2017 (2) TMI 1506 - AT - SEBI

Sale transactions without holding the scrips - Suspension of the trading membership of the appellant - ban/prohibition from trading for 5 days - HELD THAT - We have not permitted counsel for the appellant to raise that plea, because, firstly, no such plea was raised in the Review Application filed by the appellant before the DAC of NSE. Secondly, even if there are some discrepancies in the quantum of amounts moved from the clients beneficiary accounts, very fact that the appellant has moved funds and securities from the clients beneficiary accounts itself is sufficient to hold the appellant to be guilty of violating the norms required to be followed by a member of the exchange. In the present case Naveen Kumar Gupta, operating on behalf of the appellant had executed sale transactions without holding the scrips and in fact, the appellant has accepted that the sale obligations of Naveen Kumar Gupta were met by using securities of other clients. Thus, it is established that in the present case securities belonging to the clients of the appellants have been utilized to meet the pay in obligation of Naveen Kumar Gupta which is in gross violation of the code of conduct prescribed for members of the exchange. Reliance placed by the appellant on the Circular of NSE dated June 27, 2013 is totally misplaced. The said circular clearly stipulates that serious action could be taken depending upon the gravity of the violations committed. In the present case, the violations committed by the appellant being serious DAC of NSE was justified in taking stern action. Penalty of ₹ 10 lac and suspending the trading membership of the appellant for 5 trading days cannot be said to be unreasonable or excessive.

Summary

Issues:
1. Appellant aggrieved by order of Disciplinary Action Committee (DAC) of National Stock Exchange of India Limited (NSE).
2. Allegations of violations related to misuse of funds and securities of clients.
3. Appellant's contentions regarding the imposition of penalties and suspension.
4. Analysis of the violations and appellant's responses.
5. Consideration of errors in quantifying diverted amounts.
6. Violation of code of conduct by using clients' securities for obligations.
7. Justification of penalties imposed by DAC of NSE.

Detailed Analysis:
1. The appellant challenged the decision of the DAC of NSE, which declined to consider the Review Application against the previous decision, resulting in a penalty of ?10 lac and a 5-day trading membership suspension. The appellant contended the ban was erroneously imposed and in violation of NSE Circular dated June 27, 2013, arguing for the order to be quashed and set aside.

2. The NSE inspection revealed violations where client funds and securities were misused, leading to show cause notices for discrepancies in securities quantity and receipt of securities not from respective clients. The appellant's responses acknowledged the violations, attributing errors in record-keeping and justifying the use of securities based on mutual understanding with clients.

3. The appellant's oral submissions before DAC admitted to the violations, citing health reasons for delegating operations to a relative who misused client securities. Despite arguments of errors in quantifying diverted amounts, the Tribunal held the appellant guilty of moving funds and securities from client accounts, breaching exchange norms.

4. The appellant's reliance on the NSE Circular for leniency was dismissed as the violations were deemed serious, justifying the penalties imposed. The Tribunal found the diversion of client securities to meet obligations unacceptable, leading to the upheld penalty of ?10 lac and 5-day trading membership suspension.

5. The Tribunal concluded that the penalties were not unreasonable or excessive given the gravity of the violations committed by the appellant. Therefore, the appeal was dismissed, emphasizing no order as to costs based on the established breaches of exchange regulations and misuse of client securities.