Rapid Capital Services vs Sebi

Date of Decision: 7.2.2023

Appeal No.651 of 2022

Rapid Capital Services Bilquees Mansion (Kini House) 2nd Floor, North Side 261-263, D.N. Road, Opp. ICICI Bank, Fort, Mumbai - 400 001. ...Appellant

Versus

National Stock Exchange of India Ltd. Plot No.C/1, G-Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent Mr. Prakash Shah, Advocate i/b. Prakash Shah and Associates for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Rashid Boatwalla and Mr. Juan D'Souza, 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 (Oral)

1.

The present appeal has been filed challenging the

order dated 8th September, 2022 passed by the Member 2

and Core Settlement Guarantee Fund Committee

(hereinafter referred to as the 'Committee') of National

Stock Exchange of India Ltd. (hereinafter referred to as

'NSE') whereby a penalty of Rs.24,20,900 was imposed

under various heads.

2. The facts leading to the filing of the present appeal is

that the appellant is a trading member registered with

NSE. The stock exchange conducted a regular inspection

based on which a show cause notice dated 1st December,

2021 was issued for non-compliance of various

regulatory provisions. The alleged violation in the show

cause notice was with regard to misuse of clients' funds,

non-settlement of clients' funds and securities, shortfall

in net worth, incorrect reporting of margin collected from

clients etc.

3. The Committee after considering the replies found

that various relevant regulatory provisions were violated

by the Committee and, accordingly, imposed different 3

quantum of penalties under different head totalling

Rs.24,20,900/-.

4. We have heard Mr. Prakash Shah, Advocate for the

appellant and Mr. Gaurav Joshi, Senior Advocate

assisted by Mr. Rashid Boatwalla and Mr. Juan D'Souza,

Advocates for the Respondent.

5. The only ground urged before the Tribunal was with

regard to imposition of penalty of Rs.20,46,300/- for

misuse of clients' funds. The learned counsel stated that

he has nothing to say with regard to the other violations.

6. The show cause notice alleged that the appellant

misused the clients' funds to settle the obligations of

debit balance clients or used it for own proprietary

purposes. In this regard, the appellant contended that the

respondent had included the loan amount as clients'

funds. In this regard, by way of evidence the appellant

provided a copy of the audited financial statement

certified by a statutory auditor substantiating that the

appellant had taken a loan from the clients and further 4

provided proof that the appellant was paying interest on

such loan and had deducted TDS thereon. By way of

evidence the appellant provided the loan confirmation

letters and TDS returns demonstrating evidence of loan.

7. We find that without considering the audited financial

statement as certified by the statutory auditor or the loans

confirmation letter or the TDS certificates demonstrating

evidence of loan, the Committee did find that the

appellant had maintained a separate trading account and

loan account of the client but went on to hold that the

appellant failed to maintain any segregation between the

funds received as loan and the funds received for trading

from the clients since certain funds were being

transferred from the trading account and the loan account

of the clients.

8. In our opinion, this approach adopted is patently

erroneous. If the appellant had taken a loan from his

clients and was paying interest on that loan and was also

deducting tax at source then such evidence should have 5

been considered instead of treating the said loan account

as the funds of the clients merely on the basis that some

funds had moved from the trading account to the loan

account.

9. The finding that the appellant failed to maintain the

record regarding segregation of the funds received for

trading purpose and the funds received as loan prima

facie appears to be based on surmises and conjectures

especially when audited financial statements and the loan

confirmation letter and the TDS certificates demonstrates

evidence of loan was not considered.

10. Thus, on this short point the impugned order dated 8th

September, 2022 passed by the Committee to the extent

of imposition of penalty of Rs.20,46,300 for misuse of

clients' funds is set aside. The appeal is partly allowed.

11. The matter is remitted to the Committee to re-decide

the matter only on the issue of misuse of clients' funds

within three months from today subject to the condition 6

that the remaining penalty amount is deposited by the

appellant within two weeks from today.

12. 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 RAJALA Digitally by signed

KSHMI RAJALAKSHMI HARISH NAIR HARISH Date:

7.2.2023 NAIR 2023.02.14 17:44:17 +05'30' RHN