Edelweiss Broking Limited vs Sebi

Order Reserved on:17.9.2020 Date of Decision: 7.1.2021

Appeal No.210 of 2020

Edelweiss Broking Limited Edelweiss House, Off. C.S.T. Road, Kalina, Mumbai - 400 098. ... 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. Sameer Pandit, Ms. Krina Gandhi, Advocates i/b. Wadia Ghandy & Co. and Ms. Kamala Kantharaj, Authorised Representative for the Appellant.

Mr. Venkatesh Dhond, Senior Advocate with Mr. S. Vivek, Mr. Aditya Sikka, Ms. Drishti Das and Mr. Siddhant Sattur, Advocates i/b. Cyril Amarchand Mangaldas for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice M.T. Joshi, Judicial Member 2

1.

Aggrieved by the direction of the Member and Core

Settlement Guarantee Fund Committee (hereinafter

referred to as the „Committee‟) of the respondent

National Stock Exchange of India Limited to pay a

penalty of Rs.1,80,10,000 on account of two

violations vide order dated 6th June, 2020 the

appellant has preferred the present appeal.

2. The appellant is a member registered with the

exchange in the capital market and futures and

options segment. Inspection of the record of the

appellant was carried out for the period from April

1, 2017 to February 28, 2019. As certain violations

were noted appropriate disciplinary action was

started by the Committee in view of the joint

Committee meeting decision with Securities and

Exchange Board of India (hereinafter referred to as

„SEBI‟) . Show cause notice was issued to the

appellant. Its reply was considered alongwith the

oral statement before the Committee. The

Committee found that two violations were 3

committed by the appellant, while it was absolved

from the third of the charge.

3. So far as the charge of collection of margin for

trading under the margin trading facility is

concerned, 14 sample instances were considered for

considering the securities other than group one

activity. Additionally 10 sample instances wherein

securities other than group one were considered for

trading under the margin trading facility. The

appellant pointed out before the Committee that

some securities pertaining to a client were forming

part of group one securities at the time of trade.

With respect to the remaining securities the noticee

submitted that these securities comprised of bond

and debentures which were accepted as collateral

for margin trading facility as per the internal risk

policy having credit rating of AA, AAA and

AAA/stable.

4. The Committee of the respondent found that while

the part of the securities were in fact group one 4

security at the time of accepting them, another

group of 10 securities in the nature of bonds and

debentures as detailed supra cannot be accepted as

they do not fall under the group one securities as

defined by Securities and Exchange Board of India

(hereinafter referred to as „SEBI‟) vide its circular

no.SEBI/HO/MRD/DP/CIR/P/2016/ 135 dated 16th

December, 2016, SEBI circular no.

CIR/MRD/DP/54/2017 dated 13th June, 2017 and

circular no.NSE/COMP/35125 dated 15th June,

2012. In the circumstances penalty of Rs.5 lakhs on

this count was imposed.

5. Another violation with which the appellant was

charged was non adherence to leverage and

exposure limit while granting the margin trading

facility. It was alleged that the appellant had

granted an excess exposure on aggregate basis at

member level to the tune of Rs.1,75,09,72,380.

This exposure was calculated as the Committee of

the respondent excluded the funds borrowed by the 5

appellant from the sources which were not approved

by SEBI vide its circular no. CIR/MRD/DP/54/2017

dated 13th June, 2017 and circular no.CIR/MRD/DP/

86/2017 1st August, 2017 (hereinafter called as the

circular dated 13th June, 2017 and circular dated 1st

August, 2017).

The appellant‟s explanation was that while the

circular dated 1st August, 2017 permits the broker to

avail borrowing of fund for the above purposes from

the promoter it had availed loan from its group

entity namely Edelweiss Rural and Corporate

Services Ltd. (hereinafter referred to as „ERCSL‟).

Said ERCSL as well as the appellant are

subsidiaries of Edelweiss Financial Services Ltd.

The appellant has therefore contended that if the

SEBI circular dated 1st August, 2017 is read as

permitting loan from the promoter group also, there

would not be any violation. The respondent‟s

Committee however observed that the said circular

permits borrowing from the promoter and the 6

definition of the promoter as found in section 269 of

the Companies Act does not include group entity.

The submissions of the appellant therefore was not

accepted and, therefore, a penalty of Rs.1,75,10,000

was imposed on this count. Hence the present

appeal.

