Reflection Investments vs Sebi

Date of Decision: 23.01.2020

Appeal No. 36 of 2020

Reflection Investments 15/1, Beach Home Avenue, 1st Cross, Besant Nagar, Chennai- 600 090 ...Appellant

Versus

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

Mr. Vijay Sambrani, Authorised Representative for the Appellant.

Mr. Rashid Boatwalla, 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

Per: Dr. C.K.G. Nair

1.

This appeal has been filed aggrieved by the order of the

National Stock Exchange of India Limited ("NSE" for

convenience) dated January 14, 2020 whereby, inter alia, the

appellants' membership has been suspended and subsequently

effected from January 15, 2020.

2

2. The appellant is a registered partnership firm and is a

Securities and Exchange Board of India ("SEBI" for

convenience) registered trading member of NSE since 1995.

The appellant was served with a show cause notice dated July

30, 2019 by NSE alleging various violations and directing it to

show cause as to why action, including suspension and/or

monetary penalty, should not be taken against the appellant for

the stated alleged violations. The appellant in its reply dated

August 19, 2019 assured full compliance with the NSE Rules

and Regulations and requested to take a lenient view on some of

the violations which inadvertently happened. Thereafter, the

Member and Core Settlement Guarantee Fund Committee

("MCSGFC" for convenience) in its meeting held on December

20, 2019 passed an interim direction prohibiting the appellant

from doing any new client registration which was

communicated to the appellant vide NSE letter dated December

23, 2019. Thereafter vide impugned order dated January 14,

2020 a penalty of ` 5,47,900/- has been levied on the appellant

and ordered suspension of the appellant from the membership of

the NSE in all segments from the date of this order till the

appellant infuses fresh funds/ capital to recoup the shortfall of

client funds reported in weekly enhanced supervision

submissions and thereafter submits suitable evidence to the 3

satisfaction of the Exchange at the earliest and not later than 45

days from the date of the order. Thereafter, on January 15, 2020

the suspension was effected.

3. It is the submission of Shri Vijay Sambrani, Managing

Partner of the appellant, appearing on behalf of the appellant

that the order suspending the operation of the appellant without

any notice has come as a shock since the appellant was making

all out efforts in enhancing its compliance systems and for

infusing more funds. Since the suspension was effected from

the very next day itself no option was available to the appellant

in saving its business. Without going into the details regarding

the merits of the case it is the submission of the authorised

representative of the appellant that as an immediate relief the

appellant may be allowed to operate his broking business to a

limited extent which would make it feasible for bringing in

more funds. He submitted that already some funds have been

infused and by January 31, 2020 he would infuse ` 1 crore more

so as to reduce the outstanding shortfall to ` 5.75 crores by that

date and thereafter by the end of each month he would infuse

` 1 crore each. Therefore, in effect by the end of six months the

entire outstanding shortfall would be wiped out. He also

submitted that the appellant may be allowed to operate subject 4

to limits of trading in the cash segment of the Exchange alone

till the shortfall is completely removed and if there is any

interim increase in the shortfall suspension may be

reimplemented. In short, the authorised representative seeks to

keep the business alive though in a truncated way and subject to

enhanced supervision of NSE and with a time bound plan of

bringing down the shortfall in funds.

4. We have also heard Shri Boatwalla, learned counsel

appearing for respondent NSE as well as perused the records

produced before us. We note that there have been a number of

charges against the appellant in the show cause notice many of

which are sustained in the impugned order as well. We also note

that as an interim direction the appellant was prohibited from

registering any new clients. We are also told that the appellant

is immediately willing to pay penalty amount of ` 5,47,900/-.

Moreover, the MCSGFC has given a window of upto 45 days

time to implement necessary steps to the appellant to infuse

funds to recoup shortfall of client funds. However, from the

very next day of the impugned order suspension has been

effected.

5. Given the above facts and circumstances and the assurance

given by the Managing Partner of the appellant, we are of the 5

considered view that some limited relief to the appellant is in

the interest of justice. After all suspending or closing down the

business of a broker is in nobody's interest unless it is

conclusively proved that the broker is working against the

interest of the investors or that of the securities market. The

main finding in this matter is relating to some shortfall of client

funds reported in the weekly enhanced supervision. Though,

this is a serious offence it may not require an immediate

cessation of all activities of the appellant. At the same time, we

are not inclined to give the relief in terms of the time lines as

prayed by the appellant.

6. Accordingly, after considering all the factors and in the

present facts and circumstances, we pass the following

directions:-

a) Appellant shall pay the monetary penalty of

` 5,47,900/- within one week.

b) If the appellant infuses ` 1 crore funds and

thereby reduce the shortfall from the current

level of ` 6.75 crores to ` 5.75 crores by

January 31, 2020 NSE shall allow the appellant

to operate in the cash segment of the Exchange

using one Terminal i.e. Terminal No. 5621. 6

c) Permission for the limited trading as at (b)

above shall be subject to enhanced supervision

of NSE and on the condition that it shall not

result in any additional shortfall of client funds.

d) Appellant shall recoup remaining shortfall of

` 5.75 crores in two installments of ` 3 crores

by February 29, 2020 and ` 2.75 crores by

March 31, 2020.

e) NSE shall be at liberty to re-impose the

suspension or to take any other appropriate

measures in case of failure of the appellant in

complying with any of the aforesaid directions.

7. Appeal is disposed of on above terms with no orders on

costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 23.01.2020 Prepared & Compared By: PK