Abhipra Capital Limited vs National Stock Exchange Of India Limited

Tarun Agarwala, Presiding Officer

The appellant is a trading member registered with National Stock Exchange of India Limited (“NSE” for short) and is aggrieved by the order dated May 26, 2023 passed by the Member and Core Settlement Guarantee Fund Committee (“the Committee” for short) whereby the trading terminals of the appellant has been disabled in all segments with immediate effect.

The facts leading to the filing of the present appeal is, that NSE initiated a forensic audit of the appellant”s books and records for the period April 1, 2018 to March 31, 2021. Based on the findings in the forensic audit report, a show cause notice dated December 30, 2022 was issued observing non-compliances of the regulatory provisions, such as:-

(a) Misrepresentation of data to the Exchange;

(b) Shortfall of client funds;

(c) Non-reconciliation of securities;

(d) Non-settlement of clients” funds

(e) Non-maintenance of books and accounts in prescribed format;

(f) Non-segregation of client and owned funds;

(g) Non-reporting of bank account to the Exchange;

(h) Short fall in net worth;

(i) etc.

Insofar as the short fall in net worth is concerned, the show cause notice alleged-

“Upon verification of the net worth certificate submitted by the Noticee, certifying a net worth of Rs. 20.95 crores vis-à-vis the balance sheet as of March 31, 2021, it is observed that the Noticee incorrectly considered the doubtful debts and advances involving a difference to Rs. 22.76 crores while computing the net worth. After considering correct value of the doubtful debts and advances, the net worth of the Noticee stood revised at (-ve) Rs. 1 crore which is below the minimum net worth of Rs. 1 crore prescribed for the Noticee by the Exchange.”

The appellant submitted its reply to the show cause notice on January 25, 2023 and disputed the allegations relating to the short fall of net worth. The Committee after considering the matter on March 6, 2023 directed the appellant to provide the audited net worth certificate as of March 3, 2023 along with the relevant supporting data / documents as mentioned therein. The said information was duly supplied by the appellant through e-mail on April 11, 2023 and the audited net worth certificate was also filed certifying the net worth of Rs. 9.36 crore as on March 3, 2023. The Exchange thereafter sought additional data documents vide their e-mail dated April 13, 2023 relating to alleged doubtful debts and advances as per net worth as of March 3, 2023. These details were also supplied vide e-mail dated April 17, 2023. The Exchange again vide e-mail dated April 19, 2023 sought further clarification regarding the recovery of debtors. Based on the documents supplied regarding net worth as on March 3, 2023 the Committee came to a conclusion that the appellant has violated Rule 33 of Chapter III of the Rules of the Exchange and had failed to maintain the minimum net worth of Rs. 3 crore prescribed by the Exchange. The Committee accordingly disabled the trading terminals with immediate effect. The Committee found that the revised net worth submitted by the appellant as of March 3, 2023 that a sum of Rs. 3.80 crore as per the provisional balance sheet which relates to retainership fees / earnings does not prima facie appear to be related to the securities market. Further, the revised net worth certificate indicating doubtful debts and advances prima facie indicates that the appellant was trying to camouflage such illiquid assets to avoid deduction from the net worth.

We have heard Shri P.N. Modi, the learned senior counsel with Shri Kunal Kataria and Ashmita Goradia, the learned counsel for the appellant and Shri Somasekhar Sundaresan, the learned counsel with Shri Ishan Agrawal, Shri Abishek Venkataraman, Shri Karma Vivan and Shri Ashutosh Mishra, the learned counsel for the respondent.

We are of the opinion that the Committee has misdirected itself and has strayed from its path while passing an ad-interim order. The Committee was required to adjudicate the allegations made in the show cause notice. Replies were filed and documents in support of the replies have also been filed. The Committee instead of deciding the allegations in the show cause notice has embarked upon on an issue which was beyond the show cause notice. The period of investigation as per the forensic audit report was for the period April 1, 2018 to March 31, 2021 and the show cause notice alleges that during this period there was a short fall in net worth to negative Rs. 1 crore which was below the minimum net worth of Rs. 1 crore prescribed by the Exchange. This fact was required to be adjudicated. Instead without adverting as to whether the allegations made in the show cause notice was correct or incorrect, the Committee has embarked on an issue which was beyond the show cause notice and, on the basis of a prima facie finding that the appellant has failed to maintain the minimum net worth, has disabled the trading terminals of the appellant.

