Proportionate regulatory penalty for unregistered sub-broker activity reduced to warning after comparison with similar cases

Permitting an unregistered entity to function as a sub-broker was treated as a breach of the stock brokers regulations, because the proviso to rule 3 could not protect a person who was not duly registered and was allowed to trade without registration. The Tribunal upheld the finding of violation under regulation 7 read with clause A(2) of Schedule II. On penalty, the one-month restraint on taking new clients was found excessive in light of comparable matters arising from the same scrip and investigation period, where intermediaries received lighter treatment, and the sanction was reduced to a warning.

---

---

Issues: (i) whether permitting an unregistered entity to act as sub-broker amounted to violation of the code of conduct under the stock brokers regulations; (ii) whether the penalty of prohibition from taking new clients for one month was disproportionate and liable to be modified.

Issue (i): whether permitting an unregistered entity to act as sub-broker amounted to violation of the code of conduct under the stock brokers regulations.

Analysis: The appellant allowed Mayekar to trade as a sub-broker although it was not registered with any stock exchange as a sub-broker. The protection in the proviso to rule 3, relied upon by the appellant, was held inapplicable on the facts because that proviso could not be invoked by a person who was not otherwise registered and who was permitted to function without such registration. The earlier decision relied on by the appellant was distinguished on the ground that it involved a different factual situation where the sub-broker was already registered with stock exchanges and the question was only about registration on another exchange.

Conclusion: The finding that the appellant violated regulation 7 read with clause A(2) of Schedule II of the stock brokers regulations was upheld.

Issue (ii): whether the penalty of prohibition from taking new clients for one month was disproportionate and liable to be modified.

Analysis: The punishment was compared with orders passed in similar matters arising from the same scrip and investigation period, where intermediaries had been dealt with more leniently. The differential treatment was found unexplained, and the consequence of the restraint on the appellant was considered excessive in comparison with the treatment given to similarly placed persons.

Conclusion: The penalty was modified to a warning.

Final Conclusion: The finding of violation was sustained, but the consequential restraint imposed by the regulator was reduced to a warning, resulting in only partial relief to the appellant.

Ratio Decidendi: A penalty imposed for a regulatory violation must be proportionate and consistent with the treatment meted out in comparable cases, and disparate punishment without justification may be interfered with by the appellate forum.

---