SECURITIES
APPELLATE TRIBUNAL MUMBAI
Active
Finstock Private Ltd.
v.
Securities
and Exchange Board of
ARUN
BHARGAVA & UTPAL BHATTACHARYA, JJ
APPEAL
NO. 122 OF 2007
JANUARY
07, 2008
Regulation 26 of SEBI (Stock Brokers & Sub-brokers) Regulations, 1992 read with rule 3 of the SEBI (Stock Brokers & Sub-brokers) Rules 1992 - Procedure for action in case of default - Liability for monetary penalty - Appellant-stock broker was subjected to penalty on four charges, namely, (i) it had not segregated client’s funds from its own fund, (ii) it had dealt with unregistered sub-broker (iii) it had made payments to its clients having debit balances in their accounts and (iv) it had failed to comply with directions issued by Board - Whether as regards first charge, since unused brokerage lying in clients account was money belonging to appellant which could be used for its proprietary trades, appellants did nothing wrong and, therefore, first charge was wholly unsustainable - Held, yes - Whether as regards a second charge, since unregistered sub-broke, with whom appellant dealt, had filed application for registration which was pending before Board, in view of proviso to rule 3 finding of Adjudicating Officer, that appellant could not have dealt with said sub-broker till it got registered, could not be sustained - Held, yes - Whether as per circular of Board dated 7-5-1997 lending of funds by a trading member in connection with securities business is not disqualified and, therefore third charge also could not be sustained - Held, yes - Whether, since SEBI had not referred to any specific direction which appellant had failed to carry out, fourth charge also could not be sustained -Held, yes - Whether, therefore impugned order was to be set aside - Held, yes
The appellant was a stock broker registered with the SEBI. During inspection of its premises certain deficiencies and shortcomings in the maintenances of record by the appellant were noticed show cause notice was issued levelling four charges against the appellant, i.e., (i) it did not segregate the clients funds from its funds while trading on their behalf; (ii) it had dealt with three unregistered sub-brokers, (iii) it had made payment sot clients who had debit balances in their accounts; and (iv) it had failed to comply with the directions issued by the Board. The appellant filed its reply controverting all the allegations. The adjudicating officer, however, held that the charges had been established. Accordingly, penalty was imposed on the appellant under section 15HB.
On appeal:
The first charge levelled against the appellant was that it did not segregate the clients funds from its own funds while trading on their behalf. When the case came up for hearing the appellant relied upon several documents with the memorandum of appeal to contend that the finding was factually incorrect. Reliance was placed on a certificate issued by the auditors of the appellant-company to the effect that the funds had infact been segregated. The Board pointed out that the documents relied upon had been placed before the Tribunal for the first time, and that the adjudicating officer had no opportunity to look into those documents. Since the documents had some bearing on the merits of the contentions sought to be made on behalf of the appellant. The adjudicating officer was directed to look into those documents and submit a report in regard to their authenticity particularly the certificate issued by the auditors and also their effect on the merits of the case. It was found from the report of the adjudicating officer that it only dealt with the auditor’s certificate certifying the amount of brokerage lying in the clients accounts which actually belonged to the appellant. The correctness of that document had not been doubted. The adjudicating officer had not commented on any other document and, therefore, it would be presumed that the documents referred to were genuine and authentic. In the report, the adjudicating officer had given a clean chit to the appellant in regard to the first charge except in regard to one item It was slated in paragraph 8 of the report that the appellant made a payment of Rs.1,33,81,621 on August 23, 2002 for borrowing 31,100 shares of Infosys from the ‘S’ Ltd. It was admitted in the same paragraph that a total of Rs. 1,77,70,555.37 p were lying in the client’s account as on 23-11-2002 as unused brokerage earned by the appellant as a stock broker. That being so, the appellant obviously used its own money to pay to the aforesaid corporation for its proprietary trades. Admittedly, the unused brokerage lying in the clients account was the money belonging to the appellant and it could use the same for its proprietary trades. It could not be said that the appellant did anything wrong. Reference was made to the circular dated 18-11-1993 to say that the said circular was violated when the appellant used the aforesaid amount. It was must so. The circular no where debars a broker from using the unused brokerage lying in the client’s account for his own proprietary trades. Therefore the part of the charge which the adjudicating officer had upheld against the appellant, was also not established. It was, thus, clear that the first charge as a whole was unsubstantiated.
Second charge pertained to the allegations that the appellant had dealt with three unregistered sub-brokers. The adjudicating officer had herself observed that the charge that the appellant dealt with as unregistered sub-brokers had not been established in case of two sub-brokers. According to her, the only unregistered sub-broker with whom the appellant had dealt with was ‘K’. It was true ‘K’ had not been registered as a sub-broker with the Board, but it was not in dispute that it had applied for registration and pending its application for registration, it started business with the appellant and worked for 22 days till it got the registration. In view of the proviso to rule 3 of the Rules. The appellant could deal with unregistered sub-broker during the pendency of the application for registration. That being so, the finding of the adjudicating officer that the appellant could not have dealt with ‘K’ till it got itself registered could not be upheld.
The third allegation was that the appellant had made payments to clients who had debit balances in their accounts and the charge was that it funded their trades. That according to the adjudicating officer, was in violation of the Board circular dated May 7, 1997. That finding of the adjudicating officer could not be upheld for the reason that it misquoted the circular and omitted the word ‘not’ which otherwise figures in the circular. The circular provides that borrowing and lending of funds by a trading member in connection with or incidental to or consequential upon the securities business would ‘not’ be disqualified under rule 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957. In view of the circular, it is clear that lending of funds by a trading member in the circumstances alleged was not disqualified under the said rules. In that view of the matter, the findings recorded by the adjudicating officer on charge no.3 were also set aside.
Charge No.4
Fourth allegation was a general charge levied against the appellant that it failed to comply with the directions issued by the Board through its various circulars. The show cause notice did not refer to any specific direction issued by the Board which the appellant had failed to carry out. While recording findings against the appellant, the adjudicating officer referred to circulars and rules mentioned in the first three charges and held that the directions issued therein had not been complied with and, therefore, that charge stood established. That was not the way of recording findings on a general charge like this. The first three charges specifically referred to the violation of certain specified circulars and rules and it was found that there was no violation. In view of said findings the findings on that charge could not be upheld as well.
Accordingly the appeal was allowed and the impugned order was to be set
aside. (