In our opinion trading terminals cannot be terminated based on prima facie opinion. The matter is required to be adjudicated and a final order is required to be passed.

In the instant case no adjudication has taken place with regard to the allegations as to whether the appellant has failed to maintain the minimum net worth during the period April 1, 2018 to March 31, 2021. Merely by arriving at a prima facie opinion that the appellant has failed to maintain the minimum net worth as on March 3, 2023 is not sufficient to disable the trading terminals of the notice.

We are of the opinion that when all the evidence was before the Committee it should have decided the allegations contained in the show cause notice which they have failed to do so.

We also find that the Committee has misused the process in issuing an ad-interim order. The Tribunal is not aware whether the Committee is vested with the power of passing an ad-interim order but assuming that the Committee has such power, we are of the opinion that there was no tearing hurry or urgency in passing the impugned order.

We find that based on the forensic audit the show cause notice alleged that the appellant failed to maintain the minimum net worth during the period April 1, 2018 to March 31, 2021. In our opinion, it was incumbent for the Committee to decide this issue as to whether the appellant had maintained the minimum net worth during the period April 1, 2018 to March 31, 2021 and only thereafter could have embarked on the enquiry as to whether the appellant had maintained the minimum net worth as on March 6, 2023.

We are also of the view that in view of the circulars issued by NSE, in the event it is found that there was a short fall of the minimum net worth of trading member, then an opportunity to make good the net worth was also required to be given which also leads us to hold that the trading terminals could not be disabled on a prima facie basis and that the trading terminals can only be disabled upon a conclusive finding that the trading member had failed to maintain the minimum net worth.

In North End Foods Marketing Pvt. Ltd. vs SEBI, Appeal no. 80 of 2019 decided on March 12, 2019 this Tribunal held:-

“13. Having heard the learned senior counsel at length, we find that it is no more res integra that SEBI has power to pass ex-parte interim orders, pending investigation, which power flows from Section 11 and 11B of the SEBI Act. A plain reading of Section 11 and 11B shows that SEBI has to protect the interests of the investors in securities and to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section 2 of Section 11 of the Act. SEBI has power to pass interim orders and such interim orders can also be passed ex parte. Interim orders are passed in order to prevent further possible mischief of tampering with the securities market. If during a preliminary enquiry, it is found prima-facie, that the person is indulging in manipulation of the securities market, it would be obligatory for SEBI to pass an interim order or for that matter an ex parte interim order in order to safeguard the interests of the investors and to maintain the integrity of the market. Normally, while passing an interim order, the principles of natural justice has to be adhered to, namely, that an opportunity of hearing is required to be given. Procedural fairness embodying natural justice is to be applied whenever action is taken affecting the rights of the parties. At times, an opportunity of hearing may not be pre-decisional and may necessarily have to be post-decisional especially where the act to be prevented is imminent or where action to be taken brooks no delay. Thus, pre-decisional hearing is not always necessary when ex-parte ad-interim orders are made pending investigation or enquiry unless provided by the statute. In such cases, rules of natural justice would be satisfied, if the affected party is given a post-decisional hearing.

However, it does not mean that in every case, an ex-parte interim order should be passed on the pretext that it was imminent to pass such interim order in order to protect the interest of the investor or the securities market. An interim order, however, temporary it may be, restraining an entity/person from pursuing his profession/trade may have substantial and serious consequences which cannot be compensated in terms of money.

Thus, ex-parte interim order may be made when there is an urgency. As held in Liberty Oil Mills & Ors. vs. Union of India & Ors. [AIR (1984) SC 1271] decided on May 1, 1984, the urgency must be infused by a host of circumstances, viz. large scale misuse and attempts to monopolise or corner the market. In the said decision, the Supreme Court further held that the regulatory agency must move quickly in order to curb further mischief and to take action immediately in order to instill and restore confidence in the capital market.”

The said decision is squarely applicable in the instant case. An interim order, however, temporary it may be, has serious consequences. In the instant case we find that the appellant is registered with the NSE as a trading member in the Capital Market (CM) segment since November 1995 and in the Futures & Options (F&O) segment since July 2000. Nothing has come on record to show that the appellant was not compliant with any of the compliances mandated under the Regulations.

In view of the aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed. The Committee is directed to pass a final order pursuant to the show cause notice dated December 30, 2022 within three months after giving an opportunity of hearing. In the circumstances of the case, parties shall be bear their own costs.

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.