Kaynet Capital Ltd. vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI DATE : 12.06.2019

Appeal No. 245 of 2019 Kaynet Capital Ltd. 24B, Khatau Building, A. D. Modi Marg, Fort, Mumbai - 400 001. .... Appellant

Versus

1.

BSE Ltd.

Floor 25, P. J. Towers, Dalal Street, Mumbai - 400 001.

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. J. P. Sen, Senior Advocate with Mr. Kunal Katariya, Mr. Vishesh Malviya, Mr. Digvijay S. Sarangdhar, Advocates i/b Rashmikant & Partners for the Appellant.

Mr. Sagar Divekar, Advocate with Mr. Abhimanyu Mhapankar, Advocate the Respondent Nos. 1.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Mihir Mody, Mr. Sushant Yadav, Advocates i/b K. Ashar & Co. for the Respondent Nos. 2.

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

Per : Justice Tarun Agarwala, Presiding Officer (Oral)

1. The appellant is a part of Kaynet group. Securities and

Exchange Board of India (hereinafter referred to as, "SEBI") decided 2

to inspect the books of accounts, records and other documents

pertaining to stockbroking registration for the purpose of verifying

whether the books of accounts, etc. were being maintained in the

manner specified by the provisions of Securities Contract

(Regulation) Act, 1956 and the Securities and Exchange Board of

India Act, 1992 and the Rules, Regulations, Circulars made therein.

For the purpose of inspection, SEBI issued a letter dated May 2, 2019

requiring the appellant to provide the necessary data and documents

as per the questionnaire by May 17, 2019. The said letter is alleged

to have been received on May 9, 2019.

2. Since voluminous information was sought from the appellant,

an application dated May 13, 2019 was filed before SEBI praying

that two months' time may be granted to the appellant to furnish the

relevant information. The said application was considered and SEBI

by an e-mail dated May 22, 2019 extended the time to submit the

requisite information till May 31, 2019.

3. Since the requisite information was not supplied, the appellant

again sought further extension on May 29, 2019 which was granted

till June 3, 2019.

4. Similar letters providing information were also given to the

other companies of Kaynet group. It is contended that Kaynet

Commodities Pvt. Ltd. provided the requisite information on June 4, 3

2019 and the appellant as a depository participant of CDSL also

provided the requisite information on June 7, 2019. In the said letter,

it was contended that the requisite information for other group would

be supplied in due course.

5. Since the appellant failed to provide the requisite information

as per the letter of SEBI dated May 2, 2019, SEBI issued an e-mail

dated June 7, 2019 to Bombay Stock Exchange Ltd. (BSE) advising

them to invoke their bye-laws and disable the trading terminals of the

appellant for serious non-compliance despite reminders. Based on

the said e-mail, BSE by e-mail dated June 7, 2109 issued the

impugned order deactivating the trading terminals of the appellant by

exercising the powers under Rule 13A(a) of Chapter IV of the BSE

Ltd. Rules (hereinafter referred to as "Rules"). The appellant being

aggrieved by the aforesaid order has filed the present appeal.

6. We have heard Mr. J. P. Sen, the learned senior counsel

alongwith Mr. Kunal Kataria, Mr. Vishesh Malviya, Mr. Digvijay S.

Sarangdhar for the appellant and Mr. Sagar Divekar, the learned

counsel alongwith Mr. Abhimanyu Mhapankar, the learned counsel

for BSE and Mr. Pradeep Sancheti, the learned Senior counsel

alongwith Mr. Mihir Mody and Mr. Sushant Yadav, the learned

counsel for SEBI.

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7. The contention of the learned senior counsel for the appellant is

that the impugned order is wholly illegal and without any authority

of law. The impugned order has been passed by a person who had no

authority to pass the suspension order. In the instant case, it was

contended that the impugned order was passed by the Deputy

General Manager, Membership Compliance & DIS, whereas under

the Rules only the Managing Director / relevant authority was

competent to pass the suspension order. It was contended that the

Deputy General Manager was neither the Managing Director nor the

relevant authority.

8. The learned senior counsel further contended that the

imposition of suspension of its trading terminals was too harsh, a

punishment which was totally unwarranted. Non supply of the

requisite information within the stipulated period, would at best,

attract a fine as per the circular of BSE dated November 9, 2017.

9. On the other hand, the learned senior counsel for SEBI

contended that sufficient time and latitude had been granted to the

appellant to furnish the requisite information as per the letter dated

May 2, 2019. Since the requisite information was not forthcoming,

SEBI directed the stock exchange to take action as per their bye-

laws, which action has been taken. It was contended that since the

appellant was not co-operating in providing the data for the purpose 5

of inspection, the suspension order was passed which requires no

interference.

10. It was contended by the learned counsel for the stock exchange

that the decision to suspend the trading terminals of the appellant was

taken by the competent authority, namely, by the Managing Director

and communication of the suspension was intimated through the

impugned order which has been annexed to the appeal. In support of

his submission, the learned counsel has placed a note which was

placed before the Managing Director indicating the non-compliance

of the direction of SEBI and, accordingly, a recommendation was

made for suspension of the trading of the appellant under Rule

13A(a) of the Rules. It was contended that he said recommendation

was approved by the Managing Director.

