TMI Blog2015 (7) TMI 664X X X X Extracts X X X X X X X X Extracts X X X X ..... inds in light of the relentless argumentation on part of the appellant's learned lawyers. While issuing this circular, SEBI did not intend to abdicate its responsibility with respect to such a vital capital regulatory measure as the collection of margin money. We would hasten to add that stock exchanges have also been conferred with regulatory powers under the SCRA, 1956 and the rules framed thereunder. However, this per se can never be construed as precluding SEBI from acting in a particular matter which calls for intervention in the facts of a given case. SEBI, in the circular itself, has retained the right to supervise the margining system in the market. It is a stock-broker’s professional responsibility, rather it is his duty, to investigate the financial capability of an investor entering a margin transaction and to inform that investor of the implication of a margin transaction. The form of collection of margin money, its adequacy and deposit, including limit on exposure, are extremely important ingredients of a purposeful and effective margining system in the present day capital market culture. Expeditious and correct reporting of margin also acquires great significance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t SMC is a company incorporated under the Companies Act, 1956 and is stated to be registered with several Stock and Commodities Exchanges, including the NSE and the BSE, as a Trading Member, hereinafter referred to as TM . It also acts as a Clearing Member, hereinafter referred to as CM, in the NSE and BSE. During the relevant time period in the year 2008, the appellant acted as a CM for 36 TMs towards their clearing and settlement obligations. Two out of these 36 TMs, for whom the appellant acted as CM in respect of their Future and Options, hereinafter referred to as F O , trading in the NSE, defaulted in fulfilling their obligations to the appellant in respect of the payment of margin money. These two TMs are Sunchan Securities Limited, hereinafter referred to as SSL , and Ganga Yamuna Finvest Limited, hereinafter referred to as GYF . In other words, the appellant failed to collect the requisite margin money from the two TMs before allowing them to trade. 4. SSL and GYF were formally declared defaulters on July 11, 2009 by the BSE and on May 18, 2009 by the NSE, respectively, and expelled from the membership of the Stock Exchange(s). The appellant submits that it deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t balance and margin. 8. The respondent decided to order special purpose inspection of the appellant s affairs by letter dated November 11, 2009. This appears to have been done by the respondent with a view to unearth the lapses with respect to margin collection on part of the appellant so that the system pertaining to the collection of margin could be further streamlined and also to ascertain whether the appellant had stopped the practice of short collection and wrong reporting of margin to the Exchange and providing higher exposure to its TMs. On November 25, 2009, an Inspection Questionnaire with respect to the period from December 01, 2008 to November 24, 2009 was served upon the appellant by the respondent. During the said inspection, the respondent directed the appellant to submit a detailed explanation on the form of securities taken by it as collateral towards margin requirements during the period between December 1, 2008 November 24, 2009 for three TMs, i.e., SSL, GYL and Nikunj Stock Brokers, hereinafter referred to as NSB . 9. After considering the appellant s reply dated March 05, 2010, the respondent forwarded a copy of the Inspection Report to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant in this regard is a deviation and amounts to violation of the rules, regulations and guidelines on accepting collaterals in the permissible forms. The DA also held that the appellant had failed to follow the policy of compulsory squaring-off of the positions of the two TM s, thereby, widening the gap between the margin and the exposure resulting in the ultimate default. After holding as such, the DA recommended the prohibition of the appellant from taking up any new assignment or contract or launch any new scheme for a period of fifteen days under Regulation 27 of the Intermediaries Regulations. 12. The learned Designated Member (DM), who happens to be the Whole Time Member (WTM) of the respondent, issued a post-enquiry SCN dated April 16, 2012 along with the DA s report dated December 12, 2011, spelling out his reasons for disagreement with the penalty recommended by the DA. The appellant, by its letters dated May 14, 2012, June 22, 2012 and September 25, 2012, opposed issuance of such post-enquiry SCN which allegedly contained allegations beyond the inspection period. The appellant contended that the respondent had itself left it to the NSE to adjudicate upon the said al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been furnished by SSL is incorrect and false since the only condition to be met at the time was that the CM would make the margin money available to NSCCL for the TMs. Subsequent to an NSE Circular dated June 02, 2009 which clarified that a BG from a Member would not be considered towards margin collection, the Appellant has not furnished any such BG for margin. 17. Moreover, the appellant puts forth that by virtue of SEBI's circular dated August 10, 2011, the stock exchanges were given control over violations related to the short/non-collection of margin by brokers registered with the particular stock exchanges. As such, after having directed NSE to look into the matter, SEBI ought not to have initiated proceedings under the Intermediary Regulations as this amounts to double jeopardy. In the Inspection Report, SEBI's scope was recorded as being limited to ascertaining whether or not SMC was still continuing with the practice of wrong reporting of margin to the exchange and providing higher exposure to its trading members. 