BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 26.06.2019
Date of Decision: 06.08.2019
Appeal No. 73 of 2017
HRIM Finance And Securities Private Limited
3B, Jaihind Estate Building,
5th Floor, Room No. 5/6,
Dr. A. M. Road, Bhuleshwar,
Mumbai- 400 002
…Appellant
Versus
National Stock Exchange of India Limited
“Exchange Plaza”,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051
…Respondent
Mr. Piyush Raheja, Advocate with Ms. Palak Patel, Advocate
i/b Mansukhlal Hiralal & Co. for the Appellant.
Mr. Nimay Dave, Advocate with Mr. Rahul Jain and Ms. Zalak
Mody, Advocates i//b Manilal Kher Ambalal & Co. for the
Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M. T. Joshi, Judicial Member
Per: Dr. C.K.G. Nair
1.
The appellant is aggrieved by the decision of the
Disciplinary Action Committee (“DAC” for convenience) of the
National Stock Exchange of India Limited (“NSE” for
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convenience) dated July 18, 2014. DAC has passed several
directions including consolidated monetary penalty of ` 37.89
lakhs, suspension of membership and review by an independent
auditor appointed by the Exchange to confirm that the appellant
is complying with all the regulatory guidelines as well as
adequacy of the internal controls in place. This appeal has been
filed aggrieved by these directions of DAC.
2.
Appellant is a trading member of the NSE in the Capital
Market (“CM” for convenience), Futures and Options (“F&O”
for convenience) and Currency Derivatives Segments (“CD” for
convenience). The NSE conducted a regular inspection of the
books and other relevant records of the appellant in April 2012
covering the period from August 01, 2011 to February 27, 2012.
The said inspection also covered issues relating to certain
investor complaints.
During the said inspection several
violations of various regulations, rules and bye laws of
Securities and Exchange Board of India (“SEBI” for
convenience), NSE as well as the National Securities Clearing
Corporation Limited (“NSCCL” for convenience) were noticed
and a show cause notice dated May 02, 2012 was issued to the
appellant directing the appellant to provide its explanation as
well as to show cause as to why disciplinary action should not
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be initiated against the appellant. Further, the appellant has
been disabled by NSE in the CD segment w.e.f. May 04, 2012
due to margin violation, from F&O segment w.e.f. August 06,
2012 due to shortages of security deposits and from the CM
segment w.e.f. August 21, 2012 due to shortages in security
deposits.
3.
Apart from procedural violations, the charges against the
appellant and the consequent penalty imposed are reproduced as
follows:I.
II.
III.
Margin Reporting
(a) Penalty for wrong reporting
` 15,00,000/-
(b) Penalty for false reporting
` 15,00,000/-
Penalty for excess
brokerage charged to clients
[in addition excess brokerage to be
refunded to clients.]
` 6,09,000/-
Not providing proof of contract notes and
daily margin statements issued
to clients in currency derivatives
segment
` 50,000/-
IV. Late pay-in to clients
V.
Penalty
Use of bank accounts for other
than purposes specified and
receipt from clients deposited
in own bank account/ payment
to clients from own bank account
VI. Contravening clauses in
client registration documents
` 50,000/-
` 10,000/` 10,000/-
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VII. For charging penalty in excess
of the amount levied by NSCCL
[in addition excess amount charged
to be refunded to clients.]
VIII. Actual settlement of funds
and securities: non-release
of funds to clients
` 50,000/-
` 10,000/-
IX. Indefinite suspension for multiple violations, till systems
and controls are put in place.
Given the procedural as well as other violations as above the
DAC advised the appellant to put in place necessary checks and
balances to ensure investor safety and maintenance of up-todate financial records.
Till confirmation to the effect of
availability of adequacy of systems and internal controls based
on independent evaluation by an auditor the appellant was
suspended in terms of Chapter IV of the Rules of NSE. Further,
the aforesaid consolidated monetary penalty of ` 37.89 lakhs
has been imposed for violations pertaining to funding of clients
transactions, penalties levied to clients in excess of the penalties
levied by Exchange, false reporting of margin in F&O and CD
segment, wrong reporting of margin in F&O and CD segment,
actual settlement of funds and securities not done periodically as
well as on clients’ request, excess brokerage charged to clients,
use of client bank account and receipt from clients deposited in
own bank account/ payment to clients made from own bank
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account, for non-issuance of contract notes and daily margin
statement regularly to client, and for contravening clauses
included in client registration documents. In addition, refund of
penalties levied on clients in excess of the penalties levied by
the NSCCL and refund of the excess brokerage amount to the
respective clients has also been ordered. Advice/ Warning was
issued for non-maintenance of clients ledgers properly, abstain
from levying late pay-in charges in excess of rates agreed upon
by the clients, to put in place necessary checks and balances to
ensure investor safety and maintenance of up to date financial
records and other procedural steps.
