2019 (12) TMI 1142 - AT - SEBI

Decision of the Disciplinary Action Committee ( DAC ) of the National Stock Exchange of India Limited ( NSE ) - DAC has passed several directions including consolidated monetary penalty of ₹ 37.89 lakhs, suspension of membership and review by an independent auditor appointed by the Exchange to confirm that the appellant is complying with all the regulatory guidelines as well as adequacy of the internal controls in place - HELD THAT - Although the DAC has found some deficiencies in the claim of the appellant that his relatives had excess margin in their accounts the issue is not conclusively settled. Accordingly, appellant deserves benefit of doubt. Moreover, it is an established principle in law that when there are two provisions in law the more beneficial provision should be applied wherever appropriate. This is particularly relevant in the context of the appellant who has been indefinitely suspended also for the various violations impugned in this appeal. Therefore, we reduce the amount of penalty imposed on wrong reporting from ₹ 15 lakhs to ₹ 1 lakh on the ground of proportionality. Regarding the penalty imposed on other violations we do not agree with the submissions of the appellant. As the documents clearly show that such violations have been committed, the appellants' hyper technical submissions do not have any merit; what is relevant is whether the appellant, based on the evidence available, has committed those violations and whether any satisfactory explanation has been provided either in mitigating the violation or in proving that the violations have not been committed. The facts and records speak volumes about the way in which the appellant has been running the business of broking and violating multiple provisions of bye laws and circulars issued by the respondent as well as by SEBI. Accordingly, we do not find any deficiency in reiterating the penalty imposed by the DAC when such violations have been noticed by the respondent. The appellant's attempt to prove that the CA Certificate provided to the respondent Exchange was in the correct proforma, since the same was accepted by the NSCCL does not stand to merit. We note that, many of the contents of those proformae are different. The fact that NSCCL has accepted the information in a particular proforma does not absolve the appellant from providing the necessary information in the proforma specified by the Exchange, though, some of the information/part of the format may be same/common. In any case, the appellant as a broker is bound to follow the bye laws/circulars/instructions of the respondent Exchange as the Exchange is the first tier regulator of brokers. While taking membership of the Exchange the appellant has also entered into an agreement to abide by the Exchange bye laws/circulars/rules etc. Even if the submission of the appellant is accepted that they received the proforma from the Exchange belatedly the same could have been furnished by the appellant at that point of time. The direction relating to suspension of the appellant contains a solution in itself. The said suspension of membership was only till receipt of confirmation from the appellant regarding its preparedness to run the operations as per regulatory guidelines and adequacy of the internal controls put in place and therefore providing a report from an independent auditor appointed by the Exchange to these effects. Therefore, it was open to the appellant to approach the respondent Exchange to seek such an audit after putting in place the required systems and internal controls. Appeal is partly allowed by reducing the total amount of penalty imposed on the appellant from ₹ 37.89 lakhs to ₹ 23.89 lakhs.

Issues Involved:
1. Margin Reporting
2. Excess Brokerage Charged to Clients
3. Proof of Contract Notes and Daily Margin Statements
4. Late Pay-in to Clients
5. Use of Bank Accounts for Unauthorized Purposes
6. Contravening Clauses in Client Registration Documents
7. Penalties Charged in Excess of NSCCL
8. Actual Settlement of Funds and Securities
9. Indefinite Suspension for Multiple Violations

Detailed Analysis:

1. Margin Reporting:
The appellant was penalized for wrong reporting and false reporting of margins, with penalties of ?15,00,000 each. The appellant argued that the penalties were not in accordance with the provisions of NSE Circulars, specifically citing that the maximum penalty should have been only ?1 lakh for wrong reporting. The Tribunal found some merit in the appellant's argument, noting that the penalty could have been different under the relevant NSE Circular dated December 24, 2010. The Tribunal reduced the penalty for wrong reporting from ?15 lakhs to ?1 lakh, emphasizing the principle of proportionality and the benefit of doubt.

2. Excess Brokerage Charged to Clients:
The appellant was penalized ?6,09,000 for charging excess brokerage and was also ordered to refund the excess amount to clients. The appellant contended that the NSE inspection team misinterpreted the Circulars and bye-laws, arguing that the brokerage charged did not exceed the prescribed scale. The Tribunal did not find merit in the appellant's arguments and upheld the penalty.

3. Proof of Contract Notes and Daily Margin Statements:
A penalty of ?50,000 was imposed for not providing proof of contract notes and daily margin statements issued to clients in the currency derivatives segment. The appellant's arguments were not persuasive to the Tribunal, which upheld the penalty.

4. Late Pay-in to Clients:
The appellant was penalized ?50,000 for late pay-in to clients. The Tribunal found the penalty justified based on the evidence of violations and upheld it.

5. Use of Bank Accounts for Unauthorized Purposes:
A penalty of ?10,000 was imposed for using bank accounts for purposes other than those specified, and for depositing receipts from clients in the appellant's own bank account. The Tribunal upheld this penalty, noting the clear evidence of violations.

6. Contravening Clauses in Client Registration Documents:
The appellant was penalized ?10,000 for contravening clauses in client registration documents. The Tribunal found the penalty appropriate and upheld it.

7. Penalties Charged in Excess of NSCCL:
A penalty of ?50,000 was imposed for charging penalties in excess of the amount levied by NSCCL. The Tribunal upheld this penalty and ordered the refund of the excess amount charged to clients.

8. Actual Settlement of Funds and Securities:
A penalty of ?10,000 was imposed for not releasing funds to clients. The Tribunal upheld this penalty, finding the appellant's arguments unconvincing.

9. Indefinite Suspension for Multiple Violations:
The appellant was indefinitely suspended until systems and controls were put in place and confirmed by an independent auditor. The Tribunal noted that the suspension was conditional and that the appellant could seek an audit after implementing the required systems and controls.

Conclusion:
The Tribunal partly allowed the appeal by reducing the total penalty from ?37.89 lakhs to ?23.89 lakhs, primarily by reducing the penalty for wrong reporting of margins. All other penalties were upheld, and the Tribunal emphasized the importance of following regulatory guidelines and maintaining adequate internal controls. No orders on costs were issued.

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