/2009)

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Clearing Member 816.00

(As per arbitration claim 0.00 0.00

filed)

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Clearing House 2.95 0.10

(As on 27/01/2009) (As on 31/12/2008)

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0.15

Exchange 8.48 0.00 (Annual

(As on 27/01/2009) Fees)



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Total 1170.64 445.15 0.15

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(As on date information has been received only about the above claims/dues. Possibility of further claims/dues cannot be ruled out.)

5.0 Violations

Upon perusal of the aforesaid facts contained in the reports submitted by NSE and BSE, it prima facie appears that SSL has violated/not complied with various provisions of law.

5.1 Misuse of clients funds/securities As per Clause A(4) of Code of Conduct for stock brokers prescribed in Schedule II read with Regulation 7 of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (Broker Regulations), a broker shall not indulge in any act detrimental to the investors interest. As per SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993, a broker shall keep the money of the clients and own money in separate accounts. It also cannot use clients money to take proprietary positions. Further, as per Clause 6 of model agreement between stock broker and clients prescribed under SEBI Circular No. MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, the broker shall keep the money/securities deposited by the clients in a separate account, distinct from his/its own account or of any other client and shall not use for himself/itself or for any other client or for any purpose other than the purposes mentioned in SEBI Rules and Regulations /circulars/ guidelines/Exchanges Rules/Regulations/Bye-laws and circulars. In the instant case, SSL has misused the clients securities and funds for its own obligations and also the obligations of other clients. Thus, SSL has violated the Circulars dated November 18, 1993 and August 26, 2004 and also Clause A (4) of Code of conduct for stock brokers specified in the Schedule II read with Regulation 7 of the Broker Regulations.

5.2 Failure to deliver securities/funds to clients As per Clause B (1) of Code of Conduct for Stock brokers prescribed in Schedule II read with Regulation 7 of the Broker Regulations, a stock broker shall make prompt payment in respect of securities sold and arrange for prompt delivery of securities purchased by clients. Further, as per SEBI Circular No. SMD/POLICY/Cir-06/03 dated February 12, 2003, a broker shall make payment for securities sold and/or deliver the securities purchased for the clients within twenty four hours of the pay out. SSL, by its failure to make payment and / or deliver securities to clients, violated Clause B (1) of Code of Conduct for Stock brokers prescribed in Schedule II read with Regulation 7 of the Broker Regulations and the Circular dated February 12, 2003.

5.3 Non-maintenance of records As per Regulation 17 (1) of Broker Regulations, a broker shall maintain proper books and records in respect of its transactions. Further, as per SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993, a broker shall keep such books of accounts as are necessary. By not producing proper records and accounts to the NSE inspection team in respect of the funds and securities, it appears that SSL has not maintained the books and records properly and thereby violated Regulation 17 (1) of Broker Regulations and the Circular dated November 18, 1993.

5.4 Failure to redress grievances As per Regulation 6A (1) (e) of Broker Regulations, a broker shall take adequate steps for redressal of grievances of the investors within one month of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received from such investors. SSL, by not redressing large number of investor grievances, violated the conditions of grant of certificate of registration as a stock broker as enunciated in Regulation 6A (1) (e) of Broker Regulations.

5.5 Non-co-operation in inspection As per Regulation 21(1) of the Broker Regulations, it shall be the duty of the broker and its directors/officials to produce such books and records as desired by the inspecting authority and to co-operate with him. SSL, by not producing the relevant records, documents, books of accounts etc, and refusing to explain the matters, displayed utter non co-operation and has thereby violated Regulation 21(1) of the Broker Regulations.

5.6 Misstatements As per Clause C (6) of Code of Conduct for Stock Brokers as prescribed in Schedule II read with Regulation 7 of the Broker Regulations, the broker shall not furnish any false or misleading statement to the regulatory authorities, etc. SSL, by wrongly reporting collection of requisite margins, has given false and misleading statements and thereby violated Clause C (6) of Code of Conduct for Stock Brokers as prescribed in Schedule II read with Regulation 7 of the Broker Regulations.

5.7 Multiple Codes As per SEBI Circular No. SMDRP/Policy/CIR-39/2001 dated July 18, 2001, a stock broker shall use unique client code for all clients. SSL, by using multiple client codes, violated the said circular dated July 18, 2001.

5.8 Disproportionate exposure to clients As per Clause A (1) of Code of Conduct for Stock brokers prescribed in Schedule II read with Regulation 7 of Broker Regulations, a stock broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. SSL, by allowing disproportionate exposure to certain clients, has not followed the tenets of integrity and fairness and has thereby violated Clause A (1) of Code of Conduct for Stock brokers prescribed in Schedule II read with Regulation 7 of Broker Regulations.

6.0 ORDER

6.1 I am of the view that the above conduct of SSL is detrimental to the safety and integrity of the securities markets and interests of investors. In order to prevent further harm to the investors and the securities market, it is necessary to issue appropriate preventive exparte directions immediately against SSL, its Directors and Compliance Officer. After taking note of deactivation of SSLs trading terminals by NSE, in exercise of the powers conferred upon me under Section 19, Sections 11(4) and 11B of the SEBI Act, 1992 read with Regulation 35 of the SEBI (Intermediaries) Regulations, 2008, pending inquiry and passing final order, I hereby issue the following directions by way of an ad interim ex-parte order:

a) That the broker M/s. Sunchan Securities Limited, its directors viz. Mr. Sunil Mansinghani, Mrs. Kanchan Mansinghani, and Mr. Ajay Janardan Kotwal and its compliance officer Mr. Riyaz Ismail Shaikh shall not directly or indirectly buy, sell or deal in securities in any manner whatsoever, either for themselves or for their clients.

b) That the depositories, National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CDSL) shall not give effect to any debit instruction in demat accounts of the entities mentioned in Para (a) above.

c) That the Stock Exchanges viz. BSE, NSE and OTCEI and their clearing houses/clearing corporations viz. NSCCL, BOI Shareholding Limited shall not release any funds or securities to the entities mentioned in Para (a) above.

d) That the Stock Exchanges viz. BSE, NSE and OTCEI and their clearing houses/clearing corporations viz. NSCCL, BOI Shareholding Limited shall secure all assets, including realization of the bank guarantees, if any, as per the terms and conditions thereof, of the entities mentioned in Para (a) above

e) CDSL and NSDL shall not act upon debit instructions given by entities as mentioned at Para (a) above on the authority of power of attorney obtained by them from any beneficial owner.

6.2 This order shall not affect M/s. Sunchan Securities Limited acting as Depository Participant of CDSL in respect of transactions authorized through specific written instructions (not under power of attorney) of beneficial owners.

6.3 Further, this order shall be treated as show cause notice (SCN). The entities mentioned at Para 6.1(a) may show cause, within 15 days from the date of this order, as to why

a. the directions passed in this order should not be continued; and

b. other appropriate directions, including debarment from association with any listed company or any intermediary, in any manner should not be issued.

6.4 If the entities mentioned at Para 6.1(a) so desire, they may seek an opportunity of personal hearing at Securities and Exchange Board of India, Plot No. C4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051 on a date and at a time to be fixed on a specific request, to be received in this behalf from them within 15 days from the date of this order.

7.0 All the above directions shall take effect immediately and shall be in force until further orders.

8.0 A copy of this Order shall be served on NSE, BSE, OTCEI, NSCCL, NSDL, BOI Shareholding Ltd. and CDSL for appropriate action.