1. Both the Appellants are members of National Stock Exchange (NSE).
They are registered with the Securities and Exchange Board of India (the Respondent) as Share Brokers. Maruti Organics Ltd. (MOL) is a public limited company. The said company's shares are listed on the stock exchanges at Mumbai, Hyderabad and Banglore and also on NSE.2. NSE had received complaints from several brokers who had huge buy positions in the scrip of MOL in Settlement 27 of 1996, alleging that some of their clients had created huge buy positions in MOL's scrip on 3rd and 4th July 1996 and had absconded without meeting their commitments and that the dealings were carried out in an organised way to defraud the public. Complainants had requested for annulment of those trades.
3. NSE conducted investigations and submitted a report to the Respondent. As per the report "The trades in MOL in St.27 of 1996 were not executed in the normal course. The trades were not genuine and a fraud has been perpetrated to enable the sellers to offload the shares by creating a false market. A large false market was created by the large sellers by ensuring adequate buying interest through planting buying clients across the country- Hyderabad, Madras, Mumbai, Banglore, Ahmedabad and Delhi. These buying clients with huge net buy position had vanished from different cities. This suggest that there was an organised fraudulent attempt to defraud the buying members." In the light of the information received from NSE in its report, the Respondent conducted investigation into the alleged price manipulation in the scrip of MOL. Investigations revealed market manipulation. It was found that the Appellants had transacted business for one Madhav Chalsani and the said Madhav Chalsani had absconded without paying huge amounts towards the purchases he made. The Respondent decided to conduct an enquiry into the conduct the Appellants in this regard. An enquiry officer was appointed as per the requirement in SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (the Regulations). The enquiry officer issued show cause notices to the Appellants based entirely on the findings of the investigation, leveling the following charges..
"(i) The client was allowed to build up huge position, especially on 3rd and 4th July, 1996 and without having enough margins allowed to increase the position.
(ii) The member allowed a new unknown client, whose address/bank account had not been verified, to build up huge position in a volatile scrip.
(iii) The member did not take enough precaution to safeguard the market position. It was prominent that the member acted in haste to enroll the client and allowed them to build up huge position.
Thus the member was not careful and diligent and allowed the new client to build up huge position without having enough margin and without satisfying about their genuineness, thus exposing the market to a high risk. The member did not adhere to or follow the market convention of entering into agreement with their constituent. Hence the member violated clauses A(1-5)and B (4a) of Schedule II of regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992." 4. The Appellants answered the charges. The enquiry officer on completion of the enquiry came to the following conclusions: "I find that the member had not ensured that the Member Constituent agreement was signed with the client before commencing the trading.
However, as pointed out by NSE the "Know Your Client" concept was made mandatory only in February 1997 and was not in existence at the time of Sett. No. ,27 of 1996, but the requirement of executing Member-Constituent Agreement was in place. The member had not defaulted in the payment of margin to the exchange. The member has only to collect money from the absconding client.
Taking all factors into consideration, I find that there has been a fraud committed on the member by the absconding client and the member has been cheated by the clients. However, I entirely agree with the findings of NSE that the member by not following this practice, has put the settlement system at risk while accepting new business without taking proper precautions and due diligence. Had the member exercised due diligence and care the problem would not have arisen to such magnitude.
Thus by not obtaining the Member - Client Agreement, the member has violated Regulation 4.3.1 of Part: A of The National Stock Exchange (Capital Market) Trading Regulations, 1994 which resulted in violation of clause A(5) of Code of Conduct for Stock Brokers, compliance of which is mandatory in terms of Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992." 5. Having recorded his finding as above - exactly the same in respect of both the Appellants - the enquiry officer recommended: "In the light of my aforesaid findings in terms of sub regulation 7 of Regulation 28 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, I recommend that the registration of the member may be suspended for a period of one week" 6. On receipt of the enquiry report, the Respondent forwarded a copy of the same to the Appellants and asked them to show cause as to why penal action as recommended by the enquiry officer should not be taken against them. The Appellants answered the show cause notice. The submissions made by the Appellants was considered by the Chairman of the Respondent (Chairman). He passed substantially identical orders on 3.8.2002 against the Appellants. The finding arrived at and the decision made by the Chairman in both the cases as extracted below are exactly the same: "On examination of material and evidence available on record, enquiry report, submissions made from time to time, I find that the broker was negligent and allowed the client to build positions in the scrip of Maruti (MOL) which was illiquid and volatile without taking proper margins. The carelessness of the broker put the settlement system of the Exchange at risk. The broker did not verify the antecedents of their client, bank a/c or address etc. and also did not have any reference about its client. I also find that the broker did not act in careful and diligent manner. {The broker accepted the contention of the client that he would be furnishing details shortly and would open up a fresh bank account. The broker at the same time allowed its client to place orders over phone} The broker allowed the client to build up a fresh position after the earlier position had been squared up. I find the conduct of the broker was unprofessional which facilitated the client to build up position in an illiquid and volatile scrip, which was beyond the financial capacity of its client. The client failed to meet its pay in obligation exposing the exchange settlement system at risk. I tend to agree with the recommendation of the enquiry officer that the Registration Certificate of the broker be suspended for a period of seven days." (The portion in bracket is an additional finding in the order passed against the Appellant in Appeal No. 48).
7. Having recorded his findings as above, the Chairman vide orders dated 3.8.2002 directed that registration of the Appellants be suspended for a period of 7 days with effect from 14.8.2002.
8. The Appellants have filed separate appeals challenging the said orders. But for the variation in the number of shares, amount involved etc. on merits there is not much difference in these appeals. The Appellants had prayed for interim order staying the operation of the impugned order. After hearing the concerned parties and taking into consideration all the relevant factors, operation of the impugned order was stayed during the pendency of the Appeals.
9. Taking into consideration the common back ground, and the similarity of the issues required to be decided in the appeals, with the consent of the counsel for the parties, it was decided to hear the appeals together and pass a common order.
