Securities Appellate Tribunal
Bezel Stock Brokers Private Limited vs Sebi on 30 January, 2019
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 18.01.2019
Date of Decision : 30.01.2019
Appeal No. 294 of 2018
Bezel Stock Brokers Private Limited
D-6/16, Vasant Vihar,
New Delhi- 110 057 ...Appellant
Versus
National Stock Exchange of India
National Stock Exchange of India Ltd.
4th Floor, Jeevan Vihar Building,
Parliament Street,
New Delhi- 110 001 ...Respondent
Mr. Gaurav Joshi, Senior Advocate with Mr. Saurabh Bachhawat,
Advocate and Ms. Nirali Mehta, Practicing Company Secretary i/b
Mindspright Legal for the Appellant.
Mr. Sachin Chandarana, Advocate with Ms. Shreya Anuwal, Advocate
i/b M/s Manilal Kher Ambalal & Co. for the Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Per: Justice Tarun Agarwala
1.The appellant is engaged in the business of stock broking, whereby it is catering to the needs of retail, corporate and high net worth investors. It is alleged that the appellant has 4000 registered clients, out of which there are 300 active clients. The appellant contended that he is essentially a retail broker and does not advise its clients with the sale or purchase of securities by them. The appellant merely executes orders as 2 per the instructions of their clients without questioning the prudence of the transactions.
2. On 02nd February, 2018, the officials of the National Stock Exchange of India Limited ("NSE" for convenience) conducted an inspection at the registered office of the appellant covering the period 1st January, 2017 to 31st January, 2018, pursuant to which a show cause notice dated 9th March, 2018 was issued to show cause as to why necessary disciplinary action including monetary penalty/ suspension/ expulsion in accordance with National Stock Exchange of India Limited Rules, Regulations and Bye Laws should not be initiated against the appellant for the alleged non-compliance. The violations alleged in the show cause notice are as under:-
"(a) Mis-utilization of client's securities;
(b) Non-availability of client's securities;
(c) Use of client's funds to meet proprietary mark to market (MTM) obligations;
(d) Non-settlement of client/s account;
(e) Discrepancy in computation of net worth;
(f) Non-availability of client's funds;
(g) Funding of client transactions;
(h) Own beneficiary account not in the name of trading member;
(i) the appellant in clear, express and unequivocal terms has admitted the allegations though it claims that the violations were subsequently rectified;3
The appellant submitted its reply and was also heard and, thereafter, the impugned order dated 14th June, 2018 was passed imposing a penalty of ` 15,00,000/- (Rupees Fifteen Lakhs) and further suspending the trading membership of the appellant in all segments for a period of 5 days and further directing the appellant to submit a certificate of the Chartered Accountant depicting that the shortage of funds to pay off its client creditors has been recouped entirely.
3. While imposing the aforesaid penalty, the Disciplinary Action Committee ("DAC" for convenience) found that the appellant had failed to abide the Code of Conduct for trading members under Regulation 4.5.1 and Regulation 4.5.2 of the National Stock Exchange (Capital Market) Trading Regulations, 1994 as well as under the National Stock Exchange of India Limited Rules. The DAC also found that the appellant has used client's funds for meeting its pro-obligations in the Futures and Options ("F&O") Segments and that non-availability of clients' funds and securities and use of clients' funds and securities for meeting the obligations of pro- account and other clients was an indication of misuse of clients' funds and securities. The penalty was imposed in order to eliminate such mal-practices in the interest of investors and to ensure investors confidence in the stock market. The DAC, while imposing the aforesaid penalty was of the view that the indicated penalty as mentioned in the Circular dated 6th November, 2017 was insufficient. The appellant being aggrieved by the order dated 14th June, 2018 filed a Review Application which was rejected by the DAC 4 by an order dated 2nd August, 2018. The appellant being aggrieved by the aforesaid orders has filed the present appeal.
4. We have heard Shri Gaurav Joshi, learned senior counsel for the appellant assisted by Shri Saurabh Bachhawat, counsel. Learned senior counsel contended that the penalty of ` 15 lakhs imposed was excessive and not in consonance with the penalties indicated as per the Circular Dated 27th June, 2013 as modified by Circular Dated 6th November, 2017. The learned senior counsel contended that the penalty of ` 15 lakhs was, thus, required to be reduced. It was further contended that the suspension of trading membership of the appellant for a period of 5 days was excessive and was wholly unwarranted as it was the first violation by the appellant. It was urged that as per the Circular, penalty of suspension could only be given if there was repeated or serious violation which in the instant case was missing. According to the learned senior counsel for the appellant, the violation was committed by the appellant for the first time that it was not a repeated violation. The learned senior counsel thus contended that the penalty of suspension can only be given in extreme cases where the offence was serious or repetitive or where the violation had a high impact which was required to be dealt with on a case to case basis.
