2015 (7) TMI 621 - AT - Companies Law

Penalty u/s Sections 15A and 15HB of the SEBI Act, 1992 - Non compliance with the provisions of SEBI s circular dated December 3, 2009 - Quarterly settlement of funds and securities - Circular issued by SEBI directive in nature or mandatory - Supremacy of SEBI s circular, rules or regulations - Held that - We have minutely perused the contents of SEBI s circular in question as well as the three clarifications issued by NSE and we do not subscribe to the view advanced by the learned counsel for the appellant. The concept of monthly or quarterly running settlement of clients accounts by the brokers is incorporated in the said circular dated December 3, 2009 with a view to instill greater transparency and discipline in the dealings between clients and the broker. This circular was issued by SEBI after detailed consultation with various quarters including Investors Association, Secondary Market Advising Committee of SEBI (SMAC), Market Participants and major stock exchanges. Therefore, it cannot be said that SEBI issued this circular dated December 3, 2009 as a directive only and not as a mandatory one. We have also perused the three subsequent clarifications issued by NSE on February 3, 2010, September 7, 2012 and October 29, 2013. None of the circulars, in any way, tends to dilute the concept of monthly/ quarterly running settlements of clients accounts by the brokers as envisaged in the circular dated December 3, 2009 by the SEBI. Moreover, no stock exchange can supersede or make a SEBI s circular infructuous or ineffective by subsequent mere clarifications. The whole scheme of SCRA, 1956 read with the provisions of SEBI Act, 1992 does not contemplate such a situation which could be very harmful to the orderly and regulated growth of capital market. A larger task is assigned to SEBI and the stock exchanges supplement the efforts of SEBI in implementation of larger policy matters and they are not supposed to lay down their own parameters which may have the effect of diluting the provisions of SEBI s circular, rules or regulations. We also note it from the records that the appellant in response to the initial queries/questionnaires raised by SEBI had categorically stated that it was complying with the provisions of circulars dated December 3, 2009 in its email/letter dated 11th/17th August 2012. Suddenly, on January 18, 2013 the appellant, in order to come out of the clutches of SEBI, took a summersault and stated that it had started complying with the provisions of SEBI circular in question. This false reporting of the actual affairs of the appellant company can hardly be appreciated and this tendency of companies needs to be curbed at the threshold. Principles of natural justice have been duly complied with. - Decided against the appellant.

Summary

Issues:
1. Compliance with SEBI circular dated December 3, 2009 for settlement of funds and securities.
2. False reporting and violation of SEBI Act, 1992.
3. Interpretation of SEBI circular as mandatory or directory.
4. Justification of penalty imposed.

Compliance with SEBI Circular:
The appellant, a share broker, challenged an order by SEBI imposing a penalty for non-compliance with the circular dated December 3, 2009, requiring settlement of funds and securities within specified timelines. The appellant falsely claimed compliance initially but later admitted the violation, leading to the imposition of a penalty of &8377; 16 lac for the lapse lasting almost three years.

False Reporting and Violation:
The appellant misled SEBI by falsely reporting compliance with the circular, which was later admitted as a violation. Despite having over 10,000 active clients, the appellant failed to settle accounts quarterly, resulting in a net debit balance. The adjudicating officer found the appellant's actions to be in violation of SEBI regulations, justifying the penalty imposed.

Interpretation of SEBI Circular:
The Tribunal rejected the appellant's argument that the circular was directory, emphasizing that it aimed to enhance transparency and discipline in client-broker dealings. The subsequent clarifications by NSE did not dilute the mandatory nature of the circular, and the appellant's delay in installing required software further indicated non-compliance with SEBI regulations.

Justification of Penalty Imposed:
The Tribunal upheld the penalty of &8377; 16 lac as commensurate with the violation committed, noting that the maximum penalty under the law could be much higher. The appellant's false reporting and failure to comply with mandatory provisions for over three years warranted the penalty imposed. The appeal was dismissed, emphasizing the importance of adherence to regulatory requirements in the securities market.