Svarn Financial Services Pvt. Ltd. vs Sebi

Order reserved on : 13/04/2016 Date of decision:26/04/2016

Appeal No.252 of 2014

Svarn Financial Services Pvt. Ltd.

Stock Broker

C-2, Greater Kailash Enclave-1,

New Delhi - 110 048. ... Appellant

Versus

Securities and Exchange Board of India

having its registered office at

SEBI Bhavan, Plot No.C4-A, G Block,

Bandra Kurla Complex, Bandra (East),

Mumbai - 400 051. ... Respondent

Mr. Prakash Shah, Advocate for the Appellant.

Mr. Kumar Desai a/w Ms. Amrita Joshi, Advocates i/b The Law Point for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Jog Singh, Member Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair, Member

1.

Appellant is aggrieved by the impugned order passed by the

Adjudicating Officer of Securities and Exchange Board of India ("AO of SEBI"

for short) dated 29th May, 2014 whereby a total penalty of Rs.15 lac has been

imposed in terms of the relevant provisions of the SEBI Act, 1992 and

Securities Contracts (Regulation) Act, 1956.

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2. The facts of the case are as follows:

3. Svarn financial Services Pvt. Ltd. - the Appellant, is a stock broker

having membership (in the relevant period) in the National Stock Exchange

(NSE for short) and the Bombay Stock Exchange (BSE for short). SEBI carried

out inspection of the books of account of the appellant for the period from

1/4/2010 to 31/12/2011 during 2nd and 3rd February, 2012. During the

inspection, the following violations have been observed by the SEBI.

a. The Appellant had not done actual settlement of funds and securities of clients either in a calendar quarter or month, for 74 out of 151 of its clients trading in the F&O segment, thereby violating the provisions of SEBI Circular MIRSD/SE/Cir-19/2009 dated December 03, 2009; and

b. The Appellant had continued to retain a 10-day notice period clause for the revocation of running account authorizations taken from the clients, as part of its KYC kit, thereby violating the provisions of Clauses A(2) & A(5) of the Code of Conduct laid down under Schedule II specified under Regulation 7 of Broker Regulations read with SEBI Circular MIRSD/SE/Cir-19/2009 dated December 03, 2009; and

c. The Appellant had made fixed monthly payments, in the nature of interest on the additional funds kept by the clients with the Appellant, to 10 clients whose accounts were not settled at the end of the relevant months/quarters, thereby violating provisions of SEBI Circular MIRSD/SE/Cir-19/2009 dated December 03, 2009 and SEBI Circular No.SMD/SED/CIR/93/23321 dated November 18, 1993 AND Clauses A(2) & A(5) of the Code of Conduct laid down under Schedule II specified under Regulation 7 of Broker Regulations AND Rules 8(1)(f) & 8(3)(f) of SCR Rules, 1957.

4. Accordingly, SEBI through a show-cause notice (SCN for short) dated

28th January 2014 sought the explanation from the appellant on these

violations. Following the reply submitted by the appellant to the SCN and

personal hearing, the AO of SEBI passed the impugned order which is under

appeal.

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5. During the course of the hearing of the appeal in this Tribunal,

Counsel for the appellant as well as Counsel for the respondent were heard.

Counsel for the respondent reiterated the charges in the impugned order and

argued why the penalties imposed are fair and as per law. Counsel for the

appellant argued that alleged violations framed in the impugned order are

devoid of merits. The appellant was going through a period of financial

hardship and there was only some delay in settling a few clients accounts

with their permission only. There was no credible explanation as to why a 10

day notice period was insisted when the rules were categorical that clients

may revoke their account at any time and brokers were expected to clearly

communicate that condition to their clients. As far as the 3rd charge that the

appellant had carried out fund based activities, the Counsel for the appellant

denied the same. It was further submitted that the appellant had surrendered

the membership of both the NSE as well as BSE and being an entity out of

business prayed for reduction in the penalties imposed in the impugned

order. To justify their arguments for a relaxation on the penalties imposed,

the appellant relied on two judgments of this Tribunal in the case of M/s. DSE

Financial Services Ltd. v. SEBI (Appeal No.153 of 2012 decided on 11/9/2012)

and in the case of UPSE Securities Limited vs. SEBI (Appeal No.109 of 2011

decided on 25/7/2011).

6. During the course of hearing, the Tribunal enquired as to whether the

appellant is agreeable to produce copies of the letters received from their

clients to demonstrate that the actual settlement of funds and securities were

done at the instance of clients. Similarly they were also asked to furnish

proof as to how certain specific amounts of money were credited into the

accounts of some of their clients. Further, they were also asked if they could -4-

furnish copies of the ledger, bank accounts or demat accounts to prove that

funds were settled as per the process stated in the circular of December 3,

2009. However, the appellant who was present before this Tribunal

expressed his inability to produce the documents in view of the fact that the

company has stopped its operation.

