Lfs Broking Private Limited vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision : 17.11.2022 Misc. Application No. 1422 of 2022 And Misc. Application No. 1423 of 2022 And Appeal No. 891 of 2022 LFS Broking Private Limited Office No. 311/75, 3rd Floor, Shrinath Plaza, Wing 'B', F.C. Road, Shivaji Nagar, Bhamburda, Pune, Maharashtra - 411 005. .....Appellant Versus National Stock Exchange of India Ltd. A Wing, Ground Floor, Exchange Plaza, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent Shri P.N. Modi, Senior Advocate with Mr. Ashok Singh, Advocate for the Appellant. Mr. Janak Dwarkadas, Senior Advocate with Mr. Ankit Lohia, Mr. Rashid Boatwalla, Mr. Juan D'Souza, Ms. Samiksha Rajput, Advocates i/b MKA & Co. for the Respondent. CORAM : Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member Per : Justice Tarun Agarwala, Presiding Officer 1. Since the appeal has been taken up for consideration, the urgency application is disposed of. The exemption application 2 is allowed and the appellant is exempted from filing the certified copy of the impugned order. 2. The present appeal has been filed against the order dated November 5, 2022 passed by Member and Core Settlement Guarantee Fund Committee ('MCGFC / Committee' for short) of the National Stock Exchange of India Limited ('NSE' for short) whereby the trading membership of the appellant has been suspended in all segments with immediate effect.

3. The facts leading to the filing of the present appeal is, that the Exchange received market intelligence that LFS Broking & PMS Services ('LFS-PMS' for short) was running a scheme assuring 2% monthly returns for a minimum investment of Rs. 25,000/-. The Exchange accordingly made the necessary investigation and observed that the appellant was engaged as a principal in a business other than securities involving personal financial liabilities. It was observed that LFS Broking & PMS Services and MOL Commodities (MOLC) were running unauthorized portfolio management services (PMS) without being registered as registered portfolio managers under the Securities and Exchange Board of India laws and that Mr. Saiyad Jiyajur Rahaman is running 3 this business who is also a Dominant Promoter and Director of the appellant Company. 4. The Exchange accordingly initiated a forensic audit of the appellant for the period April 1, 2018 to July 7, 2021 to ascertain whether the appellant is engaged in providing assured returns to its clients. Based on the observation made in the forensic audit a show cause notice dated September 23, 2022 was issued alleging non-compliance of the regulatory provisions, namely, (a) that the appellant was engaged as a principal in a business other than securities involving personal financial liabilities and (b) failure to make arrangements for internal review of the business to detect and prevent violations and achieve compliance of the Byelaws, Rules and Regulations of the Exchange.

5. The appellant appeared before the Committee and submitted that LFS-PMS is the proprietorship firm of Mr. Saiyad Jiyajur Rahman and MOLC is the partnership firm in which Mr. Saiyad Jiyajur Rahman is the partner and that 87% of the shareholding of the appellant Company is controlled by Mr. Saiyad Jiyajur Rahman. It was contended that only the appellant is involved in the broking business and the partnership as well as partnership firms are engaged in 4 real estate business, primary material supply etc. and are not involved in the securities market. 6. Since the charge of offering assured returns were specifically refuted by the appellant, the Committee during the course of hearing produced a video clip and some pamphlets indicating that the appellant was providing 2% monthly assured returns to its clients based on which the Committee came to the conclusion that there was sufficient evidence indicating that the appellant was involved in offering assured returns and therefore the Committee found that there was potential threat to the gullible investors from the appellant and therefore suspended the trading membership of the appellant (noticee) with immediate effect.

7. Having heard the learned counsel for the parties and having perused the evidence and certain documents that have been produced by the respondent before us we find that the pamphlets which has been considered in paragraph 5.2 and 6.5 of the impugned order relates to LFS Broking. There is no finding that LFS Broking and the appellant LFS Broking Private Limited is one and the same. 8. Other than the video clip and the pamphlets there is no material to show that the appellant is offering assured returns. 5 The forensic audit considers a telephonic conversation between Mr. Manish Sarwan, Area Head - Senior Manager, Kolkata of the noticee and a potential client which factor has not been taken into consideration by the Committee. Other than this telephonic conversation the forensic audit has not come out with any other information as per the impugned order regarding assured returns being provided by the appellant. 9. We are also of the opinion that if during the course of the hearing fresh evidence comes up before the Committee then the appropriate procedure was to issue a supplementary notice and provide an opportunity to the appellant to rebut the same.

The said new evidence cannot be used to spring a surprise upon the representative of the appellant at the stage of hearing based on which the impugned interim order has been passed. 10. We also find that after the passing of the impugned order a supplementary show cause notice dated November 12, 2022 has been issued alleging the video broadcast and the social media post available across various platforms. 11. In the absence of any other evidence other than video clip and pamphlets which are yet to be proved, we are of the 6 opinion that the action of the respondent in suspending the trading membership of the appellant was done in haste and therefore the impugned order cannot be sustained. 12. In North End Foods Marketing Pvt. Ltd. vs Securities and Exchange Board of India in Appeal No. 80 of 2019 decided on March 12, 2019 this Tribunal held as under:- "13. Having heard the learned senior counsel at length, we find that it is no more res integra that SEBI has power to pass ex-parte interim orders, pending investigation, which power flows from Section 11 and 11B of the SEBI Act. A plain reading of Section 11 and 11B shows that SEBI has to protect the interests of the investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section 2 of Section 11 of the Act.

SEBI has power to pass interim orders and such interim orders can also be passed exparte. Interim orders are passed in order to prevent further possible mischief of tampering with the securities market. If during a preliminary enquiry, it is found prima-facie, that the person is indulging in manipulation of the securities market, it would be obligatory for SEBI to pass an interim order or for that matter an ex- parte interim order in order to safeguard the interests of the investors and to maintain the integrity of the market. Normally, while passing an interim order, the principles of natural justice has to be adhered to, namely, that an opportunity of hearing is required to be given. Procedural fairness embodying natural justice is to be applied whenever action is taken affecting the rights of the parties. At times, an opportunity of hearing may not be pre-decisional and may necessarily have to be post-decisional especially where the act to be prevented is imminent or where action to be taken brooks no delay. Thus, pre decisional hearing is not always necessary when ex parte ad-interim orders are made pending investigation or enquiry unless provided by the statute.

7 In such cases, rules of natural justice would be satisfied, if the affected party is given a post decisional hearing. 14. However, it does not mean that in every case, an ex- parte interim order should be passed on the pretext that it was imminent to pass such interim order in order to protect the interest of the investor or the securities market. An interim order, however, temporary it may be, restraining an entity/person from pursuing his profession/trade may have substantial and serious consequences which cannot be compensated in terms of money. 15. Thus, ex-parte interim order may be made when there is an urgency. As held in Liberty Oil Mills & Ors. vs. Union of India & 18 Ors. [AIR (1984) SC 1271] decided on May 1, 1984, the urgency must be infused by a host of circumstances, viz. large scale misuse and attempts to monopolise or corner the market. In the said decision, the Supreme Court further held that the regulatory agency must move quickly in order to curb further mischief and to take action immediately in order to instill and restore confidence in the capital market." 13. We find that the respondent has proceeded in haste in the absence of any cogent evidence and in the absence of any evidence that allowing the appellant would create a potential threat to the gullible investors, we are of the opinion that the interim order restraining the appellant from pursuing his profession / trade may have substantial and serious consequences which cannot be compensated in terms of money.

14. We also find that November 28, 2022 has been fixed by the Committee for disposal of the matter. 8 15. In view of the aforesaid, the impugned order dated November 5, 2022 cannot be sustained and is set aside. We also direct the appellant to appear before the Committee on November 28, 2022 and file the reply to the supplementary show cause notice. The Committee will thereafter decide the matter in accordance with law after giving an opportunity of hearing. The appeal is allowed. 16. 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 RAJALAK Digitally signed SHMI by RAJALAKSHMI HARISH NAIR 17.11.2022 HARISH Date: 2022.11.24 10:52:29 +05'30' NAIR msb