BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
       Appeal No.44 of 2012

                 Date of Decision : 30.3. 2012 

Pee Dee Kapur Stock & Securities Ltd.
802, International Trade Tower
Nehru Place, New Delhi – 110 019.

                              ….. Appellant  
Versus 

1. Securities and Exchange Board of India
   SEBI Bhavan, C-4A, G Block,
   Bandra Kurla Complex,
   Bandra (East), Mumbai – 400 051.
2. National Stock Exchange of India Limited
   Exchange Plaza, Plot no.C-1, “G” Block,
   Bandra Kurla Complex,
   Bandra (East), Mumbai – 400 051. ..…Respondents Mr. Sunil Kumar, Chartered Accountant for the Appellant.
   Mr. Ajay Khaire, Advocate with Ms. Rachita Romani, Advocate for Respondent no.1.
   Mr. Somasekhar Sundaresan, Advocate with Mr. Paras Parekh, Advocate for Respondent
   no.2
   CORAM : P. K. Malhotra, Member
   S.S.N. Moorthy, Member
   Per : P. K. Malhotra, Member

The appellant before us is a stock br oker, a member of the National Stock
Exchange of India Limited (NSE) and registered with the Securities and Exchange Board
of India (the Board). The a ppellant is aggrieved by the debit note dated September 27,
2011 issued by NSE whereby the appellant has been asked to pay a sum of ` 1,97,365/-
on account of penalty for client code m odification for the period August 1, 2011 to
August 31, 2011.

2. The said penalty was imposed by the stock exchange in terms of the circular dated
   July 5, 2011 issued by the Board to all the recognized stock exchanges and conveyed to
   all the members by NSE by its circular no.653 of July 29, 2011. The ci rcular dated July
   5, 2011 issued by the Board inter alia provid es that the stock exchanges may allow

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modification of client codes of non instituti onal trades only to rec tify genuine error in
entry of client code at the time of placing/modifying the related order. It also cast a duty
on stock exchanges to lay dow n strict objective criteria , with the approval of the
governing Board, for identification of genuine errors in client code which may be
modified and disclosed to market in advance. The exchanges are also required to set up a
mechanism to ensure that trading members m odify client codes only as per the strict
objective criteria. The circular also mandates that the stock exchanges shall levy penalty
on the trading member for modification of the client code and credit the penalty amount
to its investor protection fund. In complian ce with the said circular of the Board, NSE
issued the circular dated July 29, 2011 inter al ia stating that the following client code
modification would be considered as genuine modification:
(1) Where original client code/name and modified client code/name are
similar to each other but such modifications are not repetitive.
(2) Where original client code and modified client code belong to a family.
(Family for this purpose means spous e, dependent parents, dependent
children and HUF).
It was also stated that the circular will repl ace the existing penalty structure for the client
code modification and shall be effective from August 1, 2011.

3. It seems difficulties were felt in the im plementation of the aforesaid circular and,
   therefore, after a joint meeting between the Board and the stock exchanges, NSE issued
   another circular dated August 26, 2011 to all its members stating that the following
   would constitute genuine error with regard to client code modification.
   “Error due to communication and/or punching or typing such that
   the original client code/name and the modified client code/name are
   similar to each other.

Modification within relatives (‘Relative’ for this purpose would
mean “Relative” as defined under the Companies Act, 1956).

2. Shifting of any trade (institutiona l or non institutional) to the error
   account of the trading member shall not be treated as modification of
   client code under SEBI circular dated July 5, 2011, provided the positions
   arising out of trades in error accoun t are subsequently liquidated/closed
   out in the market and not shifted to some other client code.
3. Trading members would be require d to disclose the client codes
   which are classified as ‘Error Account s’ to the Exchange at the time of
   UCC upload.

