M/S Excel Stock Broking Private Limited vs Sebi

noted by the inspecting team. Minor irregularities were satisfied

by imposing a penalty of Rs. 10,000/- by the Internal

Committee of Minor Action. The major issue of user of 10

terminals by the appellant form the places other than designated

was handled by the MSCGFC vide the impugned order. Upon

considering the reply of the appellant to the show cause notice

as well as upon personal hearing the MSGFC found that the

appellant had operated 10 terminal at the locations other than

reported to the respondent NSE. Therefore, the penalty came to

be imposed at the rate of 1 lakh per terminal.

3. The appellant is a stock broker. It has obtained 102 trading

terminals for two locations at Kolkata as detailed in the order.

While some of the terminals were found closed or were having

negligible tradings, with respect to disputed 10 terminal

according to the respondent the appellant was unable to provide 3

the details and location of these 10 trading terminals.

Therefore, the show cause notice dated May 07, 2019 was

issued.

4. The appellant inter-alia replied that on the date of

inspection, there was an alarm call from Exchange with respect

to order-to-trade ratio and therefore the appellant had to log off

some of its terminals to keep the order-to-trade ratio in order. It

was further explained that when the officials of the respondent

NSE checked the premises of the appellant they did not check

the entire sections of their office. Some of the sections were

overlooked by the inspecting teams which were simultaneously

carried out by 5 inspection teams. Lastly it was contended that

as the inspecting team visited the office premises approximately

at 3:20 p.m. some of the dealers of the appellant had already

completed their job for the day and therefore they had wrapped-

up their terminal for the day.

In view of the above explanations additional show cause notice

dated January 07, 2020 was issued to the appellant, thereby

giving the details of the trading time from all the terminals. It

pointed out that even after 3:20 PM the trades were executed

from the 6 out of 10 disputed terminals. Exhibit-A, annexing

the details was provided to the appellant. 4

5. The appellant replied that on that day the alarm call was

received by Bombay Stock Exchange with respect to order-to-

trade ratio and therefore the appellant was required to log off

some of it's active terminals. Further as the inspecting team had

visited the office at Salt Lake of the appellant it was already

3:20 p.m, and therefore as some of the dealers of the appellant

had completed their trades, they had closed their terminals.

6. Vide the impugned decision the Committee of the

respondent held that while in the earlier reply it was vaguely

stated that the alarm call was from a stock exchange, in the next

of the reply however it was explained that it was the alarm call

from the Bombay Stock Exchange. Therefore not naming a

particular Exchange in the earlier response was branded by the

respondent's Committee as a mischievous explanation. As

regards the timing, that at 3:20 p.m some of the dealers of the

appellant had completed their work and closed the terminals, the

respondent's Committee observed that vide the additional show

cause notice it was brought to the notice of the appellant that

post 3:20 p.m 6 terminal out of those 10 terminals were found

executing trades as proved by the log annexed to the additional

show cause notice as Annexure A. The Committee therefore

concluded that the appellant was unable to demonstrate the 5

availability of the terminals as well as the usages of the terminal

from the declared locations of the appellant, during the

inspection. The appellant was therefore held liable for the

penalty for acting against the Circular No. NSE/MSD/34638

dated April 13, 2017. The Committee further observed that the

appellant failed to adhere to the professionalism and the trading

practices. It further found that there was a contravention of the

following Regulations/ circular:-

"i. Regulation 4.2 of NSEIL CMFO Regulations require members to establish, maintain, and enforce procedures to supervise its business and to conduct periodic review/ inspection of their offices and records of the operations carried out by them

ii. Exchange circular no. NSE/INSP/28434 dated December 24, 2014 which state that the members are required to ensure adequate monitoring and control over the trading terminals operated from the offices including sub broker and AP location of the members. iii. Exchange circular no. NSE/MA/22732 dated February 13, 2013 inter alia states that: "..Trading members shall report the details of L2 digit CTCL/IBT/DMA/STWT terminals to the 6

Exchange before routing any order through such terminals to avoid mismatches. Failure to upload the details, by member, if observed shall render such terminals unauthorized and shall consequently attract disciplinary action as prescribed by the Exchange from time to time..."

iv. Exchange circular no. NSE/MA/22732 dated February 13, 2013 inter alia states that: "...trading members can carry out their order activity on the same day subsequent to the upload of terminals through ENIT..."

In the circumstances, the penalty as detailed above came to be

imposed.

7. Heard Shri Jaikishan Lakhwani, learned counsel for the

appellant and Shri Vishal Kanade, learned counsel for the

respondent through video conference. The learned counsel for

the appellant submitted that a joint inspection was conducted by

NSE/BSE/MSEI/MCX AND NCDEX on the fateful day. In

fact all the terminals were located at the Salt Lake office of the

appellant. The Inspecting Officer reached the Salk Lake office

only at 3:20 p.m. around which time the market closed. The 7

Inspecting Officer did not ask for the said terminals. The

Inspecting Officer failed to carry the inspection completely and

in proper manner. Further on that day as there was an alarm call

from the Bombay Stock Exchange as detailed above some of the

terminals were required to be closed and therefore the finding of

the Committee are wrong.