6. Heard Mr. Somasekhar Sundaresan, Advocate

assisted by Mr. Sameer Pandit, Ms. Krina Gandhi,

Advocates and Ms. Kamala Kantharaj, Authorised

Representative for the appellant and Mr. Venkatesh

Dhond, Senior Advocate assisted by Mr. S. Vivek,

Mr. Aditya Sikka, Ms. Drishti Das, Mr. Siddhant

Sattur, Advocates for the Respondent.

7. The main thrust of the argument of Mr.

Somasekhar Sundaresan was against the imposition

of penalty of Rs.1,75,10,000 upon non acceptance

of the submissions of the appellant that the

borrowing from the group entity i.e. the promoter

group should be accepted. On the other hand,

learned counsel for the respondent submitted that 7

the very circular dated 1st August, 2017 refers to the

provisions of the Companies Act which does not

prescribe any definition of promoter group and the

circular also permits availment of loan from

promoters only.

8. SEBI‟s circulars dated 13th June, 2017 and 15th

June, 2017 provides that a stock broker may provide

margin facility by using own funds or borrowed

funds from scheduled commercial banks and/or

NBFC regulated by Reserve Bank of India. It

specifically provides that a stock broker cannot be

permitted to borrow funds from any other sources.

These restrictions were relaxed vide next of the

circulars dated 1st August, 2017 and 3rd August,

2017 which modified the earlier provisions of para

14 and prescribed as under:-

"3. Accordingly, it is clarified that Stock brokers may borrow funds by way of issuance of CP and by way of unsecured long term loans from their promoters and directors. The borrowing by way of issuance of CPs shall be subject to compliance with appropriate RBI Guidelines. The borrowing by way of unsecured long terms loans from the 8

promoters and directors shall be subject to the appropriate provisions of Companies Act.

4. A stock broker shall not be permitted to borrow funds from any other source, except the sources as sated at para 3 above."

9. Thus, vide this next of the two circulars

borrowing of funds (i) by issuance of CP subject to

the compliance with appropriate RBI guidelines (ii)

by way of unsecured loan from promoter and

directors was permitted.

10. Mr. Somasekhar submitted that no specific

definition of the term "promoter" is prescribed in

these two circulars. The term therefore will have to

be contextually and purposefully interpreted to

include even the members of the promoter group.

Even if the definition provided in the Companies

Act, 2013 of the promoter is considered, it should

be kept in mind that the defining section starts with

the caveat that the definition should be read unless

the context requires otherwise. He submitted that

the context provided by these two circulars is one of

widening and liberalizing the sources of borrowing 9

for the purposes of margin trading. These facts are

required to be taken into consideration. The

appellant as well as the ERCSL are the subsidiaries

of Edelweiss Financial Services Ltd. The

respondent‟s Committee also noted in the impugned

order that ERCSL as well as the appellant are 100%

subsidiary of EFSL. Had the appellant borrowed

the funds from EFSL, the respondent‟s Committee

could not have any grievance. On the other hand as

the appellant has borrowed the funds from ERCSL

which is also 100% subsidiary of EFSL, the purport

of the circular is not taken into consideration by the

Committee. To apply a simile a son obtaining a

loan from his father is permitted, but obtaining a

loan from the pocket of the brother who is fully

funded by the father has caused the respondent

Committee to penalize the appellant to the tune of

Rs.1,75,10,000. In the circumstances, he submitted

that the term promoter as used in the circular will

have to be read in it‟s context. In fact SEBI which 10

had issued the above circulars had in various

regulations like Securities and Exchange Board of

India (Issue of Capital and Disclosure

Requirements) Regulations, 2018 (for short „ICDR,

2018‟), Securities and Exchange Board of India

(Listing Obligations and Disclosure

Requirements) Regulations, 2015 ("LODR 2015‟

for short), Securities and Exchange Board of India

(Substantial Acquisition of Shares

and Takeovers) Regulations, 2011 („Takeover

Regulation‟ for short), Securities and Exchange

Board of India (Prohibition of Insider Trading)

Regulations, 2015 had covered the promoter group

along with the promoter while making the

provisions of charging sections etc.

11. In order to buttress this submissions Mr.

Somasekhar relied on the ratio of following four

authorities from the Supreme Court and also of the

order of a Whole Time Member of SEBI in the

matter of Xchanging Solutions India Ltd vide order 11

dated 28th January, 2020. The authorities relied on

are as under.