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4. Trading member should have a well documented error policy to
   handle client code modifications, approved by their board/management.
5. With a view to minimize errors committed by the trading
   members, the Exchange will periodically review the trades flowing to the
   ‘Error Account’ of the trading members.”
   As per SEBI circular dated July 5, 2011 and the Exchange circular dated
   July 29, 2011 on client code modificati ons, penalty will be levied on all
   client code modifications w.e.f. August 1, 2011 (including genuine errors)
   except as mentioned in point no.2 above.”
6. When NSE imposed penalty on the appellant vi de its debit note dated
   September 27, 2011 for client code modification for period August 1, 2011 to
   August 31, 2011, it was pleaded by the appellan t that the client c ode modification was
   done to rectify the genuine punchi ng error in order to effect the trades in correct client
   code. It further stated that modifications are of the month of August only being the very
   initial period of applicability of the circul ar under which penalty has been imposed. The
   contents of the circular dated July 29, 2011 were clarified vide circular issued on
   August 26, 2011 and, therefore, no penalty can be imposed for the month of
   August, 2011. By its letter dated October 8, 2011, the appellant requested NSE to waive
   the penalty amount. The NSE rejected the request vide its letter dated December 28,
   2011 observing as under:
   “As per the Exchange records, it has been observe d that all the
   modifications in the month of August, 2011 in the F&O segment were
   done from the client code ‘SI99A’ (Shivam Investment – Prop. Sushma
   Kapur) to client code ‘AD11’ (Aditya Enterprises Pvt. Ltd). These
   modifications do not fall under the criteria of ge nuine modifications as
   laid down in the Exchange circular dated July 29, 2011 pu rsuant to SEBI
   circular dated July 5, 2011.
   Further, it has been observed that you have continued to do client code
   modifications in the month of September 2011 in the F&O segment
   wherein the modifications were done ag ain from the client code ‘SI99A’
   to client code ‘AD11’ which do no t fall under the criteria of genuine
   modifications as laid down in the Exchange circular dated July 29, 2011.
   The Exchange has been levying penalty on all client code modifications of
   non-institutional trades w.e.f. A ugust 1, 2011, in accordance with its
   circular dated July 29, 2011 issued pur suant to the SEBI circular dated
   July 5, 2011 except as provided in Exch ange clarificatory circular dated
   August 26, 2011 issued pursuant to the joint meeting held between SEBI
   and Stock Exchanges.”

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5. Aggrieved by the aforesaid decision the appellant has come up in appeal before
   us. We have heard learned representative of the appellant and learned counsel for the
   respondents. Learned representative of the appellant submitted that penalty was imposed
   for client code modification done in respect of all trades in the month of August, 2011
   whereas the code for levying the penalty itself was finalized only on August 26, 2011.
   Since necessary mechanism and procedures pu rsuant to such code for levying penalty
   were provided only at a la ter date, the penalty provisi ons could be made operative
   prospectively only from such date i.e. August 26, 2011 and not from a back date. On the
   other hand, learned counsel for NSE stated that NSE is carrying out only the order issued
   by the Board and it has no power to waive the pe nalty as requested by the appellant. It
   was further submitted that circular dated August 26, 2011 issued by NSE is only
   clarificatory in nature and it does not affect the provision with regard to imposition of
   penalty for client code modification of non institutional trades as contained in the circular
   dated July 29, 2011.
6. After hearing the learned c ounsel for the parties and perusing the records, we do
   not find any merit in the appeal. The circular dated August 26, 2011 issued by NSE is by
   way of clarification to the circular dated July 29, 2011. Th e circular dated
   August 26, 2011 liberalizes and expands the scope of genuine error for the purpose of
   client code modification and does not in any way disturb/change the power of the stock
   exchange to levy penalty for client code modi fication. It is the appellant’s case that had
   the error account facility b een available earlier, he w ould have availed of it and,
   therefore, his modification prior to Augus t 26, 2011 should be treated leniently. This
   argument is not available to him because of his own conduct. Even after
   August 26, 2011, when the exception to the penalty was introduced by paragraph 2 of the
   said circular, the appellant continued to modi fy client codes and di d not upload an error
   account client code in order to shift trad es to the error account and thereafter to
   liquidate/close out the position arising out of the trades exec uted with erroneous client
   code entries. We were told during the course of the hearing that all trades in the month of
   August, 2011 have in fact been ultimately attributed to the modified client code and have
   not been liquidated at all as required even for the period after August 26, 2011. Perusal

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of the letter dated October 8, 2011 addressed by the appellant to NSE also indicates that
request of the appellant to NSE was for taking a lenient view and for waiving the penalty
amount and not for enabling him to shift the wrongly punched trades to ‘error account’.
We, therefore, do not find any merit in the appeal. The same stands dismissed
with no order as to costs.

     Sd/- 

P.K. Malhotra
Member
Sd/-
S.S.N. Moorthy
Member
30.3.2012
Prepared and compared by
RHN