2019 (11) TMI 1559 - AT - SEBI

Unexplained use of funds raised by pledging client securities with NBFCs and Banks - monetary penalty of ₹ 15 lakhs and suspension of trading membership of the appellant from all segments of NSE for 5 days - HELD THAT - There is sufficient evidence against the appellant to prove that certain violations have been committed by it. The magnitude of money involved is also large in terms of ₹ 19 crores worth of client securities being pledged, acceptance of deposits to the tune of ₹ 21.56 crores and non-settlement of funds belonging to 601 clients etc. However, since the appellant has complied with some of the directions issued by the DAC such as submission of CA Certificate, fulfillment of the networth criteria, we are of the considered view that the penalty imposed on the appellant is disproportionate in the given facts and circumstances. The violations are not light enough to let off the appellants scot-free as contended by them. In the result, while upholding the monetary penalty of ₹ 15 lakh imposed on the appellant we modify the direction relating to suspension of the appellant from all segments of the exchange NSE for 5 days to that of a direction not to enroll or register any fresh clients for a period of one month. This period of one month shall commence from the seventh day of the date of this order.

Issues:

1. Appeal against the order of the Disciplinary Action Committee of the National Stock Exchange of India Limited.
2. Allegations of major violations against the trading member.
3. Compliance with Code of Conduct for trading members.
4. Justification for penalties imposed.
5. Consideration of evidence and magnitude of violations.
6. Disproportionate penalty and modification of suspension.

Issue 1: Appeal against the order of the Disciplinary Action Committee of the National Stock Exchange of India Limited

The appeal was filed against the order of the Disciplinary Action Committee (DAC) of the National Stock Exchange of India Limited (NSE) dated November 28, 2018, which upheld a monetary penalty of ?15 lakhs and a 5-day suspension of trading membership of the appellant from all segments of NSE. The appeal sought a review of the earlier order of the DAC dated August 02, 2018, which was rejected, leading to the continuation of the penalties.

Issue 2: Allegations of major violations against the trading member

The appellant, a trading member of NSE, faced allegations of major violations during an inspection conducted by NSE. These violations included unexplained use of funds raised by pledging client securities, acceptance of deposits promising fixed returns, and discrepancies in net worth computation and data submission to the Exchange. These violations were considered serious and led to the conclusion that the appellant failed to abide by the Code of Conduct for trading members as prescribed by the regulations.

Issue 3: Compliance with Code of Conduct for trading members

The appellant argued that the pledging of client securities was due to margin shortfalls and that it had enough liquid funds to meet obligations. The acceptance of deposits was explained as short-term unsecured loans for business purposes. The appellant also provided revised net worth certificates and CA certificates to address the allegations of misrepresentation. The appellant contended that it had complied with the DAC's directions and should not be penalized, citing previous cases and the Supreme Court's remand for reevaluation of punishment.

Issue 4: Justification for penalties imposed

The respondent NSE maintained that the allegations were serious, with funds raised exceeding client obligations through pledging securities. The respondent argued that the penalties, including a monetary fine and a 5-day suspension, were justified considering the magnitude of the offenses and the findings of the DAC. The respondent emphasized the seriousness of the violations and the necessity of upholding the Code of Conduct for trading members.

Issue 5: Consideration of evidence and magnitude of violations

After hearing arguments from both parties and reviewing the evidence, the Tribunal noted sufficient evidence of violations by the appellant involving large sums of money, such as pledging client securities worth ?19 crores and accepting deposits of ?21.56 crores. Despite some compliance with DAC's directions, the Tribunal found the penalties disproportionate to the violations. The Tribunal acknowledged the seriousness of the violations but deemed the original penalties excessive.

Issue 6: Disproportionate penalty and modification of suspension

The Tribunal concluded that while the appellant's violations warranted penalties, the original suspension of 5 days was disproportionate. As a result, the Tribunal modified the suspension to a direction not to enroll or register any new clients for one month, starting from the seventh day of the order. The monetary penalty of ?15 lakhs was upheld, acknowledging the seriousness of the violations but adjusting the suspension to align with the proportionality principle.

In conclusion, the Tribunal partially allowed the appeal, modifying the suspension while upholding the monetary penalty, considering the evidence, compliance efforts, and the need for proportionate penalties in cases of violations of trading member regulations.

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