R. K. Stockholding Pvt. Ltd vs National Stock Exchange Of India Ltd

M. T. Joshi, J

Aggrieved by the order dated June 29, 2020 of the Member and Core Settlement Guarantee Fund Committee (hereinafter referred to as 'Committee') of the respondent National Stock Exchange of India Ltd. (hereinafter referred to as 'NSE'), the present appeal is preferred by the appellant who is a member registered with the respondent NSE in Capital Market, Futures and Options segment and Currency Derivatives segment.

The impugned order would show that the respondent NSE has conducted a regular inspection of the appellant in the month of September 2019 covering the period from August 1, 2018 to July 31, 2019. Various violations were noted in the inspection out of them as regards the 10 violations, a show cause notice was issued to the appellant. Upon hearing the appellant, the committee concluded that the appellant had committed all these violations and monetary penalty as provided by the relevant circulars was imposed as regards the serious violations. As regards some of the non-serious violations warning was issued. However, finding that the appellant is a repeat violator in some of the serious violations, besides the monetary penalty, the Committee had prohibited the appellant from doing new client registration for a period of six months effective from the date of the said decision. Hence the present appeal.

So far as the serious violations are concerned those were on account of non-availability and non-reconciliation of the securities of the clients, unexplained use of funds raised by pledging clients securities in exchange of clients obligation. As regards the non-availability and non-reconciliation of the securities, it was found that securities amounting to Rs. 5.16 lacs in 8 scrips were not available in the stock exchange registered securities of the appellant. Further, non-reconciliation of the clients' securities, as on July 31, 2019 was not made as regards in 125 shares as against 155 shares of HDFC in the clients securities registered. There is an unexplained use of funds in the clients' securities in excess of clients' obligation while client obligation to Rs. 3.12 crore and overdraft to Rs. 7.40 crore was availed by the appellant in case of 512 clients. The appellant explained that these clients were operating funds for the purpose of trading and, therefore, the appellant has not got revoked pledge of the securities. However, the Committee found that fund as regards those clients had credit or NIL balance still their securities were pledged by the appellant. The appellant failed to demonstrate that the funds raised by pledging of securities were used and made to the clients' obligation and, thus, misused clients' securities.

The appellant during oral submission submitted that rectification is made and violations as observed during the investigation are corrected.

The committee however noted that the appellant is a repeat violator, as earlier for the similar violations found during the inspection of June 2018, penalty of Rs. 47.70 lac was imposed upon the appellant and beside the monetary penalty the appellant was suspended for five trading days in all segments for violations. The appellant, however, had challenged the said decision in an appeal before this Tribunal and interim relief was granted to the appellant upon deposit a sum of Rs. 25 lac in an interest bearing account. Considering all the facts, the impugned order was passed.

We have heard Mr. Prakash Shah, the learned counsel with Mr. Kushal Shah, Chartered Accountant for the appellant and Mr. Shiraz Rustomjee, the learned senior counsel with Mr. Rashid Boatwalla, Mr. Aditya Vyas, the learned counsel for the respondent through video conference.

The learned counsel for the appellant submitted before us that besides the monetary penalty Committee has gone overboard in issuing the directions of prohibiting the appellant from taking new client's registration for the period of six months. He submitted that this punishment is harsh and disproportionate to the facts and circumstances of the case. It was further submitted that the Committee erred in holding indicative penalty as per circular dated November 6, 2017 is insufficient and has not given any reason for the same.

On the other hand, the learned counsel for the respondent submitted that the appellant is a repeat violator. In the earlier round the appellant was found making the similar violations. He had challenged the order of the Committee before this Tribunal in appeal No. 106 of 2020. This Tribunal by an order dated February 9, 2021 had confirmed that the violations had occurred. In the result, imposition of monetary penalty was affirmed. The direction of the Committee for suspension of the trading activities of the appellant in all segments for five days was set aside for the reasons stated therein. Thus, the fact that the appellant is a repeat violator is a concluded fact. He further submitted that considering seriousness of the violation of misuse of clients' securities, etc., now no interference in the order is called for.

Upon hearing both sides, in our view the violations committed by the appellant are not only proved but it is also established that there is a repetition of the serious violations committed by it. In the result, we do not find any infirmity in the order of the Committee in all respect. In the result, the following order :

ORDER

The appeal is hereby dismissed without any order as to costs.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the Registry. In these circumstances, 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. Parties will act on production of a digitally signed copy sent by fax and/or email.