Surplus funds placed as an inter-corporate deposit did not amount to prohibited lending business or disqualification.

Placement of a trading member's own surplus funds with a registered NBFC through its bank account, supported by an agreement describing the transaction as an inter-corporate deposit, did not by itself establish engagement in a prohibited business other than securities involving personal financial liability. The applicable exchange rule barred principal or employee participation in such businesses, while the SEBI circular excluded borrowing or lending connected with, incidental to, or consequential upon securities business. On the facts found, the alleged violation was not proved and the related penalty was set aside, although the overall penalty was reduced only by excluding the disallowed amount and the remaining penalties were sustained.

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Issues: Whether investment of surplus funds with an NBFC through own bank account amounted to engaging, as principal, in a business other than securities involving personal financial liability under the applicable exchange rules and circular.

Analysis: The applicable rule prohibited a trading member from engaging as principal or employee in any business other than securities involving personal financial liability, while the SEBI circular clarified that borrowing and lending of funds connected with, incidental to, or consequential upon securities business would not attract disqualification. The funds were found to be the appellant's own funds, and the transaction was supported by an agreement describing the placement as inter-corporate deposits. On these facts, investment of surplus funds with a registered NBFC did not establish that the appellant had entered into a prohibited business activity.

Conclusion: The alleged violation was not proved, and the penalty imposed on this count was set aside in favour of the appellant.

Final Conclusion: The penalty was reduced by excluding the disallowed amount, and the appeal succeeded only to that extent while the remaining penalties were sustained.

Ratio Decidendi: Placement of a trading member's own surplus funds as an investment or inter-corporate deposit, without proof of a prohibited lending business involving personal financial liability, does not amount to disqualification under the relevant stock exchange and securities rules.

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