2025 (2) TMI 426 - HC - SEBI

SEBI circular requiring penalty refunds only after October 2021 quashed for arbitrary date discrimination

Vimal Kumar Gupta Versus The National Stock Exchange of India, Securities Exchange Board of India

HC quashed SEBI circular dated 02.09.2022 requiring trading members to refund penalties passed to clients only after 11.10.2021. Court found the date ... Validity of Circular dated 02.09.2022 advising the trading member to refund the penalty levied on account of short/non-collection of upfront margin to clients, if the same has been passed on to the clients after 11.10.2021 - HELD THAT:- In the present case, it is the selection of the date, that is, 11.10.2021, that is the subject matter of challenge, and I am unable to find any support from the material on record as to the reason or basis for such selection. Apart from the offending date itself, there are other conditions that would have to be satisfied, for the refund of the penalty. A perusal of GRC proceedings dated 31.03.2023 would reveal that the only reason why a portion of the relief sought for has been denied is the stipulation of the date as 11.10.2021 in Circular Ref.No.60/2022 dated 02.09.2022. The circumstance set out under question and answer 15 in Circular No.48/2021 dated 12.10.2021 is thus, inapplicable to the present case. Such a conclusion emanates from a reading of the order of the GRC where the TM is not seen to have argued that there were failure/default on the part of the petitioners to justify passing on of the penalty. Having considered the matter carefully, selection/stipulation of the date as 11.10.2021 has no basis whatsoever. Such a stipulation had led to discrimination between two groups of investors, those who have been passed on the burden of penalty prior to 11.10.2021 and those who have suffered the burden post 11.10.2021. Thus, those investors who satisfy all the conditions under the Circulars but have suffered the passing on the penalty prior to 11.10.2021 have been left remediless. The passing of the penalty for short-levy by the TM to the investor has been consistently decried by SEBI. In such circumstances imposition of a date after which only the penalty would be refunded has no justification whatsoever. This is contrary to Article 14 of the Constitution of India, affecting adversely one group out of two equally placed groups of investors. The investor has no control over the date on which penalty is levied. Hence, there is serious prejudice caused by virtue of a fact that is outside the control of an investor, in respect of financial transactions that are identical to transactions by other investors, though of an anterior date. In the present case, the satisfaction of the petitioner of the other conditions for refund constitute questions of fact and I extract below the findings of the GRC which are relevant and set the context for the grievance of the petitioner. To be noted that the GRC has passed the order after hearing both the petitioner and HDFC/TM. The GRC has made it clear that the petitioner is, in fact, entitled to the refund and has ordered refund to the extent to which the Circular does not stand in the way. The decision adverse to the petitioner relates to that part of the penalty on upfront margin relatable to the period prior to 11.10.2021 only. The stipulation relating to the date under Circular Ref.No.60/2022 dated 02.09.2022, is found to be arbitrary and is quashed. As a consequence, the prayer of the petitioner stands moulded to a challenge encompassing order passed by the GRC dated 31.03.2023 and such challenge is allowed and order dated 31.03.2023 set aside. The petitioner's application before the GRC restored to its file. The GRC shall issue notice to both the Petitioner as well as the TM/HDFC, hear them and decide the matter de novo. In doing so, the GRC shall not be circumscribed by the reference to the date '11.10.2021', in Circular No.60/22 dated 02.09.2022. ISSUES PRESENTED and CONSIDEREDThe primary issue in this case is the legality and fairness of the National Stock Exchange of India's (NSE) Circular dated 02.09.2022, specifically the stipulation that penalties for short/non-collection of upfront margins should be refunded to clients only if passed on after 11.10.2021. The petitioner challenges the rationale behind this date, arguing that it creates an unjust distinction between investors penalized before and after the specified date.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves various circulars issued by the Securities and Exchange Board of India (SEBI) and the NSE. These circulars aim to regulate the collection of margins in the securities market and penalize trading members for short/non-collection of margins. The circulars are issued under the authority of Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Section 10 of the Securities Contracts (Regulation) Act, 1956.Court's Interpretation and ReasoningThe Court analyzed the series of circulars issued by SEBI and NSE, noting that the circulars aim to protect investors and regulate market practices. The Court found that the stipulation of the date 11.10.2021 in the NSE Circular dated 02.09.2022 lacked a rational basis and led to discrimination between two groups of investors. The Court emphasized that policy decisions affecting investor rights must adhere to principles of proportionality and should not be arbitrary.Key Evidence and FindingsThe Court examined the petitioner's argument that the date 11.10.2021 was arbitrarily chosen and that the circulars should apply uniformly to all investors affected by penalties for short/non-collection of margins. The Court noted that the petitioner was penalized before the stipulated date and was thus excluded from the circular's benefits. The Court also considered the proceedings before the Grievance Redressal Committee (GRC), which denied relief based on the same date stipulation.Application of Law to FactsThe Court applied the principles of equality and non-arbitrariness under Article 14 of the Constitution of India. It found that the circular's stipulation of the date 11.10.2021 was arbitrary and discriminatory, as it unjustly differentiated between investors penalized before and after the date without any reasonable basis. The Court held that the petitioner was entitled to challenge the circular, as it directly affected his rights.Treatment of Competing ArgumentsThe respondents argued that the circulars were policy decisions made after careful consideration of market conditions and should not be interfered with. However, the Court found no evidence of consultation with SEBI for the circulars issued solely by the NSE. The Court rejected the respondents' argument, emphasizing the need for rational and non-discriminatory policy decisions.ConclusionsThe Court concluded that the stipulation of the date 11.10.2021 in the NSE Circular dated 02.09.2022 was arbitrary and discriminatory. It quashed the stipulation and allowed the petitioner's challenge, remanding the matter back to the GRC for reconsideration without the date restriction.SIGNIFICANT HOLDINGSThe Court held that the stipulation of the date 11.10.2021 in the NSE Circular dated 02.09.2022 was arbitrary and discriminatory, violating Article 14 of the Constitution of India. The Court emphasized that policy decisions affecting investor rights must adhere to principles of proportionality and should not be arbitrary.Core Principles EstablishedThe decision reinforces the principle that regulatory circulars must be rational, non-arbitrary, and proportionate, especially when they affect investor rights. The Court highlighted the importance of ensuring that policy decisions are made transparently and with adequate consultation.Final Determinations on Each IssueThe Court determined that the petitioner's challenge to the circular was valid and allowed the writ petition. It quashed the stipulation of the date 11.10.2021 and remanded the matter to the GRC for reconsideration without the date restriction. The Court ordered the GRC to hear the petitioner and the trading member afresh and decide the matter de novo.