BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Hearing : 05.08.2019 Date of Decision : 06.11.2019 Misc. Application No. 18 of 2016 And Appeal No. 10 of 2016 Anand Rathi Share and Stock Brokers Ltd. 4th Floor, Silver Metropolis, Jay Coach Compound, Opp. Bimbisar Nagar, Goregaon (E), Mumbai – 400 063. ….. Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051. …… Respondent Mr. P. N. Modi, Senior Advocate with Ms. Kalpana Desai, Advocate i/b Purohit & Co. for the Appellant. Mr. Gaurav Joshi, Senior Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia, Advocates i/b The Law Point for the Respondent. With Appeal No. 29 of 2016 Greshma Shares and Stocks Ltd. 124, Viraj, 41/42, 4th Floor, S. V. Road, Khar (W), Mumbai – 400 052. ….. Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051. …… Respondent Mr. Rajesh Khandelwal, Advocate i/b Juris Matrix Partners LLP for the Appellant. Mr. Kumar Desai, Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia, Advocates i/b The Law Point for the Respondent. With Appeal No. 196 of 2016 Sushil Financial Services Pvt. Ltd. 12, Homji Street, Fort, Mumbai – 400 001. ….. Appellant Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051. …… Respondent Mr. Prakash Shah, Advocate with Mr. Chinmay Paradkar, Advocate i/b Prakash Shah & Associates for the Appellant. Mr. Gaurav Joshi, Senior Advocate with Mr. Vivek Shah, Advocate i/b ELP for the Respondent. CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C. K. G. Nair, Member Justice M. T. Joshi, Judicial Member Per : Justice M. T. Joshi, Judicial Member

1. Common question of facts and law has arisen in the present

three appeals filed against three different orders passed by the respondent Securities and Exchange Board of India (hereinafter referred to as, ‘SEBI’). Therefore, all the appeals are being decided by the present common order. Appeal No. 10 of 2016 Anand Rathi Share and Stock Brokers Ltd. :-

2. A penalty of Rs. 30 lacs is imposed by the respondent SEBI

vide order dated December 31, 2015 for violation of SEBI circulars dated November 18, 1993 and August 27, 2003 with respect to the segregation of the funds and securities of client. The circular dated November 18, 1993, inter-alia, provides as under :- “Regulation Of Transactions Between Clients And Brokers ….. C] What moneys to be paid into “clients account”. No money shall be paid into clients account other than – i. money held or received on account of clients; ii. such money belonging to the Member as may be necessary for the purpose of opening or maintaining the account; iii. money for replacement of any sum which may by mistake or accident have been drawn from the account in contravention of para D given below; iv. a cheque or draft received by the Member representing in part money belonging to the client and in part money due to the Member. D] What moneys to be withdrawn from “clients account”. No money shall be drawn from clients account other than – i. money properly required for payment to or on behalf of clients or for or towards payment of a debt due to the Member from clients or money drawn on client’s authority, or money in respect of which there is a liability of clients to the Member, provided that money so drawn shall not in any case exceed the total of the money so held for the time being for such each client; ii. such money belonging to the Member as may have been paid into the client account under para 1 C [ii] or 1 C [iv] given above; iii. money which may by mistake or accident have been paid into such account in contravention of para C above.”

3. The relevant provisions of circular dated August 27, 2003

provides as under :- “Sub :- Mode of payment and delivery

1. Please refer to SEBI circular No. SMD/SED/CIR/93/23321 and letter No. SMD-1/23341 dated November 18, 1993 regarding regulation of transactions between clients and brokers.

2. It is reiterated that brokers and sub-brokers should not accept cash from the client whether against obligations or as margin for purchase of securities and / or give cash against sale of securities to the clients.

3. All payments shall be received / made by the brokers from / to the clients strictly by account payee crossed cheques / demand drafts or by way of direct credit into the bank account through EFT, or any other mode allowed by RBI. The brokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. However, in

exceptional circumstances the broker or sub-broker may receive the amount in cash, to the extent not in violation of the Income Tax requirement as may be in force from time to time.”