18. Even though the impugned order holds that SEBI may include NSE Officers in its Inspection team and that approvals for the same had been obtai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it stems purely from the agreement to retransfer the asset if ₹ 2 crore was paid within 18 months. A CM is not prohibited from entering into a property transaction with a TM under any law. 22. With respect to the wrong reporting of margin amounting to 2.17%, it is put forth that the amount itself is miniscule. Out of the 18 instances pointed out by the respondents, 13 are allegedly based on incorrect data, and the remaining 5 have, as accused by the appellant, been incorrectly calculated by the Inspection Team. Accusations of the respondent regarding collection of undated cheques, property transactions, bank guarantees do not pertain to the period ending December 2008 to November 2009 but to the period ending November 2008. 23. Per contra, the case of the respondents is that the appellant was unduly supporting and accommodating the TMs, thereby risking the entire system and leading to the creation of a credit pyramid. The respondent, in its submission, reiterates the findings in the Impugned Order, SEBI s Inspection Report, the DA s Report and the SCN dated April 16, 2012. 24. The respondent has contended that its inspection report contained the findings of the NSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved securities in dematerialized form or such other collateral form as may be specified by the clearing corporation from time to time. NSCC/F O/C S/78 dated October 8, 2002 specifies that CMs/TMs are required to collect upfront margin from their respective trading members/ constituents. This position is reiterated by NSE Circular dated February 28, 2008. 28. The respondent submits that the role of the CM is to collect the initial margin from the TMs for their clients. The BG obtained by the appellant by leveraging the ₹ 7.5 crore FDR deposited by SSL was shown as margin and was not furnished by the TM, namely SSL. Hence, the appellant received credit from a bank to meet TM s margin requirements, which is contrary to the intention and purpose of the risk containment requirements. The undated and post dated cheques were held as impermissible forms of margin collection as the same cannot be construed as cash. The appellant had accommodated the defaulting TM, GYF, through various modes of circuitous movable / immovable property transactions in 2008-2009 on several occasions and GYF was declared defaulter by NSE on July 27, 2009. 29. In regard to the matter of MTM, the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32. We have heard the learned senior counsel for both parties at length and perused the appeal alongwith the documents attached therewith. 33. To begin with, we would like to deal with the appellant's contention that SEBI ought not to have looked into the matter having previously asked the NSE to investigate the same and report accordingly. In this regard the appellant has relied on SEBI's circular dated August 10, 2011 which deals with Short-collection/Non-collection of client margins (Derivative Segment) . A perusal of the same reveals that the stock exchanges have been empowered to penalize brokers regarding infractions committed with respect to margin collection. We have dwelled upon this issue at length and it is our considered opinion that ultimate power in respect of all matters related to the capital market rests with SEBI except statutorily excluded subjects. Clause 5 pertinently notes that All instances of non-reporting shall amount to 10% shortfall collection and the penalty as applicable shall be charged on these instances in respect of short collection . When and where regulatory intervention is required is the sole prerogative of the SEBI as a regulator. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can never be construed as precluding SEBI from acting in a particular matter which calls for intervention in the facts of a given case. SEBI, in the circular itself, has retained the right to supervise the margining system in the market. Another aspect that comes to our notice from a minute examination of the circular is that it does not deal with the mode of collection of margin money which indisputably is one of the critical constituents of the margining system. No one can disagree when we say that SEBI could not have intended that the mode of collection of margin money remain unregulated. This particular circular deals specifically with short-collection/non-collection of margin money. So as to consider the mode of collection, SEBI would have to step into the arena. The contention of the learned senior counsel for the appellant, Shri P. N. Modi, in this regard is, therefore, liable to be rejected. 35. From the records it is seen that SEBI's order for inspection dated November 11, 2009 doesn't mention the scope of SEBI's investigation to be restricted to, as the appellants have claimed time and again, ascertaining whether the appellant was still carrying on the pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted to it, should not be suspended or cancelled or why any other action provided herein should not be taken. (2) Every notice under sub-regulation (1) shall specify the contravention alleged to have been committed by the noticee indicating the provisions of the Act, rules, regulations, circulars or guidelines in respect of which the contravention is alleged to have taken place. (3) There shall be annexed to the notice issued under sub-regulation (1) copies of documents relied on in making of the imputations and extracts of relevant portions of documents, reports containing the findings arrived at in an investigation or inspection, if any, carried out. (4) The noticee shall be called upon to submit within a period to be specified in the notice, not exceeding twenty-one days from the date of service thereof, a written representation along with documentary evidence, if any, in support of the representation to the designated authority. Reply by the noticee. 