WHETHER THE SECURITIES APPELLATE TRIBUNAL HAS POWER TO MODIFY THE PENALTY IMPOSED BY SEBI?

[Mr. M. GOVINDARAJAN]

            Securities Exchange Board of India Act, 1992 ('Act' for short) requires the intermediaries such as merchant banker, stock broker, sub broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, underwriter, portfolio manager, investment adviser etc., to register with Securities Exchange Board of India ('SEBI' for short) in accordance with the regulations stipulated to such intermediaries. Sec. 12 of the Act deals with the regulation of stock brokers, sub brokers, share transfer agents etc., Sec. 15A of the Act deals with the penalty for failure for furnishing information, return etc., Sec.15B of the Act deals with the penalty for failure by any person to enter into agreement with the clients.

            Sec.12 of the Act provides that no stock broker, sub broker and such other intermediary who may be associated with securities markets shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act. A person buying or selling securities or otherwise dealing with the securities market as a stock broker, sub broker and such other intermediary may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the period of said three months, till the disposal of such application. No intermediary associated with the securities market as the Board may bed notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board.     The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations, after giving the person concerned a reasonable opportunity of being heard.

            Sec. 15A of the Act provides that if any person, who is required under this Act or any rules or regulations made there under-

> To furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less;

> To file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less;

> To maintain books of account or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

            Sec.15B of the Act provides that if any person, who is registered as an intermediary and is required under this Act or any rules or regulations made there under to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty of one lakh rupee for each day during which such failure continues or one crore rupees, whichever is less.

            In the case 'Securities and Exchange Board of India V. Saikala Associates Ltd.,' - (2009) 90 CLA 330 (SC) the SEBI filed an appeal before Supreme Court against the order passed by the Securities Appellate Tribunal ('SAT' for short).  The respondent has acted as a sub broker at the National Stock Exchange with  two NSE members, without being registered as a sub broker with SEBI for the period from the years 2000-01, 2001-023 and from April 2002 to May 2002 and created the value of Rs.403.29 crore, in breach of Sec. 12(1) of the Act read with rule of the SEBI (Stock Brokers & Sub Brokers) Rules, 1962  which provides that no stock broker or sub broker shall buy, sell, deal in securities unless he holds a certificate granted by the Board under the regulations.  Such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application.  SEBI suspended the certificate of registration. The respondent filed an appeal before SAT. SAT held that the proved charges against the respondent were not serious enough to warrant suspension of certificate of registration.

            The only question is whether the tribunal has power to modify the penalty passed SEBI.

            The appellant contended the following:

> The tribunal has no jurisdiction to modify the sentence;

> In terms of regulation 25 which was applicable prior to the amendment with effect from 2nd November, 2003, it was provided that any contravention of any provisions of the Act, Rules and Regulations is to be dealt with in the manner provided in regulations 26 to 32 of the regulations prior to the amendment with effect from 27th September, 2002. Therefore Regulation 25 prior to amendment with effect from 20th November,2 003 is applicable which provides that any contravention of any provision of the Act, Rules and Regulations is to be dealt with under the Securities and Exchange Board of India (Procedure for holding enquiry by enquiry officer and imposing penalty) Regulations, 2002;

> The provisions of Sec. 12(3) of the Act confer power on the Board, by an order, to suspend or cancel a certificate of registration in such manner as may be determined by regulations, provided that no order under the section will be made unless the person concerned has been given a reasonable opportunity of being heard;

            The respondent submitted the following:

> A tribunal constituted under Sec. 15K of the Act in exercise of powers under Sec. 15T of the Act read with regulation 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000 can modify the order of SEBI so as to modify the nature of penalty not provided for under the provisions of the statutes in respect of the concerned violations;

> The tribunal has been constituted under Sec. 15K of the Act and is, thus, a creation of the said statute and as such the tribunal is to exercise the jurisdiction, powers and authority conferred on it by or under the Act or any other law for the time being in force;

> Under rule 21 of the SAT Rules, 2000 the tribunal may make such orders or such directions as may be necessary as expedient to give effect to its orders or to prevent abuse of its process or to seek the ends of justice;

            Supreme Court after considering the arguments of both sides found that there is no dispute that there was violation of the provisions of Sec. 12(1) of the Act read with Rule 3 of the Rules.  It analyzed the Sections 12, 15A, 15B of the Act, Rule 3 of the Rules and regulation 25 of the Regulations.

            Rule 3 prohibits any broker or sub broker from buying, selling, dealing in securities, unless he holds a certificate granted by the Board under the Regulations, provided, however, those who were already in the said business on the date of coming into force of the Rules, i.e., 20th August, 1992 and Regulations, were allowed to continue with their business during the period till application for registration was disposed of.   This means that the existing brokers and sub brokers, in business were allowed to continue pending registration but no new person commencing the business of the broker or sub broker after 20th August, 1992 could do the business pending registration and could commence only after being registered.

            The Supreme Court further held that regulation 25 is the crucial regulation. Applicable regulations prior to amendment (with effect from 20th November, 2003) provide that any contravention of any provision of the Act, Rules and Regulations is to be dealt with in the manner provided in regulations 26 to 32 of the Regulations prior to amendment with effect from 27th September, 2002 and thereafter the regulation 25 of the Regulations prior to amendment with effect from 20th November, 2003 provides that any contravention of any provision of the Act, Rules and Regulations is to be dealt with under the 2002 regulations.

            As per provisions of regulations 13(1)(a)(iv) read with regulation 13(4) of the 2002 Regulations, SEBI can impose a minor penalty of suspension of the certificate of registration of the concerned stock broker or sub broker up to three months and can impose major penalty under Regulation 13(1)(b)(i) of cancellation of the certificate of registration and suspension of the certificate of registration of the concerned stock broker or sub broker exceeding three months. From the above guidelines it is clear that in case of contravention of Sec. 12(1) and/or Rule 3 of the Rules, the only penalty provided under the Act and the Regulation is of either suspension or cancellation of the certificate of registration as set out in Sec. 12(3) of the Act. There is no power even on the Board to impose any monetary penalty.

            In this case, the Supreme Court held that the position of broker/sub broker in case of violation is statutorily provided under Sec. 12 of the Act, which has to be read along with Rule 3 of the rules. No power is conferred on the tribunal to travel beyond the areas covered by sec. 12 and Rule 3. When something is to be done statutorily in a particular way, it can only be done that way. There is no scope for taking shelter under a discretionary power. The Supreme Court allowed the appeal filed by SEBI.