Order in the matter of applications filed by Ms. Swati Mayekar and 13 others[SAT Appeal No.:310/2016][SAT Appeal No.:182/2016]

ORDER In respect of the representations dated June 29, 2016 made by Sharmila Raj Thackeray, Swati Sandesh Mayekar, Sandesh Madhukar Mayekar, Shivani Sandesh Mayekar, Prodigy Finvest Pvt. Ltd, Felicila Lobo, Vidya Vinayak Wagle, Vibha Ajit Vaze, Ajit Mahadev Vaze, Madhav Gangadhar Natu, Shilpa Rajan Gupte, Rajan Hemchandra Gupte, Arun Sadashiv Bhide, Sunetra Gangadher Limay. (hereinafter referred to as ‘the applicants’)

1. The applicants herein have made a common representation dated June 29, 2016 pursuant to the order dated June 16, 2016 passed by Hon'ble Securities Appellate Tribunal (SAT) in the appeal No. 182/2016 filed by them challenging an order dated August 02, 2013 passed by SEBI in the proceeding initiated against SMC Global Securities Limited ('SMC') whereby it was prohibited SMC from taking up any new assignment or contract or launch a new scheme for a period of three months. By the said order dated June 16, 2016 Hon’ble SAT had directed as follows:

"'We permit the liberty to the appellants to move an application before SEBI seeking redressal of their grievances. If the appellants make an application to SEBI within two weeks from today, then, SEBI shall consider the said application and pass appropriate orders thereon in accordance with law, preferably within six weeks thereafter'.

2. The background in which SEBI had passed the order dated August 02, 2013 against SMC is as under:- a) During the year 2009, two stock brokers, namely, Sunchan Securities Limited ("SSL") and Ganga Yamuna Finvest Private Limited ("GYF") had defaulted in their settlement obligations to the National Stock Exchange of India Limited ("NSE"). The same had raised concerns over the clearing and risk management operations of their clearing member, SMC. SEBI had also received complaints from investors/clients of SSL stating that SMC had provided higher exposure to SSL without collecting adequate margin and the same had contributed to the defaults by SSL. SEBI, therefore advised the National Stock Exchange ('NSE') to examine the matter and to submit its report.

b) Pursuant to the examination and in view of various irregularities, the Disciplinary Action Committee of the NSE levied a penalty of `25,00,000/- on SMC. An additional amount of `25,00,000/- was also retained by NSE for a period of six

Order on the application filed by Ms. Swati Mayekar & 13 Ors.

months to be refunded based on the improvement in compliance by SMC with respect to reporting of margin collected from trading members.

c) Considering the aforesaid nature of the irregularities, SEBI also conducted an inspection of the books of accounts and subsequently SEBI initiated proceeding against the SMC under Chapter V of the SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as "the Intermediaries Regulations") and appointed a Designated Authority ("DA") in terms of the said regulations.

d) After considering the findings of the DA in the enquiry report and the submissions of SMC during personal hearing held on December 07, 2012, the Whole Time Member ('WTM') vide its order dated August 02, 2013 prohibited SMC from taking up any new assignment or contract or launch a new scheme for a period of three months. An appeal was preferred by SMC in the Hon'ble SAT against the said order which was dismissed by Hon'ble SAT vide its order dated January 31, 2014 and thus the said order had attained its finality.

3. The aforesaid 14 applicants, subsequently, filed the appeal no. 182 of 2016 before the Hon'ble SAT to modify the said order dated August 02, 2013 on various grounds including the directions to hold SMC equally liable and responsible for the illegal acts of utilizing the fund and selling the shares belonging to SSL's clients without any authority, justification or reasoning whatsoever. Hon'ble SAT disposed of the said appeal in terms of its order dated June 16, 2016 as reproduced hereinabove.

