Master Capital Services Limited vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

Heard learned counsel for the parties. Misc. Application No. 215 of 2023 is allowed. The additional documents filed in this application shall be treated as Annexure – 8 to the memo of appeal.

The present appeal has been filed against the order dated January 29, 2021 passed by the Adjudicating Officer (‘AO’ for short) of the Securities and Exchange Board of India (‘SEBI’ for short) imposing a penalty of Rs. 2 lakh for violation of SEBI Circular dated November 6, 2009.

The facts leadings to the filing of the present appeal is, that an investigation was conducted pursuant to which a show cause notice was issued. The broad allegation against the appellant is-

(a) Failed to submit order placement / call recording for the complainants / unauthorized trades which appears to be unauthorized trading and 9.2 submission of wrong information by MCSL including information of email address of Bhanu Pratap;

(b) Trades carried out to earn brokerage;

(c) Failed to perform due-diligence of it sAP viz. Rahul Raghav / Nitus solutions;

The AO after considering the material evidence on record and after considering the reply found that the appellant violated the SEBI Circular dated November 6, 2009 and accordingly imposed a penalty of Rs. 2 lakh.

We have heard Shri Vikas Gupta assisted by Deepak Batra, the learned counsel for the appellant and Shri Abhiraj Arora assisted by Shri Shourya Tanay and Shri Deepanshu Agarwal, the learned counsel for the respondent.

The appellant is a registered stock broker of SEBI. The allegation against the appellant in the show cause notice was that the appellant had not conducted any inspection of its authorized person Rahul Raghav and Nitus Solutions and therefore have violated SEBI Circular dated November 6, 2009.

In this regard Clause 7 of SEBI Circular dated November 6, 2009 provides various obligations which is required to be carried out by a stock broker. Clause 7(e) provides as under:-

“7(e) Stock broker shall conduct periodic inspection of branches assigned to authorized persons and records of the operations carried out by them.”

A perusal of the aforesaid clause indicates that the appellant was required to conduct periodic inspection of branches assigned to authorized persons.

In addition to the aforesaid National Stock Exchange of India Limited (NSE) issued a Circular dated October 17, 2002. Clause 4 of the said Circular provides as under:-

“4. As per circular no 60 (Download Reference no NSE/MEM/275) dated 12/06/1997, it shall be the primary responsibility of the affiliated stock broker / Trading Member to inspect the registered sub-brokers. It is hereby clarified that every Trading Member is required to inspect every year at least 10% of its active sub-brokers and 10% of its active branches and also to ensure that each active sub-broker / branch is inspected at least once in every five years. For this purpose, an active sub-broker / branch means one whose turnover is above 1/10th of the turnover of the Trading Member during the previous financial year (viz April to March).”

A perusal of the aforesaid clause indicates that a Trading Member is required to inspect ever year at least 10% of its active sub-brokers and ensure that each active sub-broker is inspected at least once in every five years. The said Circular further provides that active sub-broker means whose turnover is above 1/10th of the turnover of the Trading Member during the previous financial year.

It was conducted that the period of 5 years has not as yet expired. Further, the authorized person turnover was less than 1/10th of the turnover of the appellant during the previous financial year and therefore as per clause 4 of NSE Circular dated October 17, 2002 the appellant was not required to carry out the inspection.

The proof of fact that the authorized person turnover was less than 1/10th of the appellant’s turnover has been provided in Annexure – A8 to the memo of appeal which has not been disputed by the respondent.

In view of the aforesaid, NSE while carrying out the inspection, had wrongly recorded that due diligence has not been carried out by the appellant in not carrying out the inspection of its authorized person and therefore violated the Circular dated November 6, 2009. NSE while submitting the inspection report did not consider its own Circular of October 17, 2002.

In view of the Circular dated October 17, 2002 we are satisfied that since the turnover of the authorized person was less than 1/10th of the turnover of the appellant during the previous financial year, the appellant was not required to inspect the branch of the authorized person and consequently we are of the opinion that the appellant has not violated SEBI Circular dated November 6, 2009.

In view of the aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed.

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.