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2019 (3) TMI 521 - AT - Companies LawStock brokers - misuse of clients’ funds / securities - Disciplinary action including monetary penalty/ suspension/ expulsion in accordance with National Stock Exchange of India Limited Rules, Regulations and Bye Laws - failure to abide the Code of Conduct for trading members under Regulation 4.5.1 and Regulation 4.5.2 of the National Stock Exchange (Capital Market) Trading Regulations, 1994 as well as under the National Stock Exchange of India Limited Rules - doctrine of proportionality - imposition and quantum of penalty - Held that:- Admittedly, the appellant had committed violation which is clear from his submissions in reply to the show cause notice. Thus, the appellant had failed to abide by the Code of Conduct for trading members under the aforesaid Rules and Regulations. The appellant had failed to act in a diligent manner and had failed to protect the interest of his clients. It was found that the appellant had failed to ensure availability of clients’ assets and misappropriated clients’ funds to meet the proprietary obligation and, therefore, the appellant failed to perform its fiduciary duty. Using clients’ funds is a misuse of clients’ funds and securities and thus, the appellant was liable for imposition of penalty. In the instant case, it was urged by the learned counsel that if the penalty is to be calculated under this provision, a maximum penalty of ₹ 5 lakhs could have been imposed whereas, in the instant case the NSE has imposed a penalty of ₹ 15 lakhs which was excessive - Normally, the penalty indicated in the Circular should be followed in letter and spirit and if a departure is to be made, it would be necessary for the NSE to give reasons for such departure and give a finding as to whether there was repetitive nature of the violation or the gravity of the violation was such that a higher penalty was required to be imposed. If the violation was having a high impact the seriousness and gravity of such violation was required to be indicated - In the absence of any allegation of the violation being repetitive in nature and, in the absence of any finding that the violations had a high impact or that the violations were grave in nature, having serious consequences, we find that the imposition of suspension of trading membership of 5 days was excessive and unwarranted. We are further of the opinion, that considering the admission of the appellant that they had misused the client funds and securities the imposition of penalty of ₹ 15 lakhs over and above the amount indicated in Annexure 1 was justified in the given circumstances. Doctrine of proportionality - Held that:- In the instant case, the doctrine of proportionality is fully applicable. In the test of proportionality, the Courts will quash the exercise of discretionary powers if it finds that there is no reasonable relation between the objective which is sought to be achieved and the means used to that end or where the penalty imposed is wholly out of proportion to the relevant misconduct. Thus action which is arbitrary or discriminatory cannot be sustained. In the instant case, the penalty of suspension, in the facts of the given case is out of proportion and thus cannot be sustained. Appeal allowed in part - that part of the order is quashed by which the trading membership of the appellant was suspended in all segments for a period of 5 days.
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