SAT | “Proportionality” is a basic principle to adhere while interpreting any provisions relating to punishment with serious consequences

Securities Appellate Tribunal (SAT): The Coram of Tarun Agarwala, J. (Presiding Officer), Dr C.K.G. Nair (Member), M.T. Joshi, J. (Judicial Member) partly allowed the appeal in the present case with no order on costs.

The facts of the case are that the appellant is a member broker in the Capital Market (CM), Futures and Options (F&O) and Currency Derivatives (CD) segments of the National Stock Exchange of India Limited (NSE). NSE on regular inspection of the books and records noticed that the appellant falsely reported margin amounting to Rs 2,05,43,947 in the CD segment in respect of two clients on two occasions on 26-04-2016 and 21-06-2016. Therefore, the Disciplinary Action Committee (DAC) of NSE imposed a penalty of Rs 2,05,43,900 on the appellant and one trading day’s suspension after giving three weeks’ notice. Earlier in appeal, this Tribunal quashed the said order and directed the appellant to file review application before DAC which was later rejected and hence this appeal had been filed.

Counsel for the appellant, Senior Advocate, P.N. Modi stated that the alleged violations were due to delayed crediting of margin money collected from the clients. It was also stated that DAC did not apply its mind when the matter came before it for reconsideration and had taken shelter behind SEBI circular dated August 10, 2011 and held that in view of the said circular the DAC had no discretion available with it in the matter once the violation was established. The Counsel contended that this particular stand was contrary to Rule 17 of NSE and that there had been no prior violation by the appellant. Moreover, the brokerage earned (Rs 3.1 lakh) by the appellant is almost 100 times less than the penalty imposed which is extremely harsh and disproportionate.

Counsel for the respondent, Rashid Boatwalla stated that the statements made by the appellant in regard to the delayed crediting were inconsistent. It was also contended that irrespective of the margin or number of times violations are done, as per SEBI circular, the penalty could be imposed 100%.

Taking note of the contentions, the tribunal held that this does not remain a technical violation as cheques collected from the clients were not credited to the account upfront. Upfront collection of margin is an important mechanism for ensuring prompt settlement and in promoting market integrity. But, discretion in the imposition of penalty can be exercised. While the SEBI circular is quite mechanical in directing the Exchanges to impose a fixed penalty but for an only violation imposing such a penalty is out of proportion and can ruin an entity. In conclusion, a penalty of Rupees Fifty Lakh and one-day suspension from the CD segment was decided. [GRD Securities Ltd. v. NSE, 2019 SCC OnLine SAT 36, decided on 10-06-2019]

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