Arihant Capital Markets Ltd vs Securities And Exchange Board Of India

M. T. Joshi, J

Aggrieved by the order passed by the learned Adjudicating Officer (hereinafter referred to as 'AO) of respondent Securities and Exchange Board of India (hereinafter referred to as 'SEBI') dated July 17, 2019 imposing a penalty upon the appellant of Rs. 1 lac and Rs. 5 lac for violation of two circulars , the present appeal is preferred.

The appellant is the registered stockbroker. SEBI had carried regular inspection of it's accounts for a period from April 1, 2014 to March 11, 2016. In the inspection, it was found that the appellant has not made settlement of running account and has not carried segregation of the clients and own funds and securities in the cases detailed in the order. Therefore, this was stated to be the violation of SEBI circulars dated December 3, 2009 and dated November 18, 1993 which were detailed in the impugned order.

Upon hearing the appellant, the order came to be issued. Hence the present appeal.

We have heard Mr. Ashok Singh, the learned counsel for the appellant and Mr. Kumar Desai, the learned counsel along with Mr. Mihir Mody, Mr. Arnav Misra, Mr. Mayur Jaisingh, the learned counsel for the respondent through video conference.

So far as the charge No. 1 against the appellant of violation of circular dated December 3, 2009 is concerned, the appellant during six quarters falling under the inspection period had not settled its client accounts in 40 instances. The list of those accounts was provided to the appellant. The appellant in it's submission submitted that out of these accounts, in 39 instances the client securities was more than Rs. 10,000/- was rejected by its back office software due to reasons which were out of control such as mapped depository account is invalid / freeze / suspended. It was further submitted that those accounts were settled later on. SEBI circular however provides that the actual settlement and securities should be done by the broker at least once in a calendar quarter or month depending on the preference of the clients. The learned AO, therefore, concluded that as the accounts were not settled for a long gap after almost four quarters, the violation had occurred.

As regard the second charge, during inspection, it was found that the appellant had misused client funds for a debit balance of other clients during the relevant period. This was the violation of circular dated November 18, 1993. The appellant submitted that the due amount in this regard includes amounts due to group company, associates, subsidiaries, directors and their family members and, therefore, the credit balance of such internal creditor cannot be termed as mis-utilization. Only the internal credit balance cannot be considered but also the external creditor's balance should have been considered and compared. The learned AO however found that the circular does not make such difference between any internal and external account. The funds were lent by Axis Bank on each count in the amount of Rs. 6 crore each out of which an amount availed is shown in the next column.

The learned AO further noted that the circular specifically provided what money is to be paid into client accounts and what money is to be withdrawn from the client accounts. It was further specified that withdrawal of money from client accounts only towards the payment to be made on behalf of clients or towards payment of debts due, etc. as detailed was required to be made. Therefore, the appellant was found in the violation of the said circular for which penalty of Rs. 5 lac was imposed.

The learned counsel for the appellant submitted before us that in the show cause notice the respondent had relied on a formula which, in fact, was not in existence at the time of the disputed period but was incorporated in circular dated September 26, 2016 which is brought into effect from July 1, 2017. He submitted that the formula would show that so far as the bank guarantee is concerned, only 50% of the same is required to be considered and not 100% which has been considered in the cases of Axis Bank as detailed (supra).

On the other hand, the learned counsel for the respondent Mr. Kumar Desai submitted that this next of the circular merely is a formulization of the earlier circular to bring a more mathematical clarity for the brokers. Mis-utilization of the client funds and non-segregation of the accounts, in fact, is clearly proved. He further submitted that as regards the first of the violation, the appellant has admitted the same by blaming it's system. In the circumstances, he submitted that no interference in the order is warranted.

Upon hearing both sides and upon perusing the relevant circulars, in our view, the order cannot be faulted with. The earlier circular had clearly stated that the funds of the client cannot be applied for any other purposes. The appellant's case was that the funds were applied by it for the dues for their associates, group company, etc. Now, during the arguments only, the issue of non-existence of formula in the previous circular is brought up. In fact, the said formulization is nothing but the crystallization of the earlier circular.

In the circumstances, there is no merit in the appeal. The appeal is, therefore, 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.