4. Pursuant to aforesaid order of Hon’ble SAT, these 14 applicants, vide their common application dated June 29, 2016 submitted the following to SEBI:- i. In 2007, majority of applicants were inclined to trade/deal in shares. Ms Swati Mayekar and the other applicants had opened trading account with SSL, who was a trading member of NSE and Bombay Stock Exchange ('BSE') and had its clearing account with IL&FS till March 2008 and thereafter through SMC. ii. In September 2008, SSL did not execute any major transactions on behalf of the applicants. Therefore, in October 2008 when the applicants called upon SSL for an explanation as to why no trades were carried it was said that due to SMC’s foul play and breach of trust the terminals of SSL were shut down in October 2008 itself. During December 2008 SSL informed the applicants that their collaterals deposited by the applicants with SSL towards margin have been wrongly utilized by SMC. iii. In January 2009, SEBI has passed an ex-parte interim order inter-alia restraining SSL, its directors and compliance officer to trade neither for the company nor for their client’s pending inquiry.

iv. In February 2009, the applicants immediately issued a letter about their grievances to the Executive Directors of Investor’s Grievance call of SEBI. The copies of the same were also forwarded to BSE and NSE. v. In March 2009, by virtue of letter dated 3rd March 2009 the applicants lodged a complaint with SEBI seeking investigation of the conduct of the working of SMC. In May 2009, applicant no. 13 sent a letter to SEBI requesting for an audience with regard to the complaint against SMC and SSL. In October 2009, since SEBI did not respond, applicants filed an application under RTI seeking clarification of matters of SMC and SSL. vi. On 6th October 2009, SEBI passed an order confirming the interim directions issued against SSL as per order dated 30th January 2009. vii. Applicants vide their letter dated 23rd November 2009, issued to the Chairman of SEBI clearly recorded that without connivance of SMC it was not possible for SSL to default and hence requested for an investigation and action against the wrong doer. viii. Applicants issued a letter dated 15th December 2009, to SEBI and NSE seeking personal hearing. ix.

NSE submitted the Inspection Report in the year 2009 that brought on record glaring facts with regard to the illegal conduct of SMC in their capacity as Clearing Member. x. Applicants lodged their claim with NSE. NSE rejected the same. xi. Applicants issued a letter dated 10th March, 2011 thereby requested NSE not to treat Applicants’ claims as a loan merely because the amount was not used. xii. Applicants issued a letter dated 21st March, 2011 that despite NSE’s Report of 2009, BSE had failed to take action against SMC and once again sought repayment as per the claims lodged by the Applicants. xiii. On 30th June 2011 SEBI issued Show Cause Notices to SMC and SSL under u/s 11, 11B, 11(4) of the SEBI Act of 1992 and in December 2011 the Designated Authority prohibited SMC from taking up any new assignment or contracts or launching of new schemes for a period of 15 days, in terms of regulation 27 of the SEBI (Intermediaries) Regulations. xiv. On June 15, 2012 the Hon’ble Bombay High Court passed an order that SSL be wound up and appointed an Official Liquidator. xv. An email was addressed on 2nd May, 2013 to SEBI by the Applicant requesting a hearing and further pointing out the illegalities carried out by SMC. xvi.

By an email dated 7th May, 2013, they submitted that had SMC acted responsibly as a clearing member they would not have suffered losses. They further stated that no penalty would be justified unless SMC was directed to return the applicants funds taken by them from SSL illegally.

xvii. At the instance of SEBI, applicants resubmitted their claims to NSE, which were once again summarily rejected by NSE with almost identical replies. xviii. Applicants by way of letter dated 13th May, 2013 requested SEBI for an audience and hearing before final orders could be passed by him. xix. Subsequently, the Whole Time Members, Mr. Prashant Saran of SEBI in exercise of his powers under regulations 28(2) of the SEBI (Intermediaries) Regulations, 2008 read with Section 19 of the SEBI Act, 1992 passed the Order dated August 2, 2013 prohibiting the Respondent No. 2 from taking up any new assignment for a period of three months, without giving a hearing to the applicants. xx. The appeal preferred by SMC before SAT challenging the Order was dismissed by an Order dated 31st January 2014. The findings against the SMC are confirmed. SAT also has observed the far reaching impact the SMC’s conduct can cause and the responsibility of SMC being a clearing member towards the security market and its investors. xxi. SEBI has passed an order against SSL on 23rd April, 2014. The applicants have preferred an Appeal against the said Order and the same is pending, xxii.

