India Infoline Commodities Limited vs Multi Commodity Exchange Of India Limited

Sr.

No.",Name of Committee,Functions handled,Composition,"Reference of previous

SEBI directives, if any

Operational Committees,,,,

2.,"Disciplinary Action

Committee","· The Committee shall formulate the policy for

regulatory actions including warning, monetary fine,

suspension, withdrawal of trading, expulsion, to be

taken for various violations by the members of the

exchange.

· Based on the laid down policy, the Committee

shall consider the cases of violations observed during

inspection, etc and impose appropriate regulatory

measure on the members of the exchange.

· While imposing the regulatory measure, the

Committee shall adopt a laid down process, based on

the 'Principles of natural justice'.","( i) The disciplinary action

committee shall comprise of

public interest directors and

exchange officials. (ii) The

public interest directors shall

form a majority of the

committee. (iii) A maximum of

two key management personnel

of the exchange can be on the

committee one of which shall

necessarily be the Managing

Director of the stock exchange.","Statutory Committee as per

SEBI letter dated Augus

31, 2005, September 21,

2005 and February 20, 2009

and master circular dated

December 31, 2010.

The Committee was further informed that SEBI is in the process of finalizing the proposed uniform penalty structure across all the Exchanges and,,,,

upon finalization, the same shall be placed before the Committee for their noting. Until then, the Exchange shall continue to levy penalties based on its",,,,

existing penalty structure.,,,,

The Committee while taking note of the same suggested that as far as possible, levy of penalty should be automated. Penalties which are uniform in",,,,

nature may be levied by the Exchange in normal course and that except for expulsion / removal of Member, other matters should be placed before the",,,,

Committee for noting.,,,,

For Multi Commodity Exchange of India Limited,,,,

Sd/-,,,,

Ashwin Patel,,,,

Company Secretary,,,,

A perusal of the policy indicates that the Committee suggested, that as far as possible, levy of penalty should be automated and wherever penalties",,,,

are uniform in nature the same should be levied by the Exchange in the normal course and should only be placed before the committee for its noting.,,,,

Other matters such as expulsion and removal would only be considered by the Committee.,,,,

In view of the aforesaid resolution, it was urged by the respondent that the matter relating to penalties was only required to be considered by the",,,,

Exchange and the Sr. Manager, Inspection & Audit was duly authorized who has passed the order of penalty in accordance with the policies framed",,,,

by the Stock Exchange. It was, thus, contended that there is no error in the order passed by the authority and the matter was required to be placed for",,,,

consideration before the Committee except for its noting.,,,,

In order to consider the aforesaid stand of the respondent it is necessary to consider the enabling provisions relating to imposition of penalty which,,,,

has been prescribed by SEBI in its circular dated September 7, 2016 and which has been issued under Section 11(1) of the SEBI Act read with",,,,

Section 10 of the SCRA and which has the force of law is extracted here under:-,,,,

“September 07, 2016",,,,

Sub: Mechanism for regular monitoring of and penalty for short-collection/non-collection of margins from clients,,,,

………,,,,

………,,,,

The penalty structure and framework for short-collection/non-collection of margins by members from their clients shall be as under:,,,,

i.……..,,,,

xii. Exchanges shall examine implementation of these instructions during the inspection of its members. If during inspection or otherwise, incorrect",,,,

reporting on collection of margin from client by member is found, the member shall be penalized up to 100% of such amount short collected.â€​",,,,

A perusal of the aforesaid clause (xii) indicates that if during inspection or otherwise it is found that, there was incorrect reporting on collection of",,,,

margin from the client by the member is found in which case penalty up to 100% of such amount could be imposed. The word “up to†is relevant,,,,

which indicates that the margin of penalty can be from 0% to 100% depending on the explanation given by the member / appellant and the satisfaction,,,,

of the authority considering the matter. We are of the opinion that when a discretion is imposed upon an authority it must keep in mind the principles of,,,,

natural justice as embodied in Article 14 of the Constitution of India. Such discretion can only be exercised by a quasi-judicial body and cannot be,,,,

exercised by a sub-delegated authority.,,,,

In this regard, we are fortified by the contents given in Annexure ‘A’ to the master circular dated December 16, 2016 issued by SEBI",,,,

which requires constitution of a Disciplinary Action Committee by the Stock Exchange and which was required to formulate a policy for taking,,,,

regulatory actions against its members. It further directed that based on the policy the Committee would consider the cases of violations observed,,,,

during inspection and impose regulatory measures as per the principles of natural justice. From the said circular of December 16, 2016 it is clear that",,,,

Disciplinary Action Committee was required to take action and impose regulatory measures in accordance with the principles of natural justice,",,,,

namely, to issue a show cause notice and thereafter afford an opportunity of hearing before imposing a penalty.",,,,

In furtherance to the aforesaid, we find that the Disciplinary Action Committee had framed a policy on July 12, 2017. The Disciplinary Action",,,,

Committee was of the view that “as far as possible†levy of penalty should be automated meaning thereby that if a penalty for a particular,,,,

violation require no application of mind except for mathematical calculation then such penalties which were uniform in nature would be levied by the,,,,

Stock Exchange in the normal course of business, but where penalty is not automated, meaning thereby there is no uniform levy of penalty and where",,,,

a discretion is involved, then such matters has to go to the Disciplinary Action Committee. This is precisely what is culled out from the policy framed",,,,

by the Stock Exchange itself in its resolution of July 12, 2017.",,,,

In the light of the aforesaid, the stand of the Stock Exchange that all matters relating to penalty has to be dealt with only by the Stock Exchange is",,,,

patently erroneous and incorrect, in as much as, from a perusal of the penalties prescribed in the circular dated September 7, 2016 and subsequent",,,,

clarification made in the minutes of the meeting held on September 21, 2017 between the Stock Exchanges and SEBI it is clear that whatever",,,,

penalties which are depicted in the circulars which are uniform in nature and which can be termed automated were only required to be dealt with by,,,,

the Stock Exchange. We are of the opinion that where there is discretion involved and penalties can range from 0% to 100% then in such cases the,,,,

matter is required to be placed before the Disciplinary Action Committee.,,,,

In view of the aforesaid, we are of the view that the impugned orders passed by the Sr. Manager, Inspection & Audit on behalf of the Exchange",,,,

is without any authority of law and cannot be sustained.,,,,

With regard to preliminary objection we are of the view that the initial order dated October 17, 2017 was also passed by the Sr. Manager,",,,,

Inspection & Audit which was without any authority of law. The appellant filed an application for reconsideration and for an opportunity of hearing,",,,,

which was duly provided and thereafter the impugned order dated April 12, 2018 was passed. In our view the principles of merger would apply and",,,,

the order dated October 17, 2017 has merged with the order dated April 12, 2018. We are also of the view that the appellant should have also",,,,

challenged the order dated October 17, 2017 but having not done so will not entitle the respondent to contend that the appeal is not maintainable. Since",,,,

the impugned order is passed without any authority of law the preliminary objection is rejected.,,,,

In view of the aforesaid, the impugned orders are quashed. The appeals are allowed. It would also open to the Disciplinary Action Committee to",,,,

issue a fresh show cause notice and if it is issued within two months from today the same shall be dealt with in accordance with the principles of,,,,

natural justice. In the circumstances of the case, parties shall bear their own 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.,,,,