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
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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;
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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:
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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
ensure that the fiduciary and
obligations imposed on them and
staff by the various statutory Acts,
and Regulations are complied with.

shall
other
their
Rules
(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.

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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.
2.

Details of contravention
Penalty/ Disciplinary Action
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
Monetary Penalty
Penalty for repeat violations
Increase penalty amount by 50%
(if not specifically stated)
Relevant Authority may consider following actions, as it deems fit, for repeated/ serious
violations:
1.
2.
3.
4.
5.

In addition to incremental penalty, Disablement of proprietary trading
Disallowing registration of new clients for a specific period of time
Disablement of trading terminal
Suspension
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.

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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