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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 ..... to meet the proprietary obligation and, therefore, the appellant failed to perform its fiduciary duty. Using clients’ funds is a misuse of clients’ funds and securities and thus, the appellant was liable for imposition of penalty. In the instant case, it was urged by the learned counsel that if the penalty is to be calculated under this provision, a maximum penalty of ₹ 5 lakhs could have been imposed whereas, in the instant case the NSE has imposed a penalty of ₹ 15 lakhs which was excessive - Normally, the penalty indicated in the Circular should be followed in letter and spirit and if a departure is to be made, it would be necessary for the NSE to give reasons for such departure and give a finding as to whether there was repetitive nature of the violation or the gravity of the violation 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 - 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, 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 it claims that the violations were subsequently rectified; The appellant submitted its reply and was also heard and, thereafter, the impugned order dated 14th June, 2018 was passed imposing a pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 offence and, therefore, it was essential to eliminate such mal-practice in future and thus in order to protect the interest of the investors and ensure investor confidence in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: 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 Regulations. The appellant had failed to act in a diligent manner and had failed to protect the interest of his clients. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ₹ 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 Penalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r should be followed in letter and spirit and if a departure is to be made, it would be necessary for the NSE to give reasons for such departure and give a finding as to whether there was repetitive nature of the violation or the gravity of the violation 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 ₹ 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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