4. During the inspection of the accounts of the appellant – the

broker in securities market, it was found that the present appellant has also a group company, namely, Anand Rathi Commodities Ltd. (ARCL), a commodity broker. It was found that on 21,198 instances amounting to Rs. 220 crores transfer of funds was made between the appellant securities broker to the group company i.e. commodity broker during financial year 2012-13. Out of this fund transfer, there were total 11,220 instances, amounting to Rs. 119 crores of payments made from appellant’s client bank account to Anand Rathi Commodities Ltd. According to SEBI, these transactions were done in violation of circulars. Therefore, a show cause notice was issued.

5. The appellant replied that the funds were transferred by consent

of the clients from their clients to their (client’s) accounts in Anand Rathi Commodities Ltd. This was done just to facilitate the clients to fulfill the client’s obligation in respect of the segment for the ease of operation, who were trading across various segments. This was being done on the strength of letter of authority from the clients to make the process more simple, hassle free and cost effective. The appellant also forwarded a copy of the adjudication order of the another Adjudicating Officer (hereinafter referred to as, ‘AO’) dated May 4, 2009 wherein the very same explanation for a different period was accepted. Therefore, the appellant wanted that the proceedings be dropped.

6. The present AO however, found that all the transactions were

carried out against the provisions of the circulars. The earlier order passed in the previous adjudication proceedings was taken by AO as the mitigating circumstances, and therefore, the penalty of Rs. 30 lacs as detailed above was imposed.

7. Mr. Pesi Modi, the learned senior counsel for the appellant

submits that in fact the circular dated November 18, 1993 itself provides that money can be withdrawn from the client’s account on his authority. Further, the same was done for hassle free transactions between two segments wherein the same client’s trades and, therefore, the order cannot be sustained.

8. Mr. Gaurav Joshi, the learned senior counsel for the respondent

however, submits that the earlier order would show that the AO did not consider the circulars and in different set of facts, the order came to be passed. He submits that the appellant was in clear violation of the circulars which are circulated with the object of protecting the interest of the clients / investors. He further draws attention of the Tribunal to the observation of the AO in paragraph No. 25 of the impugned order which would show that erstwhile Forward Market Commission (FMC) vide its circular dated December 16, 2011 had prohibited commodities brokers on the similar lines.

9. Upon hearing both sides, in our view, there is no violation of

circular dated November 18, 1993. The circular itself, inter-alia, provides that withdrawal of money on client authority is permissible. In the present case, money was transferred from the client’s accounts to his own account in the commodities market on client’s letter of authority. The AO in the impugned order in paragraph No. 26 observed in this regard as under :- “26. …….. If argument put forward by the notice that the said transfers are executed with client’s consent is accepted, it will also convey a wrong message to the market participants that this practice has been regularised. This may also have wider implications from systemic point of view.”

10. This is against the guidelines provided in the circular dated

November 18, 1993 itself, therefore, the order, to that extent is required to be set aside.

11. This takes us to the aspect of transactions allegedly carried

out by the appellant contrary to the directions contained in SEBI circular No. MRD/SE/Cir-33/2003/27/08 of August 27, 2003. The circular, inter-alia, provides that the broker and the sub-broker shall not accept cash from the client. It provides for modes of handling of the amount strictly, (i) by account payee cross cheque; (ii) demand draft; (iii) direct credit into bank account through EFT; and (iv) any other mode allowed by Reserve Bank of India. In the present case, the appellant had admittedly made the adjustment in the books of accounts as detailed (supra) by debiting one account and crediting the same in another account. This is in violation of the circular.

12. The submission that the money was withdrawn from one

account and credited to another account was on the strength of the letter of authority from the respective client cannot be accepted so far as the present circular is concerned. In our view, the appellant had committed breach of the directions contained in the said circular.

