Neon Vinimay Pvt. Ltd. vs Sebi

Order Reserved On: 04.04.2019 Date of Decision : 26.04.2019

Appeal No. 72 of 2019

Neon Vinimay Pvt. Ltd. 510, Kamlalya Centre, 5th Floor, 156A, Lenin Sarani, Kolkata, West Bengal- 700 013 ...Appellant

Versus

National Stock Exchange of India Limited Exchange Plaza C-1 Block G, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051 ...Respondent

Ms. Mugdha Modi, Advocate i/b Juris Link for the Appellant.

Mr. Sachin Chandarana, Advocate with Ms. Shreya Anuwal and Mr. Pranjal Krishnan, 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.

This appeal has been filed challenging the decision of the

Disciplinary Action Committee (hereinafter referred to as

"DAC") of the National Stock Exchange of India Limited 2

(hereinafter referred to as "NSE") dated January 17, 2019. By

the said decision, the DAC reiterated its earlier decision dated

September 11, 2018 sought to be reviewed by the appellant with

a Review Application filed on September 19, 2018, imposing a

monetary penalty of ` 13,47,300/- as well as one day suspension

of trading in the Futures and Options Segment (F&O Segment)

for repeated false reporting of margin collected from clients by

the appellant.

2. The appellant is a private limited company and a stock-

broker/ trading member registered with NSE for dealing in the

Cash and F&O segments. NSE conducted inspection of the

books of accounts, operations and compliances of the appellant

in their Kolkata Office on July 19, 2017. This inspection

revealed certain violations in relation to reporting the margin

collected by the appellant in the F&O Segment on four

occasions amounting to ` 14,02,368/- and clarifications were

sought from the appellant by providing a copy of this

preliminary inspection report. On April 03, 2018 NSE issued a

show cause notice for violations relating to three out of four said

instances of margin collection and reporting. On April 11, 2018

the appellant gave its reply. On August 02, 2018 the DAC of

NSE passed an order levying a monetary penalty of 3

` 13,47,346/- which is 100% of the alleged false margin

reported, along with one day suspension of trading from the

F&O segment. On September 19, 2018 the appellant filed a

Review Application before the DAC requesting them to

consider the additional submissions/ evidences and sought

review of the penalty imposed. On January 17, 2019 the DAC

of NSE rejected the Review Application and reaffirmed its

earlier decision. Aggrieved by this rejection of review by the

DAC the present appeal has been filed.

3. We have heard the learned counsel for both the parties,

Ms. Mugdha Modi appearing for the appellant and Shri Sachin

Chandarana appearing for the respondent.

4. Learned counsel for the appellant took great efforts in

explaining that no false reporting of margin has been committed

by the appellant; in all the three instances cheques were

deposited by the clients in the dedicated account of the appellant

but those cheques got dishonored because of the absence of the

signature of the account holder which the appellant was not

aware of since the appellant was given document relating to

deposit not the cheque itself. Subsequently, when the appellant

came to know that the cheques got dishonored immediately the 4

open positions were squared off by the appellant and, therefore,

there was no need for uploading revised data regarding margin

collection and in any case not uploading the revised margin

collection data is only an unintentional, clerical and operational

error and such mistakes are not liable for any penalty. Learned

counsel citing the relevant NSE circular dated October 23, 2013

relating to margin collection and reporting and the related

Frequently Asked Questions (FAQs) tried to distinguish

between "false margin reporting" and "wrong margin reporting"

and thereafter, submitted that if at all the appellant is held to

have committed any violation it could be that of wrong

reporting of margin rather than false reporting of margin.

5. Learned counsel for the appellant citing an order of SEBI

M/s Indovision Securities Limited V/s Securities and

Exchange Board of India (Adjudication Order No. AO/SG-

VS/EAD/31/2017 decided on 08.03.2017), further submitted

that the penalty levied on the appellant herein is severe and

exorbitant.

6. The learned counsel for the respondent NSE, on the other

hand, submitted that proper margin collection and reporting is

an indispensable factor in maintaining market integrity as any 5

failure in proper margin collection and reporting could play

havoc with the settlement system leading to a cascading effect

on the entire market. Therefore, the rules, procedures and

operational aspects of margin collection and reporting is

strenuously followed and violations, if any, would be dealt with

immediately and very strongly for protecting the investors and

in ensuring market integrity. In the instant case, it is an

admitted fact that the appellant did not submit proper account of

margin collection, therefore, made false reporting on three

occasions and it is a repeated offence which according to the

circulars of the exchange would result in both monetary penalty

amounting to 100% of the falsely reported amount as well as

suspension of the Member.

