BP Equities Pvt. Ltd. vs National Stock Exchange Of India Ltd.

Per : Dr. Dheeraj Bhatnagar, Technical Member

This appeal is directed against order dated September 16, 2022 passed by Member and Core Settlement Guarantee Fund Committee of NSE^{22.National Stock Exchange} by which penalty of Rs. 16,49,500/- has been imposed for certain violations of NSE circulars^{33.NSE circulars dated 30.09.20 and 06.11.2017 and 25.02.2021}.

We have heard Mr. Kunal Katariya, learned advocate for the appellant and Mr. Vyom Shah, learned advocate for the respondent.

Brief facts of the case are :-

Mr. Kunal Katariya, learned advocate for the appellant submitted that out of the 17 violations, the appellant is challenging only 4 violations in the present appeal, while in case of 7 violations, the appellant has been let off with warning and in remaining violations, small amount of penalty has been imposed/ warning issued, which the appellant is not challenging.

He further submitted that the appellant is challenging the following four violations:-

Re (i): Misuse of clients’ fund, Mr. Kunal Katariya submitted that Committee failed to appreciate that requirements of enhanced supervision was put in place to monitor the financial health of the trading member and to ensure that the Trading Members of the Exchange always have the wherewithal to repay all creditors at any point in time. In case of the appellant, reporting under enhanced supervision was verified across 43 days and the following was observed:-

He submitted that the above clearly substantiates that the funds available with the appellant were far in excess of the alleged positive “J” and, therefore, no adverse inference may be drawn on account of this one instance. It was submitted that only for a single day, there was occurrence of positive “J” (Rs.9.05 crores) and, therefore, considering the clean record of the appellant, it did not warrant levy of monetary penalty of 1% of this amount and mere warning would have been sufficient. He further submitted that the doctrine of proportionality has been ignored. Drawing our attention to the decision of this Tribunal in the Anand Rathi Share and Stock Broking Limited v. NSE^{66.Appeal No.241 of 2020 decided on 24.04.2025 by Securities Appellate Tribunal}, he submitted that penalty, being disproportionate, may be appropriately reduced.

In reply, Mr. Shah for respondent, submitted that the wordings of the Enhanced Supervision makes it clear that the onus of making appropriate reporting lies upon the trading member and it is liable to be penalized on any instance of incorrect reporting. In the case herein, NSE has observed that on September 11, 2020, the value of "J" had a positive value of Rs.9.08 Crore. Appellant’s contention that the funds available in its own account and non-funded portion of bank guarantee were in excess of the observed misuse is not acceptable since balances in appellant’s own account could not be considered and the non-funded portion of bank guarantee had already been considered while computing the value of 'I' under Principle-2 of the Enhanced Supervision Circular.

Re (ii): Funding of client transactions of debit balance clients with the funds of credit balance funds, Mr. Katariya submitted that allegation that the appellant had provided further exposure to the clients beyond T+2+5 days in 9 instances pertaining to 5 clients which involved Rs. 2.21 Crores is factually incorrect. In case of 2 instances with respect to client codes no. (2120) and (43029), he submitted that BP Equities follows the process of posting bills on settlement day. For a transaction of Rs. 0.01 Lakhs, T+2+5 was getting completed on September 23, 2020, and the trades took place on September 22, 2020. Further, for the transaction of Rs. 14.59 Lakhs, T+2+5 was getting completed on April 6, 2021 and the trades took place on April 5, 2021, and no further exposure was allowed as the trade was already executed. Accordingly, these instances have been excluded from the instances of violations.

With respect to violation relating to client code (SJ007), it is alleged that the client was allowed exposure under the Margin Trading Facility (MTF), and hence, the Member should have posted the said bill in the separate MTF ledger and not in the normal trading ledger of the client. Mr. Katariya submitted that it is only a technical violation due to inadvertently posting made in general ledger in place of MTF register.

Mr. Katariya further submitted that in terms of Circular, penalty of Rs. 50,000/- may be levied, where violations are noted in 5% or more instances or the amount involved in the violations exceeds Rs. 1 Crore. The instances in the case of appellants are less than 5%. However, only in one instance of a client, the amount involved is Rs. 2,38,372.98/-.