10. Shri Bharat Merchant, learned Counsel appearing for the Appellants submitted that the impugned orders are time barred and as such void. He submitted that the provisions of regulation 29(3) of the Regulations require the Respondent to pass an order within 30 days from the date of the written reply received from the noticee. . Learned Counsel in this regard referred to the factual position relating to the Appellant in Appeal No. 49/2002 and submitted that the written reply of the Appellant was received by the Respondent on 19.9.2001 and therefore, the Respondent was obliged to pass the order within 30 days thereon. He further referred to the list of dates and events relating to the matter and stated that the Appellant received the notice dated 30.8.2001 from the Respondent under regulation 29(1) asking to show cause as to why suspension for 7 days should not be imposed as recommended by the enquiry officer, that the Appellant replied to the said show cause notice on 18.9.2001, that on 24.1.2002, the Respondent wrote to the Appellant informing that "a personal hearing before the Chairman, SEBI has been fixed for February 15, 2002 at 3.15 p.m." that on 1.2.2002 the Appellant wrote back inter alia stating that "we have not requested a personal hearing and do not wish to request a personal hearing with the Chairman, SEBI on Feb. 15, 2002 in the matter relating to your show cause notice dated 27.8.2001, since we have already presented our case fully in our reply dated 18.9.2001. We await your directions if we should still come to Mumbai to attend the personal hearing scheduled before the Chairman on 15.2.2002 at 3.15 p.m." that on 13.2.2002 the Respondent without even referring to the Appellant's letter dated 1.2.2002, informed the Appellant that hearing scheduled for 15.2.2002 has been adjourned and a fresh date will be intimated in due course, that after two months i.e. on 16.4.2002 the Respondent again wrote to the Appellant informing that "personal hearing before the Chairman - SEBI, has been fixed for 14.5.2002 at 12.50 p.m." that on 20.4.2002 the Appellant wrote back reiterating its stand as stated in its letter dated 1.2.2002. Learned Counsel further stated that for the reasons best known to the Respondent, again a letter was addressed to the Appellant on 26.4.2002, referring to the Appellant's letter dated 20.4.2002 informing that the Appellant has been granted personal hearing before the Chairman - SEBI for 14.5.2002 at 12.50 p.m. stating therein that in case the Appellant chose not to attend the hearing, it will be presumed that the Appellant has nothing more, other than the written submission, to say in the matter and proceedings will be completed without further recourse to the Appellant. In this context Shri Merchant, referred to the Appellant's letter dated 6.5.2002 and read out the following portion: "We had all along stated that we had made out representations in full by way of our letter dated 18.9.2001 and had specifically not asked for a hearing with the SEBI Chairman since we did not have anything further to add. We had reiterated the same in our letter dated 1.2.2002 and again in our letter dated 20.4.2002.
Since it was more than 4 months since we had replied to your show cause notice, we had surmised that the matter had been dropped. We are, therefore, surprised to receive the letter in the first instance itself, calling for a personal hearing with the SEBI Chairman.
We again reaffirm that we are surprised that the matter has not been already dropped by SEBI Once again we state that we have nothing further to add to our written submissions and with all humility we respectfully submit that we do not require a personal hearing with the Chairman, SEBI" 11. Learned Counsel referred to another letter dated 28.5.2002 from the Respondent on the subject "Hearing before the Chairman - SEBI in the case of Maruti Organics Ltd." informing that "With reference to the above I am directed to inform you that the hearing scheduled for 14.5.2002 was adjourned and now personal hearing before the Chairman - SEBI has been fixed for 5/7/2002 at 1.20 p.m., that in reply to the said letter the Appellant wrote on 20.6.2002 requesting the Respondent to refer to the letter dated 6.5.2002 written in reply to the Respondent's letter dated 26.4.2002.
12. Learned Counsel submitted that all these letters from the Appellant were served on the Respondent and service of the same has not been denied and referred to the copies of these correspondence filed along with the appeal memorandum. Learned Counsel submitted that from the details and events stated, it is clear that the very first hearing with SEBI Chairman was scheduled for 15.2.2002 which is more than 30 days after the written reply given by the Appellant which was received by the Respondent on 19.9.2001, that further the Respondent had adjourned the hearing on two further occasions in February and May and finally passed the order only on 3.8.2002, thus at every stage, the Respondent had breached and violated the stipulation under Regulation 29(3).
Learned Counsel further submitted that in the Appellant's case, the Appellant by its letter dated 1.2.2002 clearly stated that it never wished to have personal hearing from the Chairman in the matter and even then the Respondent failed to pass the order within 30 days there from and ultimately passed the impugned order after 6 months. He submitted that the order passed so belatedly is bad and invalid.
13. With reference to the facts relating to Appeal No. 48/2002 also Shri Merchant adopted the same submission as was made in Appeal No.49/2002. The relevant factual position as stated in the Application No.24/2002 in Appeal No. 48/2002 was referred to by the learned Counsel.
He submitted that the Appellant had submitted its submissions to the Respondent vide letter dated 30.8.2001 in reply to the show cause notice dated 27.8.2001, that the Respondent vide letter dated 24.1.2002 informed the Appellant of the personal hearing fixed before the Chairman, SEBI for 15.2.2002 at 4.15 p.m., that vide letter dated 13.2.2002 the Respondent on its own postponed the hearing to a future date to be intimated in due course, that vide letter dated 16.4.2002 the Appellant was informed that the personal hearing has been fixed for 14.5.2002 at 1.00 p.m. that the Appellant's representative appeared on 14.5.2002 but he was informed that the hearing has been adjourned, that vide letter dated 28..5.2002, the Respondent fixed the hearing for 5.7.2002 at 1.30 p.m., that on 5.7.2002 the Appellant's representative appeared before the Chairman and made oral submission and also filed written representation. Learned Counsel submitted that the 30 days limit is required to be reckoned with reference to the date of receipt of the written reply to the show cause notice by the Respondent, that though the reply was received by the Respondent in this case on 30.8.2001, the impugned order was made only on 3.8.2002 i.e. long after the prescribed 30 days, and as such the order is bad and invalid.
14. In support of the contention that the mandate in regulation 29 (3) is to pass an order within 30 days of the receipt of the reply, Shri Merchant cited this Tribunal's decision in Atul Kanodia V SEBI (2002) 2 CLJ 275 and stated that in the said case the Tribunal set aside an order passed by the Respondent on the ground that the order was passed beyond the stipulated 30 days period.
15. Shri Kumar Desai, learned Counsel appearing for the Respondent submitted that the Appellant (in Appeal No. 49/2002) had written to SEBI of its willingness to appear before the Chairman. In this context he referred to the letter dated 1.2.2002 and also the letter dated 20.4.2002 from the Appellant , asking the Respondent as to whether the Appellant should come for the personal hearing, it was in that context the Respondent fixed the personal hearing and informed of it to the Appellant. He submitted that the hearing before the Chairman was fixed for 5.7.2002 and the impugned order was passed on 3.8.2002 which was well within the statutory stipulation of 30 days fixed by regulation 29(3) of the Regulations. He further submitted that the decision of this Tribunal in Atul Kanodia's case (supra) has no application to the Appellant's case in view of the distinguishable facts of the cases.
