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Judgment
Tarun Agarwala, Presiding Officer
The appellants have challenged the order dated September 20, 2023 passed by the Whole Time Member (“WTM”) for short of the Securities and Exchange Board of India (“SEBI”for short) restraining the appellants from accessing the securities market for a period of 7 years and further directing the noticees to refund the monies due to the investors / clients jointly and severally under the supervision of National Stock Exchange of India Limited (“NSE”for short) and BSE Limited (“BSE”for short). Various other directions were also issued.
The facts leading to the filing of the present appeal is, that the appellant no. 1 is the stock broker and appellant no. 2 is the director of the stock broker firm. Initially a limited purpose inspection was carried out by NSE and upon a consideration of the reference made by NSE, SEBI carried out a comprehensive inspection pursuant to which it was observed that the appellant Company failed to carry out verifications with respect to the income sources / financial details of their clients, non-settlement of accounts for active and inactive clients, failure to segregate its own securities and funds from those of its clients and mis-utilization of client securities etc.
Based on the inspection report SEBI issued ex parte ad interim order dated September 25, 2018 restraining the appellants from accessing the securities market. Further other directions were also issued.
In the meanwhile, the appellant was also expelled by NSE from its membership on March 5, 2018 against which an appeal was filed before this Tribunal and vide order dated May 9, 2019. This Tribunal remanded the matter to the Disciplinary Action Committee (DAC / Committee) of NSE to decide the review application afresh. Subsequently, the Committee of NSE by an order dated August 26, 2019 rejected the review application. SEBI thereafter directed NSE and BSE to appoint a forensic auditor and based on the audit report a show cause notice dated October 31, 2021 was issued. The show cause notice alleged-
a) Failure to ensure compliance with KYC and Anti-money laundering (hereinafter referred to as “AML”) norms which was in violation of:
(i) Clauses 5.1(f) and (g) of the SEBI Master Circular No. CIR/ISD/AML/3/2010 dated December 31, 2010 (hereinafter referred to as “Circular dated December 31, 2010”).
(ii) Clauses 3 and 4 of the SEBI Circular No. CIR/MIRSD/2/2013 dated January 24, 2013 (hereinafter referred to as “Circular dated January 24, 2013”).
(iii) Clause 4 Annexure 4 of the SEBI Circular No. CIR/MIRSD/16/2021 dated August 22, 2011 (hereinafter referred to as “Circular dated August 22, 2011”).
b) Non–settlement of clients”funds and securities, which amounted to a violation of:
(i) Clauses 12(d) and (e) of Annexure A of the SEBI Circular No. MIRSD/SE/Cir–19/2009 dated December 3, 2009 (hereinafter referred to as “Circular dated December 3, 2009”);
(ii) Clause 33 of the Rights and Obligations document for Stock Broker, Sub–brokers and Clients as specified in Annexure 4 of the Circular dated August 22, 2011.
(iii) Clauses A (1), (2) and (5) of the Code of Conduct specified for Stock Brokers read with Regulation 9 of the SEBI (Stock Brokers and Sub– brokers) Regulations, 1992 (hereinafter referred to as “Stock Brokers Regulations, 1992”).
c) Non–segregation of clients”funds and securities, which was in violation of:
(i) Clauses 1 and 2 of the SEBI Circular No. SMD/SED/CIR/93/23321 dated November 18, 1993 (hereinafter referred to as “Circular dated November 18, 1993”) and Clauses 1 and 2.4 of Annexure to SEBI Circular No.SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 (hereinafter referred to as “Circular dated September 26, 2016”).
(ii) Clause 15 of the Rights and Obligations document for Stock Broker, Sub–brokers and Clients as specified in Annexure 4 of the Circular dated August 22, 2011.
(iii) Clauses A (1), (2) and (5) of the Code of Conduct specified for Stock Brokers read with Regulation 9 of the Stock Brokers Regulations, 1992.
d) Availing of Loan against securities (hereinafter referred to as “LAS”) facility by pledging securities belonging to clients with NIL or credit balance in violation of:
(i) Circular dated November 18, 1993 and Clause 2.5 of the Annexure to the Circular dated September 26, 2016.
(ii) Clauses 2.1 and 4 of the SEBI Circular No. MRD/DoP/SE/Cir – 11/2008 dated April 17, 2008 (hereinafter referred to as “Circular dated April 17, 2008”).
(iii) Clauses A (1), (2) and (5) of the Code of Conduct specified for Stock Brokers read with Regulation 9 of the Stock Brokers Regulations, 1992.
e) Non–cooperation with SEBI and the Forensic Auditor appointed by BSE thereby violating:
(i) Regulation 26(ii) of the Stock Brokers Regulations.
