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TMI Blog2019 (3) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the prudence of the transactions. 2. On 02nd February, 2018, the officials of the National Stock Exchange of India Limited ("NSE" for convenience) conducted an inspection at the registered office of the appellant covering the period 1st January, 2017 to 31st January, 2018, pursuant to which a show cause notice dated 9th March, 2018 was issued to show cause as to why necessary disciplinary action including monetary penalty/ suspension/ expulsion in accordance with National Stock Exchange of India Limited Rules, Regulations and Bye Laws should not be initiated against the appellant for the alleged non-compliance. The violations alleged in the show cause notice are as under:- "(a) Mis-utilization of client's securities; (b) Non-availability of client's securities; (c) Use of client's funds to meet proprietary mark to market (MTM) obligations; (d) Non-settlement of client/s account; (e) Discrepancy in computation of net worth; (f) Non-availability of client's funds; (g) Funding of client transactions; (h) Own beneficiary account not in the name of trading member; (i) the appellant in clear, express and unequivocal terms has admitted the allegations though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was wholly unwarranted as it was the first violation by the appellant. It was urged that as per the Circular, penalty of suspension could only be given if there was repeated or serious violation which in the instant case was missing. According to the learned senior counsel for the appellant, the violation was committed by the appellant for the first time that it was not a repeated violation. The learned senior counsel thus contended that the penalty of suspension can only be given in extreme cases where the offence was serious or repetitive or where the violation had a high impact which was required to be dealt with on a case to case basis. 5. On the other hand, the learned counsel Shri Sachin Chandarana, for the respondent contended that the appellant in his reply before the DAC had admitted all the violation that was pointed out in the show cause notice. Learned counsel contended that the penalties indicated in the Circular are only indicative in nature and could undergo a change in specific cases depending on frequency and gravity of the violation. It was urged that in the instant case, the violation committed by the appellant had financial implications which was a serious of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , notices, guidelines and instructions of the relevant authority as may be applicable from time to time. (c) Honesty and Fairness: In conducting his business activities, a Trading Member shall act honestly and fairly, in the best interests of his constituents. (d) Capabilities: A Trading Member shall have and employ effectively the resources and procedures which are needed for the proper performance of his business activities." Regulation 4.5.3 of the Regulations provides as under:- "4.5.3 TRADING PRINCIPLES (a) Trading Members/ Participants shall ensure that the fiduciary and other obligations imposed on them and their staff by the various statutory Acts, Rules and Regulations are complied with. (b) ............. (c) .............. (d) ............. (e) No Trading Member or person associated with a Trading Member shall make improper use of constituent's securities or funds." On the basis of the aforesaid provisions, admittedly, the appellant had committed violation which is clear from his submissions in reply to the show cause notice. Thus, the appellant had failed to abide by the Code of Conduct for trading members under the aforesaid Rules and Regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action in respect of violations having high impact would be dealt with on case to case basis depending on seriousness and gravity of such violations. Members are advised to take note of the same and put in place systems and procedures so as to ensure adherence to the compliance requirements." The penalty which is relevant for this issue has been indicated at Sr. No. 2 of Annexure 1 which is extracted hereinunder:- Sr. No. Details of contravention Penalty/ Disciplinary Action 2. Use of client funds & securities/commodities for other than specified purposes/ Use of client funds for own purpose/ for other clients. Rs. 1,00,000/- or 1% of the amount involved, whichever is higher The incremental penalties involving financial implications which is also indicated in Annexure 1 is extracted hereinunder:- Incremental Penalties Structure for violations with financial implications In case of any violation is observed to be repeated compared to last inspection conducted, the following escalation of penalty would be made applicable. Applicable Penalty Penalty for repeat violations Monetary Penalty Increase penalty amount by 50% (if not specifically stated) Relevant Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was such that a higher penalty was required to be imposed. If the violation was having a high impact the seriousness and gravity of such violation was required to be indicated. 12. In the light of the aforesaid Circular, it thus becomes necessary for us to see as to what finding has been given by the NSE while imposing the penalty of Rs. 15 lakhs and suspending the trading membership for a period of 5 days. We find that the committee has given a finding that the appellant had used client funds which is a misuse and is a mal-practice. We find that the NSE has only found that the appellant had misused the clients' funds and securities and that it was a mal-practice in violation of Regulation 4.5.1 and Regulation 4.5.2 of the Regulations. No reason has been given as to why the penalty indicated in the Circular was insufficient. Admittedly the appellant had committed the violation for the first time. We are thus of the opinion, that in the absence of any allegation of the violation being repetitive in nature and, in the absence of any finding that the violations had a high impact or that the violations were grave in nature, having serious consequences, we find that the imposition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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