Applicants have time and again placed their grievances against SMC and SSL before SEBI however the same remain to be resolved till date. The inspection Report as well as the Order dated 2nd August, 2013 passed by SEBI highlight glaring misconduct of SMC in its working as a clearing member despite that Applicants grievances still remain unresolved till date. Applicants’ rights/claim have been prejudice by the conduct of the clearing member. Justice is required to be granted to the applicants. xxiii. The applicants state and submit that the directions passed by SEBI against SMC is clearly not commensurate with the lapses and violations committed by SMC and therefore urge the SEBI in compliance with the SAT order to redress the applicants’ grievances and pass appropriate orders within six weeks hereafter. 5. Thereafter the matter was brought before me on July 28, 2016 for grant of hearing with advice to pass an order on the applications. Accordingly, the applicants were granted an opportunity of personal hearing on August 03, 2016 at 4:00 pm before me when Ms. Swati S. Mayekar, Ms. Felicila Lobo, Ms. Shilpa Gupte, Ms. Vibha Vaze appeared for themselves and all other applicants.

They reiterated their grievances as mentioned in the common representation dated June 29, 2016 and requested for another date of hearing, preferably on August 10th or 11th. However, in view of the SAT directions as mentioned above, another opportunity of hearing was granted to them on August 08th, 2016 at 4:00 pm, when Ms. Shruti Sardesai, Advocate, Ms. Swati Mayekar and Ms. Felicia Lobo, authorized representative of the applicants appeared and made further submissions inter alia as under:- i. They reiterated that they had entered into Direct Client Agreement with SSL during the period 2006-2008 with the intention to trade in securities. Between the years 2006-2007, the applicants were stakeholders in Prodigy Finvest Limited and routed their investment through it which had an account with SSL. At this point, some of the applicants traded in the Cash segment and certain others traded in the Cash and F&O segment. ii. In April 2008, based on representations made by SSL, the applicants decided to invest in Options Futures arbitrage strategy independently and directly with SSL instead of routing through Prodigy Finvest Limited. iii.

In August 2008, all the applicants except Prodigy Finvest Limited issued separate cheques to SSL so that trade could be commenced from their account from September 2008. iv. In September-October 2008, when no major trade was executed by SSL, the applicants began to follow up with SSL on the status of funds/securities lying with SSL. v. Vide an email dated 21.10.2008 SMC had reminded SSL about payment of outstanding dues. SMC further advised SSL that in case of non-receipt of reply, it would write down to NSE to square off all outstanding positions including that client codes positions. Further, they will be compelled to sell those shares which are lying with them as collateral to reduce the debit. In response to the same SSL had requested SMC to release both fixed deposit of ` 5 crores and ` 7.5 crores and release the same plus interest into the ledger to clear the MTM debit in the ledger. On the same day, SSL further requested SMC to not to sell the shares as they belonged to the clients’ and given for the positions standing in the F&O segment. vi. Vide separate letters dated December 22, 2008, SSL had confirmed that the shares transferred by the applicants will be considered for margins in the derivative segment.

It further informed that there was a overall shortfall in margins of SSL with clearing member – SMC which had illegally sold all the shares of the applicants pledged with them for exposure margins. Although SSL attempted to reason with SMC that the shares belonged to the clients, SMC still proceeded still sold the same in their proprietary account. vii. The applicants on knowing the said developments started addressing complaints to SEBI and NSE. viii. Referring to the claim form submitted to NSE during July-August, 2009, they submitted that representative of SSL had approached them and advised them to keep margin of some funds and shares so that they can do futures and option arbitrage strategy which is 100% safe and will give them high returns. The authorized representative made oral submissions that the shares were deposited with SSL by the applicants as margins. ix. NSE vide its letter dated February 22, 2011 stated that allegedly the nature of applicants' claim were found to be in the nature of loan transaction and hence was inadmissible. The applicants, in reply to NSE, stated that the amount should not be treated merely as a loan if the same was not used.