In reply, Mr. Shah for NSE, submitted that undisputedly, appellant granted further exposure beyond T+2+5 days involving Rs. 2.21 Crore and hence liable for penalty. With regard to the particular instance in case of client code (SJ007), he submitted that the Exchange circular No. NSE/COMP/35125, dated June 15, 2017, requires a stock broker to maintain separate client-wise ledgers for funds and securities of clients availing margin trading facility, which the appellant failed to do. Therefore, the penalty imposed in violation of the Circular is justified.

Re (iii): non-maintenance of Clients’ email IDs and phone numbers, Mr. Katariya submitted that this is a venial violation, since the mismatches were found pertaining to 126 mobile numbers and 124 email Ids only out of 38,000 clients. Moreover, the appellant was getting the records made in the back office and updated in the UCC database.

In reply, Mr. Shah for respondent, submitted that these violations are not venial in nature, and in fact these portray serious lapses on the part of the appellant to maintain client information. The ground that the findings pertains to only 0.3% of its client base, is untenable and the penalty imposed as per the Circular is justified.

Re (iv): Violation of Rule 8(3)(f) of the SCRR, it was also informed that recently NSE has withdrawn action against all companies in which violation of said Regulation 8(3)(f) was noted.

We have carefully perused the facts of the case and rival submissions of the parties.

Re (iv): Violation of Rule 8(3)(f) of the SCRR, we note that subsequent to the filing of the appeal, the respondent has already reviewed the action and revoked the penalty of Rs. 5 Lakh for violation of Rule 8(3)(f).

Re (i): Misuse of clients’ fund- As per the NSE circular dated November 6, 2017, in case of use of client funds/securities/commodities for other than specified purposes, penalty of Rs. 5 Lakhs or 1% of the fund so used, whichever is higher, has been provided.

Learned advocate for the appellant submitted that the above provisions are only indicative and, penalty is not to be mandatorily charged but to be decided on a case to case basis. The same NSE circulars states that penalty/ disciplinary actions are indicative in nature and specific activity of violation could be dealt with on a case to case basis depending upon seriousness of the violations. We note that inspection carried out by the SEBI finds violation only on one day during the inspection period.

We find merit in the appellant’s submission that the appellant is not a repeat offender. Our attention was drawn to Anand Rathi (supra) where based on the facts of the case, penalty was reduced from Rs. 59.90 Lakhs to Rs. 20 Lakhs. Considering that the appellant has not made any such violation throughout inspection period except for one day, in the facts of this case, penalty of Rs. 9,08,500/- is reduced to Rs. 1 Lakh.

Re (ii): Funding of transactions of debit balance clients with the funds of credit balance funds- The circular provides for levy of penalty, if non-compliance is noted in more than 5% instances or the amount involved exceeds Rs. 1 Crore. In such case, the penalty of Rs. 50,000/- is imposed. In the appellant’s case, we note that no amount-wise details have been given in the impugned order with regard to the alleged 9 instances of violations pertaining to 5 clients in violation of Rs. 2.21 Crores.

The appellant has submitted details of amount involved in various instances to the Respondent, though there has been no mention in the impugned order about these amounts. In its reply to SEBI vide letter dated February 28, 2022 appellant has given summary of use of clients’ funds in violation of the circular, which shows that in the case of client code (SJ007), there were 3 instances, the total client funding involved was Rs. 38,39,623.51/. Further, in case of another client with code (43029), the total fund involved is Rs. 1,73,01,907/. Thus, even if appellant’s submission of inadvertent posting in general ledger in place of MTF ledger is considered in respect of code (SJ007), the abuse of client’s fund in other instances, exceeds an aggregate amount of Rs 1 crore, which makes the appellant liable for penalty.

Keeping in view the above, the penalty imposed on this ground is upheld.

Re (iii): non-maintenance of Clients email IDs and phone numbers. We are informed that the appellant is maintaining email IDs and phone numbers of 38,000 clients and only in case of 118 instances such details were not maintained, which is a venial violation. In our considered view, the appellant is required to maintain the basic data in respect to clients to ensure integrity of the securities market. The circular provides for a nominal penalty of Rs. 1000 per client in whose case details of email/mobile number have not been maintained and respondent has imposed the prescribed penalty only for such 118 violations. The appellant as a trading member plays an important role in maintaining integrity of securities market and is required to maintain the required details or ensure correctness of data. The reasoning that the data is maintained by the back office does not absolve the appellant from its responsibility. In view of this, the penalty on this ground is upheld.

In view of the aforesaid, the following: