LSC Securities Limited vs National Stock Exchange Of India Limited

Tarun Agarwala, Presiding Officer

The appellant has challenged the order dated June 21, 2023 passed by the Member and Core Settlement Guarantee Fund Committee (‘MCSGFC’ / ‘Committee’ for short) of National Stock Exchange of India Limited (‘NSE’ for short) directing the appellant to stop onboarding new clients and Authorized Persons for three months. Certain other directions have also been issued.

The appellant is the trading member registered with the NSE. The books of accounts of the appellant was inspected for the period April 1, 2021 to November 30, 2022 based on which a show cause notice dated March 3, 2023 was issued observing non-compliance of regulatory provisions. The show cause notice alleged that the appellant was offering fixed / assured return to the clients directly and / or through Authorized Person.

The said charge was denied vehemently. The appellant contended that no fixed returns were being given to any of the clients of the appellant and that there is not even a single instance where payment has been made to clients having insufficient and / or negative balances. The appellant also provided a certificate of the Chartered Accountant certifying that no fixed return was being paid to any client of the appellant. It was contended that if the client was withdrawing from his funds after meeting margin obligations such withdrawal would not amount to an assured return being paid as a pay out by the appellant.

The Committee after considering the material evidence on record came to the conclusion that the appellant was providing fixed return to some of its clients. This finding was based on the financial ledger summary of one of the client, namely, Ms. Priya who was withdrawing a sum of Rs. 45,000/- per month. It was, thus, contended by the Committee that such withdrawal by Ms. Priya was a fixed pay out given by the appellant.

We have heard Shri Prakash Shah, the learned counsel with Shri Kushal Shah, CA and Shri Andhyarujina, the learned Senior Counsel with Shri Shayan Bisney and Shri Rudra Deosthali, the learned counsel for the respondent.

We find that the show cause alleged that 71 clients of the appellant were receiving assured return. The Committee only considered the payments of one client of the appellant, namely, Ms. Priya and came to the conclusion that withdrawals made by the said client amounts to a fixed pay out being given to the client by the appellant. The Committee came to the conclusion that fixed pay out amounts to an assured return being given by the appellant.

In our opinion this finding is patently erroneous and cannot be accepted in order to show that the appellant was giving an assured return. The Committee should have consider the credit entries of the clients of the appellant to come to a conclusion that a fixed pay out was being given by the appellant to its clients. Such evidence is not before us nor is the basis of the show cause notice.

The figures that has been taken into consideration in the case of Ms. Priya is the withdrawal amounts made by her which is reflected in the financial ledger summary. Such withdrawal made by the client of the appellant cannot and does not lead to a conclusion that the appellant was giving a fixed pay out / assured return to Ms. Priya.

In our view the withdrawal made by the client of the appellant does not amount to receiving a fixed assured return being given by the appellant. There is no other evidence which can lead to a conclusion that the appellant was providing a fixed return.

Though only the case of Ms. Priya was considered we find that the 70 other clients of the appellant has been referred to in the show cause notice also considers the withdrawal made by those clients.

In view of the aforesaid, we are of the view that finding of the Committee that the appellant was indulging in giving an assured return to its clients is not based on any cogent evidence.

For the reasons stated aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed. The miscellaneous applications are disposed of.

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.