South Gujarat Shares & Shrebrokers Ltd. vs Sebi
- CitationAppeal No. 802 of 2022
Ratio decidendi
The rule this decision rests on
A stockbroker's misuse of clients' funds for other purposes, occurring on several occasions, is a serious violation; the fact that the shortfall was later rectified, or that post-inspection compliance was made, does not absolve the violation or remove the basis for penalty. Where a penalty regime sets a ceiling of up to 3% of the misuse, the imposition of a penalty within that framework is justified where the violations are found to be serious and repeated; a one-off characterisation of the violation is not sustainable on such findings. The principle that inspection is meant to secure compliance and that not every irregularity should culminate in a penalty is accepted, but it does not bar penalty where the violations found are serious, and a warning-only response in other instances does not compel leniency in the case of serious violations.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
Date of Decision : 20.02.2023
Appeal No. 802 of 2022
South Gujarat Shares & Shrebrokers Ltd. 3rd Floor, Belgium Chambers, Opposite Linear Bus Stop, Ring Road, Surat - 395 003. ...Appellant Versus National Stock Exchange of India Limited Exchange Plaza, C-1, Block 'G', Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent
Mr. Aman Kacheria, Advocate and Mr. Robin Shah, Advocate i/b Bodhi Legal for the Appellant.
Mr. Pradeep Sancheti, 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 against the order dated
June 6, 2022 passed by the Member and Core Settlement 2
Guarantee Fund Committee ('MCSGFC / Committee' for short)
of the National Stock Exchange of India Limited ('NSE' for
short) whereby a penalty of Rs. 15.74 lakh has been imposed for
various violations and the appellant has also been prohibited
from registering new clients for 6 months.
2. The facts leading to the filing of the present appeal is, that
the appellant is a trading member registered with NSE since
July 2010. The Exchange conducted a limited purpose
inspection of the books of accounts and records of the appellant
to verify the data submitted towards weekly monitoring of
clients' funds under the Enhanced Supervision of Stockbrokers
from June 4, 2021 to June 25, 2021 and further conducted
inspection to verify the data submitted as on July 19, 2021,
July 20, 2021, July 21, 2021, July 26, 2021, July 27, 2021 and
August 2, 2021. Pursuant to the inspection a show cause notice
dated October 11, 2021 was issued for the observed
non-compliance of various regulatory provisions. The
allegations in the show cause notice was misuse of clients' fund
i.e. funds of credit balance clients used for margin obligations of
debit balance clients and proprietary trading to the extent of
Rs. 1.13 crores as of June 18, 2021. The show cause notice
alleged that funds of credit balance clients used to meet the 3
settlement obligations of debit clients or own purpose to the
extent of Rs. 0.35 crore, Rs. 0.26 crore, Rs. 2.16 crore, Rs. 0.62
crore, Rs. 0.51 crore and Rs. 1.89 crore as on July 19, 2021,
July 20, 2021, July 21, 2021, July 26, 2021, July 27, 2021 and
August 2, 2021. The show cause notice further alleged that
misuse of funds of credit balance clients used for margin
obligations of debit balance clients and proprietary trading and
incorrect reporting of client-level cash and cash equivalent
balances and non-settlement of clients' funds and securities etc.
3. The Committee after considering the material evidence on
record and after considering the reply of the appellant found that
the charges leveled against the appellant stood proved and that
the appellant had misused more than 50% of the net worth of
the clients for other purposes and accordingly levied a penalty
up to 3% of the misuse and further prohibited the appellant from
taking new clients for a period of 6 months.
4. We have heard Shri Aman Kacheria with Shri Robin Shah,
the learned counsel for the appellant and Shri Pradeep Sancheti,
the learned senior counsel assisted by Shri Rashid Boatwalla
and Shri Juan D'Souza, the learned counsel for the respondent. 4
5. Having heard the learned counsel for the appellant we find
that misuse of clients fund for other purposes is a serious
violation. The contention that it was a one off violation which
was rectified immediately is not correct. The Committee has
found that appellant had insufficient funds to cover clients
payable as on July 19, 2021, July 20, 2021, July 21, 2021, July
26, 2021, July 27, 2021 and August 2, 2021. The contention that
the appellant had infused a substantial amount of Rs. 2.50 crores
on July 29, 2021 is meaningless in as much as post-inspection
compliances has no relevance and does not absolve the violation
committed by the appellant. Consequently, the penalty imposed
was justified.
6. The learned counsel contended that a maximum penalty
has been imposed whereas the circular says that a penalty upto
3% should be imposed. It was submitted that penalty imposed in
the instant case was harsh and excessive. In support of his
submission the learned counsel for the appellant placed reliance
upon a decision of this Tribunal in GRD Securities Limited vs
National Stock Exchange of India Limited (Appeal no. 285 of
2018 decided on June 10, 2019).
7. In our opinion considering the peculiar facts and
circumstances of the present case, we find that the contention 5
that violation was one off case was incorrect as we find that the
appellant had misused the clients' funds on a number of
occasions and therefore considering the said fact the penalty
imposed was appropriate in the circumstances of the case.
8. The learned counsel has placed reliance upon a decision
of this Tribunal in UPSE Securities Limited vs Securities and
Exchange Board of India (Appeal no. 109 of 2011 decided on
July 25, 2011) wherein this Tribunal held that object of carrying
inspection of the books of accounts and records of any
intermediary is to ensure compliance with the provisions of the
Act, Rules and Regulations and that every irregularity /
deficiency should not culminate into an imposition of penalty.
9. In our opinion there is no quarrel with the proposition laid
down in the aforesaid decision. The fact remains that various
violations have been found to have been committed by the
appellant and, in some of the cases, only a warning has been
issued and penalty has been imposed wherever the violation was
serious.
10. In view of the above, we do not find any error in the
impugned order. The appeal fails and is dismissed with no order
as to costs.
6
11. 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
20.02.2023 MADHUKAR SHAMRAO Digitally signed by MADHUKAR SHAMRAO BHALBAR
msb BHALBAR Date: 2023.02.23 12:05:46 +05'30'
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