2019 (11) TMI 846 - AT - SEBI

Broker's suspension order modified to one-year client restriction by tribunal for serious violations balancing market dynamics

The tribunal modified the suspension order imposed by SEBI on a broker, reducing it to a one-year restriction on taking new clients instead of a complete ... Suspension of registration of a broker with the National Stock Exchange of India Limited (‘NSE’ for short), for a period of one year by Whole Time Member (‘WTM’) of SEBI - HELD THAT:- Safekeeping all the documents and material relating to a broker’s functions is a basic responsibility. Conflicting replies relating to the role of BGSPL and Shri Puneet Agarwal as well as relating to other similar clients owned premises based branch operations therefore do not absolve the appellant fully from the violations upheld in the impugned order. It is held in the impugned order that the appellant violated various provisions of law, regulations and circulars issued thereunder. These include SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, PFUTP Regulations, Securities Contract (Regulations) Act, 1956 and the Securities Contract (Regulations) Rules, 1957 and various circulars issued by SEBI. Some of the violations though may be technical and procedural in nature. We also do not agree with the contentions of the appellant that client codes given in the contract notes are just reference codes in the absence of SEBI identifying those clients. When BGSPL was only one client and its unique client code was used there was no requirement for using other reference codes. Therefore, we do not find any fault in the finding in the impugned order that the appellant was using the services of unregistered sub brokers or some of its clients were actually discharging functions of sub brokers without SEBI registration. Whether BGSPL or some other such entities got the registration for sub broker-ship later is not germane to the matter because what is relevant is whether they were certified sub brokers at the relevant time. Therefore, given these major violations we do not find any fault in penalizing the appellant with an order of suspension. Time frame is very important while judging gravity of offences across time and in doing justice. We also agree with the submissions of the appellant that a long period of suspension of a market intermediary like a broker would make them completely defunct which, in the given context would make the punishment disproportionate. At the same time we do not agree with the submission that a warning would suffice since utilizing unauthorized sub-broker type dealing by a broker is a serious offence irrespective of the vintage of the offence. Balancing all these factors and circumstances into account we are of the view that a complete suspension of the appellant for a period of one year may not do full justice. Therefore, we modify the order of one year suspension of the appellant to that of one year restriction from taking any fresh clients. Therefore, the appellant shall not admit or take business from any new clients for a period of one year from the date of this order. Issues:- Suspension of registration of the broker by SEBI- Allegations of violations under SEBI Act, Rules, Regulations, and Circulars- Defense arguments presented by the broker- Comparison with past tribunal orders- Decision on the appeal and modification of the suspension orderSuspension of Registration:The judgment involves the suspension of the registration of a broker by SEBI for a period of one year due to multiple violations found during inspections and investigations. The violations included allowing unregistered entities and clients to operate trading terminals, failure to collect margins, delay in remitting dividends, and intermingling of client funds with the broker's own funds.Allegations of Violations:The broker faced allegations of grave violations, including aiding unregistered entities to function as sub-brokers, reporting false information, and failing to maintain proper segregation between funds. The Designated Authority recommended a five-year suspension, which was reduced to one year by the Whole Time Member. The violations were found to contravene various laws, regulations, and circulars issued by SEBI.Defense Arguments:The broker's defense argued against the allegations, stating that certain practices were justified, such as the use of premises owned by clients and the explanation for discrepancies in the records. The defense contended that the penalties imposed were too harsh for technical violations and highlighted the lack of major violations by the broker.Comparison with Past Orders:The defense cited past tribunal orders where similar violations resulted in warnings rather than suspensions. However, the respondent argued that the violations in this case were more serious and warranted the suspension. The tribunal examined the contentions of both parties and found explanations provided by the broker to be insufficient to negate the violations upheld in the impugned order.Decision on the Appeal:After a detailed hearing and consideration of all records, the tribunal modified the suspension order. Acknowledging the changes in market practices and technology over time, the tribunal restricted the broker from taking new clients for one year instead of a complete suspension. The decision aimed to balance the severity of the violations with the need for proportionate punishment and taking into account the evolving market dynamics.In conclusion, the appeal was partially allowed with the modification of the suspension order to a one-year restriction on taking new clients, emphasizing the importance of time frame in assessing violations and ensuring a fair and just outcome.