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Judgment
Tarun Agarwala, Presiding Officer
The present appeal has been filed against the order dated December 30, 2022 passed by the Adjudicating Officer (“AO” for convenience) of the Securities and Exchange Board of India (“SEBI” for convenience) imposing a penalty of Rs. 15 lakhs under Section 15HB of the SEBI Act, 1992 and Section 23D and Section 23H of the Securities Contracts (Regulation) Act, 1956 (“SCRA” for convenience).
The facts leading to the filing of the present appeal is, that the appellant is a registered broker and member of Bombay Stock Exchange (“BSE”) and National Stock Exchange of India Limited (“NSE”). A comprehensive joint inspection of the books of accounts and other records of the appellant was conducted by BSE and NSE and the Central Depository Services (India) Limited (“CDSL”) for the period of April 01, 2019 to July 31, 2020.
Pursuant to the joint inspection certain anomalies were found and after considering the reply proceedings were initiated by BSE as well as NSE. Amongst others NSE imposed a penalty of Rs. 7 lakhs for misuse of clients’ funds. This amount was reduced in an appeal filed by the appellant to Rs. 3 lakhs. Similarly, BSE also imposed a fine of Rs. 3 lakhs for misuse of clients’ funds.
SEBI also issued a show cause notice dated September 14, 2022 for various violations committed by the appellant during the same inspection period. The alleged violations are as under:-
(i) Misuse of client funds.
(ii) Short collection of margin.
(iii) Client funding.
(iv) Client registration process (KYC and KRA Process).
(v) Verification of Email ID & Mobile numbers.
(vi) Incorrect reporting of net worth.
(vii) Non-adherence to rule of membership.
(viii) Incorrect reporting of weekly enhanced supervision data to stock exchange.
(ix) Failure to upload clients’ fund/ securities balance.
(x) Failure in reporting RBS data.
The appellant contested the show cause notice denying the charge and contended that it had complied with all the Rules and Regulations and was not in violation of any Rule or Circulars. The AO after considering the reply and the evidence on record passed the impugned order finding that the appellant had violated various provisions of the Rules and Regulations and the Circulars and accordingly imposed a penalty of Rs. 15 lakhs.
We have heard the learned counsel for the parties.
At the outset, we find that for the same violation during the same inspection period, namely, misuse of clients’ funds BSE and NSE had imposed a penalty. For the same violation, the two Exchanges have already imposed a penalty and, therefore, it was not appropriate for the AO to impose a penalty again on an issue which had already been adjudicated by the Stock Exchanges. The AO while passing the impugned order has not considered the penalty imposed by the BSE and NSE for the same violation. In our opinion, the imposition of penalty by the AO in nothing but an act of penalizing the appellant more than once for the same violation. Consequently, the imposition of penalty of Rs. 6 lakhs under Section 23D of the SCRA for misuse of clients’ funds cannot be sustained.
The learned counsel made submissions that other violations as indicated in the previous paragraphs were incorrect and that the appellant was not in violation of any Rule or Circular. In this regard, we find that the AO has extensively gone into each and every issue and has found that the appellant has violated the Circulars and various provisions of Rules.
Consequently, we are of the opinion that the imposition of Rs. 5 lakhs under Section 15HB of the SEBI Act and Rs. 4 lakhs under Section 23H of the SCRA does not suffer from any manifest error of law.
In view of the aforesaid, the appeal is partly allowed. The imposition of Rs. 15 lakhs passed by the AO is reduced to Rs. 9 lakhs. In the circumstances of the case, parties shall 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.