The submissions of SSL ought to have been considered in this regard. x. NSE, vide its letter dated February 25, 2014, alleged that the applicants had failed to provide additional documents to further substantiate their case and thus the earlier decision dated February 22, 2011 did not require any review. xi. The applicants submit that NSE has never indicated the nature of documents/details required by it. Further, all the letters to 14 applicants are identical and issued mechanically. xii. The applicants submitted that SEBI ought to consider the findings of NSE in its Inspection Report of 2009 against SMC which was overlooked by NSE whilst arriving at its decision of February 22, 2011. xiii. The applicants reproduced the findings of WTM, SEBI against SMC in paras 34, 47, 50 and 52 of the order dated August 02, 2013. xiv. The applicants reproduced the findings of the Hon'ble SAT vide its order dated January 31, 2014 in the appeal filed by SMC against the order dated August 02, 2013 of SEBI. xv. The applicants submitted that SMC failed to fulfill its duty as a prudent regulator for their own personal gain solely at the cost of the innocent investors. xvi.

The applicants have relied on the various orders namely Bank of Baroda vs, SEBI 2000 (38) CLA 226; Dushyant N Dalal, Ms. Puloma D Dalal vs SEBI (Appeal No. 182 of 2009 dated 12.11.2010); and Karvy Stock Broking Limited bs SEBI (Appeal No. 155 of 2008 dated 08.09.09). xvii. The applicants submitted that SMC is primarily liable to make good the losses suffered by them. xviii. The applicant submitted that had SMC informed SSL before the expiry of the NIFTY September Series that it will not be able to hold the position, SSL would not have created any new positions but would have squared off all the open positions on the last Thursday of the September Series. 6. In terms of the order dated June 16, 2016 passed by Hon’ble SAT, I proceed to deal with the grievance of the applicants by way of this order. I have considered their oral and written submissions/representations and taken into account the orders of SEBI and Hon’ble SAT and other relevant material available on record. The applicants have claimed that they were clients of SSL and they had regular transactions with it and they had even been receiving contract notes from it for their trades.

They had given the funds to SSL for trading in securities especially in F&O segment. The sum and substance of the grievance in the representation as regards the applicants as that they are seeking recovery of monies given by them to SSL from SMC who according to them was clearing member for transactions of trading member SSL for its clients. It is an established position in this matter that the aforesaid order dated August 02, 2013 was upheld by Hon'ble SAT vide its order dated January 31, 2014 has attained finality with respect to violations and irregularities found as against SMC. 7. It is, however, relevant to mention that the grievances, if any, of the applicants can not be rejected summarily on the ground that disciplinary action has been taken against the stock broker and it need to be carefully seen whether the applicants were clients of SSL with regard to their funds/securities transactions with it and, if so, whether any remedy could be provided to them in accordance with rules, regulation and by-laws, etc. of concerned stock exchange NSE as they are against it’s member. Such grievance have to be redressed under the available mechanism at the stock exchange.

8. It is noted that SEBI, vide order dated December 08, 2010, has cancelled the certificates of registration of SSL. The relevant findings which were basis of that order are as under- a) SSL had misused the clients’ securities and funds for its own obligations and also the obligations of its directors. It had not accounted for clients’ securities worth over ` 5 crores. b) The clients of SSL had a balance of `21.55 crores. c) Securities of the clients of SSL held with SMC were kept as margin for the proprietary trades of the stock broker and that of its directors. d) SSL had misused the clients’ funds and securities by keeping them with SMC for more exposure and using that exposure for trading in its own and its directors’ account. The fact that SSL was taking more exposure in the securities market which was not commensurate with its own financial soundness and that it was utilizing the securities of its clients to take such exposure was found to be against the interest of its clients. SSL and its directors were trading in their own names against the exposure received by pledging the clients’ securities and sharing the profits with its clients. e) Its act of taking general authorization from all its clients for maintaining their shares as collateral with the clearing member and operating a “Loan Scheme”, where securities were accepted from the clients on profit sharing basis duly falls in the definition of the 'portfolio manager'.