7. With reference to the 1st charge levelled against the appellant, it is

submitted that in view of conflicting circular issued by NSE on 3/2/2010,

7/9/2012 and 29/10/2013 no fault can be found with the appellant for not

actually settling the accounts of 74 clients out of 151 clients. We see no merit

in the above contentions, because, firstly, the appellant failed to produce any

document to show that the said clients had asked the appellant to withhold

any amount that is due to be settled. Secondly, the NSE circular dated

3/2/2010 merely clarifies that the trading member may retain additional

margin to take care of any margin obligation arising in next 5 days. In the

present case, there is nothing on record to suggest that the amount withheld

by the appellant represented the margin money obligation that was to arise in

next 5 days from the relevant date. Although the appellant has relied on the

CA certificate, the said certificate has neither been substantiated before the

AO or before this Tribunal with documents to show that the margin money

obligation set out therein in fact did arise. Hence, decision of the AO on the

first issue cannot be faulted.

8. With reference to the 2nd charge, the appellant has placed reliance on

SEBI circular dated 13/5/2011. We see no merit in this contention, because,

even the May 13, 2011 circular specifically requires that the authorization

shall be dated and shall contain a clause that the clients may revoke the -5-

authorization at any time. Fact that the said circular dated 13/5/2011 further

provides that the stock brokers while sending periodical statement of

accounts to the clients, shall mention therein that their running account

authorization would continue until it is revoked by the clients, does not mean

that the clause to be inserted in the authorization is dispensed with.

Therefore, in the present case, the clause contained in the authorization that

there shall be 10 days notice cannot be said to be in consonance with SEBI

Circular dated 3/12/2009. Consequently, decision of SEBI on the second issue

cannot be faulted.

9. With reference to the 3rd charge the appellant has relied upon SEBI

Circular dated 7/5/1997, NSE Circular dated 14/1/2002 and clause 8(d) of SEBI

Circular dated 3/12/2009. We see no merit in these arguments, because

admittedly appellant had made fixed payment to 10 clients (who had

maintained positive balance with the appellant) on a monthly basis from

January 2011 to October 2011. Argument of the appellant that the monthly

payments were made under specific instruction of the clients to suit their

convenience and to meet their own monthly fund requirements has been

rejected by the AO by recording that a stock broker is an entity engaged in

the business of trading securities on its own account or on behalf of its clients

and not to borrow funds from its clients and pay a fixed amount by way of

interest, which is not covered under the stock broking business. Reliance

placed on SEBI Circular dated 7/5/1997 is misplaced, because, as rightly held

by the AO, the practice of paying interests to the clients towards funds

maintained with the broker to meet their monthly fund requirement cannot

be said to be 'in connection with or incidental to or consequential upon the

securities business' so as to exempt the transaction from the prohibition -6-

imposed under Rule 8(i)(f) and 8(3)(f) of SCR Rules, 1957. Accordingly, no

fault can be found with the decision of the AO in upholding the 3rd charge

levelled against the appellant.

10. Reliance placed by the appellant on the decision of this Tribunal in

case of DSE Financial Services Ltd. (supra) is distinguishable on facts. In that

case, the finding of fact recorded by the AO was that the violations

committed by the appellant therein were mostly technical in nature, whereas,

in present case, the violations committed by the appellant are in gross

violation of the clauses contained in the circular issued by SEBI and the SCR

Rules 1957. Hence, the aforesaid decision has no relevance to the facts of

present case.

11. Reliance placed by the appellant on the decision of this Tribunal in

case of UPSE Securities Ltd. (Supra) is also misplaced. The alleged violations

set out in para 2 of the said order are not comparable with the violations

established against the appellant herein. Hence, the said decision is also

distinguishable on facts.

12. Argument of the appellant that the penalty of Rs.8 lac imposed under

Section 15HB of SEBI Act and penalty of Rs.7 lac under Section 23H of SCR

Act is excessively harsh is without any merit. Penalty imposable under

Section 15HB of SEBI Act is upto one crore of rupees and after considering all

mitigating factors the AO has imposed penalty of Rs.8 lac which cannot be

said to be harsh. Similarly, the penalty imposable under Section 23H of

SCRA, 1956 is up to Rs. One Crore and after considering all mitigating

factors, the AO has imposed penalty of Rs.7 lac under Section 23H of SCRA

which cannot be said to be harsh.

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13. For the reasons stated above, we see no merit in the appeal.

14. Accordingly, the appeal is dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member

26/04/2016 Prepared & compared by-ddg