Learned Counsel referred to this Tribunal's decision in Dodger and Associates Ltd. V SEBI (2001) 32 SCL 9 (Sat) and cited the following observation there from: "On bar of limitation on the ground that the order was issued after 30 days from the date of receipt of the reply to the show cause notice, it is to be noted that the scope of the expression "reply" in sub regulation (3) of Regulation 40 can not be restricted only to written reply to the show cause notice. Oral submissions are also to be treated as replies. Since, the order was issued, with in 30 days of the completion of the oral submissions, it can not be said that the order was issued beyond the time limit prescribed in regulation 40 (3) of the 1992, Regulations" 16. Learned Counsel submitted that regulation 40(3) in SEBI (Merchant Bankers) Regulation, 1992 is in pari materia to the provisions of regulation 29(3), that in the light of the interpretation given by the Tribunal in Dodger Associates the impugned order passed on 3.8.2002 is well within the time prescribed in regulation 29(3).
17. With reference to the submissions made in Appeal No. 48/2002, the learned Counsel submitted that while replying to the Respondent's show cause notice dated 27.8.2001, the Appellant vide its letter dated 30.8.2001 had specifically sought for a personal hearing before the Chairman, and the Appellant was given the opportunity and the Appellant availing of the same appeared before the Chairman on 5.7.22002 and made oral and written submissions, that the order was passed on 3.8.2002 i.e. within 30 days of the hearing as provided in regulation 29(3). He submitted that the Atul Kanodia's case cited by the Appellant has no application to the facts of this case. The fact that the Appellant had appeared and made oral submissions on 5.7.2002 is evidenced from the Appellant's written submissions dated 5.7.2002. He referred to the copy of the said letter forming part of the documents filed by the Appellant along with the appeal memorandum. He submitted that the Appellant's allegation that the impugned order is time barred is thus baseless.
18. This Tribunal in Atul Kanodia (supra) had examined the scope of regulation 29(3) and had observed as follows: According to regulation 29(3) the requirement as already mentioned is that the Board after considering the reply to the show cause notice, if received, is mandated, as soon as possible but not later than thirty days from the receipt of the reply to pass such order as it deems fit. The portion " shall as soon as possible but not later than thirty days from the receipt of the reply, if any" in the regulation is of considerable significance. In this context it has to be noted that the Regulation has prescribed time limit for action by the Respondent for different purposes. Regulation 8(4) requires the Respondent to communicate its decision "as soon as possible" in a representation received against refusal to grant registration.
Similar provisions are in regulation 13(4) relating to refusal of registration as sub brokers. According to regulation 16A on receipt of an application for registration in the Derivative Segment etc., "derivatives exchange or segment or clearing house or corporation as the case may be shall forward the application (received from the applicant seeking registration) to the Board as early as possible but not later than thirty days from the date of its receipt".
Regulation 16E(4) provides that " the Board shall reconsider an application made under sub regulation (3) ( reconsidering the decision not to grant the certificate) as soon as possible.......".
In terms of regulation 22 the inspecting authority appointed by the SEBI is required to submit its report as soon as may be possible.
Regulation 28(7) requires the enquiry officer to submit a report to the Board. But no time limit has been prescribed in the regulation for submitting the enquiry report. The regulations also provide time frame to file the reply to show cause notice within twenty one days of the receipt of the show cause notice. The Regulations are made by the Respondent for the purpose of the Act. .In this context it has been noted that in several other Regulations notified by the Respondent for regulating the activities of the market intermediaries, etc., time limit for suspension or cancellation of the certificate of registration has been prescribed uniformly that " the Board after considering the reply to the show cause notice , if received, shall as soon as possible but not later than 30 days from the receipt of the reply, if any, pass such orders as it deems fit".
Such identical provisions are in the SEBI Regulations for (1) Merchant Bankers,(2) Bankers to an Issue),(3) Debenture Trustee, (4) Foreign Institutional Investors, (5) Under Writers, (6) Registrars to an Issue and Share Transfer Agents, (7)Portfolio Managers (8) Custodian of Securities etc. In the SEBI Regulations relating to Mutual Funds, Venture Capital Funds, Foreign Venture Capital Investors etc., the requirement to pass the suspension or cancellation order is that " the Board after considering the reply, if any, shall as soon as possible pass such order as it deems fit.
So it is clear that wherever the Regulator felt that the time frame is to be strictly adhered to, it gave an option to the authority to decide the matter as soon as possible, but mandated not to go beyond 30 days. Addition of the words " but not later than 30 days" disables the authority to stretch the time limit beyond the prescribed time. In this case it is also to be noted that the suspension or cancellation order of a market intermediary in the event of proven charges of default/misconduct is not a matter to be delayed inordinately from the investors protection angle, as to allow such a person to carry on business activity as intermediary unpunished, even after a finding of fault, is not a matter to be considered healthy for the development of the securities market. The requirement of quick decision within a month is in public interest.
It is for this reason that the Regulation has specifically put the time limit to pass the order of suspension or cancellation. It is a mandatory requirement which the Respondent cannot ignore, but adhere to. There is no provision for condonation of delay in this regard in the Act or the rules or regulation.
19. According to Blacks Law Dictionary the word 'mandatory' means -' containing a command, perceptive, imperative, peremptory, obligatory"- . "Mandatory statutes - General term describing statutes which require and not merely permit a course of action. They are characterised by such directives as shall and not "may". A mandatory provision in a statute is one the omission to follow which renders the proceedings to which it relates void, while a directory provision is one the observance of which is not necessary to validity of the proceeding. It is also said that when the provision of the statute is the essence of the thing required to be done, it is mandatory, Kavanaugh V Farh, CCA .Okl; 74 F.2d 435, 437; otherwise when it relates to form and manner, and where an act is incident, or after jurisdiction acquired, it is directory merely". " Mandatory statutory provision is one which must be observed, as distinguished from "directory" provision which leaves it optional with department or officer to which addressed to obey it or not".
20. An act done in breach of a mandatory provision will be invalid but if the provision is directory the act will be valid although the non-compliance may give rise to some other penalty if provided by the statute (Rubber House Vs. Excellsior Industries Pvt. Ltd - AIR 1989 SC 1160 p. 1165).
21. The use of the word "shall" in the sub regulation also strengthens the view that the requirement is mandatory. In this context it is to be noted that in regulation 26, dealing with the Boards power to grant penalty, discretion has been given for imposing the penalty as the regulation stipulates that " a penalty of suspension of registration of a stock broker may be imposed". So is the case with reference to awarding penalty of cancellation also. But in contradistinction to this, sub regulation 3 of regulation 29 has used the word shall. The legislative intent is thus clear. Hon'ble Supreme Court has held in several cases (see, T.R. Sharma v. Prithipal Singh AIR 1976 SC 367 p.
