BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No. 62 of 2012

Date of decision: 31.07.2012

M G Capital Services Limited
S-529, First Floor,
School Block, Shakarpur,
Delhi – 110 092

       … Appell   

Versus

Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.

… Respondent   

Mr. Deepak Dhane, Advocate for the Appellant.

Dr. Poornima Advani, Advocate with Mr. Ajay Khaire, Ms. Rachita Romani,

Advocates for the Respondent.

CORAM : P. K. Malhotra, Member & Presiding Officer ( Offg .)
S. S. N. Moorthy, Member

Per : P. K. Malhotra

This appeal has been filed against the order dated November 14, 2011 of

the adjudicating officer of the Securities and Exchange Board of India (the Board)

holding the appellant guilty of not exercising due skill, care and diligence in the

conduct of its business thereby violating clause A(2) of the code of conduct

specified under Schedule II read with Regulation 7 of the Securities and Exchange

Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short

stockbrokers regulations) and imposing a penalty of ` 5 lacs on it under Section

15HB of the Securities and Exchange Board of India Act, 1992 (the Act).

2. The appellant before us is a stock broker registered with the Board and is a

member of NSE. The Board received investor complaints against M/s. Rishabh

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Shares and Securities (Rishabh), a sub-broker of the appellant. While

investigating these complaints, the Board conducted inspection of the books of

accounts and other documents of the appellant and noticed that the appellant had

violated certain regulations. It was alleged that the appellant had allowed Rishabh

to take over exposure in trades through its sister concern namely, FMS Securities

Ltd. (FMS) as an unregistered sub-broker and there was 720 segregations between

Rishabh ’s trons trons f ts ent. Itwasfuall

that the appellant had not registered its ultimate clients through Rishabh by not

executing the required KYC forms and tripartite agreements. A show cause

notice dated September 23, 2007 was issued to the appellant asking it to show

cause why an enquiry should not be held against it and penalty imposed under the

Act. The appellant responded to the show cause notice vide its letter dated

March 25, 2009 denying the allegations. An opportunity of personal hearing was

also afforded where after the adjudicating officer of the Board passed the

impugned order, holding the appellant guilty of not exercising due skill, care and

diligence in the conduct of its business and, thus, violated the provisions of clause

A(2) of the code of conduct prescribed for the stockbrokers under the

stockbrokers regulations. A penalty of ` 5 lacs is imposed under Section 15HB of

the Act. Hence this appeal.

3. We have heard Mr. Deepak Dhane, Advocate for the appellant and

Dr. (Mrs.) Poornima Advani, Advocate for the respondent Board. After hearing

learned counsel on both sides and perusing the material available on record, we

are of the considered view that the matter needs to be remanded to the Board for

fresh proceedings in accordance with law after framing clear charges and

indicating the provisions of law/rules/regulations/order/circular which have been

violated by the appellant. It is settled legal position that show cause notice is the

foundation of any inquiry proceedings and, therefore, it must bring out clearly the

charge against the appellant and evidence – documentary or oral, on which the

charge is based. It should state which provision of law/rules or regulations or

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orders has been violated. The delinquent should also be provided with the

material relied upon by the Board in support of the charge. The enquiry

proceedings too should be confined to the charge. It cannot travel beyond the

show cause notice. We notice that these basic requirements have not been

complied with while holding inquiry against the appellant. Rule 4 of the

Securities and Exchange Board of India (Procedure for Holding Inquiry and

Imposing Penalties by Adjudicating Officer) Rules, 1995 under which these

proceedings were initiated also provide that every notice issued thereunder shall

indicate the nature of offence alleged to have been committed. It also provides

that on the date fixed, the adjudicating officer should explain to the person

concerned the offence alleged to have been committed indicating the provisions

of the Act, rules or regulations in respect of which contravention is alleged to

have taken place. In the impugned order, the appellant has been absolved of some

of the charges referred to in the show cause notice but has been held guilty on

three counts:

1. non- segatiof ishabh’s transaons the ctiof
   its client;
2. dealings of Rishabh with FMS Securities Ltd., a sister concern of the
   appellant; and
3. non registering of sub-clients of Rishabh and not entering into broker-
   sub-broker-client agreement.
4. Neither the show cause notice nor the impugned order passed by the

adjudicating officer indicate that by not doing so, which provision of

law/rules/orders/regulations/circular issued by the Board has been violated by the

appellant. It is not enough to say that the appellant had failed to exercise skill,

due e dilinso as ctiof ishabh appellsis

concern namely FMS are concerned. We are of the view that either the Board

should bring out clearly as to what a stock broker was supposed to do which it has

failed to do and thus, violated a laid down norm. Due diligence would imply such

care and skill as a man of ordinary prudence would exercise under similar

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circumstances. The finding of due diligence is to be sustained by convincing

preponderance of probabilities standard. Further, we notice that the adjudicating

officerhasconcludth“, is siscon t he noticee, was

knowingly dealing on behalf of the clients of Rishabh through Rishabh, even

though Rishabh was not registered with them as a sub- b”. Wdo find

any such charge or allegation in the show cause notice. Moreover, FMS was also

in appeal before us relating to the same investigation proceedings. Vide our order

dated January 9, 2012 (in Appeal no. 188 of 2011), we have remanded the matter

to the Board for fresh consideration observing as under:-

“4. We have heard the learned counsel for both the parties. We
have gone through the show cause notice and the impunged order.
It is true that the adjudicating officer has mentioned that the
appellant had knowingly dealt through Rishabh on behalf of its
clients. However in the show cause notice, which is the foundation
of the impugned order no specific charge has been made out in
respect of the above violation. From a reading of the show cause
notice and the impugned order it is clear that the respondent had
sufficient material in respect of the above mentioned violation
though specific charge has not been spelt out in the show cause
notice. It goes without saying that a show cause notice should be
precise and it should contain specific charges against a delinquent.
It is possible for the delinquent to meet the charges only when they
are specifically laid down in the show cause notice. In the present
case a reading of the show cause notice would give an impression
that the charge relates to dealings with a sub-broker who is not
registered with any stock exchange. Since the respondent Board is
in of ficmaterial respet appant’s
dealings with Rishabh and its clients we feel that the case requires
fresh consideration after issuing a proper show cause notice stating
the facts of the case and charges to the appellant. In this view of
the matter, we remand the case to the respondent Board for fresh
consion as pe”

5. On the issue of non registration of sub-clients of Rishabh and not entering

into broker-sub-broker-client agreement, the charge against the appellant in the

show cause notice reads as under:-

“5. It was further observed that MG Capital had not registered
its ultimate clients through Rishabh by not entering into the KYC
form and required Broker-Sub-broker- Cent aement.”

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6. However, in the impugned order, the appellant has been found guilty of

not entering into broker-sub-broker agreement or tripartite agreement. The

appellant had furnished explanation that at the relevant time there was no

requirement of tripartite agreement which has been noted by the adjudicating

officer. But he has gone further holding that the appellant was guilty of not

maintaining broker-sub-broker agreement which is not a charge in the show cause

notice.

In view of the foregoing discussion, we set aside the impugned order and

remand the matter to the Board for initiating fresh proceedings from the stage of

show cause notice clearly mentioning the provision of law which stands violated.

Since the transactions pertain to the year 2004, it is imperative that the Board

should try to pass final order as per law as expeditiously as possible. No costs.

Sd/-  
                P. K. Malhotra  
                    Member &  
                  Presiding Officer ( O ffg .)  

Sd/-
S. S. N. Moorthy
Member

31.07.2012
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