(a) The Vanguard Fire and General Insurance Co. Ltd. vs. Fraser and Ross and Another.

[AIR 1960 SC 971].

(b) K.P. Varghese vs. The Income Tax Officer, Ernakulam and Anr. [(1981) SCC (4) 173].

(c) Smt. Pushpa Devi & Ors vs. Milkhi Ram [(1990) 2 SCC 134].

(d) K. V. Muthu vs Angamuthu Ammal [(1997) 2 SCC 53].

12. On the other hand Mr. Mr. Venkatesh Dhond,

learned senior counsel for the respondent submitted

that the circular itself prescribes that borrowing of

funds from promoter is permitted. The circular

further also referred to the provisions of the

Companies Act. The circular would show that

while earlier the borrowing of fund was limited only

from the source of scheduled bank and NBFC,

further permission was granted to avail loan from

promoter and by way of corporate borrowing under

certain specified conditions. He further submitted

that the definition of promoter and promoter group 12

found in some of the Regulations of SEBI has no

role to play in the present scenario. The purpose of

defining promoter and promoter group in those

Regulations is to regulate various entities, as regards

the issue of capital, disclosures, takeover,

prevention of insider trading etc. It was therefore

submitted that the appeal be dismissed.

13. In the case of the Vanguard Fire and General

Insurance Co. Ltd. cited supra the question related

to the interpretation of section 33 of the Insurance

Act, which provides for inspection of the affairs of

an insurer by an authority. The term „insurer‟ was

defined as an entity carrying on the business of

insurance. The authorities under section 33 of the

Insurance Act decided to carry inspection of the

appellant‟s affairs who had already closed its

business. The appellant ther in therefore argued that

since it did not remain insurer as per the definition

of the Insurance Act, no inspection can be carried.

The inspection was contempleted regarding the past 13

business of the appellant. In this context the apex

court observed that the court is required not only to

look at the word but also to look at the context, the

collocation and the object of such words relating to

such matters and interpret the meaning. Taking into

consideration the context the apex court found that

the literal meaning of the term of the definition

„insurer‟ found in the insurance Act will have to be

expanded to mean that it would include the entity

who was insurer in the past.

In the case of K.P. Varghese the issue was regarding

assessment of the tax on transfer of a property by

assesse for the purpose of capital gains. Section 52

(2) of the Income Tax Act 1961 provided that if in

the opinion of the Income Tax Officer, fair market

value of a transferred property as on the date of

transfer exceeds the full value of the consideration

declared by the assessee above 15 percent, then the

fair market value would be considered for

assessment. Considering the fact that the actual 14

transfer may take effect after several years of the

agreement, marginal notes appended to the Section

and a contemporaneous circular, again a purposive

interpretation was invoked by the Supreme Court. It

was held that the provisions of the Section would be

applicable only if the assessee makes an

understatement regarding the value of the property.

14. In the case of Pushpa Devi cited supra

possession of a shop premises was sought by the

landlord on the ground of non-deposit of the arrears

of rent by the tenant in the Court.. In that case a

common counsel for the tenant as well as the

alleged sub-tenant had deposited the rent in the

court. It was therefore argued by the landlord that

since the rent was not deposited by the tenant

exclusively, there was a default and hence eviction

on this ground was sought. The alleged sub-tenant

had claimed that in fact he was the co-tenant being a

partner in the partnership firm. In this context again 15

the purposive interpretation of the term tenant was

made by the Supreme Court.

In the case of K. V. Muthu cited supra successor of

the landlord - the widow- sought possession of the

tenanted premises for bona fide occupation of the

same by a foster son. The term family was defined

in the Tamil Nadu Buldings ( Lease and Rent

Control ) Act, 1960 as a nuclear family which did

not include a foster son for whom the bonafide

occupation was sought. The documents on record

showed that landlord‟s brother‟s son was reared by

the deceased original landlord and even the property

was bequeathed to him. In those circumstances the

Supreme Court was required to interpret the word

family as defined in the said Act. The Supreme

Court made a purposive interpretation of the term

family and declared that a foster son would also

include in the same.

In the case of Xchanging Solutions Ltd. the learned

Whole Time Member of SEBI relied on the ratio of 16

Pushpa Devi cited supra to interpret the term

frequently traded shares.