5. On the other hand, the learned counsel Shri Sachin Chandarana, for the respondent contended that the appellant in his reply before the DAC had admitted all the violation that was pointed out in the show cause notice. Learned counsel contended that the penalties indicated in the 5 Circular are only indicative in nature and could undergo a change in specific cases depending on frequency and gravity of the violation. It was urged that in the instant case, the violation committed by the appellant had financial implications which was a serious offence and, therefore, it was essential to eliminate such mal-practice in future and thus in order to protect the interest of the investors and ensure investor confidence in the stock market it was essential to impose a penalty other than the penalties specified in the Circular. Learned counsel thus contended, that the penalty that was imposed was justified and require no modification.
6. In support of the submissions, the learned counsel for the respondent has relied upon a decision of this Tribunal dated 20th February, 2017 in the matter of M/s Prrsaar V/s National Stock Exchange of India Limited, wherein in similar circumstances, the penalty of suspension imposed for violation which had financial implications was upheld by the Tribunal.
7. Having heard the learned counsel for the parties and in order to appreciate their submissions, it would be essential to peruse a few provisions of the Rules and Regulations. Chapter IV of the National Stock Exchange of India Limited Rules provides for Disciplinary Proceedings, Penalties, Suspension and Expulsion of a trading member the relevant portion which for facility are extracted hereunder: 6
Clause 3 of Chapter IV provides as under:-
"(3) A trading member shall be deemed guilty of misconduct for any of the following or similar acts or omissions namely:
(a) .............
(b) .............
(c) Improper Conduct: If in the opinion of the relevant authority it is guilty of dishonourable or disgraceful or disorderly or improper conduct on the Exchange or of willfully obstructing the business of the Exchange;
(d) Breach of Rules, Bye Laws and Regulations: If it shields or assists or omits to report any trading member whom it has known to have committed a breach or evasion of any Rule, Bye-law and Regulation of the Exchange or of any resolution, order, notice or direction thereunder of the relevant authority or of any Committee or officer or the Exchange authorised in that behalf;"
Regulation 4.5.2 of the Regulations provides as under:-
"4.5.2 GENERAL PRINCIPLES
(a) Professionalism: A Trading Member in the conduct of his business, shall observe high standards of commercial honour of just and equitable principles of trade.
(b) Adherence to Trading Practices: Trading Members shall adhere to the Rules, Regulations and Byelaws of the Exchange and shall comply with such operational parameters, rulings, notices, guidelines and instructions of the relevant authority as may be applicable from time to time.
(c) Honesty and Fairness: In conducting his business activities, a Trading Member shall act honestly and fairly, in the best interests of his constituents.7
(d) Capabilities: A Trading Member shall have and employ effectively the resources and procedures which are needed for the proper performance of his business activities."
Regulation 4.5.3 of the Regulations provides as under:-
"4.5.3 TRADING PRINCIPLES
(a) Trading Members/ Participants shall ensure that the fiduciary and other obligations imposed on them and their staff by the various statutory Acts, Rules and Regulations are complied with.
(b) .............
(c) ..............
(d) .............
(e) No Trading Member or person associated with a Trading Member shall make improper use of constituent's securities or funds."
On the basis of the aforesaid provisions, admittedly, the appellant had committed violation which is clear from his submissions in reply to the show cause notice. Thus, the appellant had failed to abide by the Code of Conduct for trading members under the aforesaid Rules and Regulations. The appellant had failed to act in a diligent manner and had failed to protect the interest of his clients. It was found that the appellant had failed to ensure availability of clients' assets and misappropriated clients' funds to meet the proprietary obligation and, therefore, the appellant failed to perform its fiduciary duty. Using clients' funds is a misuse of clients' funds and securities and thus, the appellant was liable for imposition of penalty.
8
8. The penalties are depicted in the Circulars Dated 27th June, 2013 and 6th November, 2017. The penalty indicated in the Circular Dated 27th June, 2013 was modified by the Circular Dated 6th November, 2017. Thus, the Circular of 2017 becomes the relevant Circular for consideration. It would be appropriate to extract the relevant paras of the Circular for a proper appraisal for the factual position. The Circular Dated 6th November, 2017 is extracted hereinunder:-
"To All Members Sub: List of violations and applicable penalties (CM, F&O and CD segments) This has reference to the Exchange Circular No. 163/2013; Download Ref. No: NSE/INSP/23768 dated June 27, 2013.
The existing penalty structure has been reviewed and revised in consultation with all the Stock Exchanges and SEBI.
The common violations are grouped in three categories namely, violations with financial implications, procedural violations and other procedural violations. In addition to the above, the penalties/ disciplinary action(s)/ charges for non-compliance with the provisions of Enhanced Supervision Guidelines have also been included.
The revised list of common violations and the applicable penalties/disciplinary action(s) charges including escalation of penalties for repeat violations as given in Annexure 1 and Annexure 2.
Revised penalty norms as mentioned in Annexure 1 shall be applicable in respect of inspections commenced on or after the date of this Circular and the penalties/ disciplinary action(s)/ charges as mentioned in Annexure 2 shall be applicable for all forthcoming submissions.
