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Judgment
Tarun Agarwala, Presiding Officer
The present appeal has been filed questioning the order dated November 26, 2021 passed by the Member and Core Settlement Guarantee Fund Committee (“Committee” for convenience) of the National Stock Exchange of India Limited (“NSE” for convenience) whereby a penalty of Rs. 25,92,000/-has been imposed for misuse of client’s funds.
The facts leading to the filing of the present appeal is, that a limited inspection was carried out by the Stock Exchange for the period January 2021 to July 2021 wherein it was prima facie observed that the appellant had misused the client funds and submitted incorrect data towards weekly monitoring of client funds under the Enhanced Supervision of Stock Brokers.
Accordingly, a show cause notice dated August 12, 2021 was issued. The show cause issued was that the appellant had misused the client funds as on January 22, 2021 and May 07, 2021 to the tune of Rs. 8.64 crores and Rs. 6.95 crores respectively and that the funds of credit balance clients was utilized towards margin obligation of the debit balance clients and proprietary trading on April 23, 2021, June 18, 2021, July 02, 2021 and July 09, 2021.
The appellant accepted the violation indicated in the show cause notice and contended that the lapse was not intentional, which was rectified subsequently by increasing the margin placed with the Clearing Member.
The Committee after considering the matter found that the appellant had misused the client’s funds and had acted in contravention with Regulation 4.5.3(e) of NSEIL Regulations Capital Market (CM) and Futures & Options (‘F&O’) Segments and Exchange Circular No. NSE/INSP/29096 dated March 11, 2015 and Circular No. NSE/INSP/2016/33276 dated September 27, 2016 and accordingly imposed a monetary penalty of Rs. 25,92,000/- in accordance with the Exchange Circular dated February 25, 2021.
We have heard Shri Kunal Katariya, the learned counsel for the appellant and Shri Gaurav Joshi, the learned senior counsel for the respondent.
The only contention raised by the appellant is, that the non-compliances was not intentional and was rectified by increasing the margin placed with the Clearing Member. Further, to prevent recurrence of the said issue the appellant had taken corrective measures and had increased the margin deposit with the Exchange by way of Fixed Deposits and had dis-continued providing margin limits on securities that are not in the NSE’s approved list of securities and had also shifted the securities pledged, from the cash segment to the F&O segment, where the client trades and that after taking corrective measures there have been no instance of misuse of client’s funds.
Having heard the learned counsel for the parties, we find that misuse of client’s funds is a serious violation. Twice on January 22, 2021 and again on May 07, 2021 the appellant has utilized the funds of clients having credit balance towards margin obligation of the clients having debit balance to the tune of Rs. 8.64 crores and Rs. 6.95 crores respectively. Further, the appellant had utilized funds of the credit balance clients towards margin obligation of debit balance clients in proprietary trading on the following dates:-
a.
April 23, 2021
-
Rs. 7.14 crore
b.
June 18, 2021
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Rs. 15.99 crore
c.
July 02, 2021
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Rs. 13.64 crore
d.
July 09, 2021
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Rs. 2.24 crore
In view of the gross irregularities found by the Committee which is admitted by the appellant, we find that the penalty imposed to the tune of 3% of the misuse of Rs. 8.64 crores was just and proper. The impugned order does not suffer from any error of law. The appeal fails and is dismissed.
This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.