By trading on behalf of different clients in its proprietary account it had acted as an unregistered portfolio manager. f) SSL had been providing a loan scheme. It either gave advisory services to clients or took shares from them on loan and gave them a certain percentage of profits as compensation for use of their shares. g) SSL had accommodated its clients for the transactions in securities without collecting the obligations from them and funded the said transactions. h) SSL did not co-operate fully with the inspection team of NSE. i) SSL had failed to redress the investor complaints. j) SSL had falsely reported that it had collected adequate margins. k) SSL had used multiple client codes during the relevant period. l) SSL was not sending the quarterly statement of accounts/ holdings and daily margin statements to its clients. 9. In another proceedings in respect of the alleged role of SSL, its directors and its compliance officer with regard to the aforesaid violations as discussed in detail in the SEBI order dated

December 08, 2010, vide another order dated April 23, 2014, SEBI issued several directions to SSL, its directors and compliance officer in the interest of investors / clients. The relevant directions are mentioned hereunder- a) SSL and its directors, namely, Mr. Sunil Mansinghani Ms. Kanchan Mansinghani, Mr. Ashok Daswani, Mr. Surendra Gama Yadav and its compliance officer Mr. Riyaz Ismail Shaikh were restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market directly or indirectly for a period of seven (7) years. b) Mr. Sunil Mansinghani, Ms. Kanchan Mansinghani, Mr. Ashok Daswani, Mr. Surendra Gama Yadav and Mr. Riyaz Ismail Shaikh were restrained from holding the position of Director or Compliance Officer in any listed company or being associated with any intermediary or entity registered with SEBI for a period of seven (7) years.

c) SSL and its directors were also directed to replenish the Investor Protection Fund of BSE to the extent of ₹1,86,93,149 and Investor Protection Fund of NSE to the extent of ₹2,58,32,823.72, i.e. the amount disbursed from IPF towards the claims of investors of SSL as a stock broker.

d) SSL and its directors were directed to compensate investors to the extent their claims were not fully met out of IPF of ₹5,30,96,338.27 (₹1,68,47,272.87 + ₹3,62,49,065.40) i.e. the claim admitted less the amount disbursed out of IPF. 10. It was also provided in the aforesaid order of SEBI that SSL and its directors are jointly and severally liable to make the payments as directed in the sub-paragraphs (c) and (d) above, within 45 (forty five) days from the date of the said order. It was further clarified that if the aforesaid amounts are not paid within the specified time, SSL, and its directors Mr. Sunil Mansinghani, Ms. Kanchan Mansinghani, Mr. Ashok Daswani, Mr. Surendra Gama Yadav shall be restrained for a further period of ten (10) years from (i) buying, selling or dealing in securities market in any manner whatsoever, (ii) accessing the securities market, directly or indirectly and (iii) associating with any securities market intermediary or listed company in any manner or capacity, without prejudice to SEBI’s right to enforce disgorgement. While passing the aforesaid order it was also noted that SSL was in the process of liquidation and Official Liquidator had been appointed by the Hon'ble Bombay High Court vide order dated June 15, 2012. Hon'ble Bombay High Court vide its order dated January 21, 2014 had granted leave to SEBI under section 446 of the Companies Act, 1956 to proceed further in the proceedings against SSL. Accordingly, SEBI was directed to take up the matter with the concerned Official Liquidator for the purposes of enforcing the directions as against SSL contained in the paragraph (c) and (d) above.

11. It is noted that the directions in paragraph (c) and (d) above were given in view of the fact that as on the date of that order, the claims of clients had been partially settled from the IPF of the respective stock exchanges. An amount of ₹1,60,81,597.84 had been disbursed from the IPF of BSE. Further an amount of ₹2,34,33,233.74 had been disbursed from the IPF of NSE. However, an amount of ₹4,27,48,132.17, was still due to the clients of SSL as such claims were not fully met out of IPF of the exchanges (i.e. claims admitted less the amount disbursed out of IPF). SSL and its directors had not disputed the said figures. Considering the same, SEBI had directed SSL and its directors to replenish the Investor Protection Fund (IPF) of BSE to the extent of `1,86,93,149/- and of `2,58,32,823.72/- of NSE. Further, SSL and its directors were directed to compensate the investors to the extent of their claims which were not fully met up our of IPF i.e. `5,30,96,338.27/-.