370) that the use of the word "shall" with respect to one matter and use of the word "may" with respect to another matter, in the same section of a statute, will normally lead to the conclusion that the word "shall" imposes an obligation whereas the word " may" confers a discretionary power. The Hon'ble Supreme Court in Sainik Motors v.State of Rajasthan (AIR 1961 SC 1480 p. 1485) had observed that the word "shall" is ordinarily mandatory, but it is not so interpreted, if the context or the intention otherwise demand". In the context and intention of sub regulation 3 of regulation 29 it is difficult to view that the word "shall" in the regulation should be interpreted to mean "may".
22. The mandate in regulation 29(3) is clear and unambiguous. The order required to be issued under regulation 29(3) is in public interest. The inquiry envisaged therein is an adversarial one. The effect of the order is also clear. It adversely affects the rights and obligations of the Stock broker. In this context the legislative intent is manifest in the words requiring the order to be passed as soon as possible but not later than thirty days. The emphasis to adhere to the requirement of issuing early order comes from the words 'but not later than 30 days' used in the regulation. If there was no such intention, these words would not have been put in there, as is seen in the regulations relating to Mutual Funds, Venture Capital Funds etc. By providing the outer time limit specifically, the legislature wanted the order to be passed in any case within 30 days if not possible at an early date. In this context it is also to be noted that an order under regulation 29(3) is of serious consequences affecting the right to carry on business by stock brokers. It is also important from the angle of investor protection.. In this context the provisions of regulation 31 is also to be noted which requires the order of suspension or cancellation of certificate passed in sub regulation (3) of regulation 29 to be published in at least two daily news papers by the Board. This requirement is indicative of the importance of the order making it known to the public. The Respondent has not made any submission as to in what way the order passed beyond the prescribed time limit is protected which is against the specific requirement in the regulations.
The main thrust of the Respondent's submission was that the order was passed within the time limit. But this submission is contrary to the facts available on record. There is no explanation from the Respondent's side as to in the light of the Appellant's letter dated 22.10.2001 and non-appearance of the Appellant for hearing on 24.10.2001, why the order was not made within the time limit of 30 days there from. Even for argument sake , 22.10.2001 or still 24.10.2001 is taken as the date of hearing, still the order should have been issued by 24.11.2001 whereas the order was actually issued only on 26.12.2001.
Taking into consideration the strictly binding mandatory provisions of regulation 29(3) and the fact that the impugned order was passed beyond the prescribed time limit of 30 days I am inclined to agree with the submission made by Shri Merchant that the order is bad and cannot survive. Therefore the order deserves to be set aside." 23. The Appellants' contention that order is required to be passed within 30 days of the receipt of the written reply to the show cause notice is not correct. This Tribunal, in Dooger and Associates (supra) had clearly held that the scope of the expression 'reply' can not be restricted only to written reply to the show cause notice. Oral submissions are also to be treated as replies.
24. The Respondent's contention in Appeal No. 49/2002 that the order was passed within 30 days of the receipt of the reply is difficult to accept. The Appellant had categorically stated more than once in its letter to the Respondent that it was not interested in appearing before the Chairman to make submissions that it had already presented its case fully in its letter dated 18.9.2001. The Appellant in its letter dated 6.5.2002 addressed to the Respondent had categorically stated that "once again we state that we have nothing further to add to our written submissions and the all humility we respectfully submit that we do not require a personal hearing with the Chairman." The receipt of the said letter by the Respondent is evidenced from endorsement of receipt made on the copy of the letter on 10.5.2002 by the Respondent's office. In the light of such categorical reply from the Appellant, the purpose of again calling the Appellant for personal hearing vide Respondent's letters is very strange. One can not be blamed if an inference is drawn in the said context that it was only a bait from the Respondent to buy time to overcome the limitation prescribed in regulation 29(3), which the Appellant did not bite. The Respondent in its reply filed in the proceedings has stated that while exercising quasi judicial function it has to observe the principles of natural justice before any action is taken against any of the entities within its regulatory purview and it was in observance of such principles that the opportunity of hearing was granted to the Appellants before the Chairman, that the hearing before the Chairman was fixed for 5.7.2002 in which no one represented the Appellant and hence the allegation of the Appellant that the impugned order was time barred is untenable. This is a very strange submission. When the Appellant voluntarily submits that it does not wish to be heard, why it should be compelled to appear before the Chairman to make oral submissions . It is not a requirement of the rules of natural justice that a person who does not want to be heard need be forced to make submissions in support of his case. The noticee can not be compelled against his wish to appear and make oral submissions before the authority adjudicating show cause notice. The noticee is the best judge to decide as to the measures to be followed for protecting his interests in an enquiry proceeding and it is upto him to decide whether he should appear or not to make oral submissions.
25. It is crystal clear that the order under challenge in Appeal No.49/2002 was passed not within 30 days as prescribed in regulation 29(3) but much belatedly and therefore it can not be sustained for the reasons stated by this Tribunal in Atul Kanodia's case. Therefore the order deserves to be set aside.
26. But it is not so, as far as the impugned order in Appeal No.48/2002 is concerned. It is seen from the Appellant's letter dated 30.8.2001 in reply to the show cause notice that the Appellant had requested the Respondent "to have a personal hearing with the Chairman of SEBI to convince him about our position". Accordingly an opportunity was given and the Appellant appeared before the Chairman SEBI on 5.7.2002 and made oral and written submissions. The Appellant's written submission dated 5.7.2002 (copy) has been filed in appeal proceedings.
Since the Appellant was heard on 5.7.2002 and it had also submitted written submissions on that date, in my view for the purpose of reckoning the 30 days period in terms of regulation 29(3), the referral date should be 5.7.2002 and in that view of the matter the impugned order passed on 3.8.2002 is well within 30 days of the date of hearing.
Therefore, it can not be said that the order under challenge in appeal No. 48/2002 is time barred. Therefore, the Appellant's contention that the said order is time barred is rejected.
27. Since the Appeal No. 49/2002 being bad for the reason that it was made much beyond the statutory time limit prescribed for passing the order under regulation 29(3) the order cannot be sustained. It is void.
Therefore, I do not consider it necessary to examine the other contentions raised by the parties to the appeal.
28. Since the order impugned in Appeal No. 48/2002 was made within time the challenge against the said order need be examined in the light of the submissions made by the parties.
29. Therefore it is felt necessary to further consider the challenge against the order impugned in Appeal No. 48/2002 only.
