Grd Securities Limited vs Sebi

GRD Securities Limited 238A, A J C Bose Road, 6th Floor, Kolkata - 700 012. ...Appellant

Versus

1.

National Stock Exchange of India Limited Exchange Plaza, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051.

2. Securities and Exchange Board of India.

SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondents

Mr. P.N. Modi, Senior Advocate with Ms. Kalpana Desai, Advocate i/b Farooqui Mohammed Khalid, Advocate for the Appellant.

Mr. Rashid Boatwalla, Advocate i/b Manilal Kher Ambalal & Co. for Respondent No. 1.

Mr. Abhiraj Arora, Advocate with Mr. Vivek Shah, Advocate i/b ELP for Respondent No. 2

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member 2

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

1. This appeal is filed challenging the decision of the

Disciplinary Action Committee ('DAC' for short) of the National

Stock Exchange of India Limited ('NSE' for short) dated July 20,

2018 whereby the review application of the appellant was

rejected. Consequently, the earlier decision of the DAC dated

February 8, 2018 which directed the appellant to pay a penalty of

Rs. 2,05,43,900/- and face suspension of one trading day in the

currency derivative segment of the Exchange stood confirmed.

2. The appellant is a member broker in the Capital Market

(CM), Futures and Options (F&O) and Currency Derivatives (CD)

segments of the NSE. During a regular inspection of the books

and records of the appellant for the calendar year 2016 in

February 2017 NSE noticed that the appellant falsely reported

margin amounting to Rs. 2,05,43,947/- in the CD segment in

respect of two clients on two occasions on April 26, 2016 and

June 21, 2016. Accordingly, DAC in its meeting held on January

12, 2018, after considering the oral and written submissions of the

appellant, imposed a monetary penalty to the tune of

Rs. 2,05,43,900/- and suspension of one trading day in the CD 3

segment after giving three weeks' notice. This was communicated

to the appellant on February 8, 2018. This matter came up in

appeal before this Tribunal which quashed the said order passed

by the DAC of NSE on March 1, 2018 and directed the appellant

to file a review application before the DAC. The order impugned

in this appeal is issued by the DAC of NSE further to giving

another opportunity of personal hearing to the appellant and

considering their written submissions.

3. Shri P.N. Modi, the learned senior counsel for the appellant

submitted that the alleged violations relate to delayed crediting of

margin money collected from the clients. It is a technical mistake

happened due to factors beyond the control of the appellant. For

instance, in the case of the first alleged violation in respect of

client Monotype India Ltd. the client had given cheuqes for

Rupees One crore before trading on June 21, 2016. However, on

account of a death in their family, on June 22, 2016 this client

requested not to deposit the cheque for sometime, which is on

record. Since the price moved in the expected direction there was

no margin required on T + 5th day and hence no false reporting in

the matter.

4

4. In the case of the second client as well cheques worth Rs. 65

lakh and 70 lakh were given by the client Viswakarma Metalicks

Pvt. Ltd.. There was an inadvertent delay in depositing the

cheques. However, the cheque was deposited on the T + 5 day and

the same was cleared on the next day i.e. one day later. So it was

again a technical error. It was also submitted that on account of

these technical faults of the appellant no settlement issues

happened nor the market was affected in any way.

5. It was further contended by the learned senior counsel for

the appellant that though based on these factors this Tribunal had

remanded the matter to DAC for reconsideration, the DAC did not

apply its mind and has taken shelter behind SEBI circular dated

August 10, 2011 and held that in view of the said circular the

DAC has no discretion available with it in the matter once

violation is established. The learned senior counsel contended that

this stand is contrary to the Rules of the respondent NSE,

particularly Rule 17 which states as follows:-

"Reconsideration / Review

(17) Subject to the provisions of the Securities Contracts (Regulation) Rules, 1957 the relevant authority may of its own motion or on appeal by the trading member concerned within 90 days from the date 5

of communication of decision of the relevant authority to the member reconsider and may rescind, revoke or modify its resolution withdrawing all or any of the membership rights or fining, censuring or warning any trading member. In a like manner the relevant authority may rescind, revoke or modify its resolution expelling or suspending any trading member."

6. It was further submitted by the learned senior counsel that

the appellant has been a broker for a long time and there has been

no prior violation since 2011, nor any further violation during the

year 2017, is found. Moreover, the brokerage earned by the

appellant in the CD segment during the financial year 2016-17

was only about Rs. 3.1 lakh and the penalty imposed is more than

Rs. 2.05 crore which is not only extremely harsh and

disproportionate but if the appellant is obligated to pay such an

amount there is no option other than closing down the business

since such a hefty amount of penalty is beyond the reach of the

appellant. In view of this the appellant sought to quash the

impugned order treating it as a merely technical violation or

alternatively reduce the amount of penalty to a modest sum.

7. Shri Rashid Boatwalla, learned counsel for the respondent

no. 1 NSE, on the other hand, submitted that as per circular of

SEBI dated August 10, 2011 the respondent NSE has no

discretion which has been stated upfront in the impugned order by 6

the DAC. The said circular has been issued by SEBI to all Stock

Exchanges after consultation with the Stock Exchanges which,

inter alia, states as follows:-

"If during inspection it is found that a member has reported falsely the margin collection from clients, the member shall be penalized 100% of the falsely reported amount along with the suspension of trading for one day in that segment.

This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market."

8. It was further submitted by the learned counsel for the

respondent NSE that the appellant has given different reasons for

the same delayed collection of margin in respect of the client

Viswakarma Metalicks Pvt. Ltd. For instance, in their

communication dated June 12, 2017 it was submitted that cheques

of Rs. 65 lakh and Rs. 70 lakh were 'unfortunately misplaced

from the office premises.' Vide letter dated January 12, 2018 it

was stated that the cheque of Rs. 70 lakh was 'unsigned' as the

client was travelling and cheque of Rs. 65 lakh was cleared one

day late 'due to late deposit in the bank.' Further, vide letter dated

March 15, 2018 it was stated that cheque of Rs. 70 lakh was 7

deposited on T + 11th day 'due to issue with signature.' These

inconsistent statements from the side of the appellant reduced the

veracity of the submissions.

9. Since this Tribunal noted that irrespective of the amount of

margin involved or the number of instances of violations involved,

the SEBI circular dated August 10, 2011 directs imposition of

100% of the falsely reported margin as penalty along with

suspension of one day trading, on the direction of this Tribunal

SEBI was also impleaded as Respondent No. 2, inorder to

ascertain the stand of SEBI on this matter. SEBI vide affidavit

dated October 31, 2018 reiterated their stand as in the circular. In

addition SEBI submitted that as per the communication dated

October 4, 2018 of NSE, suspension of a trading member is not

initiated if the instance of false reporting is less than 5% of the

margin required to be collected and value of false reporting is less

than Rs. 5 lakh. Since the present matter does not meet these

criteria penalty of 100% margin and one day suspension imposed

on the appellant is as per law.

10. We do not agree with the contentions of the appellant that it

was only a technical violation. It is quite evident from the facts

that though cheques may have been received from the clients the 8

appellant had not credited these amounts to the account upfront

which is a basic requirement of margin collection from clients.

Moreover in respect of client Monotype India it is not even clear

whether the margin was ever collected. The submission that

margin requirement as on T + 5, not as on the trading day, is what

is relevant is not correct and hence not admissible. Upfront

collection of margin is an important mechanism for ensuring

prompt settlement and in promoting market integrity. As such any

explanation to the contrary is not sustainable.

