w w w . L a w y e r S e r v i c e s . i n



M. G. Capital Services Limited v/s Securities and Exchange Board of India

    Appeal No. 62 of 2012

    Decided On, 31 July 2012

    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal

    By, P. K. MALHOTRA
    By, MEMBER & PRESIDING OFFICER (OFFG.) & S. S. N. MOORTHY
    By, MEMBER

    For the Appellant: Deepak Dhane, Advocate. For the Respondent: Dr. Poornima Advani with Ajay Khaire, Ms. Rachita Romani, Advocates.



Judgment Text

P. K. Malhotra

1. This appeal has been filed against the order dated November 14, 2011 of the adjudicating officer of the Securities and Exchange Board of India (the Board) holding the appellant guilty of not exercising due skill, care and diligence in the conduct of its business thereby violating clause A(2) of the code of conduct specified under Schedule II read with Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short stockbrokers regulations) and imposing a penalty of Rs.5 lacs on it under Section 15HB of the Securities and Exchange Board of India Act, 1992 (the Act).

2. The appellant before us is a stock broker registered with the Board and is a member of NSE. The Board received investor complaints against M/s. Rishabh Shares and Securities (Rishabh), a sub-broker of the appellant. While investigating these complaints, the Board conducted inspection of the books of accounts and other documents of the appellant and noticed that the appellant had violated certain regulations. It was alleged that the appellant had allowed Rishabh to take over exposure in trades through its sister concern namely, FMS Securities Ltd. (FMS) as an unregistered sub-broker and there was 720 segregations between Rishabh’s own transactions and transactions of its client. It was further alleged that the appellant had not registered its ultimate clients through Rishabh by not executing the required KYC forms and tripartite agreements. A show cause notice dated September 23, 2007 was issued to the appellant asking it to show cause why an enquiry should not be held against it and penalty imposed under the Act. The appellant responded to the show cause notice vide its letter dated March 25, 2009 denying the allegations. An opportunity of personal hearing was also afforded where after the adjudicating officer of the Board passed the impugned order, holding the appellant guilty of not exercising due skill, care and diligence in the conduct of its business and, thus, violated the provisions of clause A(2) of the code of conduct prescribed for the stockbrokers under the stockbrokers regulations. A penalty of Rs.5 lacs is imposed under Section 15HB of the Act. Hence this appeal.

3. We have heard Mr. Deepak Dhane, Advocate for the appellant and Dr. (Mrs.) Poornima Advani, Advocate for the respondent Board. After hearing learned counsel on both sides and perusing the material available on record, we are of the considered view that the matter needs to be remanded to the Board for fresh proceedings in accordance with law after framing clear charges and indicating the provisions of law/rules/regulations/order/circular which have been violated by the appellant. It is settled legal position that show cause notice is the foundation of any inquiry proceedings and, therefore, it must bring out clearly the charge against the appellant and evidence – documentary or oral, on which the charge is based. It should state which provision of law/rules or regulations or orders has been violated. The delinquent should also be provided with the material relied upon by the Board in support of the charge. The enquiry proceedings too should be confined to the charge. It cannot travel beyond the show cause notice. We notice that these basic requirements have not been complied with while holding inquiry against the appellant. Rule 4 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 under which these proceedings were initiated also provide that every notice issued thereunder shall indicate the nature of offence alleged to have been committed. It also provides that on the date fixed, the adjudicating officer should explain to the person concerned the offence alleged to have been committed indicating the provisions of the Act, rules or regulations in respect of which contravention is alleged to have taken place. In the impugned order, the appellant has been absolved of some of the charges referred to in the show cause notice but has been held guilty on three counts:

1.) non-segregation of Rishabh’s own transactions and the transactions of its client;

2.) dealings of Rishabh with FMS Securities Ltd., a sister concern of the appellant; and

3.) non registering of sub-clients of Rishabh and not entering into brokersub-broker-client agreement.

4. Neither the show cause notice nor the impugned order passed by the adjudicating officer indicate that by not doing so, which provision of law/rules/orders/regulations/circular issued by the Board has been violated by the appellant. It is not enough to say that the appellant had failed to exercise skill, due care and diligence in so far as transactions of Rishabh with appellant’s sister concern namely FMS are concerned. We are of the view that either the Board should bring out clearly as to what a stock broker was supposed to do which it has failed to do and thus, violated a laid down norm. Due diligence would imply such care and skill as a man of ordinary prudence would exercise under similar circumstances. The finding of due diligence is to be sustained by convincing preponderance of probabilities standard. Further, we notice that the adjudicating officer has concluded that 'FMS, which is a sister concern of the noticee, was knowingly dealing on behalf of the clients of Rishabh through Rishabh, even though Rishabh was not registered with them as a sub-broker'. We do not find any such charge or allegation in the show cause notice. Moreover, FMS was also in appeal before us relating to the same investigation proceedings. Vide our order dated January 9, 2012 (in Appeal no. 188 of 2011), we have remanded the matter to the Board for fresh consideration observing as under:-

'4. We have heard the learned counsel for both the parties. We have gone through the show cause notice and the impunged order. It is true that the adjudicating officer has mentioned that the appellant had knowingly dealt through Rishabh on behalf of its clients. However in the show cause notice, which is the foundation of the impugned order no specific charge has been made out in respect of the above violation. From a reading of the show cause notice and the impugned order it is clear that the respondent had sufficient material in respect of the above mentioned violation though specific charge has not been spelt out in the show cause notice. It goes without saying that a show cause notice should be precise and it should contain specific charges against a delinquent. It is possible for the delinquent to meet the charges only when they are specifically laid down in the show cause notice. In the present case a reading of the show cause notice would give an impression that the charge relates to dealings with a sub-broker who is not registered with any stock exchange. Since the respondent Board is in possession of sufficient material in respect of appellant’s dealings with Rishabh and its clients we feel that the case requires fresh consideration after issuing a proper show cause notice stating the facts of the case and charges to the appellant. In this view of the matter, we remand the case to the respondent Board for fresh consideration as per law.'

5. On the issue of non registration of sub-clients of Rishabh and not entering into broker-sub-broker-client agreement, the charge against the appellant in the show cause notice reads as under:-

'5. It was further observed that MG Capital had not registered its ultimate clients through Rishabh by not entering into the KYC form and required Broker-Sub-broker-Client agreement.'

6. Howev

Please Login To View The Full Judgment!

er, in the impugned order, the appellant has been found guilty of not entering into broker-sub-broker agreement or tripartite agreement. The appellant had furnished explanation that at the relevant time there was no requirement of tripartite agreement which has been noted by the adjudicating officer. But he has gone further holding that the appellant was guilty of not maintaining broker-sub-broker agreement which is not a charge in the show cause notice. In view of the foregoing discussion, we set aside the impugned order and remand the matter to the Board for initiating fresh proceedings from the stage of show cause notice clearly mentioning the provision of law which stands violated. Since the transactions pertain to the year 2004, it is imperative that the Board should try to pass final order as per law as expeditiously as possible. No costs.
O R