7. We find no merit in the contentions of the learned counsel

for the appellant, since the various circulars relating to margin

collection placed before us are quite clear as regards the correct

way of reporting. It is also very clearly stated in the circular

dated October 23, 2013 that no client should be allowed to trade

without receiving the margin. Moreover, the following

clarifications regarding margin reporting have been specifically

stated in the NSE circular issued by its inspection department on

October 23, 2013 which is extracted as below:- 6

"To All Members

Sub : Clarification regarding Margin Reporting

This is with reference to the Exchange circulars NSE/INSP/19583 dated Dec 14, 2011 NSE/CMPT/19587 December 14, 2011, NSE/CD/19588 dated December 14, 2011 and NSE/CMPT/21163 dated July 02, 2012, regarding margin collection and reporting.

Members' attention is drawn to below provisions:

a) Client margin reporting file to be uploaded up to T+5 working days i.e 5 working days after the trade date through CIM(Collateral Interface for Members) or through the Extranet.

b) Multiple margin files can be uploaded for the same trade date with incremental batch numbers within the said five days. Where multiple files are uploaded for a trade day, the information of client margin collected as provided in the file with latest batch number for the trade date is considered as final.

c) Cheques from clients shall be considered as adequate margin collected provided the same have been received / recorded in the books of trading member on or before T day and deposited by member by T+1 day (excluding bank holiday, if any) and cleared subsequently.

In this regard it is further clarified that:

a) In case a cheque is received from a client and the same is recorded in the books on or before T day and deposited by T+1 day, Member shall report the margin collected from such client after considering the effect of such cheque, if the same is cleared within T+5 days.

b) Members should ensure that only cheques which are cleared should be considered and cheques dishonored or not cleared up to T+5 7

working days should not be reported as margin collected. If subsequent to the margin reporting by the Member, the cheque deposited by the Member is dishonored or not cleared within T+5 working days, then revised margin file shall be uploaded after factoring into the effect of such dishonored or non-cleared cheques ,with incremental batch number within the above mentioned five days.

Failure to report the correct margins to the Exchange may result in false margin reporting by the Member and accordingly appropriate actions, as applicable, may be initiated by the relevant authority."

The above clarifications clearly state that even in case of

dishonored cheques the procedure of reporting include

uploading the revised margin factoring in such dishonored or

non cleared cheques within 5 working days of the trade.

8. Therefore, even assuming that the member was not aware

of the possibility of dishonoring the cheques on the trading day

(T day) when it was deposited the member had sufficient time to

rectify the false margin reported. In any case such an argument

is perverse since it strikes at the very root of the endeavour to

ensure a robust settlement system which is fundamental to

market integrity. Therefore, the contention that it was only an

unintentional, clerical and operational error does not have any

merit.

8

9. The contention that the mistake committed was only

wrong reporting and not false reporting also does not have any

merit because in the FAQs relied on by the appellant, 'wrong

reporting' is a situation where there is some discrepancy in the

amount reported relating to a particular margin collection as is

evident from the example given in the FAQs. For instance

instead of the total 100% margin to be collected if it is short by

certain percentage (less than 10%, less than 20% etc.) what

would be the consequences is what is given in the examples. In

case of a more than 50% wrong reporting the consequences are

that of 2% of the wrongly reported amount and five days

suspension from trading. Since, in the instant case, on all the

three occasions it was a case of 100% reporting deficiency

consequent to dishonoring of the cheques deposited by the

clients it cannot be treated as wrong reporting particularly when

the appellant did not upload the revised margin data. We,

therefore, do not find any reason to treat it as wrong reporting

rather than false reporting.

10. Given the above, there is no merit in the submissions

made by the appellant. However, given the fact that there are

only three such instances and the amounts involved on each

occasion are not very large the penalty of 100% of the falsely 9

reported margin i.e. ` 13,47,300/- is sufficient to meet the ends

of justice and additional penalty of suspension of trading for one

day from the F&O segment makes it too harsh. Accordingly,

we uphold imposition of only the monetary penalty. Appeal is

partly allowed. No order on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 26.04.2019 Prepared & Compared By: PK