4.
Learned counsel Shri Piyush Raheja appearing on behalf
of the appellant submits that the appellant received its
registration certificate from SEBI and NSE in the year 2000 and
for 10 years no violations have been made or noticed by either
NSE or SEBI.
Therefore, it is the first time that certain
inadvertent omission might have happened. It is also appellants’
stand that the NSE carried out the inspection and issued a large
number of communications, including Email, Telephone calls
etc. seeking documents and responses in a very short time and
that too at odd hours. Further, it is contended that the inspection
team carried out their inspection in a spiteful manner. Despite
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such arbitrary behavior of the NSE the appellant co-operated in
the said inspection. However, despite the explanation given by
the appellant and supporting documents provided to the DAC
the DAC did not consider many of the facts and passed the
impugned order in a very arbitrary manner.
Many of the
charges levelled in the inspection report and reiterated by the
DAC are devoid of merit. The learned counsel for the appellant
cited the following directions in the impugned order to support
his stand:
(a)
Penalty of ` 15 lakh each imposed for wrong
reporting and false reporting of margin is not as
per the provisions in the Circulars issued by
NSE.
Many of the Circulars issued by the
respondent NSE are either not clear or the
penalty provisions of the said Circulars have
been wrongly interpreted by the NSE. For
instance for wrongful reporting of margin the
maximum prescribed penalty is only 1.25% of
the wrongly reported amount subject to a
maximum of ` 1 lakh (NSE Circular dated
24.12.2010). As informed by CA Certificate
the factual wrong reporting of margin was only
to the tune of ` 16.12 lakh out of a total margin
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reported as collected to the tune of 23.32
crores, which is only about 0.69% for which
the imposable penalty should have been only a
“warning”.
In
any
case,
the
maximum
prescribed penalty could have been only ` 1
lakh and not ` 15 lakh as imposed by the NSE.
(b)
The allegation of wrong reporting and false
reporting are not correct because a CA
Certificate was given to the DAC of NSE
which was not accepted by them. However,
the same CA Certificate which was given to the
DAC of NSCCL was accepted. The NSCCL
did not find any deficiency in the said CA
Certificate
and,
therefore,
accepted
the
submissions made by the appellant.
(c)
The allegation that CA Certificate in a
particular format was not given by the
appellant to NSE is not correct, because, no
such format was received by the appellant;
only an Email was received almost 2 years
after submission of the original CA Certificate
in June 25, 2012. In any case, the contents of
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the certificate given by the appellant and what
is stated to be the appropriate format of CA
Certificate are the same and hence there was no
ground for rejecting the first certificate
submitted by the appellant in June 25, 2012.
(d)
Further, even if the information furnished in
the CA Certificate was not in the prescribed
format the information given was not incorrect
but may be only incomplete.
In such a
situation,
no penalty should
have been
imposed.
In any case, the alleged margin
shortfall is devoid of merit as it was already
informed to the NSE that there was sufficient
margin available in the account of the
shareholders of the appellant which is a closely
held company.
5.
Similarly, the appellant refutes the charge of the DAC that
the appellant did not do actual settlement of funds and securities
of the clients periodically as well as on their request by citing
mistakes on the part of the NSE inspection team or incorrect
interpretation of the Circulars by the DAC.
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6.
Regarding the charge that the appellant collected excess
brokerage also a similar stand has been taken by the appellant
i.e. the NSE inspection team being wrong or the interpretation
of the Circulars and bye laws is not correct. As a case in point
the appellants contends that regulation 3.7 of F&O segment
prohibits brokerage exceeding the scale prescribed therein and
only when the scale is exceeded can it be called excess. The
appellant has never exceeded the given scale. Scale of 2.5% of
the contract value in F&O segment of ` 100/- per lot in case of
options contract. Further it was submitted that in any case the
alleged excess brokerage collected is a very small amount and
no penalty should have been imposed for the same.
7.
Similar arguments were put forth for all the other alleged
violations as well as i.e. misinterpretation by the inspection
team or misinterpretation of the Circulars/ bye laws by the
DAC.
8.
At the end of his arguments the learned counsel for the
appellant also took a stand that the minutes of the DAC were
not provided to the appellant and the composition of the DAC
itself was changed and thereafter no further hearing was
provided to the appellant. We note that, though the appellant
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had filed an appeal before this Tribunal in November 2014
(Appeal No. 412 of 2014) such a preliminary objection was not
raised during hearing of the matter on February 07, 2017.