12. It is noted that in the order dated August 02, 2013 in respect of SMC it has been found that its trading members including SSL from whom SMC had not collected proper margin and reported wrongly to the exchange about their margin deposit, had in fact defaulted in their payment obligations. SMC was found to have failed to collect the margin in the approved form/mode and it has also made wrong reporting to the stock exchange. 13. It is noted that in the orders dated December 08, 2010 and April 23, 2014, SEBI has found that SSL and its directors misused clients’ funds and securities for its trade obligations and those of its directors. Further, it has been further found in the said order dated April 23, 2014 that SSL and its directors had failed to clear the dues of clients/ investors. In the order dated August 02, 2013 it has been found that SSL had not given proper margin to SMC and in fact SSL had defaulted in its payment obligations. From the findings and directions contained in aforesaid orders of SEBI it is clear that the clients of SSL had suffered losses on account of wrongs of SSL.

Further, the order dated April 23, 2014 read with the order dated December 08, 2010 intend to compensate the clients’ of SSL from the funds to be provided by SSL and its directors and in case of their failure through disgorgement process. Since SSL had been under liquidation, SEBI had to take up the matter with the concerned Official Liquidator for the purposes of enforcing those directions as against SSL. The remedy as provided in this order needs to be further explored for the purpose of protection of interest of clients. Therefore, SEBI is directed to take appropriate steps to enforce those directions expeditiously. 14. However, the aforesaid is without prejudice to the redressal of the grievances of clients of members of NSE under the rules, regulations and bye-laws of NSE. It is undisputed fact that the applicants had provided their funds and securities to SSL and they have lost for no fault on their end. The applicants have also relied upon an email dated October 21,2008 from SSL to SMC wherein it had stated that “ Please do not sell the shares as they belong to the clients and given for the positions standing in the F&O segment”.

The applicants have further claimed that the funds and securities were deposited with SSL as margin. It is noted from the submissions made and documents filed by the noticees that they were genuine clients of SSL. In this regard, it is noted that NSE vide letter dated February 22, 2011 had observed that the transaction of the applicants was in the nature of ‘loan transaction’ and they were informed that since ‘no proof of documents’ was provided for showing that the amount deposited by ‘the client’ was used for trading, their application was rejected. NSE vide its letter dated February 25, 2014 rejected the subsequent complaints of the applicants against SMC for want of proof/documents /clarifications. I note that the grievance of the applicants was summarily rejected by NSE though it seems to have accepted the applicants as clients of SSL. It is noted that NSE itself has observed in its communication dated February 22,2011 that the claimant had deposited substantial amount of funds/securities with the defaulter broker with apparent intention to trade as under :- “ The claimant has deposited substantial amount of funds and/or securities with the defaulter with the apparent intention to trade but, however, the claimant has not furnished any evidence with respect to the execution of trades for the amount which are proportionate to the value of amount of funds and/or securities deposited.”

15. In view of the above, the claim of the applicants cannot be summarily rejected by observing that they were loan transactions especially when not only the funds but the securities were also involved and the exchange itself has accepted the fact that they were deposited with intention to trade. In these circumstances, the applicants are entitled to be considered for relief under the stock exchange mechanism i.e., through Investor Protection Fund of NSE. Any rejection of such eligibility can be done only if concrete evidence is found to the contrary. I do not find reasons given by NSE for rejecting the claim sound enough. 16. I, therefore, direct NSE to reconsider the complaints of the applicants afresh taking into account the findings contained in the aforesaid orders of SEBI and examining all the evidences including those furnished by them as Annexures to Appeal no. 182/2016. The NSE is further directed to dispose of the complaints in accordance with its rules, regulations and bye-laws within two months.

Sd/- Date: August 9th, 2016 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA