Hrim Finance And Securities Private ... vs Sebi

Order Reserved On: 26.06.2019 Date of Decision: 06.08.2019

Appeal No. 73 of 2017

HRIM Finance And Securities Private Limited 3B, Jaihind Estate Building, 5th Floor, Room No. 5/6, Dr. A. M. Road, Bhuleshwar, Mumbai- 400 002 ...Appellant

Versus

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

Mr. Piyush Raheja, Advocate with Ms. Palak Patel, Advocate i/b Mansukhlal Hiralal & Co. for the Appellant.

Mr. Nimay Dave, Advocate with Mr. Rahul Jain and Ms. Zalak Mody, Advocates i//b Manilal Kher Ambalal & Co. for the Respondent.

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

Per: Dr. C.K.G. Nair

1.

The appellant is aggrieved by the decision of the

Disciplinary Action Committee ("DAC" for convenience) of the

National Stock Exchange of India Limited ("NSE" for 2

convenience) dated July 18, 2014. DAC has passed several

directions including consolidated monetary penalty of ` 37.89

lakhs, suspension of membership and review by an independent

auditor appointed by the Exchange to confirm that the appellant

is complying with all the regulatory guidelines as well as

adequacy of the internal controls in place. This appeal has been

filed aggrieved by these directions of DAC.

2. Appellant is a trading member of the NSE in the Capital

Market ("CM" for convenience), Futures and Options ("F&O"

for convenience) and Currency Derivatives Segments ("CD" for

convenience). The NSE conducted a regular inspection of the

books and other relevant records of the appellant in April 2012

covering the period from August 01, 2011 to February 27, 2012.

The said inspection also covered issues relating to certain

investor complaints. During the said inspection several

violations of various regulations, rules and bye laws of

Securities and Exchange Board of India ("SEBI" for

convenience), NSE as well as the National Securities Clearing

Corporation Limited ("NSCCL" for convenience) were noticed

and a show cause notice dated May 02, 2012 was issued to the

appellant directing the appellant to provide its explanation as

well as to show cause as to why disciplinary action should not 3

be initiated against the appellant. Further, the appellant has

been disabled by NSE in the CD segment w.e.f. May 04, 2012

due to margin violation, from F&O segment w.e.f. August 06,

2012 due to shortages of security deposits and from the CM

segment w.e.f. August 21, 2012 due to shortages in security

deposits.

3. Apart from procedural violations, the charges against the

appellant and the consequent penalty imposed are reproduced as

follows:-

I. Margin Reporting Penalty

(a) Penalty for wrong reporting ` 15,00,000/-

(b) Penalty for false reporting ` 15,00,000/-

II. Penalty for excess brokerage charged to clients ` 6,09,000/- [in addition excess brokerage to be refunded to clients.]

III. Not providing proof of contract notes and daily margin statements issued to clients in currency derivatives segment ` 50,000/-

IV. Late pay-in to clients ` 50,000/-

V. Use of bank accounts for other than purposes specified and receipt from clients deposited in own bank account/ payment to clients from own bank account ` 10,000/-

VI. Contravening clauses in client registration documents ` 10,000/- 4

VII. For charging penalty in excess of the amount levied by NSCCL ` 50,000/- [in addition excess amount charged to be refunded to clients.]

VIII. Actual settlement of funds and securities: non-release of funds to clients ` 10,000/-

IX. Indefinite suspension for multiple violations, till systems and controls are put in place.

Given the procedural as well as other violations as above the

DAC advised the appellant to put in place necessary checks and

balances to ensure investor safety and maintenance of up-to-

date financial records. Till confirmation to the effect of

availability of adequacy of systems and internal controls based

on independent evaluation by an auditor the appellant was

suspended in terms of Chapter IV of the Rules of NSE. Further,

the aforesaid consolidated monetary penalty of ` 37.89 lakhs

has been imposed for violations pertaining to funding of clients

transactions, penalties levied to clients in excess of the penalties

levied by Exchange, false reporting of margin in F&O and CD

segment, wrong reporting of margin in F&O and CD segment,

actual settlement of funds and securities not done periodically as

well as on clients' request, excess brokerage charged to clients,

use of client bank account and receipt from clients deposited in

own bank account/ payment to clients made from own bank 5

account, for non-issuance of contract notes and daily margin

statement regularly to client, and for contravening clauses

included in client registration documents. In addition, refund of

penalties levied on clients in excess of the penalties levied by

the NSCCL and refund of the excess brokerage amount to the

respective clients has also been ordered. Advice/ Warning was

issued for non-maintenance of clients ledgers properly, abstain

from levying late pay-in charges in excess of rates agreed upon

by the clients, to put in place necessary checks and balances to

ensure investor safety and maintenance of up to date financial

records and other procedural steps.