(ii) Clauses A (1), (2) and (5) of the Code of Conduct specified for Stock Brokers read with Regulation 9 of the Stock Brokers Regulations.
(iii) Conditions of registration as specified under Regulations 9(b) and (f) of the Stock Brokers Regulations, 1992.
f) Failure to redress investor grievances in violation of:
(i) Regulation 26(iv) of the Stock Brokers Regulations, 1992.
(ii) Conditions of registration as specified under Regulation 9(e) of the Stock Brokers Regulations, 1992.
The WTM after considering the material evidence on record found that charges were correct and were proved against the appellant and other noticees. The WTM thereafter on the basis of the material issued certain directions restraining the appellants from accessing the securities market and further directed the noticees including the appellants to refund the monies due to the investors / clients of noticee no. 1 jointly and severally under the supervision of NSE and BSE.
We have heard Shri Gaurav Agarwal, the learned counsel with Shri Gaurav Bhardwaj, Shri Deepak Shukla and Shri Alok Singh, the learned counsel for the appellants and Shri Sumit Rai, the learned counsel with Ms. Nidhi Singh, Ms. Deepti Mohan, Shri Nishin Shrikhande, Ms. Komal Shah, Shri Harish Ballani, Ms. Hubab Sayyed and Ms. Nidhi Faganiya, the learned counsel for the respondent.
The contention of the learned counsel for the appellants is, that the appellants are willing to refund the monies due to investors / clients of noticee no. 1 but are unable to pay as their accounts have already been frozen by orders of the SEBI. It was urged that liability to refund the amount has been unnecessarily imposed upon noticee no. 2. It was contended that he was only a director and that there is no finding that he was in-charge of or was responsible for the alleged violations committed by the Company. It was contended that no directions for refund of the monies could be issued to appellant no. 2 under Section 27A of the SEBI Act.
Having heard the learned counsel for the appellant we find that the arguments raised do not hold any merit. The contention that the appellants would release the money only after their accounts are de-freezed is patently misconceived and cannot be accepted. Directions no. (c) and (j) of paragraph 109 of the impugned order of the WTM is extracted hereunder:-
“(c) Noticees no. 1, 2, 3, 4 and 8, shall, jointly and severally, be liable to repay / refund the monies due to investors / clients of Noticee no. 1, under the supervision of NSE and BSE.
(j) The modalities of selling the assets, depositing the proceeds thereof in the account opened in accordance with the directions contained in sub- paragraphs(h) and (i) above and disbursing the amounts to the clients / investors after verifying the claims, shall be worked out by NSE and BSE by their mutual co- ordination. NSE and BSE shall have a lien on the remaining amount, if any, lying in the Escrow Account(s), after satisfying the claims of the investors/clients. The lien shall be up to the extent of total money disbursed by the Exchange out of its Investor Protection Fund accounts to the clients/investors of Noticees no. 1, 2, 3, 4 and 8.”
The aforesaid directions make it clear that appellants were required to refund the amount jointly and severally to the investors / clients of the Company under the supervision of NSE and BSE. Any sale of assets and disbursements of the accounts has to be worked out under the supervision of the NSE and BSE. Consequently, the contention that the payments can only be made only after de-freezing of the accounts is patently erroneous. The freezing of the accounts is only to ensure that the appellants do not siphon off the monies and that monies are used to pay the monies back to the investors / clients. In this regard the appellants have only to issue a request to the Stock Exchanges for releasing the money to the investors from their accounts.
Insofar as the contention that the appellant no. 2 is not liable for refund of money under Section 27 of the SEBI Act since there is no finding of the WTM that he was in-charge of and was responsible for the violations committed by the Company is patently erroneous. Section 27 of the SEBI Act cast a burden upon person who at the time the contravention was in charge of, and was responsible to, the company for the conduct of the business of the Company. Section 27, sub-clause (2) further provides that such director who was in charge of the affairs of the company shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. The tenor of Section 27 is clear that the burden to prove that the person was not responsible to the violations committed by the company is upon the director who has to prove under the first proviso to Section 27(1) that the contravention was committed without his knowledge or that he exercised due diligence to prevent the commission of such contravention.
In the instant case, the appellant no. 2 has nowhere contended before the WTM that he was not responsible for the conduct of the business or that he was not in charge of the affairs of the Company. In fact we find that a joint reply was filed by the Company and the director from which we can easily discern that appellant no. 2 was in charge of the affairs and conduct of the Company.
We find that the appellant no. 2 has failed to discharge the burden that he was not aware of the violations committed by the Company or that the contravention was committed without his knowledge.
In view of the aforesaid, we do not find any error in the impugned order. The appeal is dismissed summarily at the admission stage itself. All the miscellaneous applications are disposed of.