26. (1) The noticee shall submit to the designated authority its written representation within the period specified in the notice along with documentary evidence, if any, in support thereof : Provided that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommendation to the DM elucidating the nature of the violation committed by the wrongdoer. The DM is under no obligation to stick to the charges as levelled in the DA's report or to go by the penalty recommended therein, and there is nothing in the Intermediaries Regulations to suggest otherwise. For purposes of the Intermediaries Regulations, the DA's report is the result of merely an inspection conducted by the DA to give the DM a preliminary opinion on facts and the law with respect to the violation in question. Nowhere in the Intermediaries Regulations is there even a semblance of suggestion that the DA's report is binding on the learned DM in any form regarding any element contained therein. The learned DA's report is, as clearly spelt out in the Intermediaries Regulations themselves, only a recommendation and as such giving it any kind of tangibility is out of the question. The DM has all the necessary discretion to enhance or reduce the penalty recommended by the DA depending upon the facts, violations and the circumstances of the case. Therefore, the learned DM followed the law by looking at the matter afresh and framing allegations followed by a penalty he d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant of succouring the TMs exposed the market equilibrium to a very serious risk. 39. The appellant also accepted undated/ post-dated cheques from SSL and GYF as collateral. In the case of a post-dated cheque, the holder must wait till the date shown on the cheque before he/she can encash it. The value of such a cheque cannot be considered towards margin collection since its worth cannot be realised instantly. It can only be accounted for once it is encashed, assuming it gets cleared. The appellant's odd contention that even such post-dated cheques should be treated as available margin and should be discounted only if dishonoured cannot be accepted. The simple reason for this being that margin requirements arising on a particular day would not be satisfied if such collateral were to be accepted, defeating the entire purpose for which the margining system has been put in place. 40. We now come to the allegation of immovable property being treated as margin collected by the appellants. It is a matter of record that exposure was given to GYF since March 3, 2008. On that day itself no margin was collected when the actual amount that should have been collected was ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its report with the issuer company instead of with SEBI. 2.2 Presently, clause 49 of Equity Listing Agreement requires the Audit Committee of an issuer company to monitor the utilisation of issue proceeds and to make appropriate recommendations to the Board of the issuer company. It is therefore felt that even where a monitoring agency has been appointed, the report submitted by such agency may be placed before the Audit Committee of the issuer company, so as to enable the Audit Committee to make appropriate recommendations to the Board of the issuer company. Accordingly, it has been decided to amend clause 49 of Equity Listing Agreement, requiring the issuer company to place the monitoring report filed with it before its Audit Committee. 2.3 Further, every issuer company shall be required to inform material deviations in the utilisation of issue proceeds to the stock exchange and shall also be required to simultaneously make the material deviations / adverse comments of the Audit committee / monitoring agency public through advertisement in newspapers. 42. The appellant has submitted that it is not involved in any fund based activity by collecting ₹ 3104251.90 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generate proceeds that could sufficiently protect collecting entities covered by the proposed requirements from losses occurring in the event of a counter-party default. Therefore, the assets should be highly liquid and should be able to hold their value in a time of financial stress, after accounting for an appropriate haircut. 44. The significance of the concept of margin lies in the fact that it is treated as defaulter-pay . This means that in the event of a counter-party default, margin protects the surviving party by absorbing losses using the collateral provided by the defaulting entity. Each portfolio has its own designated margin for absorbing the potential losses in relation to that particular portfolio. In addition to the initial margin, another equally important risk management technique is the daily margining, i.e., collateralization of credit risk. Here margining is not static and has to be recalculated or adjusted six times a day as the risk rises or falls. On the basis of his volatility in any given scrip, the clients are asked for margin money over and above the initial margin already paid upfront. This is collected as additional margin, and comprises an equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CM shall collect margins from the TM as prescribed by the relevant authority from time to time. Not having done the same, the appellant is also in contravention of these provisions. Clauses A(1) (2) and (5) of the Code of Conduct for stock brokers provide that stock brokers shall maintain high standards of integrity, promptitude and fairness in the conduct of all business while acting with due skill, care and diligence; and abiding by all the provisions of the law applicable to stock brokers. 47. Margin money has always played an important role in containing risks which are inherent in the functioning of any capital market. Owing to its non-adherence huge market crashes have been witnessed all over the glove in the recent past. The vital position that the margining system holds as a crucial instrument to maintain market equilibrium can never be undermined. It is, therefore, pertinent for all market players to maintain the sanctity of margining as a risk management tool while dealing in securities, be it in the cash or in the F O segment. 48. We, therefore, find no reason to interfere with the Impugned Order, which is hereby upheld, and the appeal is dismissed with no order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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