8. Without prejudice to the above submission, it was

contended that the respondent was not able to establish that the

terminals were located at any other premises. The only findings

are that the terminals were not found at the designated location.

As per the Circular No. NSE/INSP/28434 dated December 24,

2014 the penalty can be imposed only for using the terminal at a

location other than designated location.

9. Further, as regards the quantum of the penalty it was

submitted that the Circular No. NSE/INSP/36248 dated

November 06, 2017 on the basis of which the penalty is

imposed itself provides that the penalties indicated therein are

only indicative in nature and could undergo change in specific

cases depending on the frequency and gravity of the violations.

Admittedly, the present violation is the first violation. 8

Therefore, according to him, the penalty of Rs. 10 lakh imposed

upon the appellant is excessive.

10. On the other hand, the learned counsel for the respondent

NSE submitted that the appellant has shifted his stand from time

to time. While in the first reply it was vaguely stated that there

was an alarm call from an Exchange, in the subsequent reply it

was changed to the alarm call from the Bombay Stock

Exchange. Further no specific reply could be given as against

the definite details given of the log at Exhibit-A to the

supplementary show cause notice wherein it was shown that 6

out of these 10 terminals were used for trading purposes beyond

3:20 p.m. as against the appellant's claim that by 3:20 p.m., the

work of some of the dealers were completed and therefore they

had closed their terminals. In the circumstances, it was

submitted that there is no merit in the appeal.

11. As regards the use of terminal at the different locations.

The respondent NSE submitted that once it is proved that the

terminals were not found at the premises and were used during

the said period, there is no need to prove that those were

operated from different locations than designated. As regards

the quantum of penalty it was submitted that the reliance placed 9

by the appellant on the circular to show that the penalties are

indicative in fact further shows that in cases of repeat violators

the penalty can be more than prescribed by the circular.

12. Upon hearing both the sides, in our view, the explanation

given by the appellant cannot be accepted. It is to be noted that

while in the first reply the appellant merely gave a vague

explanations that an alarm call from certain exchange required

closing of certain terminals, In subsequent reply the appellant

added that it was an alarm call from the Bombay Stock

Exchange. Even, if we ignore this anomaly as trivial one, the

fact remains that after 3:20 p.m., out of the 10 disputed absent

terminals, 6 terminals were still found functioning after that

time, as against the explanation of the appellant that when the

inspecting team arrived at 3:20 p.m., some of the dealers had

completed their transactions and closed those terminals. In

view of the above fact, we do not find any merit in the factual

submissions of the appellant. The appellant has clearly violated

the Circulars.

13. On the question of penalty the respondent has issued a

circular dated November 06, 2017 providing various penalties

for different violations. Under the heading " Penalties/ 10

disciplinary action for procedural violations" the penalty for not

finding the terminal at the location has been provided at Sr. no.

8. For facility, the said provision is extracted hereunder:-

Sr. No. Details of contravention Penalty/Disciplinary Action 8 Unauthorized extension of NEAT/ Rs. 1 Lac per location Trading terminal/ Non-upload of CTCL Trading terminals to the Exchange/ In cases where non-upload of details of Location of terminal at a place other than more than five CTCL terminals are main/ branch office and the location of observed and such CTCL terminals are also the offices of registered sub brokers/ observed to be operated by entities acting as authorized persons of the member not unregistered intermediaries in the CM uploaded to Exchange segment or as intermediaries in the F&O segment and/ or such terminals are observed to be used for carrying out illegal trading activity, suspension of the trading membership may also be considered depending upon the gravity of the violation.

14. A perusal of the aforesaid indicates that if the terminal is

not found at the location then the penalty is Rs. 1 lakh per

location. In the instant case, we find that there is no finding that

the 10 terminals were found at different locations. In the

absence of this kind of finding, the penalty of Rs. 10 lakh is

wholly excessive and against Sr. no. 8 of the Circular dated

November 06, 2017. Since the Committee has not given any

finding that the terminals were found at different locations, we

are of the opinion that a maximum penalty of Rs. 1 lakh can be

imposed, coupled with the fact that there is no finding of

repetitive violation by the appellant. 11

ORDER

15. In view of the aforesaid, while affirming the violation

committed by the appellant we reduce the penalty from Rs. 10

lakhs to Rs. 1 lakh which shall be paid by the appellant within

four weeks from today. Appeal is partly allowed. In the

circumstances of the case parties shall bear their own costs.

16. 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 Tarun Agarwala RAJALAKS Digitally signed by RAJALAKSHMI H Presiding Officer HMI H NAIR Date: 2021.01.07 NAIR 15:45:13 +05'30'

Dr. C.K.G. Nair Member

Justice M. T. Joshi Judicial Member 7.01.2021 PK