30. Learned Counsel for the Appellant referred to the notice dated 31.7.2000 from the enquiry officer forwarding therewith a copy of the investigation report made by the investigating officer requiring the Appellant to show cause for not proceeding against it for allegedly violating clauses A (1 to 5), and clause B 4(a) of Schedule II of the Regulations. He referred to the following clauses A (1 to 5) of the Regulations: "(1) Integrity - A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business (2) Exercise of due skill and care: A stock broker shall act with due skill, care and diligence in the conduct of all his business.
(3) Manipulation: A stock broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumors with a view to distorting market equilibrium or making personal gains (4) Malpractices: A stock broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors or which leads to interference with the fair and smooth functioning of the market. A stock broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.
(5) Compliance with statutory requirements: A stock broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.
31. He also referred to clause B4(a) and stated that as per the said regulation: "a stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission" 32. Shri Merchant submitted that the Appellant answered the charges and the enquiry officer after taking into consideration the submissions, viewed that the Appellant did not violate the provisions of Clause A(1 to 4) and clause B 4(a), that according to the enquiry officer the Appellant violated only the requirement of clause A (5) of the code of conduct and categorically stated that there was no violation of any other regulations. In this context he referred to clause A (5) and submitted that the scope of the said clause is very wide as it requires the Stock Broker to abide all the provisions of the Securities and Exchange Board of India Act, 1992 (the Act) and the rules and regulations issued by the concerned authorities; that there was no violation by the Appellant of any provisions of the Act, rules and regulations applicable to it, issued by the Respondent, that the alleged violation was only with respect to regulation 4.3.1 of Part A of the National Stock Exchange (Capital Market) Trading Regulations, 1994 for not obtaining the Member Client Agreement. He submitted that two requirements of the said regulation 4.3.1 are that (1) the stock broker should enter into an agreement with the client (2) the broker should meet the liability - that it is true that the said agreement was not entered into following the then prevailing market practice, but the Appellant met the liability, and that this aspect has been admitted by the Respondent also. He submitted that even though the Appellant had not entered into an agreement, it had obtained the client registration form duly filled in and signed by the client. He also submitted that the NSE had annulled the transactions taken place in the scrip of MOL and therefore the Respondent is not entitled to proceed against the Appellant any more. He further submitted that the Appellant having paid the full amount, and having not acted in any way detrimental to the interest of the investors and NSE, imposition of 7 days' suspension of the Appellant's certificate of registration was unwarranted. In this context he submitted that the enquiry officer, whose report is stated to be the basis of the decision contained in the impugned order, had clearly stated that "the member (i.e. the Appellant) had not defaulted in the payment of margin to the exchange. The member has only to collect money from the absconding client." He further cited the observation made by the enquiry officer that "taking all factors into consideration, I find that there has been a fraud committed on the member by the absconding client and the member has been cheated by the clients." Learned Counsel submitted that having stated so, the enquiry officer erred in concluding that "by not executing the Member Client Agreement the member had put the settlement system at risk while accepting new business without making proper precautions and due diligence. Had the member exercised due diligence and care the problem would not have risen to such magnitude." In this context learned Counsel submitted that the Appellant was transacting only a very small percentage of trade in the scrip of MOL. He further submitted that lack of due diligence is attributed to the Appellant for not obtaining Member Client Agreement, that in fact the market was in turmoil on account of the fraud perpetrated by the client, which the NSE itself in its report has admitted that it was a well organised plan devised by few, and therefore it can not be said that if the Appellant had obtained the Agreement the problem would not have risen to such a magnitude. He referred to the data furnished in the enquiry report and submitted that there was nothing to show that the Appellant had indulged in speculative activities that more than anybody else it was people like the Appellant who suffered as a result of the client absconding without making the requisite payment.
33. Shri Merchant referred to the show cause notice issued by the Respondent and stated that the Appellant was charged with violations of regulation 4.3.1 of the NSE (Capital Market) Regulations which attracted clause A(5) of the code of conduct prescribed under Schedule II of the Regulations and submitted that the impugned order has strayed out of the scope of the show cause notice in as much as it refers to, negligence, inadequate margin collection etc. He submitted that the Respondent can't pass an order on a charge which the Appellant was not asked to explain. He submitted that enquiry officer though had asked the Appellant to explain the charge of violation of code of conduct in sub clauses 1 to 5 of clause A and clause B (4a), after considering the explanations given by the Appellant gave up all the charges except the one referable to clause A (5) and, therefore, the Respondent's finding on the other charges and the penalty imposed based on the said findings is untenable. He submitted that the Respondent's observation in the impugned order that (1) the Appellant was not careful while enrolling his client (2) the Appellant allowed an unknown client to build up huge position in a volatile, illiquid scrip without taking sufficient margins and beyond its financial capacity, that (3) the conduct of the Appellant was unprofessional etc. are not germane to the charge referred to in the show cause notice. He submitted that the only charge the enquiry report upheld was failure to comply with the NSE regulation 4.3.1 and that charge no longer survives as the Appellant has already met with the liability required to be met in terms of the said regulation. He submitted that the Respondent can not raise those charges again and penalise the Appellant. Shri Merchant submitted that the Respondent has not taken into consideration the mitigating circumstances and imposed a harsh penalty. He submitted that the Appellant had collected sufficient margin which the Appellant considered necessary to cover the risk, that the fact that it had sold 3000 shares on 4th July shows its bonafides, that the contract notes were sent by courier to ensure the receipt of the same by the client and the moment the courier returned the contract notes unserved, sale order was put and complaints were also filed with the concerned authorities including the police, and further that immediately on NSE's demand for payment was received the same was met without any delay.
Learned Counsel submitted that the Respondent has not given any reason to suspend the certificate of registration at this point of time i.e.
in respect of a technical default stated to have taken place in 1996.
He submitted that in the case of some other share brokers who had provided greater exposure to the client, no such harsh penal action was taken but let off with a warning and the Appellant was given a discriminatory treatment. He further submitted that the penalty imposed on the Appellant was disproportionate to the gravity of the violation for which it has been charged. In this context he referred to the following observation made by the Hon'ble Supreme Court in Ranjit Thakur V Union of India AIR 1987 SC 2386 that "Sentence has to suit the offence and the offender. It should not be vindictive or unduly harsh.