13. However, considering the fact that though none of the

prescribed mode of cash transfer was adopted by the appellant as provided by the circular, nonetheless, there was no cash handling in any of the transactions. Considering all these facts on the record, in our view, a penalty of Rs. 5 lacs would be fair. Appeal No. 29 of 2016 Greshma Shares and Stocks Ltd. :-

14. In the present case, SEBI found that in 65 instances of

payments amounting to Rs. 36,94,510.34 were made from the clients bank accounts to the appellant’s group company dealing in commodities market during the year 2012-13. During inspection, it was observed that the appellant has taken authorization from the client wherein the amount involved was more than Rs. 5,000/-. In 17 instances an amount of Rs. 19,344.65 was transferred without authorization being the transfer of less than Rs. 5,000/- in each case.

15. In the financial year 2013-14, out of 78 instances again, the

amount in the similar fashion was transferred without authorization where the amount was less than Rs. 5000/- i.e. in 13 instances. In respect of two specific clients, namely, Ms. Nagamani Sheela and Mr. Vijayakumar, appellant had not obtained any authorization though the amount exceeded Rs. 5,000/- i.e. Rs. 66,443.15 and Rs. 1,90,990.28 respectively. As regards Ms. Nagamani, the appellant had explained that the client was not responding to calls and was not traceable. In 28 instances, the appellant was given authorization by the client for transfer of funds from NSE cash account to GCPL account. However, the appellant transferred funds from NSE F&O account to GCPL account. In 4 instances, SEBI found that the signatures of authorization letter were different from that of the KYC. In the circumstances, the AO observed that since the transactions were carried out against the two circulars as detailed in Appeal No. 10 of 2016, the appellant would be liable for penalty. Accordingly, upon considering the material on record, a penalty of Rs. 20 lacs was imposed.

16. The learned counsel for the appellant submits that only in cases

where the amount withdrawn was less than Rs. 5,000/-, the authority of the client was not obtained. The amount was meager one. There was no complaint from any of the clients. Signature mismatch can occur. Considering all these facts, he submitted that the penalty imposed is very disproportionate.

17. Learned counsel for the respondent, on the other hand

submitted that in some cases there was no authorization at all though the amount was higher as detailed (supra). In one case, the appellant has filed the authority letter in the appeal. The learned counsel for the respondent however, pointed out that the authorization is after the transaction and the same is produced in the appeal.

18. Considering the fact that only in cases where the amount was

less than Rs. 5,000/-, the same was transferred without authorization. In our view, though the appellant has acted contrary to the circulars, the penalty of Rs. 20 lacs would be disproportionate to the amount involved in the transactions. Considering the said material on record, in our view, a penalty of Rs. 10 lacs for violation of both the circulars jointly would be sufficient. Appeal No. 196 of 2016 Sushil Financial Services Pvt. Ltd. :-

19. In the present appeal, the penalty of Rs. 16 lac and 8 lacs was

imposed on the appellant under Section 15HB of the SEBI Act and 23D of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as, ‘SCRA’) respectively, basically for non-compliance with the provisions of the circulars. During inspection, the respondent SEBI noted following three acts of the irregularities :- “2.1.1. Inter mingling of funds between securities client bank account and commodities client bank account. 2.1.2. Using the credit fund balances of clients for purposes other than specified in the circulars. 2.1.3. Not incorporating / mentioning the word “Client Account” in the bank account name which is required as per the SEBI circular.”

20. As regard the first irregularity, it is an admitted fact that the

appellant had an associate company named and styled as Sushil Global Commodities Pvt. Ltd. (hereinafter referred to as, ‘SGCPL’) which was a commodity broker. This SGCPL was registered as a client with the appellant with a specific trading account. It however, did not trade in the securities market at any time. The same was being used for the purpose of selling securities taken by it as collateral from the commodities clients for margin. The same used to be sold on it’s behalf by the appellant towards the recovery of the outstanding debit from the commodities clients. It was however, observed that not only funds were transferred from the appellant’s clients bank account into SGCPL bank account but there were vice – versa transfer of funds also. Hence, it was alleged that a intermingling of fund had occurred. A list of such transaction was annexed to the show cause notice.

