Alice Blue Financial Services Pvt. Ltd vs National Stock Exchange Of India Limited

Dr. C.K.G. Nair, Member

This appeal has been filed aggrieved by the order of the Member and Core Settlement Guarantee Fund Committee (“MCSGFCâ€/Committee

for short) of National Stock Exchange of India Limited (“NSE†for short) dated June 6, 2020 whereby a penalty of Rs. 4.35 crore (Rs. 43502000)

has been imposed on the appellant apart from directing one day suspension of the membership in F&O segment for false reporting of margin.

The respondent exchange NSE carried out a regular inspection of the functioning of the appellant broker for the period April 1, 2018 to March 31,

2019. The inspection team noticed a number of violations committed by the appellant which include false reporting of margin collected from clients in

F&O segment; non-settlement of clients†funds and securities; discrepancy in net worth; charging of excess brokerage, etc. as specifically stated in

the impugned order.

Shri Prakash Shah, the learned counsel for the appellant submitted that the appellant had a large number of clients and there are around 23,000 of

instances of margin collections during the inspection period in question. Out of these, inspection team had taken a sample of 75 clients / instances and

from these only 10 instances of violations have been noted. Therefore, the discrepancy in margin collection is extremely negligible compared to the

total transactions of the appellant. Further, it was submitted that the funds had been received by those clients through online payment gateway, viz.

ATOM. Therefore, even if there were some lapses from the side of the appellant, they were inadvertent and unintentional human error. Post-

inspection, those system discrepancies/deficiencies have been rectified.

Similar contentions have been raised by the learned counsel for the appellant on the other charges in the impugned order as well. Further, it was

contended that it is the first time that during the inspection any discrepancies / lapses have been noticed and as such there has been no repetitive

nature of the violations. Given this, the maximum penalty@ 100 % of false reporting Rs. 4.32 crore and one day trading suspension imposed on the

appellant is too harsh and without considering the proportionality angle as held by this Tribunal in its orders in the matter of GRD Securities Limited vs

National Stock Exchange of India Ltd. & Anr. (Appeal No. 285 of 2018 decided on June 10, 2019) and Neon Vinimay Pvt. Ltd. vs National Stock

Exchange of India Limited (Appeal No. 72 of 2019 decided on April 26, 2019). Accordingly, it is pleaded that even if some of the violations have

occurred because of human lapses at least suspension imposed upon the appellant is to be lifted. In any case while praying to this Tribunal to take an

appropriate call on the amount of penalty it was prayed that suspension should not be imposed since it is disproportionate as well as it would impact

about 72,000 clients which the appellant is currently having. It was also urged by the learned counsel for the appellant that following the order of this

Tribunal in GRD Securities (supra), Securities and Exchange Board of India (“SEBI†for short) issued a circular dated August 1, 2019 which

categorically stated that the proportionality factor has to be considered by the stock exchanges while deciding on the penalty. Similarly, the circular

issued by the NSE on December 16, 2019 also has rationalized the penalty structure for false reporting and therefore the maximum monetary penalty

would be only Rs. 15 lakh and suspension of one day will be directed only in the case of grave violations which are repetitive in nature.

Shri Venkatesh Dhond, the learned senior counsel representing respondent NSE, on the other hand, urged that the violations against the appellant

are writ large on the face of it and all the violations have been admitted by the appellant. In fact, the learned senior counsel contended that the

appellant did not even give any / proper explanation for their violations after copy of the inspection report was given to the appellant seeking their

comments / explanation. It was further contended that the inspection team could analyze only a sample of 75 instances out of which in 10 instances

there was false reporting of margin and this is a high percentage and did not indicate the total number of violations that would have been identified if

all the transactions had been analyzed. Therefore, there is no merit in the submissions of the appellant that it is only a few instances of violations.

Moreover, it was contended that the circulars relied on by the appellant dated August 1, 2019 and December 16, 2019 are not applicable to the case of

the appellant as these circulars have been issued subsequent to the violations. Moreover, NSE circular dated December 16, 2019 specifically stated

that “The revised penalty structure will be applicable for all instances of false reporting of margin from September 1, 2019 onwards. For all prior

instances of false / incorrect reporting upto August 31, 2019, the penalty structure as prescribed under SEBI circular dated August 10, 2011 shall

continue to be applicable.â€​ The learned senior counsel also distinguished the case of the appellant from that of GRD Securities (supra) in terms of the

seriousness of the violations and emphasized that the violations were hidden from the exchange and had been noticed only during the inspection. On

the other hand, if it was disclosed to the exchange suo motu by the appellant the penalty would have been much lower. The learned senior counsel

also emphasized the importance of collecting and accurate reporting of margin money upfront to preserve the integrity of the market as held in our

order in the matter of GRD Securities (supra).

Though it is a matter of record that the appellant had admittedly committed most of the violations we note that they are not repetitive in nature in the

sense that such violations have been noted only during one inspection report. We are also told that necessary rectifications have been done by the

appellant. At the same time, we are not ready to treat the violations as just the result of some human error or miniscule as submitted by the appellant.

We are also rather perplexed by the lack of interest shown by the appellant in giving a proper reply/explanation to the charges levelled in the

inspection report. At the same time we are also not convinced that there is a repetitive offence. Therefore, the proportionality angle has to be brought

in explicitly. Though we note that the NSE circular dated December 16, 2019 has categorically stated that its applicability is from September 1, 2019

only, proportionality as a principle and as held in our order in GRD Securities (supra) has to be examined. Though in the case of grave violations the

MCSGFC is empowered to reject the proportionality angle, it is imperative for the Committee to give justification for such rejection and it cannot be

done just mechanically or by stating that the violations are serious. This is the crux of the circular dated August 1, 2019 issued by SEBI in order to

rationalize and to bring uniformity in the manner of imposition of fine / penalty for false /incorrect reporting of margin, non-reporting of margin etc.

Since the impugned Order has been issued subsequent to the said SEBI Circular, on 20 June, 2020, the Committee was bound to abide by that

Circular, in addition to our Orders in GRD Securities (supra).

In the light of the above reasons, we quash and set aside the impugned order and remand the matter to the MCSGFC of respondent NSE to re-

examine the matter by considering the proportionality angle and pass a fresh order in accordance with law within three months from the date of this

order. However, in view of the specific facts of the case that most of the violations are admitted by the appellant the deposit of Rs. 2 Crore made by

the appellant in an interest-bearing account and maintained by the NSE in terms of our interim directions shall continue as such till the matter is

decided by the Committee afresh and thereafter the said amount shall be adjusted in terms of the fresh Order.

Appeal is allowed on above terms with no orders on 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 Presiding Officer 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.