Instead, after hearing the matter for some time the appellant
sought to withdraw the appeal with liberty to file a fresh appeal,
which was granted.
Therefore, after such a long period of
almost five years this submission which was not even argued at
the beginning does not have any merit. Therefore, we proceed
to examine the merit of the charges and submissions thereon.
9.
We have also heard Shri Nimary Dave, learned counsel for
the respondent, who on the other hand, submitted that the
appellant has been taking a non-cooperative approach in
answering various queries. However, the DAC has gone into all
the aspects of the case and whatever submissions have been
made by the appellant while passing the impugned order. In
fact the DAC has exonerated the appellant on several charges
which are procedural in nature and imposed only reasonable and
at times the minimum penalty. Though, eight violations have
been identified the total penalty imposed is only ` 37.89 lakhs,
which given the seriousness of the violations, is only
reasonable.
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10. Without getting carried away by the extremely circuitous,
hair- splitting and hair- raising arguments of the appellant and in
the interest of justice we proceed to discern the factual matrix as
well as the veracity of the submissions of the appellant. We
find some substance in the submissions of the appellant that the
penalty of ` 15 lakhs imposed for wrong reporting could have
been different in terms of the provisions in the relevant NSE
Circular dated December 24, 2010. In the said circular, there
are two broad provisions relating to wrong reporting under the
heading Margin reporting requirement in category (a) where
percentage of factual wrong reporting of margin collection from
constituents and in (b) percentage of margins not properly
accounted for (where excess margin available with member in
the accounts of relatives, with authorizations). The appellant is
taking shelter under (b) while the respondent has issued the
order under (a).
Although the DAC has found some
deficiencies in the claim of the appellant that his relatives had
excess margin in their accounts the issue is not conclusively
settled. Accordingly, appellant deserves benefit of doubt.
Moreover, it is an established principle in law that when there
are two provisions in law the more beneficial provision should
be applied wherever appropriate. This is particularly relevant in
the context of the appellant who has been indefinitely suspended
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also for the various violations impugned in this appeal.
Therefore, we reduce the amount of penalty imposed on wrong
reporting from ` 15 lakhs to ` 1 lakh on the ground of
proportionality.
11. Regarding the penalty imposed on other violations we do
not agree with the submissions of the appellant. As the
documents clearly show that such violations have been
committed, the appellants’ hyper technical submissions do not
have any merit; what is relevant is whether the appellant, based
on the evidence available, has committed those violations and
whether any satisfactory explanation has been provided either in
mitigating the violation or in proving that the violations have
not been committed. The facts and records speak volumes about
the way in which the appellant has been running the business of
broking and violating multiple provisions of bye laws and
circulars issued by the respondent as well as by SEBI.
Accordingly, we do not find any deficiency in reiterating the
penalty imposed by the DAC when such violations have been
noticed by the respondent.
12. The appellant’s attempt to prove that the CA Certificate
provided to the respondent Exchange was in the correct
proforma, since the same was accepted by the NSCCL does not
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stand to merit. We note that, many of the contents of those
proformae are different. The fact that NSCCL has accepted the
information in a particular proforma does not absolve the
appellant from providing the necessary information in the
proforma specified by the Exchange, though, some of the
information/ part of the format may be same/ common. In any
case, the appellant as a broker is bound to follow the bye laws/
circulars/ instructions of the respondent Exchange as the
Exchange is the first tier regulator of brokers. While taking
membership of the Exchange the appellant has also entered into
an agreement to abide by the Exchange bye laws/ circulars/
rules etc. Even if the submission of the appellant is accepted
that they received the proforma from the Exchange belatedly the
same could have been furnished by the appellant at that point of
time.
13. The direction relating to suspension of the appellant
contains a solution in itself. The said suspension of membership
was only till receipt of confirmation from the appellant
regarding its preparedness to run the operations as per
regulatory guidelines and adequacy of the internal controls put
in place and therefore providing a report from an independent
auditor appointed by the Exchange to these effects. Therefore,
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it was open to the appellant to approach the respondent
Exchange to seek such an audit after putting in place the
required systems and internal controls.
14. In the light of the above reasons, the appeal is partly
allowed by reducing the total amount of penalty imposed on the
appellant from ` 37.89 lakhs to ` 23.89 lakhs. No orders on
costs.
Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C.K.G. Nair
Member
Sd/Justice M. T. Joshi
Judicial Member
06.08.2019
Prepared & Compared By: PK