It may be noted that the penalties/ disciplinary action(s) charges are indicative in nature and could undergo change in specific cases depending on frequency and gravity of the violations. The penalties/ disciplinary action(s)/ charges actually levied are decided by the Relevant Authority of the 9 Exchange. Penalty/ disciplinary action in respect of violations having high impact would be dealt with on case to case basis depending on seriousness and gravity of such violations.
Members are advised to take note of the same and put in place systems and procedures so as to ensure adherence to the compliance requirements."
The penalty which is relevant for this issue has been indicated at Sr. No. 2 of Annexure 1 which is extracted hereinunder:-
Sr. No. Details of contravention Penalty/ Disciplinary Action
2. Use of client funds & securities/ Rs. 1,00,000/- or 1% of the amount commodities for other than involved, whichever is higher specified purposes/ Use of client funds for own purpose/ for other clients.
The incremental penalties involving financial implications which is also indicated in Annexure 1 is extracted hereinunder:-
Incremental Penalties Structure for violations with financial implications In case of any violation is observed to be repeated compared to last inspection conducted, the following escalation of penalty would be made applicable.
Applicable Penalty Penalty for repeat violations Monetary Penalty Increase penalty amount by 50% (if not specifically stated) Relevant Authority may consider following actions, as it deems fit, for repeated/ serious violations:
1. In addition to incremental penalty, Disablement of proprietary trading
2. Disallowing registration of new clients for a specific period of time
3. Disablement of trading terminal
4. Suspension
5. Any other action, as deemed fit.
From the aforesaid Circular, it is apparently clear that the violations have been grouped in three categories namely, violations with financial implications, procedural violations and other procedural violations. For 10 the first time offender, a violation having financial implications, the penalty indicated at Sr. No. 2 of Annexure 1 is ` 1 lakh or 1% of the amount involved, whichever is higher.
9. In the instant case, it was urged by the learned counsel that if the penalty is to be calculated under this provision, a maximum penalty of ` 5 lakhs could have been imposed whereas, in the instant case the NSE has imposed a penalty of ` 15 lakhs which was excessive.
10. The Circular further indicates that the penalties/ disciplinary action(s) are only indicative in nature and could undergo change in specific cases depending upon the frequency and gravity of the violations. Thus, in case of financial irregularity, the penalty of ` 1 lakh as indicated in Sr. No. 2 of Annexure 1 could be enhanced if in a specific case it was found that there was repetitive of the violation or that the violation was grave in nature. Further, the Circular indicates that the penalty in respect of violations having high impact would be dealt with on a case to case basis depending on seriousness and gravity of such violations. Thus, from the reading of the Circular it is apparently clear that the penalty indicated in Annexure 1 and 2 are only indicative in nature and that the penalty can be changed depending on the frequency and the gravity of the violations and where the violation have a high impact.
11. In our opinion, the penalty indicated in the Circular are indicative in nature and provide a guideline to the NSE to consider the quantum while imposing the penalty. Normally, the penalty indicated in the 11 Circular should be followed in letter and spirit and if a departure is to be made, it would be necessary for the NSE to give reasons for such departure and give a finding as to whether there was repetitive nature of the violation or the gravity of the violation was such that a higher penalty was required to be imposed. If the violation was having a high impact the seriousness and gravity of such violation was required to be indicated.
12. In the light of the aforesaid Circular, it thus becomes necessary for us to see as to what finding has been given by the NSE while imposing the penalty of ` 15 lakhs and suspending the trading membership for a period of 5 days. We find that the committee has given a finding that the appellant had used client funds which is a misuse and is a mal-practice. We find that the NSE has only found that the appellant had misused the clients' funds and securities and that it was a mal-practice in violation of Regulation 4.5.1 and Regulation 4.5.2 of the Regulations. No reason has been given as to why the penalty indicated in the Circular was insufficient. Admittedly the appellant had committed the violation for the first time. We are thus of the opinion, that in the absence of any allegation of the violation being repetitive in nature and, in the absence of any finding that the violations had a high impact or that the violations were grave in nature, having serious consequences, we find that the imposition of suspension of trading membership of 5 days was excessive and unwarranted. We are further of the opinion, that considering the admission of the appellant that they had misused the client funds and securities the imposition of penalty of ` 15 lakhs over and above the amount indicated in Annexure 1 was justified in the given circumstances. 12 The decision cited by the learned counsel for the respondent is distinguishable and not applicable in the peculiar facts of this case.
13. In the instant case, the doctrine of proportionality is fully applicable. In the test of proportionality, the Courts will quash the exercise of discretionary powers if it finds that there is no reasonable relation between the objective which is sought to be achieved and the means used to that end or where the penalty imposed is wholly out of proportion to the relevant misconduct. Thus action which is arbitrary or discriminatory cannot be sustained. In the instant case, the penalty of suspension, in the facts of the given case is out of proportion and thus cannot be sustained.
14. We accordingly allow the appeal in part and quash that part of the order by which the trading membership of the appellant was suspended in all segments for a period of 5 days.
15. In the circumstances of the case, there shall be no order as to costs.
Sd/-
Justice Tarun Agarwala Presiding Officer Sd/-
Dr. C.K.G. Nair Member 30.01.2019 Prepared & Compared By: PK