2025 (2) TMI 750 - AT - SEBI

Allegations of violations by a SEBI registered stockbroker - violations have been alleged by the SEBI against the noticees for Misuse of clients funds Funding the clients beyond T 2 5 days and Not issuing the contract notes. HELD THAT - As recorded in the impugned order that during the inspection it was noted that funds of credit balance clients were being utilized for settlement obligation of debit balance clients. In all 41 instances were checked and in 31 instances misutilization was observed ranging between Rs. 88, 000 to Rs. 2.48 crores. Some of the instances have been tabulated and reproduced in paragraph No.21 of the impugned order. It is also recorded in paragraph No.22 that Noticee No.1 has brought in Rs. 1 crore into the system in October 2020. Though a sum of Rs. 1 crore was infused in October 2020 the G value was still negative for March 2021 ranging between Rs. 66.35 Lakhs to Rs. 88, 000. It is not denied by the appellant that the G value was negative as recorded in the tabular column in paragraph No.21 of the impugned order. Second charge is providing exposure beyond T 2 5 days. This charge is also not denied but an explanation is sought to be urged that appellant was unable to detect the over exposure because of a bug in the computer system. It is also not denied that the over exposure was about Rs. 39.13 Lakhs as described in the table in paragraph No.46. Third charge is non-issuance of contract notes. Appellant has furnished an excel sheet containing a column with regard to the status of delivery of the contract notes. As urged by the learned Advocate for the appellant that there is no specific provision to convey the proof of delivery of contract notes to the respondent. To a pointed query as to whether there exists any provision requiring the stock broker to furnish the proof of delivery of contract notes on a regular basis on instruction it was submitted by Shri Kanade that no such provisions exists. Therefore in our considered view the third charge is untenable. We may hasten to record that SEBI as a Regulator must treat all brokers with even hand. It is not disputed that in the case of Angel Broking where the misutilization of funds was to the extent of Rs. 32.97 crores the penalty imposed is Rs. 10 Lakhs. In the instant case as noted in paragraph No.25 of the impugned order misutilization is in the range of Rs. 42.47 Lakhs to Rs. 2.08 crores (Rs.99 Lakhs). Quantum of exposure beyond T 2 5 days(charge No.2) is also Rs. 39.13 Lakhs. Therefore having regard to the undisputed facts in our view appellant s case merits consideration only with regard to the doctrine of proportionality. Considering the quantum of penalty imposed in the case of Angel Broking Ltd. and also keeping in view that noticee No.1 is a repeat offender ends of justice would be met by reducing the penalty to Rs. 15 Lakhs.

Summary

The appeal before the Securities Appellate Tribunal at Mumbai involved allegations of violations by a SEBI registered stockbroker and a commodities company. The core issues considered in the judgment were the misuse of clients' funds, funding clients beyond the permissible period, and failure to issue contract notes. The Tribunal heard arguments from both parties and examined the evidence presented.In the analysis of the first charge of misusing clients' funds, it was found that the appellants had utilized credit balance clients' funds for settling debit balance clients' obligations. The inspection revealed instances of misutilization ranging from Rs. 88,000 to Rs. 2.48 crores. Despite infusing Rs. 1 crore into the system, the G value remained negative. The Tribunal noted the instances of misutilization and the appellant's acknowledgment of the negative G value.Regarding the second charge of providing exposure beyond the permissible period, the appellants did not dispute the allegation but attributed it to a computer system bug. The overexposure was approximately Rs. 39.13 lakhs, as detailed in the records.The third charge of non-issuance of contract notes was contested by the appellant, who argued that there was no requirement to provide proof of delivery of contract notes regularly. The Tribunal found this charge untenable based on the absence of a specific provision mandating the submission of such proof.In assessing the proportionality of the penalties imposed, the Tribunal referenced a previous case involving Angel Broking Limited, where a penalty of Rs. 10 lakhs was imposed for misutilization of funds amounting to Rs. 32.97 crores. The Tribunal acknowledged the appellant's status as a repeat offender but emphasized the need for consistent regulatory treatment. Considering the facts and the penalties in comparable cases, the Tribunal reduced the penalty to Rs. 15 lakhs, upholding the findings but modifying the penalties against the noticees.In conclusion, the Tribunal partially allowed the appeal, upholding the findings but reducing the penalties imposed. The penalty was modified to Rs. 15 lakhs, payable by the first noticee due to the merger with the second noticee. No costs were awarded in this matter.