R. K. Stockholding (P) Ltd. vs Sebi

R. K. Stockholding (P) Ltd. A 7, Block B 1, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi - 110044. ...Appellant

Versus

National Stock Exchange of India Limited Exchange Plaza, Plot No.C/1, G- Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400051. ...Respondent

Mr. Prakash Shah, Advocate with Mr. Kushal Shah, Chartered Accountant with Mr. Navdeep Varshney, Director i/b. Prakash Shah & Associates for the Appellant.

Mr. Vishal Kanade, Advocate with Mr. Rahul Jain, Advocate 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 : Justice Tarun Agarwala, Presiding Officer 2

1.

The appellant has filed the present appeal

questioning the order dated 28th February, 2020 passed

by the Member and Core Settlement Guarantee Fund

Committee wherein a penalty of Rs.47.70 lakhs and

suspension of trading in all segments for five days was

passed on the ground of non-availability of clients‟

funds and misuse of client‟s securities.

2. The appellant is a member registered with National

Stock Exchange of India Limited (hereinafter referred

to as „NSEIL‟) in capital market, futures & options

segment and in currency derivatives segment. The

respondent conducted a limited purpose inspection

across all segments in June, 2018 covering the period

from 1st May, 2017 to 30th April, 2018. Based on the

inspection, the Internal Committee for Minor Actions

imposed a monetary penalty of Rs.2,50,000 on 19th

September, 2018 for violations pertaining to non-

settlement of clients‟ accounts and funding of clients‟

transactions. For other violations the Internal 3

Committee referred the matter to the Member and Core

Settlement Guarantee Fund Committee (hereinafter

referred to as „the Committee‟).

3. The Committee issued a show cause notice alleging

that on verification of the register of securities there

was a short fall of Rs.46.23 crores as on 17th April,

2018 out of a total of Rs.127.91 crores. Further, there

was non-reconciliation of the clients‟ securities.

4. In response to the said allegation the appellant

denied the allegations of non-availability of clients‟

securities and contended that the securities received by

the appellant was transferred either to the clearing

member for margin requirements or to NBFC i.e.

Rapid Credit & Holding Pvt. Ltd. for pledge or were

transferred to the group company of the appellant,

namely, R.K. Commodities Services Private Limited

for margin purposes. It was, thus, contended that there

was no short fall of clients‟ securities. In this regard

reconciliation chart was given indicating that there was 4

no short fall of securities. It was also stated that the

securities that was transferred to the clearing member

or to NBFC or to group company was transferred on

the instructions given by the clients and, therefore,

there was no misuse of clients‟ securities.

5. The Committee after considering the matter found

that the transfer of securities to NBFC/group

companies itself amounted to a misuse of clients‟

securities. The Committee further found that the

securities transferred to Rapid Credit & Holding Pvt.

Ltd. were further pledged to another NBFC Edelweiss

Credit Limited and the funds so raised were received

by the appellant and, therefore, misappropriated

clients‟ securities by such transfer as well as by

transfer of such securities to the group company. The

Committee observed that all pledging of client

securities and crediting of such funds establishes

misuse of clients‟ securities.

5

6. We have heard Mr. Prakash Shah, Advocate assisted

by Mr. Kushal Shah, Chartered Accountant and Mr.

Navdeep Varshney, Director for the Appellant and Mr.

Vishal Kanade, Advocate assisted by Mr. Rahul Jain,

Advocate for the Respondent.

7. The sole contention raised by the appellant was that

the securities were transferred under instructions given

by the client and, therefore the appellant has not

violated any circular or regulations nor have

misutilised the securities of the clients. It was also

contended that the penalty awarded towards non

reconciliation was incorrect as the appellant had

subsequently provided the reconciliation statement. It

was also contended that the securities so transferred to

NBFC/group companies were brought back which fact

was noticed by the Committee in the impugned order

inspite of which a penalty has been imposed.

8. On the other hand, the respondent contended that the

violation is greivous and no leniency should be 6

provided to the appellant as the appellant has

misutilised the clients‟ securities in a circuitous

manner.

9. Having heard the learned counsel for the parties, we

find that the appellant had clearly stated that the

securities were transferred on instructions of the client.

This fact has not been disbelieved by the Committee.

The impact of this fact has not been considered by the

Committee. However, in our view, non consideration

of this aspect will not have any material effect in as

much as subsequent pledging of the securities to

another NBFC Edelweiss Credit Limited and the funds

so raised being received by the appellant has not been

denied. Such subsequent pledging of the securities by

the group companies/NBFC and the funds being

received by the appellant is a clear misuse of the

clients‟ securities. We, thus, find that the appellant has

misused the securities of its clients to fulfill the

obligations of other clients and, thus, acted in 7

contravention of the exchange regulations, its bye

laws, and the capital market regulations. Similarly, the

reconciliation charge was subsequently given

therefore there was an apparent violation of the

exchange‟s circulars. Consequently, the penalty

imposed as per the circulars does not suffer from any

error of law.

10. The Committee however held that the penalty as

prescribed by the exchange‟s circular dated 6th

November, 2017 is insufficient and since there has

been an increase in the incidence of broker‟s default

with regard to misuse of clients‟ securities the

Committee thought it fit that the instant case warrants

disciplinary action in addition to levy of monetary

penalty and, consequently, imposed suspension of

trading activities in all segments for five days.

11. In our view, the circular dated 6th November, 2017

provides for penalty to be applied in respect of various

violations as identified during the inspection. The 8

circular states that the penalties/disciplinary actions are

indicative in nature and could undergo changes in

specific case depending on the frequency and gravity

of the violations. It further states that

penalty/disciplinary action in respect of violations

having high impact would be dealt with on a case to

case basis depending on gravity of violations. The

circular makes it clear that seriousness of such

violations has to be considered while considering the

frequency and gravity of the violations. There is no

finding that the appellant was a habitual violator of the

circulars and the regulations. The usage of the word

"indicative" does not mean that it gives a handle to the

exchange to increase the penalty over and above the

quantum indicated in the circular. In a given set of

circumstances, the quantum of penalty could be

reduced. The quantum can increase provided there is a

finding of frequency and gravity of the violation which

in the instant case is lacking.

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12. Considering the aforesaid, we are of the opinion that

the monetary penalty imposed by the Committee is just

and proper but it does not justify the Committee to

impose a penalty of suspension of trading for five days

which is unwarranted in the present facts and

circumstances of the case considering that the

reconciliation of the securities was submitted to the

satisfaction of the authorities and that the securities

that was transferred to group company/NBFC were

already brought back coupled with the fact that there

has been no complaint from the client whose securities

were transferred.

13. In view of the aforesaid, we affirm the order passed

by the Committee in so far as it relates to imposition of

monetary penalty is concerned. The appellant is also

directed to pay the penalty amount within four weeks.

We, however, set aside the direction of the Committee

for suspension of trading activities in all segment for

five days. The appeal is partly allowed. In the 10

circumstances of the case, parties shall bare their own

costs.

14. 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 Presiding Officer Digitally signed by RAJALAKS RAJALAKSHMI NAIR H

HMI H NAIR Date: 2021.02.11 Dr. C.K.G. Nair 15:25:41 +05'30' Member

Justice M.T. Joshi Judicial Member

09.2.2021 RHN