4. Learned counsel Shri Piyush Raheja appearing on behalf

of the appellant submits that the appellant received its

registration certificate from SEBI and NSE in the year 2000 and

for 10 years no violations have been made or noticed by either

NSE or SEBI. Therefore, it is the first time that certain

inadvertent omission might have happened. It is also appellants'

stand that the NSE carried out the inspection and issued a large

number of communications, including Email, Telephone calls

etc. seeking documents and responses in a very short time and

that too at odd hours. Further, it is contended that the inspection

team carried out their inspection in a spiteful manner. Despite 6

such arbitrary behavior of the NSE the appellant co-operated in

the said inspection. However, despite the explanation given by

the appellant and supporting documents provided to the DAC

the DAC did not consider many of the facts and passed the

impugned order in a very arbitrary manner. Many of the

charges levelled in the inspection report and reiterated by the

DAC are devoid of merit. The learned counsel for the appellant

cited the following directions in the impugned order to support

his stand:

(a) Penalty of ` 15 lakh each imposed for wrong

reporting and false reporting of margin is not as

per the provisions in the Circulars issued by

NSE. Many of the Circulars issued by the

respondent NSE are either not clear or the

penalty provisions of the said Circulars have

been wrongly interpreted by the NSE. For

instance for wrongful reporting of margin the

maximum prescribed penalty is only 1.25% of

the wrongly reported amount subject to a

maximum of ` 1 lakh (NSE Circular dated

24.12.2010). As informed by CA Certificate

the factual wrong reporting of margin was only

to the tune of ` 16.12 lakh out of a total margin 7

reported as collected to the tune of 23.32

crores, which is only about 0.69% for which

the imposable penalty should have been only a

"warning". In any case, the maximum

prescribed penalty could have been only ` 1

lakh and not ` 15 lakh as imposed by the NSE.

(b) The allegation of wrong reporting and false

reporting are not correct because a CA

Certificate was given to the DAC of NSE

which was not accepted by them. However,

the same CA Certificate which was given to the

DAC of NSCCL was accepted. The NSCCL

did not find any deficiency in the said CA

Certificate and, therefore, accepted the

submissions made by the appellant.

(c) The allegation that CA Certificate in a

particular format was not given by the

appellant to NSE is not correct, because, no

such format was received by the appellant;

only an Email was received almost 2 years

after submission of the original CA Certificate

in June 25, 2012. In any case, the contents of 8

the certificate given by the appellant and what

is stated to be the appropriate format of CA

Certificate are the same and hence there was no

ground for rejecting the first certificate

submitted by the appellant in June 25, 2012.

(d) Further, even if the information furnished in

the CA Certificate was not in the prescribed

format the information given was not incorrect

but may be only incomplete. In such a

situation, no penalty should have been

imposed. In any case, the alleged margin

shortfall is devoid of merit as it was already

informed to the NSE that there was sufficient

margin available in the account of the

shareholders of the appellant which is a closely

held company.

5. Similarly, the appellant refutes the charge of the DAC that

the appellant did not do actual settlement of funds and securities

of the clients periodically as well as on their request by citing

mistakes on the part of the NSE inspection team or incorrect

interpretation of the Circulars by the DAC. 9

6. Regarding the charge that the appellant collected excess

brokerage also a similar stand has been taken by the appellant

i.e. the NSE inspection team being wrong or the interpretation

of the Circulars and bye laws is not correct. As a case in point

the appellants contends that regulation 3.7 of F&O segment

prohibits brokerage exceeding the scale prescribed therein and

only when the scale is exceeded can it be called excess. The

appellant has never exceeded the given scale. Scale of 2.5% of

the contract value in F&O segment of ` 100/- per lot in case of

options contract. Further it was submitted that in any case the

alleged excess brokerage collected is a very small amount and

no penalty should have been imposed for the same.

7. Similar arguments were put forth for all the other alleged

violations as well as i.e. misinterpretation by the inspection

team or misinterpretation of the Circulars/ bye laws by the

DAC.

8. At the end of his arguments the learned counsel for the

appellant also took a stand that the minutes of the DAC were

not provided to the appellant and the composition of the DAC

itself was changed and thereafter no further hearing was

provided to the appellant. We note that, though the appellant 10

had filed an appeal before this Tribunal in November 2014

(Appeal No. 412 of 2014) such a preliminary objection was not

raised during hearing of the matter on February 07, 2017.

Instead, after hearing the matter for some time the appellant

sought to withdraw the appeal with liberty to file a fresh appeal,

which was granted. Therefore, after such a long period of

almost five years this submission which was not even argued at

the beginning does not have any merit. Therefore, we proceed

to examine the merit of the charges and submissions thereon.

9. We have also heard Shri Nimary Dave, learned counsel for

the respondent, who on the other hand, submitted that the

appellant has been taking a non-cooperative approach in

answering various queries. However, the DAC has gone into all

the aspects of the case and whatever submissions have been

made by the appellant while passing the impugned order. In

fact the DAC has exonerated the appellant on several charges

which are procedural in nature and imposed only reasonable and

at times the minimum penalty. Though, eight violations have

been identified the total penalty imposed is only ` 37.89 lakhs,

which given the seriousness of the violations, is only

reasonable.

11

10. Without getting carried away by the extremely circuitous,

hair- splitting and hair- raising arguments of the appellant and in

the interest of justice we proceed to discern the factual matrix as

well as the veracity of the submissions of the appellant. We

find some substance in the submissions of the appellant that the

penalty of ` 15 lakhs imposed for wrong reporting could have

been different in terms of the provisions in the relevant NSE

Circular dated December 24, 2010. In the said circular, there

are two broad provisions relating to wrong reporting under the

heading Margin reporting requirement in category (a) where

percentage of factual wrong reporting of margin collection from

constituents and in (b) percentage of margins not properly

accounted for (where excess margin available with member in

the accounts of relatives, with authorizations). The appellant is

taking shelter under (b) while the respondent has issued the

order under (a). Although the DAC has found some

deficiencies in the claim of the appellant that his relatives had

excess margin in their accounts the issue is not conclusively

settled. Accordingly, appellant deserves benefit of doubt.

Moreover, it is an established principle in law that when there

are two provisions in law the more beneficial provision should

be applied wherever appropriate. This is particularly relevant in

the context of the appellant who has been indefinitely suspended 12

also for the various violations impugned in this appeal.

Therefore, we reduce the amount of penalty imposed on wrong

reporting from ` 15 lakhs to ` 1 lakh on the ground of

proportionality.

11. Regarding the penalty imposed on other violations we do

not agree with the submissions of the appellant. As the

documents clearly show that such violations have been

committed, the appellants' hyper technical submissions do not

have any merit; what is relevant is whether the appellant, based

on the evidence available, has committed those violations and

whether any satisfactory explanation has been provided either in

mitigating the violation or in proving that the violations have

not been committed. The facts and records speak volumes about

the way in which the appellant has been running the business of

broking and violating multiple provisions of bye laws and

circulars issued by the respondent as well as by SEBI.

Accordingly, we do not find any deficiency in reiterating the

penalty imposed by the DAC when such violations have been

noticed by the respondent.

12. The appellant's attempt to prove that the CA Certificate

provided to the respondent Exchange was in the correct

proforma, since the same was accepted by the NSCCL does not 13

stand to merit. We note that, many of the contents of those

proformae are different. The fact that NSCCL has accepted the

information in a particular proforma does not absolve the

appellant from providing the necessary information in the

proforma specified by the Exchange, though, some of the

information/ part of the format may be same/ common. In any

case, the appellant as a broker is bound to follow the bye laws/

circulars/ instructions of the respondent Exchange as the

Exchange is the first tier regulator of brokers. While taking

membership of the Exchange the appellant has also entered into

an agreement to abide by the Exchange bye laws/ circulars/

rules etc. Even if the submission of the appellant is accepted

that they received the proforma from the Exchange belatedly the

same could have been furnished by the appellant at that point of

time.

13. The direction relating to suspension of the appellant

contains a solution in itself. The said suspension of membership

was only till receipt of confirmation from the appellant

regarding its preparedness to run the operations as per

regulatory guidelines and adequacy of the internal controls put

in place and therefore providing a report from an independent

auditor appointed by the Exchange to these effects. Therefore, 14

it was open to the appellant to approach the respondent

Exchange to seek such an audit after putting in place the

required systems and internal controls.

14. In the light of the above reasons, the appeal is partly

allowed by reducing the total amount of penalty imposed on the

appellant from ` 37.89 lakhs to ` 23.89 lakhs. No orders on

costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 06.08.2019 Prepared & Compared By: PK