Asit C Mehta Investment Intermediates ... vs Sebi

Order Reserved On: 28.11.2022 Date of Decision : 06.01.2023

Misc. Application No. 227 of 2021 And Appeal No. 317 of 2021

Asit C Mehta Investment Intermediates Ltd. "Nucleus House", 5th Floor, Saki Vihar Road, Andheri (East), Mumbai- 400 072 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051 ...Respondent

Mr. Abishek Venkatratnam, Advocate with Ms. Sabeena Mahadik, Mr. Sagar Hate, Advocates i/b. Visesha Law Services for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Akash Kolse Patil, Ms. Nidhi Singh Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Purvi Jain and Mr. Niket Dalal, Advocates i/b Vidhii Partners for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member

Per: Justice Tarun Agarwala, Presiding Officer 2

1.

The appellant has filed the present appeal challenging the

order dated January 19, 2021 passed by the Adjudicating

Officer ("AO" for convenience) of the Securities and Exchange

Board of India ("SEBI" for convenience) wherein a penalty of

Rs. 27,00,000/- (Rupees Twenty Seven Lakh Only) was

imposed under Section 23D of the Securities Contracts

(Regulation) Act, 1956 ("SCRA" for convenience) read with

Section 15HB of the SEBI Act, 1992.

2. The facts leading to the filing of the present appeal is, that

the appellant is a stock broker and a comprehensive joint

inspection of the broking and depository participant operations

of the appellant was conducted by SEBI, National Stock

Exchange ("NSE") and Bombay Stock Exchange ("BSE") and

the Central Depository Services (India) Limited ("CDSL") from

April 2017 to September 2018. Based on the inspection, the

following violation of various Circulars was noticed, namely,:-

(i) Section 23D of the SCRA read with (r/w) clause 1 of

Annexure of SEBI Circular SMD/SED/CIR/93/23321

dated November 18, 1993 (hereinafter referred to as

SEBI Circular dated November 18, 1993) and clause 3

of Annexure of SEBI Circular

SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated 3

September 26, 2016 (hereinafter referred to as SEBI

Circular dated September 26, 2016).

(ii) Clause 3.2 of Annexure of SEBI Circular dated

September 26, 2016.

(iii) Clause 2 of Annexure of SEBI Circular dated

September 26, 2016.

(iv) SEBI Circular SEBI/MIRSD/SE/CIR-19/2009 dated

December 3, 2009 (hereinafter referred to as SEBI

Circular dated December 3, 2009) and Clause 8.1 of

Annexure of SEBI Circular dated September 26,

2016.

(v) Clause A(5) of Schedule II r/w regulation 9(f) of SEBI

(Stock Brokers) Regulations, 1992 (hereinafter

referred to as Stock Brokers Regulations) r/w NSE

Circular no. NSE/MEMB/3574 dated August 29, 2002

(hereinafter referred to as NSE Circular dated August

29, 2002), NSE Circular no. NSE/MEMB/3635 dated

September 25, 2002 (hereinafter referred to as NSE

Circular dated September 25, 2002) and

NSE/MA/22732 dated February 13, 2013 (hereinafter

referred to as NSE Circular dated February 13, 2013).

(vi) Clause 2.4.2 of Annexure of SEBI Circular dated

September 26, 2016 and 4

(vii) Clause 12(e) of Annexure A of SEBI Circular dated

December 3, 2009.

3. Accordingly, a show cause notice was issued alleging the

following violations, namely,:-

i) Failure to segregate securities and monies of clients.

ii) Incorrect reporting of enhanced supervision data.

iii) Non-reporting of enhanced supervision data.

iv) Non-settlement of funds and securities of clients.

v) Discrepancies in terminal related requirements.

vi) Non-maintenance of daily reconciliation statement.

vii) Incorrect retention statement.

4. The AO after considering the reply of the appellant found

that the charges levelled in the show cause notice were found to

be correct and stood proved. The AO after considering the

gravity of the violation and, after taking into the factors

contemplated under Section 23J of the SCRA and 15J of the

SEBI Act imposed a penalty of Rs. 27 lakhs under Section 23D

of the SCRA and 15HB of the SEBI Act.

5. We have heard Shri Abishek Venkatratnam, the learned

counsel for the appellant and Shri Mustafa Doctor, the learned

senior counsel for the respondent.

5

6. The learned counsel for the appellant admitted that the

appellant had committed the violation as depicted in the show

cause notice. The learned counsel however contended that the

violation is a technical violation or at best a procedural violation

and, therefore, a nominal penalty should be imposed instead of

arbitrarily imposing a penalty of Rs. 27 lakhs. It was contended

that the impugned order fails to indicate as to how a sum of

Rs. 27 lakhs has been arrived at for imposing a penalty under

Section 23D of the SCRA.

7. Having considered the submissions made by the appellant

we find that admittedly the appellant committed various

irregularities and violations as depicted in the show cause notice

and, consequently, violated various Circulars issued by SEBI

from time to time on various subjects. Without going into the

details of the violation, what strikes the most is the violation

relating to the failure on the part of the appellant to segregate

securities and monies of clients. In this regard, we find that out

of 39 sample instances taken by the inspection team it was

observed that in all these 39 sample instances the appellant had

misused credit client funds which were misutilised to meet the

obligations of debit balance clients and/ or for its own purposes.

The extent of misutilisation ranged from Rs. 7.3 crore to 6

Rs. 28.9 crore. Further, in 31 instances reported to the

exchange, funds of credit balance clients were misutilised to

meet the obligations of debit balance clients and for its own

purposes which ranged from Rs. 1.1 crore to Rs. 14.9 crore.

8. Section 23D of the SCRA provides as under:-

"SCRA Penalty for failure to segregate securities or moneys of client or clients 23D:

If any person, who is registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) as a stock broker or sub-broker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees."

9. A perusal of the aforesaid provision indicates that where a

stock broker fails to segregate securities or moneys of a client or

uses the securities or moneys of a client for any other, he shall

be liable to pay a penalty which is not less than one lakh rupees

and which may extend to one crore rupees.

7

10. Considering the violation as depicted aforesaid which is

serious we are of the opinion that the AO has exercised its

discretion in only imposing a penalty of Rs. 27 lakhs instead of

imposing a maximum of Rs. 1 crore under Section 23D of the

SCRA. In our opinion, the amount of penalty imposed is just

and proper in the circumstances of the present case which

requires no interference.

11. In view of the aforesaid, the appeal lacks merit and is

dismissed with no order as to costs. The misc. application is

disposed of accordingly.

12. This order will be digitally signed by the Private Secretary

on behalf of the bench and all concerned parties are directed to

act on the digitally signed copy of this order. Certified copy of

this order is also available from the Registry on payment of

usual charges.

Justice Tarun Agarwala Presiding Officer

Ms. Meera Swarup Technical Member PRERNA Digitally signed 06.01.2023 by PRERNA MANISH MANISH KHARE PK Date: 2023.01.09 KHARE 17:03:32 +05'30'