Alankit Assignments Limited vs Sebi

Date of Decision : 08.11.2019

Appeal No. 406 of 2018

Alankit Assignments Limited Alankit House, 4E/2, Jhandewalan Extension, New Delhi - 110 055. ..... Appellant

Versus National Stock Exchange of India Limited Exchange Plaza, C-1, Block G, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051. ....Respondent

Mr. Somasekhar Sundaresan, Advocate with Mr. K.C. Jacob, Advocate i/b Corporate Law Chamber of India for the Appellant.

Nimay Dave, Advocate with Ms. Shreya Anuwal, Advocate i/b Manilal Kher Ambalal & Co. for the Respondent.

CORAM : Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Dr. C.K.G. Nair, Member

1.

By this appeal, the appellant, who is a stock broker and

member of the National Stock Exchange of India Limited

('NSE' for short) challenges the order of the Disciplinary 2

Action Committee ('DAC' for short) of the NSE dated

October 25, 2018. Based on various violations noticed during

a regular inspection conducted by NSE, the DAC has imposed

a monetary penalty of Rs. 25 lakh and ordered suspension of

the appellant from all segments of the Exchange for a period

of five days after giving three weeks' notice.

2. The inspection period was during July 1, 2016 to June

30, 2017. On observation of various violations a show cause

notice was issued on June 8, 2018 to which the appellant

replied on June 19, 2018. Thereafter an opportunity for

personal representation was provided before the DAC on

September 11, 2018 wherein the Managing Director and a

Director of the appellant appeared and made their

submissions. After considering their reply and submissions

the impugned order has been passed by the DAC.

3. There are several charges against the appellant in the

impugned order. They include, misuse of clients securities

and clients funds to the tune of Rs. 107.17 crore through 695

transactions / instances. Part of these securities (worth

Rs. 62.54 crore) was transferred to one of its clients which is

a NBFC, namely, Diwakar Commercials Private Limited

('DCPL' for short). DCPL, in turn, pledged Rs. 52 crore 3

worth of clients securities and mobilized funds. Therefore, not

only that the appellant had transferred clients' securities

worth Rs. 107.17 crore but out of such transferred securities

part of the securities have gone out of the hands of even the

transferee entity as well thereby jeopardizing a substantive

quantity of clients securities. There are similar charges of

unexplained use of funds raised by pledging securities of

1216 clients to the extent of Rs. 8.18 crore; non-availability of

client funds to the tune of Rs. 4.05 crore; non-settlement of

client funds and securities amounting to Rs. 31.99 crore;

multiple unique clients code (UCC) allotted to clients etc.

4. The learned counsel Shri Somasekhar Sundaresan

appearing on behalf of the appellant submits that in the day-

to-day business of brokers minor deviations generally happen;

immediately after pointing out the deficiencies by the NSE

inspection team the appellant took all steps necessary to avoid

any repetition or recurrence of such deficiencies; the

monetary penalty of Rs. 25 lakh imposed is in excess of what

is provided for under the relevant Guidelines of NSE; the

minor deviations are not repetitive and hence in addition to

penalty of Rs. 25 lakh five days suspension of the appellant

from all the segments of the Exchange is very harsh 4

punishment for such minor offences though admitted. In

support of his contention the learned counsel also relied on

three orders of this Tribunal in the matter of Bezel Stock

Brokers Private Limited vs SEBI (Appeal No. 294 of 2018

decided on 31.01.2019), UPSE Securities Limited vs SEBI

(Appeal No. 109 of 2011 decided on 25.07.2011) and

Religare Securities Limited vs SEBI (Appeal No. 23 of 2011

decided on 16.06.2011). Relying on UPSE and Religare

(supra) he contended that the purpose of inspection is not to

impose penalties where some minor violations have been

observed but to facilitate implementing remedies. Relying on

Bezel (supra) it was contended that for similar violations as

allegedly committed by the appellant only a monetary penalty

is sufficient and suspension makes the punishment

disproportionate, particularly in the context that during its 20

years operations there have been no violation by the

appellant.

5. The learned counsel Shri Nimay Dave appearing on

behalf of the respondent NSE, on the other hand, submits that

the violations committed by the appellant are much more

serious than the matters in the orders relied on by the

appellant. Transfer of clients securities and funds are to the 5

tune of about Rs. 108 crore and Rs. 52 crore respectively and

non-settlement of clients funds comes Rs. 32 crore. More

importantly client securities had been transferred to a third

party who in turn further transferred and encumbered the

same. Therefore, the situation was alarming and warranted

severe action as it would have imperiled even the functioning

of the appellant at the cost of thousands of investors and as

well as adversely imparting the integrity of market. He also

submits that the calculation of monetary penalty given by the

appellant is not correct.

6. Having heard the learned counsel for the parties and

having perused the documents including the relevant circulars

we are of the opinion that the directions contained in the

impugned order are justifiable.

7. The general principles governing the code of conduct

prescribed under Regulation 4.5 of NSE CM and F&O

Regulations which the appellant is mandated to follow states

that a broker has to maintain a high degree of professionalism,

adhere to fair trading practices, honesty and fairness and

should have capabilities to perform the task efficiently.

Moreover, the said Regulations also state that "no trading

member or person associated with trading member shall make 6

improper use of constituent's securities or funds".

Accordingly, given the findings that appellant has

misappropriated client assets despite the mandate to conduct

the business in a fiduciary capacity following the code of

conduct prescribed the appellant is liable to be penalized. The

impugned order further notes that the committed violations

are of serious nature, which, if not identified by the Exchange

in its inspection and timely remedial action not taken, the

situation could have turned extreme and would have gravely

impacted investor confidence.

8. Though we agree that the violations are broadly of the

types as in the matter of Bezel (supra) relied upon by the

appellant, we note from the relevant records of Bezel (supra)

that the amount involved in Bezel was much lower than the

amount involved in the present appeal. For instance, the value

of clients securities transferred in Bezel (supra) was worth

only Rs. 2.27 crore while in the present matter it is about

Rs. 107 crore. In Bezel there was no further transfer of

clients' securities to another entity like in the present matter.

Therefore, we are of the view that the magnitude as well as

seriousness of the violations in the present matter is at a

different level than in the facts and circumstances of Bezel. 7

9. In any case this Tribunal did not uphold the suspension

of Bezel because the impugned order therein had not given

sufficient reasons for imposing suspension in addition to

monetary penalty. However, in the order impugned in the

present appeal the reasons are categorically stated. As far as

reliance on other two orders is concerned i.e. UPSE (supra)

and Religare (supra) what is stated therein is that no penalty

should be imposed for observed minor violations. Given the

fact that the present appeal relates to major and serious

violations, reliance on these orders does not help the

appellant.

10. However, in the interest of investors as well as the

market we are of the view that suspension of a trading

member who is trading on behalf of clients for a short period

may not achieve the desired objective while at the same time

adversely affecting its existing clients (in the case of long

term suspension of a broker clients have the option of

migrating to another broker). Therefore, while upholding the

penalty of Rs. 25 lakh we would modify the five days

suspension of the appellant from all segments of the

Exchange to that of restraining the appellant from taking /

enrolling any fresh clients for a period of one month. This 8

restraint shall commence from the seventh day of the date of

this order; i.e. from November 15, 2019.

11. Appeal is partially allowed on above terms. No orders

on costs.

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 08.11.2019 Prepared and compared by:msb