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TMI Blog2025 (2) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case. Such a conclusion emanates from a reading of the order of the GRC where the TM is not seen to have argued that there were failure/default on the part of the petitioners to justify passing on of the penalty. Having considered the matter carefully, selection/stipulation of the date as 11.10.2021 has no basis whatsoever. Such a stipulation had led to discrimination between two groups of investors, those who have been passed on the burden of penalty prior to 11.10.2021 and those who have suffered the burden post 11.10.2021. Thus, those investors who satisfy all the conditions under the Circulars but have suffered the passing on the penalty prior to 11.10.2021 have been left remediless. The passing of the penalty for short-levy by the TM to the investor has been consistently decried by SEBI. In such circumstances imposition of a date after which only the penalty would be refunded has no justification whatsoever. This is contrary to Article 14 of the Constitution of India, affecting adversely one group out of two equally placed groups of investors. The investor has no control over the date on which penalty is levied. Hence, there is serious prejudice caused by virtue of a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... member to refund the penalty levied on account of short/non-collection of upfront margin to clients, if the same has been passed on to the clients after 11.10.2021. 4. The first objection to the prayer is that Circular dated 02.09.2022 is a beneficial Circular and by seeking declaration of this nature, the petitioner has, in fact, sought removal of a benefit that has been granted by the respondents. In arguing so, I believe that the respondents have lost sight of the fact that the challenge is qua the fixation of the date, 11.10.2021 and not to the Circular perse. What the petitioner is aggrieved by is the restriction under the Circular to refund the penalty levied on account of short/non-collection of upfront margin to clients, if the same has been passed on to the clients after 11.10.2021. 5. The benefit of the Circular has been made unavailable to those situations where the penalty has been passed on to clients prior to 11.10.2021. A distinction is thus made between those clients who have received demands of penalty before and after the stipulated date, that is, 11.12.2021 which is what the petitioner assails. I am of the view that the objection raised in this regard is myop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Article 226 of the Constitution of India. In light of this discussion, this Writ Petition is held to be maintainable. 12. The detailed submissions of Mr.K.Jagannathan, learned counsel for the petitioner, Mr.P.Giridharan, learned counsel for R1 and Mr.C.Prasanna Venkatesh, learned counsel for R2 have been heard. 13. The submissions of the petitioner are that Circulars issued by the SEBI in exercise of powers under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Section 10 of the Securities Contracts (Regulation) Act, 1956 are for the protection of the interests of investors. A series of Circulars have been issued over the years, specifically providing for the levy of penalty on trading members for short collection/non-collection of margin from clients in Equity and Currency Derivative segments. 14. Mr.Jagannathan would take me through the Circulars pointing out that the first of Circulars comes into effect on 01.09.2011. The second Circular is dated 07.09.2016, and stipulates that the penalty collected for short collection/non-collection of margins from clients should be credited to the Investor Protection Fund. 15. Vide Circular dated 01.08.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; (Rs 1 lakh) And (10% of applicable margin) 0.5 (Rs 1 lakh) Or (10% of applicable margin) 1.0 Where a = Short-collection/non-collection of margins per client per segment per day ……….. 21. The Circular went on to stipulate different circumstances where there could be a short/non-collection of margins and set out various parameters that would be applicable in those different situations. 22. On 07.09.2016, a Circular was issued by SEBI setting out a mechanism for regular monitoring of, and imposition of penalty for short collection/non-collection of margins from clients. Paragraph 1 of Circular dated 10.08.2011 was reiterated therein and other stipulations also set out to address different situations of non/short levy. This Circular states that the penalty collected should be credited to the Investor Protection Fund. 23. On 01.08.2019, the rationalization measures continued, and it was stated that earlier Circulars dated 10.08.2011 and 07.09.2016 stood rescinded. Clause 3 of this Circular stipulated as follows : Securities and Exchange Board of India CIRCULAR CIR/HO/MIRSD/DOP/CIR/P/2019/88 August 01, 2019 To The Managing Directors/Chief Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber for short reporting of client upfront margins/margin on consolidated crystallized obligation/MTM losses, member may pass on the actual penalty to the client, provided he has evidences to demonstrate the failure on part of the client. Wherever penalty for short reporting of upfront margin/margin on consolidated crystallized-obligation/MTM losses is being passed on to the client relevant supporting documents for the same should be provided to the client. *Member cannot pass on the penalty w.r.t.short collection of upfront margin to client. 