SAT | Tribunal modifies suspension of appellant from NSE for 5 days to banning them from registering new clients for a period of one month

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala, (Presiding Officer), Justice M. T. Joshi (Judicial Member), and Dr C. K. G. Nair (Member) partly allowed an appeal filed by the appellant against an order of the Disciplinary Action Committee (DAC) of the National Stock Exchange of India Limited (NSE) whereby they rejected an application to review their earlier order dated 02-08-2018.

Through the impugned order, the appellant was fined with a monetary penalty of Rs 15 lakhs and with a suspension of trading membership of the appellant from all segments of NSE for 5 days. The NSE had conducted an inspection for the period from 1-01-2017 to 7-09-2017. They imposed a consolidated monetary penalty of Rs 50,000 for the minor violations and issued a show-cause notice asking as to why the penalty should not be imposed on them for the alleged violations. The stated violations were:-

  • Unexplained use of funds raised by pledging client securities with NBFCs and Banks to the tune of Rs 19.23 crores belonging to 515 clients.
  • Acceptance of deposits by offering fixed returns from more than 200 entities to the tune of Rs 21.56 crores and not reflecting such receipts of funds in the financial ledgers/ trial balance of the appellant.
  • Discrepancy in computation of net worth and misrepresentation of data submitted to the Exchange.

Because of the aforesaid violations, it was held that the appellant has failed to abide by the Code of Conduct for trading member prescribed under Regulation 4.5.1 and 4.5.2 of CM and F&O Segments relating to adherence to SEBI Code of Conduct and general principles of professionalism, adherence to trading principles, honesty and fairness.

Prakash Shah, Counsel for the appellant submitted that securities belonging to some clients were pledged with NBFCs, etc. because of margin shortfall from those clients. Appellant had enough liquid funds available with it to meet the full obligations. Allegation relating to accepting deposits from clients promising assured returns, too was not correct because it was short term unsecured loans taken from external sources to promote appellant’s proprietary arbitrage and ALGO trading business. Regarding the third allegation, it was submitted that a revised net worth certificate was produced which the DAC had noted in the impugned order and therefore no action should be taken. 

The counsel for the respondent, Nimay Dave, on the other hand, stated that the allegations against the appellant were serious as was clearly shown that funds to the tune of ` 19.23 crores were raised in excess of respective client’s obligation by pledging the securities belonging to those clients. More than 350 out of 515 clients did not have any obligation/ debit balance but still, their securities were pledged by the appellant. 

The Tribunal held that the magnitude of money involved was large in terms of acceptance of deposits to the tune of Rs 21.56 crores and non-settlement of funds belonging to 601 clients etc. However, since the appellant had complied with some of the directions issued by the DAC, the penalty imposed on the appellant was disproportionate with the facts and circumstances. However, the violations were not light enough to let off the appellants free as contended by them. They upheld the monetary penalty of Rs 15 lakh imposed on the appellant and modified the direction relating to suspension of the appellant from all segments of the exchange NSE for 5 days to that of a direction not to enroll or register any fresh clients for a period of one month. [KSBL Securities Ltd. v. National Stock Exchange of (India) Ltd., 2019 SCC OnLine SAT 242, decided on 26-11-2019]

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