Market regulator Securities and Exchange Board of India (SEBI) imposed a penalty of Rs20 lakh on Pantomath Stock Brokers Pvt Ltd (now known as Pentagon Stock Brokers Pvt Ltd) for deliberate disregard of its obligations towards its clients, while putting in jeopardy the interests of lakhs of investors. It is the same brokerage whose managing director (MD) was arrested last year by the economic offences wing (EOW) of Mumbai police in a fraud case of about Rs40 crore
. But more about it later.
In an order passed in June 2022
, Suresh B Menon, adjudicating officer (AO) of SEBI says, "At the cost of repetition, the observations findings as regards mis-utilisation of clients' funds or securities and non-settlement of funds and securities of clients, unauthorised pledging, discrepancies in the client registration process (know-your-customer -KYC and KYC registration agency -KRA process) and in-correct reporting of data to the stock exchanges as found in the instant matter, certainly deserve imposition of penalty on the noticee (Pantomath Stock Brokers)."
During the hearing, Pantomath Stock Brokers contended that the violations had taken place at the time of the previous management. However, the AO rejected it by saying it was 'baseless and without any merit' and "the overall conduct of the noticee during the inspection period shows the failure on the part of the noticee."
In September last year, the EOW arrested Mahavir Toshniwal, the then MD of Pantomath Stock Brokers, in a fraud case of about Rs40 crore. Madhu Lunawat, co-founder and director of Pentagon Stock Brokers, had filed the complaint with EOW.
After the arrest of Mr Toshniwal, Ms Lunawat took over as director of the brokerage. On 29 September 2021, she submitted a reply sharing the developments after the arrest of Mr Toshniwal. She also informed SEBI about various measures and steps the new management took to ensure proper functioning of its stock broking activities and the overall conduct of its business.
Mr Menon, the AO of SEBI, observed that "during the inspection period, the total control and management of the business operations of the Noticee was under Mr Toshniwal along with Deepa Toshniwal, who was arrested by the EOW and were the main perpetrators of the fraud as alleged by the EOW. Therefore, I note that the violations committed by the noticee during the inspection period have a probability of intent under the then management of Mr Toshniwal."
"At the same time, one cannot lose sight of the fact that the violations committed by the noticee during the relevant inspection period has had a serious effect on the unsuspecting clients or investors of the noticee and the contention of the noticee that the defaults took place due to the mis-deeds of its earlier management cannot be accepted," the AO says.
In its show-cause notice to the brokerage, SEBI has alleged that on 35 out of 37 dates, Pantomath Stock Brokers had misused client funds. "Misuse of funds ranges from 7.68% to 64.38% of funds of credit balance clients. Funds of credit balance clients have been used for the purpose of debit balance clients. The broker appears to have mis-used the credit client's fund in the range of the amount of Rs24.31 lakh to Rs3.84 crore for the selected sample days."
The market regulator also found that Pantomath Stock Brokers had placed its own funds in clients' accounts, which indicates non-segregation of clients' funds and the broker's own funds.
Coming back to the complaint filed with the EOW, in which Ms Lunawat, a chartered accountant (CA) and executive director of Pantomath Capital Advisors Pvt Ltd, says, "We have now also come to know that Mahavir and Deepa Toshniwal in an illegal and unauthorised manner, pledged shares of Pentagon Stock Brokers' clients including our shares kept with Pentagon Stock Brokers without knowledge and consent of the concerned shareholders."
Mahavir Lunawat, a founder of Pentagon Stock Brokers, also group founder and MD of Pantomath Capital Advisors Pvt Ltd, a SEBI-registered merchant banker, told Moneylife
, "In 2019, we disassociated from Pentagon Stock Brokers and applied to the stock exchanges for the change. However, Mr Toshniwal continued to use our names. When we asked him about the affairs (of) Pentagon Stock Brokers, he told us since we have dis-associated from the firm, we should not worry about its affairs." (Read: Pentagon Stock Brokers MD Mahavir Toshniwal Arrested in Rs40 Crore Fraud)
During 2020-21, National Stock Exchange (NSE) also levied a monetary penalty of Rs5,000 on the broker.