11. Having heard the learned counsel for the parties, we find that

action has been taken under Rule 13A(a) of the Rules of BSE.

Chapter IV of the Rules relates to disciplinary proceedings, penalties,

suspension and expulsion. Under Rule 1, the relevant authority may

expel or suspend or impose a fine or censure or give a warning if a

member is found guilty of contravention or non-compliance of the

Bye-laws or Rules or Regulations or any resolutions, orders, notices,

directions or decisions or rulings of the exchange by the relevant 6

authority. Thus, under the said Rule, a wide power is given to take

disciplinary action if a member is found guilty.

12. Rule 2 provides that penalty can be imposed for misconduct

in particular and without in any way limiting the generality of the

provisions of Rule 1. Rule 3 provides various types of misconducts.

Rule 13 provides for explanation before suspension or expulsion and

Rule 13A(a) provides for temporary suspension. For facility, Rule

13 and 13A(a) of the Rules are extracted hereunder :-

"13. A member shall be entitled to be summoned before the relevant authority and afforded an opportunity for explanation before being suspended or expelled but in all cases the findings of the relevant authority shall be final and conclusive.

13A(a). Notwithstanding what is contained in clause (13) herein above if in the opinion of the Managing Director / relevant authority, it is necessary to do so, he / it may, for reasons to be recorded in writing, temporarily suspend a member, pending completion of the proceedings for suspension under this chapter by the relevant authority, and no notice of hearing shall be required for such temporary suspension and such temporary suspension shall have the same consequences of suspension under this chapter."

13. A perusal of the Rule 13 makes it apparently clear that the

relevant authority is required to afford an opportunity for explanation

from the member before passing of an order of suspension or

expulsion. Rule 13A(a) is, however, an exception to Rule 13 and

provides that in an exceptional case where it is necessary to do so, 7

the Managing Director or relevant authority for reasons to be

recorded in writing may issue a temporary suspension order without

giving an opportunity of hearing / explanation.

14. Rule 13A(a) clearly indicates that the Managing Director or

relevant authority must record its opinion in writing that in the given

circumstances, it was necessary to temporarily suspend a member

pending completion of the proceedings for suspension under the

Chapter by the relevant authority. We find from the impugned order

and from the note and the trail mail provided by BSE that no reason

has been recorded by the Managing Director nor any opinion has

been given by the Managing Director as to why the appellant was

required to be suspended temporarily. Merely by approving the

recommendations made on a note by some other person does not

mean that the Managing Director has given any opinion / reasons and

the circumstances as to why it was necessary to suspend the

appellant. In fact, it only indicates non application of mind by the

Managing Director. The Managing Director has to apply its own

mind and come to a conclusion that in the given circumstances, the

penalty of suspension was justifiable. We are clearly of the opinion

that in the instant case, there was no application of mind nor any

reasons have been recorded by the Managing Director / relevant

authority for suspending the appellant. The impugned order, thus,

cannot be sustained.

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15. For the aforesaid reasons, it is not necessary for us to dwell into

the question as to whether the impugned order was passed by the

Managing Director / relevant authority or not.

16. We further find that SEBI had issued directions to the appellant

to provide the requisite information. If the same was not

forthcoming, SEBI should have taken action on its own under the

SEBI Act, Rules and the Regulations framed by it instead of

directing the stock exchange to pass the order of suspension.

17. During the course of arguments, the circular dated November

9, 2017 issued by BSE was placed wherein monetary penalty ranging

from Rs. 1000/- to Rs. 1 lac per day could be imposed for furnishing

wrong data, delay in submission of documents or for non-cooperation

in providing data. Taking a clue from this circular, we find that

admittedly, no information was provided by the appellant for more

than a month. Certain information in part was supplied by the

appellant on June 10, 2019 after the passing of the impugned order.

No cogent justification has been given except the fact that

voluminous information was sought under the questionnaire. We are

of the opinion that sufficient latitude has been given to the appellant

to furnish the requisite information. Since the appellant failed to

furnish the information, monetary penalty was justifiable. In the

circumstances of the present case, the penalty of suspension of 9

trading by the appellant was harsh and unwarranted. In the first

instance, a monetary penalty could have been imposed. We are, thus,

of the opinion that the appellant instead of being suspended was

liable to pay a monetary penalty for not furnishing the information

during this period. We are further of the opinion that instead of

remanding the matter to the authority for computation of penalty, we

compute a sum of Rs. 1 lac (Rupees One Lac) only towards monetary

penalty in order to put an end to this controversy.

18. For the reasons stated aforesaid, the impugned orders are

quashed. The appeal is allowed on payment of Rs. 1 lac (Rupees

One Lac) as stated aforesaid which shall be paid by the appellant to

respondent SEBI within a week from today. The appellant will also

provide the requisite information as per the letter of SEBI dated May

2, 2019 on or before June 17, 2019 latest by 4 p.m. failing which, it

would be open to SEBI to pass such orders in accordance with law.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 12.06.2019 Prepared & Compared by PTM