It should not be so disproportionate to the offence as to shock the conscience and amount in itself to conclusive evidence of bias." He also cited Ex. Naik Sardar Singh V Union of India AIR 1992 SC 417 that "the penalty imposed must be commensurate with the gravity of the misconduct, and that any penalty disproportionate to the gravity of the misconduct would be violative of Article 14 of the Constitution." 34. Shri Kumar Desai, Learned Counsel appearing for the Respondent submitted that trading in the scrip of MOL was suspended by NSE for two days from 10.7.1996 and a request was made to the Respondent to approve indefinite suspension of trading in the scrip, that on 11.7.96, the Respondent approved of the same and also directed NSE to investigate the matter, that it was at the instance of the Respondent that NSE further investigated the matter and submitted the detailed report. Shri Desai referred to the general findings in the investigation report that around 10-11 clients with huge net buying position on the second day of settlement No. 27 of 1996 of NSE were suddenly found absconding leaving no trace, that the total net buy quantity of these clients were 796900 - 802700 valued around Rs.4.5 crores, that the balance margin money of the clients left with the members was around Rs.30 lakhs, that it was observed that the members did not enroll the absconding clients in their generally followed procedure, that in no case the addresses or bank account details of the clients were checked by the members, that the clients were allowed to build up huge positions on the first day of settlement No. 27 and without having enough margin were allowed to increase the positions often over phone, that in some cases clients did not have bank accounts and offered cash/ bank draft which is against general practice. Shri Desai submitted that the NSE in its report had come to the conclusion that the members did not take enough precautions before doing huge business for clients and exposed the market. He referred to the following portion in the investigation report relating to the Appellant: 35. Normally the member used to enroll the clients with proper reference from directors/existing clients/ people known to them, and also fulfil various formalities including collecting margin, getting details of bank a/c, information on dealings with other members etc. to their satisfaction.
36. The client did not have any reference, bank a/c or proper address.
The client stated that he was in process to close down his aqua firm in Nellore, and the bank a/c there. He was yet to open an account in the town and did not have proper address also. Mr. Madhav told the member that within three days from 26/6/96 he would be giving the details but he did not do so, though he was allowed to do business throughout the settlement and also next settlement.
37. Except the first order on 26/6/96, for all the other transactions the client traded over phone. The member, without any knowledge of the exact address /activities of the new, unknown clients, executed his order over phone, more so when the client failed to turn up after 3-4 days of the initial enrollment to furnish details of himself as promised. The member not only allowed the client to build up position in the first day but executed his order on the second day to increase his position to 40000 shares (Rs.20-22 lacs) with only Rs.1.84 lacs at his credit. The member did never try to safeguard his position and traded recklessly for the client putting the market to a great risk.
i) The client was allowed to build up huge position, especially on 3rd July and 4th July, 1996, and without having enough margins allowed to increase the position further.
ii) The member allowed a new, unknown client, whose address/ bank accounts had not been verified, to build up huge position in a volatile scrip.
iii) The member did not take enough precaution to safeguard the market position. It was prominent that the member acted in haste to enroll the client and allowed them to build up huge position.
39. Thus, the member was not careful and diligent and allowed the new client to build up huge position without having enough margin and without satisfying about their genuineness, thus exposing the market to a high risk. The member did not adhere to or follow the market convention of entering to agreement with their constituent. Hence the member has violated clauses A(1 to 5), B(4a) of Schedule of regulation 7 of SEBI (Stock Broker & Sub-broker) Regulations, 1992." 40. Shri Desai referred to the show cause notice dated 27.8.2001 forwarding a copy of the enqu0iry report submitted by the enquiry officer and submitted that the charges leveled in the said notice were relatable to the findings recorded in the NSE's investigation report.
He further referred to the following finding recorded by the enquiry officer, after considering the explanation given by the Appellant in reply to the show cause notice.
"Subsequently NSE conducted further investigations as per the directions given by the Court and vide their letter dated 24.11.2000, they had submitted a report to SEBI giving the details in this case. From that report it is seen that: "The trades in MOL in St. No. 27 of 1996 were not executed in the normal course. The trades were not genuine and a fraud has been perpetrated to enable the sellers to off load the shares by creating a false market. A large false market was created by the large sellers by ensuring adequate buying interest through planting buying clients across the country - Hyderabad, Madras, Mumbai, Bangalore, Ahmedabad and Delhi. These buying clients, with huge net buy position, had vanished from different cities. This suggest that there was an organised fraudulent attempt to defraud the buying members.
In order to ensure that the persons involved in the fraud does not take the benefit of such fraudulent transactions and in the interest of the capital markets, for healthy development thereof and in larger public interest, there was a need to send a strong signal to that effect to the fraudsters that no such activities will be acceptable in a fair market. Hence, the Executive Committee (constituted for this purpose) had decided that all trades executed in the shares of MOL in St. No. 1996027 be annulled and consequential action taken." 41. The Hon. High Court of A.P. in their judgment dated 27.4.2000 had observed that (on page 20 of their Order) :"Normally, a trading member is not expected to execute the orders placed by a person who is not properly acquainted to him or introduced to him and unless he has executed a formal agreement as required under Section 15 of Securities Contracts (Regulation) Act and the relevant rules and byelaws and letter in spirit. If this requirement of law had been complied with, perhaps such a contingency of the constitutes backing out would not have arisen.
42. On this issue, NSE in their above report had stated that "the Know Your Client Concept was made mandatory only in February 1997 and was not in existence at the time of St. No. 1996027. But the requirement of executing Member-Constituent Agreement was in place." They had also stated that "the Executive Committee concluded that the violation of the requirement of execution of Member-Constituent Agreement was more directed by the commercial and competitive needs of the members at that relevant point of time and appeared to be generally in tune with the market practices then obtained and, therefore, a matter more of negligent violation of regulations than any sinister involvement in the fraudulent transactions. The Executive Committee, however, felt that the Trading Members had put the settlement system at risk while accepting new business without taking proper precautions an due diligence." 43. Regarding the issue of small investors who are genuinely trapped, NSE in their above report to SEBI had stated that "any genuine small investors who may be inadvertently affected by this decision of annulment and who establishes their bonafides may be compensated to the extent of purchase value or the sale value, whichever is lower, subject to their satisfying the exchange about the genuineness of the transactions..." The member(the Appellant) had dealt for their client Shri Madhav Chalsani. The client started dealing with the member from 26/6/96 onwards after depositing an amount of Rs.1,00,000/- on 26.6.96. On 3/7/96, the member bought 15,000 shares valued at Rs.8,44,500/- and on 4/7/96 the member purchased another 25,000 shares valued at Rs.14,23,585/-. Thus, as on 4th July 96, the member had an outstanding buy position of 40,000 shares valued at Rs.22,68,085/-.
Against this position, the client had a credit of Rs.1.84 lakhs. The Member had paid an amount of Rs.2,11,043.50 to NSE.45. The member had got only the application form (Know your client form) from the client and had collected a deposit of Rs.1 lakh prior to the commencement of the business. However, the Member-Constituent Agreement was not filled up.
