Alice Blue Financial Services Pvt. Ltd vs Sebi

which include false reporting of margin collected from clients in

F&O segment; non-settlement of clients‟ funds and securities;

discrepancy in net worth; charging of excess brokerage, etc. as

specifically stated in the impugned order.

3. Shri Prakash Shah, the learned counsel for the appellant

submitted that the appellant had a large number of clients and

there are around 23,000 of instances of margin collections

during the inspection period in question. Out of these,

inspection team had taken a sample of 75 clients / instances and

from these only 10 instances of violations have been noted.

Therefore, the discrepancy in margin collection is extremely

negligible compared to the total transactions of the appellant.

Further, it was submitted that the funds had been received by

those clients through online payment gateway, viz. ATOM. 3

Therefore, even if there were some lapses from the side of the

appellant, they were inadvertent and unintentional human error.

Post-inspection, those system discrepancies/deficiencies have

been rectified.

4. Similar contentions have been raised by the learned

counsel for the appellant on the other charges in the impugned

order as well. Further, it was contended that it is the first time

that during the inspection any discrepancies / lapses have been

noticed and as such there has been no repetitive nature of the

violations. Given this, the maximum penalty@ 100 % of false

reporting Rs. 4.32 crore and one day trading suspension

imposed on the appellant is too harsh and without considering

the proportionality angle as held by this Tribunal in its orders in

the matter of GRD Securities Limited vs National Stock

Exchange of India Ltd. & Anr. (Appeal No. 285 of 2018

decided on June 10, 2019) and Neon Vinimay Pvt. Ltd. vs

National Stock Exchange of India Limited (Appeal No. 72 of

2019 decided on April 26, 2019). Accordingly, it is pleaded that

even if some of the violations have occurred because of human

lapses at least suspension imposed upon the appellant is to be

lifted. In any case while praying to this Tribunal to take an

appropriate call on the amount of penalty it was prayed that

suspension should not be imposed since it is disproportionate as 4

well as it would impact about 72,000 clients which the appellant

is currently having. It was also urged by the learned counsel for

the appellant that following the order of this Tribunal in GRD

Securities (supra), Securities and Exchange Board of India

(„SEBI‟ for short) issued a circular dated August 1, 2019 which

categorically stated that the proportionality factor has to be

considered by the stock exchanges while deciding on the

penalty. Similarly, the circular issued by the NSE on December

16, 2019 also has rationalized the penalty structure for false

reporting and therefore the maximum monetary penalty would

be only Rs. 15 lakh and suspension of one day will be directed

only in the case of grave violations which are repetitive in

nature.

5. Shri Venkatesh Dhond, the learned senior counsel

representing respondent NSE, on the other hand, urged that the

violations against the appellant are writ large on the face of it

and all the violations have been admitted by the appellant. In

fact, the learned senior counsel contended that the appellant did

not even give any / proper explanation for their violations after

copy of the inspection report was given to the appellant seeking

their comments / explanation. It was further contended that the

inspection team could analyze only a sample of 75 instances out

of which in 10 instances there was false reporting of margin and 5

this is a high percentage and did not indicate the total number of

violations that would have been identified if all the transactions

had been analyzed. Therefore, there is no merit in the

submissions of the appellant that it is only a few instances of

violations. Moreover, it was contended that the circulars relied

on by the appellant dated August 1, 2019 and December 16,

2019 are not applicable to the case of the appellant as these

circulars have been issued subsequent to the violations.

Moreover, NSE circular dated December 16, 2019 specifically

stated that "The revised penalty structure will be applicable for

all instances of false reporting of margin from September 1,

2019 onwards. For all prior instances of false / incorrect

reporting upto August 31, 2019, the penalty structure as

prescribed under SEBI circular dated August 10, 2011 shall

continue to be applicable." The learned senior counsel also

distinguished the case of the appellant from that of GRD

Securities (supra) in terms of the seriousness of the violations

and emphasized that the violations were hidden from the

exchange and had been noticed only during the inspection. On

the other hand, if it was disclosed to the exchange suo motu by

the appellant the penalty would have been much lower. The

learned senior counsel also emphasized the importance of

collecting and accurate reporting of margin money upfront to 6

preserve the integrity of the market as held in our order in the

matter of GRD Securities (supra).

6. Though it is a matter of record that the appellant had

admittedly committed most of the violations we note that they

are not repetitive in nature in the sense that such violations have

been noted only during one inspection report. We are also told

that necessary rectifications have been done by the appellant. At

the same time, we are not ready to treat the violations as just the

result of some human error or miniscule as submitted by the

appellant. We are also rather perplexed by the lack of interest

shown by the appellant in giving a proper reply/explanation to

the charges levelled in the inspection report. At the same time

we are also not convinced that there is a repetitive offence.

Therefore, the proportionality angle has to be brought in

explicitly. Though we note that the NSE circular dated

December 16, 2019 has categorically stated that its applicability

is from September 1, 2019 only, proportionality as a principle

and as held in our order in GRD Securities (supra) has to be

examined. Though in the case of grave violations the MCSGFC

is empowered to reject the proportionality angle, it is imperative

for the Committee to give justification for such rejection and it

cannot be done just mechanically or by stating that the

violations are serious. This is the crux of the circular dated 7

August 1, 2019 issued by SEBI in order to rationalize and to

bring uniformity in the manner of imposition of fine / penalty

for false /incorrect reporting of margin, non-reporting of margin

etc. Since the impugned Order has been issued subsequent to the

said SEBI Circular, on 20 June, 2020, the Committee was bound

to abide by that Circular, in addition to our Orders in GRD

Securities (supra).

7. In the light of the above reasons, we quash and set aside

the impugned order and remand the matter to the MCSGFC of

respondent NSE to re-examine the matter by considering the

proportionality angle and pass a fresh order in accordance with

law within three months from the date of this order. However, in

view of the specific facts of the case that most of the violations

are admitted by the appellant the deposit of Rs. 2 Crore made by

the appellant in an interest-bearing account and maintained by

the NSE in terms of our interim directions shall continue as such

till the matter is decided by the Committee afresh and thereafter

the said amount shall be adjusted in terms of the fresh Order.

8. Appeal is allowed on above terms with no orders on costs.

9. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be 8

issued by the registry. In these circumstances, this order will be

digitally signed by the Presiding Officer on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

Justice Tarun Agarwala TARUN Presiding Officer Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR

PRADESH, postalCode=221505, st=Uttar Pradesh, 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2ab

AGARWAL 7954d509c85ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e7999727 d404aa38ca422f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.10.09 13:07:44 +05'30'

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member 09.10.2020 msb