Securities Appellate Tribunal
Upse Securities Limited vs Sebi on 25 July, 2011
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 109 of 2011
Date of Decision : 25.07.2011
UPSE Securities Limited
Padam Towers, 14/113, Civil Lines,
Kanpur - 208 001 (U.P.) ...Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East), ...Respondent
Mumbai - 400 051.
Mr. K.D. Gupta, Chairman and Authorised Representative of the Appellant. Mr. Shiraz Rustomjee, Advocate with Mr. Mihir Modi, Mr. Kersi Dastoor and Mr. Mohin Shaikh, Advocates for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer P.K. Malhotra, Member S.S.N. Moorthy, Member Per : Justice N.K. Sodhi, Presiding Officer (Oral) This is one of those cases where we are of the view that initiating adjudication proceedings against the appellant was wholly unwarranted. The appellant is a public limited company and a wholly owned subsidiary of U.P. Stock Exchange Ltd (UPSE). It is a member of the Bombay Stock Exchange Ltd. (BSE), National Stock Exchange of India Ltd.(NSE) and MCX Stock Exchange Ltd. and registered as a stock broker with the Securities and Exchange Board of India (for short the Board). UPSE for all practical purposes is a defunct exchange and its trading platform is not operational. This is the position with quite a few regional stock exchanges and as per the requirements of the Board, the defunct stock exchanges float their subsidiary companies like the appellant which are registered as stock brokers. These subsidiaries 2 cannot deal in securities on their own account or in their own name. The members of the defunct stock exchanges then get themselves registered with the Board as sub brokers of the subsidiary company and they trade through the subsidiary company. The subsidiary company becomes a member of NSE / BSE and the sub brokers trade on these exchanges through the subsidiary company.
2. The Board carried out inspection of the books of accounts, documents and records of the appellant and observed that the appellant had committed several irregularities and some deficiencies were noticed in its functioning as a stock broker. Since most of the irregularities have not been established during the course of the enquiry conducted by the adjudicating officer, it is not necessary for us to deal with those irregularities / deficiencies. The adjudicating officer found the following two irregularities for which the appellant has been penalised.
(i) Allotting of more than one terminal to the same user at different addresses;
(ii) Not allotting unique client code to clients.
According to the adjudicating officer, the violation at (i) above was in breach of notice dated May, 2007 issued by BSE and Clause A(5) of the Code of Conduct prescribed for stock brokers in Schedule II read with Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The adjudicating officer also found that by not allotting unique client code to its clients, the appellant violated circular dated July 18, 2001 issued by the Board. Accordingly, by her order dated May 31, 2011 she imposed on the appellant a penalty of ` 2 lacs under Section 15HB of the Securities and Exchange Board of India Act, 1992 for the aforesaid violations. It is against this order that the present appeal has been filed.
3. We have heard the authorised representative of the appellant and the learned counsel for the Board and are of the view that the appeal deserves to be allowed. The Board had carried out inspection of the records of the appellant and found the 3 aforesaid deficiencies / irregularities. The first irregularity is in regard to the appellant allotting more than one terminal to the same user at different addresses. The appellant has denied the charge. It is pointed out that out of the two terminals one was operative through internet at the address of the sub broker and the other at the premises of the appellant company. According to the appellant, the second terminal installed at its premises was to be used only under contingent circumstances when the internet connectivity of the terminal located at the address of the sub broker fails during trading hours to enable the concerned sub broker to square up the outstanding transactions or to withdraw pending orders of their investors to protect them from unnecessary losses. In both the cases, only one terminal was operative at a time by the same user and it could not be said that the appellant had allotted two terminals to the same user at different addresses. The procedure adopted by the appellant is clearly permissible as per the notice subsequently issued by BSE on June 21, 2011 by which members were informed that contingency pool was available for trading only in case of emergencies such as in situations wherein they were unable to trade from their respective offices for technical reasons or otherwise. The adjudicating officer has not taken note of the explanation furnished by the appellant. It is pointed out by the learned counsel for the respondent that this procedure was not pointed out to the adjudicating officer. He may be right but the adjudicating officer ought to have known what the procedure was and, in any case, the Board as a market regulator ought to have known it. BSE is one of the intermediaries of the market which is regulated by the Board and all the notices / circulars issued by it are with the permission / sanction of the Board. The procedure adopted by the appellant is not only plausible but in accordance with the practice followed by BSE as it is clear from the subsequent notices. There is yet another reason why the penalty levied on the appellant on this count cannot be upheld. BSE after issuing the notice in May, 2007 the violation of which is now being alleged, subsequently reviewed and regrouped the existing penalty norms relating to inspection of members and laid down the consequential penalties in the case of different irregularities / violations to make the system uniform. When we look at the consequential penalties provided by BSE we find that it has provided for an advice being given to the erring member when such an 4 irregularity is noticed. It is alleged that the appellant had two terminals with different addresses both of which were not operated by persons with BCSM certification. BSE has provided that the erring member be advised in this regard. In the light of the consequential penalty which BSE itself has provided, we do not think that the Board was justified in initiating adjudication proceedings for such a violation. Let us not forget that BSE being a stock exchange is also a regulator of the market at the grassroot level regulating its members.
4. Now coming to the second charge which, according to the adjudicating officer, was established against the appellant. The charge is that the appellant did not allot unique client code to its clients and this is said to be in violation of the Board's circular dated July 18, 2001. The appellant has denied the charge. It is pointed out that the client(s) had changed their sub broker and, therefore, there was a change in the unique client code. The appellant as a stock broker had no control over the clients if they chose to change the sub broker through whom they would trade. This was beyond the control of the appellant. However, after receipt of the inspection report from the Board, the appellant has assured the former that no client would henceforth work on the old client code and that a system has been put in place to ensure that only after the deactivation of the old client code that trading would be allowed to be done under a new client code by the same client. Here again, we find the explanation of the appellant to be reasonable. How can the appellant control their clients in choosing their sub brokers through whom they wish to trade. These are matters on which the clients alone have to take a call and no fault can be found with the appellant as a stock broker. Be that as it may, BSE in regard to this irregularity / deficiency has also provided that the erring entity like the appellant be advised in the matter and it has not provided any other monetary penalty. The Board was wholly unjustified in not taking note of the practices and procedures followed by BSE and initiating adjudication proceedings against the appellant. The inspecting team in regard to both the irregularities for which fault has been found should have advised the appellant at the time of inspection as to how the latter was required to deal with those issues and that imposing monetary penalties was wholly uncalled for.
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5. Before concluding we cannot resist observing that the object of carrying out inspection of the books of accounts and records of any intermediary including a stock exchange or its subsidiaries is to ensure compliance with the provisions of the Act, Rules, Regulations, By-laws and circulars issued from time to time which are meant to regulate the securities market. Every little irregularity / deficiency noticed during the course of the inspection is not culpable and does not call for initiation of penalty proceedings. The purpose of inspection in quite a few cases could be better achieved if the inspecting team at the time of the inspection were to advise the erring entity. However, if any serious lapse is discovered, it would always be open to the Board to take penal action in accordance with law. Having said this, we leave the matter at that.
In the result, the appeal is allowed and the impugned order set aside with no order as to costs.
Sd/-
Justice N.K. Sodhi Presiding Officer Sd/-
P.K. Malhotra Member Sd/-
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