Securities Appellate Tribunal
Alankit Assignments Limited vs Sebi on 8 November, 2019
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 31.10.2019
Date of Decision : 08.11.2019
Appeal No. 406 of 2018
Alankit Assignments Limited
Alankit House, 4E/2,
Jhandewalan Extension,
New Delhi - 110 055. ..... Appellant
Versus
National Stock Exchange of India Limited
Exchange Plaza, C-1, Block G,
Bandra Kurla Complex,
Bandra (E),
Mumbai - 400 051. ....Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. K.C. Jacob,
Advocate i/b Corporate Law Chamber of India for the
Appellant.
Nimay Dave, Advocate with Ms. Shreya Anuwal, Advocate
i/b Manilal Kher Ambalal & Co. for the Respondent.
CORAM : Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member
Per : Dr. C.K.G. Nair, Member
1.By this appeal, the appellant, who is a stock broker and member of the National Stock Exchange of India Limited ('NSE' for short) challenges the order of the Disciplinary 2 Action Committee ('DAC' for short) of the NSE dated October 25, 2018. Based on various violations noticed during a regular inspection conducted by NSE, the DAC has imposed a monetary penalty of Rs. 25 lakh and ordered suspension of the appellant from all segments of the Exchange for a period of five days after giving three weeks' notice.
2. The inspection period was during July 1, 2016 to June 30, 2017. On observation of various violations a show cause notice was issued on June 8, 2018 to which the appellant replied on June 19, 2018. Thereafter an opportunity for personal representation was provided before the DAC on September 11, 2018 wherein the Managing Director and a Director of the appellant appeared and made their submissions. After considering their reply and submissions the impugned order has been passed by the DAC.
3. There are several charges against the appellant in the impugned order. They include, misuse of clients securities and clients funds to the tune of Rs. 107.17 crore through 695 transactions / instances. Part of these securities (worth Rs. 62.54 crore) was transferred to one of its clients which is a NBFC, namely, Diwakar Commercials Private Limited ('DCPL' for short). DCPL, in turn, pledged Rs. 52 crore 3 worth of clients securities and mobilized funds. Therefore, not only that the appellant had transferred clients' securities worth Rs. 107.17 crore but out of such transferred securities part of the securities have gone out of the hands of even the transferee entity as well thereby jeopardizing a substantive quantity of clients securities. There are similar charges of unexplained use of funds raised by pledging securities of 1216 clients to the extent of Rs. 8.18 crore; non-availability of client funds to the tune of Rs. 4.05 crore; non-settlement of client funds and securities amounting to Rs. 31.99 crore; multiple unique clients code (UCC) allotted to clients etc.
4. The learned counsel Shri Somasekhar Sundaresan appearing on behalf of the appellant submits that in the day- to-day business of brokers minor deviations generally happen; immediately after pointing out the deficiencies by the NSE inspection team the appellant took all steps necessary to avoid any repetition or recurrence of such deficiencies; the monetary penalty of Rs. 25 lakh imposed is in excess of what is provided for under the relevant Guidelines of NSE; the minor deviations are not repetitive and hence in addition to penalty of Rs. 25 lakh five days suspension of the appellant from all the segments of the Exchange is very harsh 4 punishment for such minor offences though admitted. In support of his contention the learned counsel also relied on three orders of this Tribunal in the matter of Bezel Stock Brokers Private Limited vs SEBI (Appeal No. 294 of 2018 decided on 31.01.2019), UPSE Securities Limited vs SEBI (Appeal No. 109 of 2011 decided on 25.07.2011) and Religare Securities Limited vs SEBI (Appeal No. 23 of 2011 decided on 16.06.2011). Relying on UPSE and Religare (supra) he contended that the purpose of inspection is not to impose penalties where some minor violations have been observed but to facilitate implementing remedies. Relying on Bezel (supra) it was contended that for similar violations as allegedly committed by the appellant only a monetary penalty is sufficient and suspension makes the punishment disproportionate, particularly in the context that during its 20 years operations there have been no violation by the appellant.
5. The learned counsel Shri Nimay Dave appearing on behalf of the respondent NSE, on the other hand, submits that the violations committed by the appellant are much more serious than the matters in the orders relied on by the appellant. Transfer of clients securities and funds are to the 5 tune of about Rs. 108 crore and Rs. 52 crore respectively and non-settlement of clients funds comes Rs. 32 crore. More importantly client securities had been transferred to a third party who in turn further transferred and encumbered the same. Therefore, the situation was alarming and warranted severe action as it would have imperiled even the functioning of the appellant at the cost of thousands of investors and as well as adversely imparting the integrity of market. He also submits that the calculation of monetary penalty given by the appellant is not correct.
6. Having heard the learned counsel for the parties and having perused the documents including the relevant circulars we are of the opinion that the directions contained in the impugned order are justifiable.
7. The general principles governing the code of conduct prescribed under Regulation 4.5 of NSE CM and F&O Regulations which the appellant is mandated to follow states that a broker has to maintain a high degree of professionalism, adhere to fair trading practices, honesty and fairness and should have capabilities to perform the task efficiently. Moreover, the said Regulations also state that "no trading member or person associated with trading member shall make 6 improper use of constituent's securities or funds". Accordingly, given the findings that appellant has misappropriated client assets despite the mandate to conduct the business in a fiduciary capacity following the code of conduct prescribed the appellant is liable to be penalized. The impugned order further notes that the committed violations are of serious nature, which, if not identified by the Exchange in its inspection and timely remedial action not taken, the situation could have turned extreme and would have gravely impacted investor confidence.
8. Though we agree that the violations are broadly of the types as in the matter of Bezel (supra) relied upon by the appellant, we note from the relevant records of Bezel (supra) that the amount involved in Bezel was much lower than the amount involved in the present appeal. For instance, the value of clients securities transferred in Bezel (supra) was worth only Rs. 2.27 crore while in the present matter it is about Rs. 107 crore. In Bezel there was no further transfer of clients' securities to another entity like in the present matter. Therefore, we are of the view that the magnitude as well as seriousness of the violations in the present matter is at a different level than in the facts and circumstances of Bezel. 7
9. In any case this Tribunal did not uphold the suspension of Bezel because the impugned order therein had not given sufficient reasons for imposing suspension in addition to monetary penalty. However, in the order impugned in the present appeal the reasons are categorically stated. As far as reliance on other two orders is concerned i.e. UPSE (supra) and Religare (supra) what is stated therein is that no penalty should be imposed for observed minor violations. Given the fact that the present appeal relates to major and serious violations, reliance on these orders does not help the appellant.
10. However, in the interest of investors as well as the market we are of the view that suspension of a trading member who is trading on behalf of clients for a short period may not achieve the desired objective while at the same time adversely affecting its existing clients (in the case of long term suspension of a broker clients have the option of migrating to another broker). Therefore, while upholding the penalty of Rs. 25 lakh we would modify the five days suspension of the appellant from all segments of the Exchange to that of restraining the appellant from taking / enrolling any fresh clients for a period of one month. This 8 restraint shall commence from the seventh day of the date of this order; i.e. from November 15, 2019.
11. Appeal is partially allowed on above terms. No orders on costs.
Sd/-
Dr. C.K.G. Nair Member Sd/-
Justice M.T. Joshi Judicial Member 08.11.2019 Prepared and compared by:msb