2015 (7) TMI 664 - AT - Companies Law

Default in collection of margin from Trading members (TMs) - Prohibition on taking new assignment or contract or launch a new scheme for a period of 3 months - Section 19 of the SEBI Act, 1992, read with Regulations 28 (2) of the SEBI (Intermediaries) Regulations, 2008 - Professional responsibilities of stock brokers - Significance of margin money - Held that - SEBI would always have the authority to inquire and impose punishment in those matters which, in its expert opinion, have not been dealt appropriately by the stock exchange concerned. It is not a question of the punishment being mild or severe, but that of regulating the market at a level far beyond the scope and reach of an individual stock exchange which is concerned primarily with its own members and their respective clients. Clause 8 of the circular dated August 10,2011 particularly states that SEBI shall examine the implementation of this circular during inspection of the stock exchange . The insertion of this particular clause removes any doubt which may have crept into our minds in light of the relentless argumentation on part of the appellant s learned lawyers. While issuing this circular, SEBI did not intend to abdicate its responsibility with respect to such a vital capital regulatory measure as the collection of margin money. We would hasten to add that stock exchanges have also been conferred with regulatory powers under the SCRA, 1956 and the rules framed thereunder. However, this per se can never be construed as precluding SEBI from acting in a particular matter which calls for intervention in the facts of a given case. SEBI, in the circular itself, has retained the right to supervise the margining system in the market. It is a stock-broker s professional responsibility, rather it is his duty, to investigate the financial capability of an investor entering a margin transaction and to inform that investor of the implication of a margin transaction. The form of collection of margin money, its adequacy and deposit, including limit on exposure, are extremely important ingredients of a purposeful and effective margining system in the present day capital market culture. Expeditious and correct reporting of margin also acquires great significance towards this end. Additionally, SEBI has prescribed a model Clearing Member-Trading Member Agreement vide circular dated December 3, 1998. According to clause 5 of this agreement, the CM shall collect margins from the TM as prescribed by the relevant authority from time to time. Not having done the same, the appellant is also in contravention of these provisions. Clauses A(1) (2) and (5) of the Code of Conduct for stock brokers provide that stock brokers shall maintain high standards of integrity, promptitude and fairness in the conduct of all business while acting with due skill, care and diligence; and abiding by all the provisions of the law applicable to stock brokers. Margin money has always played an important role in containing risks which are inherent in the functioning of any capital market. Owing to its non-adherence huge market crashes have been witnessed all over the glove in the recent past. The vital position that the margining system holds as a crucial instrument to maintain market equilibrium can never be undermined. It is, therefore, pertinent for all market players to maintain the sanctity of margining as a risk management tool while dealing in securities, be it in the cash or in the F&O segment. - Decided against the appellant.

Issues Involved:
1. Form and mode of collection of margin money by a Clearing Member (CM) from its Trading Members (TMs).
2. Reporting of margin collection to the stock exchange.
3. Alleged violations of SEBI regulations and circulars.
4. Double jeopardy concerning NSE and SEBI proceedings.
5. Authority and scope of SEBI's inspection and regulatory powers.
6. Role and responsibilities of the Designated Member (DM) and Designated Authority (DA) under SEBI regulations.
7. Acceptable forms of margin collection and reporting.
8. Implications of market conditions and financial crises on regulatory compliance.

Detailed Analysis:

1. Form and Mode of Collection of Margin Money:
The appellant, SMC Global Securities Limited (SMC), acted as a Clearing Member (CM) for 36 Trading Members (TMs) and faced issues with two TMs, Sunchan Securities Limited (SSL) and Ganga Yamuna Finvest Limited (GYF), who defaulted in fulfilling their margin obligations. The appellant collected margin in non-permissible forms such as undated cheques and immovable property, which was against the regulations. The Disciplinary Action Committee (DAC) of NSE found that the appellant accepted undated cheques and treated immovable property documents as margin, which was legally impermissible. The appellant's actions were seen as accommodating the TMs and risking the entire system, leading to the creation of a credit pyramid.

2. Reporting of Margin Collection:
The appellant was found to have wrongly reported details of margin collection to the NSE. The DAC held that the appellant had accepted non-permissible forms of margin and wrongly reported the margins collected. This led to a penalty of Rs. 25 lac and additional fines. The appellant's practice of short collection and wrong reporting of margin to the exchange was noted as a significant issue. The appellant's contention that the wrong reporting was minuscule and based on incorrect data was dismissed.

3. Alleged Violations of SEBI Regulations and Circulars:
The appellant was charged with not accepting collaterals in permissible forms, not collecting the required margin from TMs before allowing them to trade, wrongly reporting margins collected, providing excess exposure to TMs, failing to compulsorily square off TMs' positions, and funding TMs. These actions were alleged to have violated clauses A1, A2, and A5 of the Code of Conduct for Stock Brokers specified in Schedule-II read with Regulations 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, along with various circulars issued by SEBI and NSE.

4. Double Jeopardy Concerning NSE and SEBI Proceedings:
The appellant argued that SEBI should not have initiated proceedings after directing NSE to investigate the matter, claiming it amounted to double jeopardy. However, the Tribunal held that SEBI, as the chief regulator, has the ultimate authority to intervene and take action in matters related to the capital market, regardless of NSE's actions. SEBI's circular dated August 10, 2011, empowering stock exchanges to penalize brokers, does not preclude SEBI from taking action.

5. Authority and Scope of SEBI's Inspection and Regulatory Powers:
The Tribunal noted that SEBI's order for inspection dated November 11, 2009, did not restrict the scope of investigation. SEBI's right to regulate various facets of the capital market is inherent in its constitution. The Tribunal dismissed the appellant's argument that SEBI exceeded its scope of inspection.

6. Role and Responsibilities of the Designated Member (DM) and Designated Authority (DA) Under SEBI Regulations:
The Tribunal clarified that the DA's report is a recommendation to the DM, who has the discretion to enhance or reduce the penalty based on the facts and circumstances. The DM is not bound by the DA's report and can frame new allegations if deemed necessary.

7. Acceptable Forms of Margin Collection and Reporting:
The Tribunal upheld that the appellant's collection of margin through non-permissible forms such as undated cheques, post-dated cheques, and immovable property was against the regulations. The appellant's actions exposed the market to significant risk. The Tribunal agreed with the DM's findings that the appellant's conduct showed an attempt to accommodate the TMs in margin collection, disregarding its role and responsibilities.

8. Implications of Market Conditions and Financial Crises on Regulatory Compliance:
The appellant argued that the financial crisis in 2008 led to defaults and the collection of securities in any form to prevent TMs from becoming defaulters. However, the Tribunal held that the appellant's actions of accepting non-permissible forms of margin and providing excessive exposure to TMs were serious violations of SEBI regulations. The Tribunal emphasized the importance of maintaining the integrity of the margining system to protect the market.

Conclusion:
The Tribunal upheld the impugned order, finding no reason to interfere with the decision to prohibit the appellant from taking up any new assignment or contract or launching a new scheme for three months. The appeal was dismissed with no order as to costs.

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