46. Thus, I find that the member had not ensured that the Member Constituent agreement was signed with the client before commencing the trading. However, as pointed out by NSE, the Know Your Client Concept was made mandatory only in February 1997 and was not in existence at the time of St. No. 1996027, but the requirement of executing Member-Constituent Agreement was in place.
47. The member had not defaulted in the payment of margin to the exchange. The member has only to collect money from the absconding client.
48. Taking all factors into consideration, I find that there has been a fraud committed on the member by the absconding client and the member has been cheated by the clients. However, I entirely agree with the findings of NSE that the Member by not following these practice, had put the settlement system at risk while accepting new business without taking proper precautions and due diligence. Had the Member exercised due diligence and care the problem would not have risen to such magnitude.
49. Thus, by not obtaining the Member-Client Agreement, the Member has violated Regulation 4.3.1 of Part : A of The National Stock Exchange (Capital Market) Trading Regulations, 1994, which resulted in violation of clause A(5) of Code of Conduct for Stock Brokers, compliance of which is mandatory in terms of Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992." 50. Shri Desai submitted that the Appellant's contention that the only surviving charge as per the enquiry officer's report is non compliance of obtaining Broker Client Agreement is not correct, that the enquiry officer had accepted all the findings of the investigating officer that (1) the Appellant had not obtained sufficient margin money, (2) not taken proper precautions and due diligence in dealing with the client.
etc. He further submitted that these findings were made available to the Appellant and the Appellant had put forward its views in its reply dated 30.8.2001 to the show cause notice and also in its written submissions dated 5.7.2002. Shri Desai referred to the copy of the said reply and written submissions filed with the appeal. Learned Counsel submitted that the Respondent had issued as far back in November 1993, guidance notes for the benefit of the stock brokers which inter alia required that "the Member Brokers shall buy securities on behalf of client only on receipt of margin of minimum 20% on the price of the securities proposed to be purchased, unless the client already has an equivalent credit with the broker" and against the said requirement, the margin money obtained relating to the trade undertaken by the Appellant for the client was negligible, that the Appellant's contention that margin money required to be retained was 10% is not correct as the requirement was to obtain 20%. Shri Desai, reiterated that violation of regulation 4.3.1 of NSE Regulation is not the only charge against the Appellant. In this context he submitted that the charges that (1) the Appellant was negligent, (2) allowed the client to build positions in the scrip of MOL without taking margins, (3) the Appellant did not verify the antecedents of the client (4) its' negligence and indifference put the settlement system at risk etc. are not new charges but charges found to subsist as per the enquiry report.
51. Shri Desai referred to the decision in Ranjit Thakur relied on by the Appellants' Counsel and submitted that, the ratio of the said case has no application to the present case, for the simple reason that suspension of the certificate of registration for a week in the context of proven misconduct of the Appellant can not by any standard be considered as disproportionate or one that would "shock the conscience" or that it was made on account of any "bias" as observed in Ranjit Thakur. He refuted the Appellants' contention , based on the views expressed by the Hon'ble Supreme Court in Ex Naik Sardar Singh and submitted that in the said decision the Hon'ble Court had held that penalty should not be arbitrarily imposed, that it should be commensurate with the gravity of the offence. He submitted that suspension of the certificate of registration for 7 days is a very lenient penalty compared to the gravity of the default committed by the Appellant and that the penalty was not imposed in an arbitrary manner.
Referring to the Appellant's allegation that some of the brokers who had higher exposure were let off with a warning, the learned Counsel submitted that the nature and quantum of penalty in each case would depend on facts specific to each case and the Appellant was awarded suspension of its certificate of registration for 7 days taking into consideration all the relevant facts applicable to the case.
52. I have carefully considered the rival contentions. Shri Merchant's argument that the only charge based on which the enquiry officer recommended suspension of certificate of registration is the failure to obtain Broker Client Agreement under 4.3.1 of the NSE (Capital Market) Trading Regulations (NSE Regulations) and that since the Appellant had already met the financial commitment no further action by the Respondent in this regard is warranted, is not acceptable.
53. Regulation 27 of the Regulations provides that ""no order of penalty of suspension or cancellation shall be imposed except after holding an enquiry in accordance with the procedure specified in regulation 28." In terms of regulation 28 for the purpose of holding an enquiry under regulation 27, the Board (i.e. the Respondent) has to appoint an enquiry officer, and the enquiry officer so appointed is required to issue a notice to the Stock Broker, and the Stock Broker is expected to reply the said show cause notice within 30 days of the receipt of the notice and the enquiry officer thereafter is also required to give a reasonable opportunity of hearing to the stock broker to enable him to make submissions in support of his reply. The enquiry officer is required, after taking into account all relevant facts and submissions by the stock broker, to submit a report to the Board and recommend the penalty to be awarded as also the justification of the penalty proposed. In terms of regulation 29(1) "on receipt of the report from the enquiry officer, the Board shall consider the same and issue a show cause notice as to why the penalty as it considers appropriate should not be imposed. In terms of sub regulation 3 "the Board after considering the reply to the show cause notice, if received, shall as soon as possible but not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit.
54. Regulation 26(1) inter alia provides that a penalty of suspension of registration of a stock broker may be imposed if "the stock broker violates the provisions of the Act, rules and regulations" and "does not follow the code of conduct annexed at Schedule II." 55. On a perusal of the requirements of the above regulations it is clear that though the Respondent is required to appoint an enquiry officer and await his report before deciding the action against the errant stock broker, it is not obliged to go only by the recommendations of the enquiry officer. But the Respondent can not go beyond the scope of the show cause notice issued in the enquiry by the enquiry officer. What the Board is required to consider is the enquiry report. As per the regulation, the Respondent is at liberty, after considering the report, to decide the quantum of penalty as it is empowered to pass such order as it deems fit. The Respondent is empowered to impose the penalty as it considers appropriate. However, the Respondent has to follow the principles of natural justice while deciding the matter . The whole purpose behind regulation 29 to issue a show cause notice is to give an opportunity to the noticee to meet the findings in the enquiry report which the Board has taken cognizance of.
It is not necessary that the Board should only go by the findings arrived at by the enquiry officer, that the Board is free to come to a different finding based on the facts disclosed in the enquiry report and the submissions made by the stock broker. In that case the show cause notice should specifically state so, to enable the noticee to explain its position with reference to the Boar's view at variance with the decision of the enquiry officer.