15. In our view the first principle of the

interpretation to be applied is that there shall be no

interpretation of statute. It means that a literal

interpretation of statute is required to be made

unless the context requires otherwise or unless it is

contrary to the intent of the legislation upon

consideration of the whole scheme of the relevant

legislation.

16. In the present case the earlier circulars of the

SEBI strictly permitted availing loan from the

scheduled commercial bank and/or NBFC only.

This provision was liberalized by the next of the

circular which provided for borrowing by way of

unsecured long term loan from promoter and by

way of issuance of Commercial Paper (CP).

The appellant had secured loan not from the

promoter but from the group entity 17

17. Grafting of the definitions of other SEBI

regulations in the circulars cannot be made by

making any interpration in the above circumstances.

The object and purpose of those Regulation is to

regulate/cover various entities including promoter

and promoter group.

Regulation 2(1)(oo) of ICDR Regulations, 2018,

which is adopted in other above referred

Regulations defines promoter as under.

"2. Definitions (1) In these regulations, unless the context otherwise requires:

(oo) "promoter" shall include a person:

i) who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or

ii) who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or

iii) in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act:

Provided that nothing in sub-clause (iii) shall apply to a person who is acting merely in a professional capacity;

18 Provided further that a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that twenty per cent or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations;

18. Regulation 2(1)(pp) defines promoter group as

under:

"(pp) "promoter group" includes:

i) the promoter;

ii) an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and

iii) in case promoter is a body corporate:

a) a subsidiary or holding company of such body corporate;

b) any body corporate in which the promoter holds twenty per cent. or more of the equity share capital; and/or any body corporate which holds twenty per cent. or more of the equity share capital of the promoter;

c) any body corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold twenty 19

per cent. or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty per cent or more of the equity share capital of the issuer and are also acting in concert; and

iv) in case the promoter is an individual:

a) any body corporate in which twenty per cent. or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member;

b) any body corporate in which a body corporate as provided in (A) above holds twenty per cent. or more, of the equity share capital; and

c) any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty per cent. of the total capital;

v) all persons whose shareholding is aggregated under the heading "shareholding of the promoter group":

Provided that a financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be promoter group merely by virtue of the fact that twenty per cent or more of the equity share 20

capital of the promoter is held by such person or entity:

Provided further that such financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them;"

19. The reading of the above definitions would

show that the promoter group includes the promoter

and other entities as enumerated therein. While the

promoter group is a genus, promoter is one of the

specie. The appellant wants that the entire genus of

the promoter group should be grafted in the circular

dated 1st August, 2017.

At the time of obtaining loan from the group entity

the appellant was very well aware that the circular

does not permit the same. The circular had only

opened a chink for borrowing from the promoter or

by way of CP only in certain circumstances. The

context therefore does not require widening any 21

scope of the term „promoter‟ employed in the said

circular. The finding of the Committee on this

count therefore requires no interference.

However, as regards quantum of the penalty on

this count, in our view in the facts and

circumstances that when borrowing of money in the

nature of CP is permitted, vide the circular dated 1st

August, 2017, the appellant has merely availed loan

from one of its group entity who was 100%

subsidiary of the promoters of the appellant.

Therefore according to us though there is a violation

on the part of the appellant, the penalty of

Rs.1,75,10,000 on this count at the rate of 1% of the

exact amount involved is excessive. Considering all

the above facts, in our view a penalty of Rs.25 (

Twenty Five ) lakhs on this count would meet the

ends of the justice. Hence the following order.

20. The appeal is partly allowed without any order as

to costs. The appeal to the extent of levying penalty

of Rs.5 lakhs for considering the collection of 22

margin for trading under the margin trading facility

by way of securities other than group one is hereby

confirmed. However, the penalty of Rs.1,75,10,000

for non-adherence to the leverage and exposure

limit is hereby set aside. Instead it is hereby

directed that the penalty of Rs.25 lakh also shall be

paid by the appellant on this count.

21. 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 issued by the

registry. In these circumstances, 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.

Parties will act on production of a digitally signed

copy sent by fax and/or email.

Justice TarunAgarwala RAJALAKS Digitally signed by RAJALAKSHMI H NAIR Presiding Officer HMI H NAIR Date: 2021.01.07 15:43:21 +05'30' 23

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member

7.1.2021 RHN