21. The appellant admitted that funds amounting to Rs. 7.36 lacs

on 11 occasions from commodities bank account to the securities bank account was transferred in the financial year 2011-12. During the inspection period also 23 funds transfer in the similar fashion amounting to Rs. 2.01 lacs has occurred. The appellant’s contention was that those were the exceptional incidents. The AO held that this explanation is not acceptable.

22. As regards the second charge, the appellant explained that

only some of credit balances of all credit clients should not be considered for verifying funds lying in the bank accounts as the same would be in isolation, because pay-in and pay-out happens on net basis and hence even debit balances of all debit clients should be considered. Emphasizing on the net basis pay-in and pay-out, the appellant contended that settlement at member level shall not be considered and thus, the allegation that the credit funds of the clients was used is wrong. The AO however observed that the submission cannot be accepted as the funds of credit balance client was used for obligation of debiting balance client. Further, it was pointed that the account of the credit balances clients account had eroded by adopting the said practice. It was found that the said practice was in violation of SEBI circulars dated November 18, 1993 and August 27, 2003.

23. As regards the third charge, the explanation regarding the

proper nomenclature of the clients account was accepted. However, on two counts as detailed (supra), the penalty was imposed.

24. The learned counsel for the appellant submitted before us as

regard the first charge that only in exceptional case, in few instances the violation had occurred. However, a huge penalty was imposed. As regard the second charge, he submits that the AO’s order is erroneous as in day to day transactions, balances are required to be adjusted on net basis.

25. He further submitted that all these violations are of technical

nature and, therefore, relying on the decisions of this Tribunal in three cases, he submits that no penalty was warranted.

26. In our view, while the violation as regard the first charge is

admitted by the appellant, the explanation regarding the second charge is not acceptable. The clients account cannot be tinkered with that for pay-in and pay-out on net basis of the appellant.

27. As regard the penalty, we have perused the copies of the

order passed by this Tribunal, filed as Annexures ‘K’, ‘L’, and ‘M’. The reasons forwarded by this Tribunal in these cases would show that only some technical violation has occurred and, therefore, either the penalty was modified or the order of the AO as regards penalty was set aside in the facts and circumstances of each of the case.

28. In the present case, what we find is that the appellant has

accepted the cash transactions from SGCPL and vice versa. As regards the second charge, the same is also established, in view of the admission by the appellant by terming it as ‘practice’.

29. As regard the penalty, however, we note that the AO found

no quantifiable figures to show the unfair advantage made by the appellant as a result of the defaults. No monetary loss also to the investors could be ascertained by the AO. The AO however, observed that as regard the second violation there was a mismatch on account of actual bank balances being less than corresponding total of credit client ledgers. Taking into consideration the fact that the quantifiable figures are not available and there was no compliant to SEBI from any of the clients in this regards, in our view, penalty of Rs. 8 lacs and Rs. 4 lacs respectively i.e. total penalty of Rs. 12 lacs would be just. In the circumstances, the following order :-

ORDER

1. In Appeal No. 10 of 2016, the order of the AO holding the

appellant liable for violation of circular dated November 18, 1993 is hereby set aside. However, the order as regard the violation of circular dated August 27, 2003 is hereby confirmed. The direction to pay cumulative penalty of Rs. 30 lacs is set aside instead of it is hereby directed that the appellant shall pay the penalty of Rs. 5 lacs for the violation of the circular dated August 27, 2003. Misc. Application No. 18 of 2016 seeking relief of stay of the impugned order is hereby disposed of.

2. Appeal No. 29 of 2016 is partly allowed to the extent of

imposition of penalty from Rs. 20 lacs to Rs. 10 lacs.

3. Appeal No. 196 of 2016 is partly allowed to the extent of

quantum of the total penalty from Rs. 24 lacs to Rs. 12 lacs. Sd/- Justice Tarun Agarwala Presiding Officer Sd/- Dr. C. K. G. Nair Member Sd/- Justice M. T. Joshi Judicial Member 06.11.2019 Prepared & Compared by PTM