26. This stood modified under Circular dated 12.10.2021 reading thus: 'National Stock Exchange of India Limited CIRCULAR DEPARTMENT: INSPECTION Download Ref No: NSE/INSP/49929 Date: October 12, 2021 Circular Ref. No:48/2021 To All Members, Sub : Guidelines/clarifications on Margin collection & reporting 15. In case of short reporting of margin/margin on consolidated crystallized obligation/MTM, can member pass on the penalty to the clients? Member shall not pass on the penalty w.r.t. short collection of upfront margins to clients under any circumstances. In case of failure (requirement not met by the client) on part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pported by SEBI itself, and these Circulars appear to have been issued by SEBI unilaterally. 31. A specific query was put forth to Mr.Giridharan, learned counsel for SEBI as to whether any records were available to indicate discussion with SEBI prior to issuance of the three Circulars as aforesaid and he confirms that there are none. While the authority under which the Circulars have been issued is itself not in question, policy decisions that impinge on the rights of the investing public would have to be bound by Rules of proportionality and cannot be seen to be arbitrary or whimsical. That apart, it also does not seem appropriate that the NSE could impose a condition/restriction unilaterally in regard to a benefit that has extended by SEBI, without prior sanction/approval. 32. In the present case, it is the selection of the date, that is, 11.10.2021, that is the subject matter of challenge, and I am unable to find any support from the material on record as to the reason or basis for such selection. Apart from the offending date itself, there are other conditions that would have to be satisfied, for the refund of the penalty. 33. A perusal of GRC proceedings dated 31.03.2023 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s auditor about margin penalty charges being debited in his account by the TM on a regular basis and he was shocked to see the huge debits in his account over the period of 1st April 21 to 8th March 22 amounting to Rs.8.83 Crs. He has claimed the reversal and refund of this amount by TM. Considering the huge volume of business carried out by the complainant and the oral submissions made during the hearing, the complainant comes across as a seasoned trader and his claim that he has not seen the emails sent by the TM and is not aware that margin shortfalls attract penalties, seems to be a hollow claim and is not tenable. Having executed the RDD (Risk Disclosure Document) which forms part of the KYC, he is deemed to have fully understood the risks involved in the market and that payment of margins and penalty for non-payment of margins are integral to the F&O system of trading. It is the bounden duty of the client entering into the stock market to read, understand and assimilate the basic rules and regulations of trading in the F&O Segment in which he has been very active. He cannot turn a blind eye to the primary responsibilities cast upon him to be vigilant of his trading account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ont margins" to the clients on an immediate basis if same has been passed on to the clients after 11th October, 2021. By their own submissions the TM has quoted the above circulars in their replies and has also mentioned in his reply dated 4th March 23 that penalty on upfront margin cannot be passed to the Client from October 12, 2021. Further vide their communication dated 29th March 2023, TM has given the break-up of the Rs.8.85 Crs as below:- period 1 - (1st April 21 to 11th Oct 21) - 5.08 Crs and period 2 (12th Oct 21 to 8th Mar 22) - 3.77 Crs The TM has also computed the penalty amount on account of non-payment of Mark to Market Margins from 12th Oct 21 to 8th Mar 22 as Rs 87,39,571.96/- which can be passed on to the client. This brings the net margin refundable for the period 12th Oct 21 to 8th Mar 22 to Rs 2.89 Crs. Orders given by GRC: Both the parties were heard and explained in detail of their respective positions. Based on the above observations and documents perused, this panel is of the unified view that the TM being one of the premier broking institutions of the country has to strictly adhere to the circulars issued by the exchange. Hence they hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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