56. In the instant case it is seen that the Respondent had on receipt of the report from the enquiry officer issued a show cause notice. In the notice it has been clearly stated that the enquiry officer appointed by the Respondent after enquiry has submitted the report and the enquiry officer has found the Appellant guilty of having violated the SEBI Regulations mentioned therein. The scope of the notice is thus not found to be restricted to the failure to obtain the member client agreement. The charge is that the Appellant has violated provisions of SEBI Regulations. The notice has also referred to the penalty recommended by the enquiry officer. It is also seen that a copy of the text of the enquiry report was also forwarded to the Appellant. The enquiry report as far as factual input is concerned, is fairly exhaustive. The enquiry officer has agreed with the findings in the investigation report based on which the enquiry was ordered. Relevant extract from the investigation report has already been extracted in the earlier part of this order. The gist of the allegation is that: "(i) The Appellant allowed the client to build up huge position, especially on 3rd and 4th July, 1996 and without having enough margins allowed to increase the position further (ii) The Appellant allowed a new unknown client, whose address/bank account had not been verified, to build up huge position in a volatile scrip. (iii) The Appellant did not take enough precaution to safeguard the market position. It was prominent that the member acted in haste to enroll the client and allowed them to build up huge position.
57. It was viewed in the report "that the Appellant was not careful and diligent and allowed the new client to build up huge position without having enough margin and without satisfying about their genuineness, thus exposing the market to a high risk. The Appellant did not adhere to or follow the market convention of entering into agreement with their constituent. Hence the Appellant violated clauses A(1-5), B (4a) of Schedule II of regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992." 58. The Appellant was required to answer the above referred to charges stated in the show cause notice issued by the enquiry officer and the scope of the enquiry was thus confined to the said notice which as is evident was not restricted to the failure to obtain the Broker Client Agreement in terms of regulation 4.3.1 of NSE Regulations alone.
59. It is seen that the Appellant vide its letter dated 30.8.2001 in reply to the said show cause notice had submitted its version in respect of the charges inter alia stating that it had sufficient margins while executing the orders and the volumes was also within reasonable limits and thereby exercised enough caution before initiating the transactions, that it had a practice of indirectly establishing the identity of the client by couriering the contract notes on daily basis, that the "know your client" concept was made mandatory in February 1997 and the transactions referred to relate to July, 1996, that it had obtained client registration form which stipulated the terms and conditions and an additional document of member constituent agreement would not have materially altered the situation.
60. On a perusal of the enquiry report, I find it extremely difficult to agree with Shri Merchant's version that the only surviving charge is failure to obtain the Broker Client Agreement in terms of regulation 4.3.1 of the NSE Regulations. It is one of the charges. The Appellant's argument that since it had already met the liability to make payments, no further action is tenable against the Appellant for its failure to obtain the Broker Client Agreement is not correct. In terms of clause A(5) of the code of conduct a stock broker is also required to comply with the requirements of the stock exchange regulations, failure to do so would attract the penalty of suspension as provided in regulation 26(1) of the Regulations. On meeting the payment requirements under regulation 4.3.1 of the NSE Regulations, the penalty prescribed in the Regulation for failure to obtain Broker Client Agreement provided in the NSE Regulations can not visit the default, is unfounded.
Irrespective of the fact that whether the Appellant met the liability to make payment or that the trade in the scrip was annulled, the Appellant's failure to obtain the Broker Client Agreement could be penalised.
61. The enquiry officer has, in his report, cited the findings of the investigating officer. He has not concluded that those findings are baseless. The text of the observation made by the enquiry officer has already been extracted in this order while recording the submissions made by Shri Kumar Desai and as such it is not reproduced here. In the order the enquiry officer has categorically stated that "I entirely agree with the findings of the NSE that the member by not following these practice had put the settlement system at risk while accepting new business without taking proper precautions and due diligence." The relevant portion from NSE's report has also been extracted in the earlier part of this order. The enquiry officer's finding that by not obtaining the Member Client Agreement the Appellant has violated regulation 4.3.1 of the NSE Regulations and consequently violated clause A(5) of the code of conduct does not mean that "accepting new business without taking proper precautions and due diligence" the Appellant has not violated the other requirements of clause A of the code of conduct. In my view picking up the observation from one of the paragraphs and stating that the failure to obtain Broker Client Agreement is the only violation for which penalty has been recommended is not tenable. The enquiry report as a whole has to be considered. If the enquiry officer had recorded a view contrary to the findings of the investigating officer on any one of the charges, and the Respondent did not agree to the same, and had the Respondent not referred to the same in its show cause notice, the Appellant would have been justified in contesting the Respondent re-opening a matter already concluded by the enquiry officer. But in the instant case it is not so. The Respondent has wholly accepted the findings of the enquiry officer and decided, based on its judgment, that a penalty of suspension of certificate of registration for 7 days would be sufficient.
62. I have considered the factual position recorded by the enquiry officer. The charges stand established. The Appellant has also not questioned the authenticity of the facts, The manner in which the Appellant had conducted itself in transacting the business for Shri Madhav Chilsani is a clear indication of the fact that in its anxiety to grab business, it did not exercise requisite caution and due diligence expected to be followed by a stock broker. The Appellant did not know the client fully well and still without following the safety requirements, it blindly traded for him and ultimately came to grief.
The fact that the Appellant had made the payment to NSE or that the Appellant suffered on account of the default by its client does not absolve the Appellant of its failure to comply with the requirements of the Regulations. I agree with Shri Kumar Desai on his submission that the Appellant had failed to exercise due diligence. This fact is also born out of the material on record.
63. With reference to the penalty imposed by the Respondent by suspending the Appellant's certificate of registration, for a week, it is difficult to accept Shri Merchant's version that the penalty was disproportionate or shocking. Taking into consideration the gravity of the charges - the negligent manner in which it acted - as revealed in the enquiry report, I do not consider that the suspension of certificate of registration for a period of 7 days is harsh or disproportionate or that the penalty was imposed arbitrarily.
64. The facts on record also clearly establish the failure on the part of the Appellant in exercising due diligence as a stock broker in dealing with Shri Madhav Chalsani. In the said context penalty of suspension of certificate of registration for seven days imposed by the Respondent in my view is not harsh. It is commensurate with the gravity of the offence. Therefore, I do not find any need to interfere with the order passed by the Respondent in appeal No. 48/2002. Since the operation of the impugned order was stayed during the pendency of the appeal the suspension order will be operative prospectively.
Accordingly it is ordered that suspension of the certificate of registration ordered by the Respondent in appeal NO. 48/2002 shall come into effect from 17.2.2003.
65. For the reasons stated above Appeal No. 49 of 2002 allowed and Appeal No. 48 of 2002 dismissed.