11. However, we are not able to agree with the stand of SEBI

and NSE that no discretion in imposition penalty can be exercised,

once a violation is established. The Circular issued by SEBI dated

August 10, 2011 specifies different percentages of penalty with

respect to short-collection / non-collection of margins from clients

in equity and currency derivatives segment. While it specifies

small proportion of 5% to 10% of margin short fall as penalty for

non-reporting, it specifies that 100% of the short-collection shall

be imposed as penalty. If such violation is noticed at the time of

inspection then in addition to 100% penalty one day suspension

has to be imposed. The said circular does not differentiate

between situations involving upfront collection of cheques but late

depositing or late crediting of the said amount and no upfront 9

collection at all and hence suffers from the proportionality

principle. In order to incorporate proportionality, as is provided

for small percentages of short falls in margin collection in the

same circular itself, the word 'shall' in the circular has to be read

as 'may' as it would enable the Exchange authorities to

distinguish between no collection of margin at all and delayed

collection of margin, particularly, in situations like no impact on

the settlement or market at all. Accordingly, we are unable to

agree with the interpretation of the spirit of the circular provided

by SEBI as well as NSE. First of all Rule 17 of the NSE Rules

quoted in paragraph 5 of this order clearly states that "the relevant

authority has the power to reconsider and may rescind, revoke or

modify its resolution withdrawing all or any of the membership

rights or fining, censuring or warning any trading member. In a

like manner the relevant authority may rescind, revoke or modify

its resolution expelling or suspending any trading member. The

relevant authority may modify its resolution expelling or

suspending any trading member." These Rules are made under the

Securities Contracts (Regulations) Act, 1956 (SCRA) and the

SEBI Circular dated August 10, 2011 is issued under both SEBI

Act and SCRA. Further, proportionality is a basic principle to be

adhered to while interpreting any provisions relating to 10

punishment where the consequences are serious. In the instant

case the violation is not in collecting the margin per se from the

clients upfront but in delayed crediting of margin money. Delayed

crediting of margin and not collecting the margin are not the same

and has different consequences and cannot be treated on par. It is

not in dispute here that the margin had been received by the

appellant in the form of cheques; delay happened only in crediting

the said amount to the account. This is quite different from not

collecting the margin at all. It cannot be the intention of the law to

treat both these situations identical when it comes to imposing a

penalty. Penal consequences have to follow proportionality. It is

also a matter of record that due to delayed collection no further

consequences like a settlement failure has happened though it can

be argued that post-events cannot be a ground as violation itself,

irrespective of what happens thereafter, is the ground for imposing

penalty. Though this argument is correct one cannot be totally

oblivious to the post-event scenario from a proportionality angle.

Therefore a violation which leads to a complete failure of the

market or market integrity and a violation which has no impact on

the market need to be distinguished in interpreting proportionality.

12. In this matter before us the penalty imposed is

Rs. 2,05,43,900/- and suspension from trading in the Currency 11

Derivatives segment for one day. The appellant before us submits

that the annual income from brokerage from CD segment is only

to the tune of about Rupees three lakh which is not disputed.

While we totally agree that upfront collection of margin is an

important regulatory tool to safeguard market integrity, at the

same time we are equally concerned with proportionality while

imposing a penalty of a very heavy amount which can completely

ruin an entity for a single violation. It is an undisputed fact that the

appellant has not committed any other violation. While the SEBI

circular is quite mechanical in directing the Exchanges to impose

a fixed penalty, the Exchange Rules provide for an appeal / review

and empowers the authority to review / rescind / reconsider the

penalty imposed. Given these factors we are of the considered

view that based on the facts and circumstances of the present

matter, the law has to be interpreted in its spirit invoking

proportionality.

13. Though we are inclined to reduce the penalty given these

facts, the penalty has to be in tune with the violation. The

appellant's submission that brokerage from the CD segment is

only just over Rs. 3 lakh is incomplete since it has not disclosed

the total earnings including that from other segments of the

market. Moreover, it is imperative to underscore the importance of 12

prompt upfront margin collection for promoting market integrity.

Balancing all these, a penalty of Rupees Fifty Lakh and one day

suspension from the CD segment would meet the ends of justice

in the matter. Appellant is directed to pay the penalty within four

weeks from today. Respondent NSE shall implement the one day

suspension after giving fifteen days notice to the appellant.

14. Appeal is partly allowed on the above lines. No order on

costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 10.06.2019 Prepared and compared by:msb