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Ved Prakash Gupta v. National Stock Exchange Of India Limited
Factual and Procedural Background
The appeal arises from an order of the Disciplinary Action Committee (DAC) of the National Stock Exchange of India Limited (NSE) dated February 03, 2017, in which the DAC declined to consider the appellant's Review Application against the DAC's earlier decision dated October 25, 2016. As a consequence of the DAC's earlier decision, a penalty of Rs. 10,00,000 was imposed on the appellant and the appellant's trading membership was suspended in all segments for 5 trading days from Monday, 27 February 2017 to Friday, 3 March 2017. The appellant challenged the DAC's February 03, 2017 order before the tribunal. The hearing was taken up by consent of both parties; J.P. Devadhar was the presiding officer.
NSE's regular inspection had resulted in a show cause notice dated November 04, 2015 alleging two violations: (a) difference in quantity of securities as per the back office register and holding statements of beneficiary accounts; and (b) receipt of securities not from respective clients. The appellant filed an affidavit in reply dated November 20, 2015, addressing both alleged violations. The DAC's October 25, 2016 order records oral submissions by the appellant admitting the violations, explaining that operations had been handed over to a relative (Naveen Kumar Gupta, referred to as NKG), and stating that client securities had been recouped and reconciled.
Legal Issues Presented
- Whether the DAC of NSE erred in declining to consider the appellant's Review Application and in allowing the penalty and suspension to attain finality.
- Whether the suspension of the appellant's trading membership for 5 trading days was contrary to the NSE Circular dated June 27, 2013, which the appellant relied upon.
- Whether the penalty of Rs. 10 lac and suspension for 5 trading days were unreasonable or excessive in the circumstances.
Arguments of the Parties
Appellant's Arguments
- The total ban/prohibition from trading for 5 days was erroneously imposed in a "casual, nonchalant and blasé manner."
- The DAC's decision violated the NSE Circular dated June 27, 2013 because, according to that circular, suspending trading was not contemplated for the violations alleged against the appellant.
- All remedial and corrective measures had been taken to ensure non-recurrence of any lapse found during NSE's inspection; therefore the impugned order should be quashed and set aside.
- Counsel for the appellant also sought to argue there were errors in quantifying amounts alleged to have been diverted from client beneficiary accounts to the demat account of Naveen Kumar Gupta, but the tribunal did not permit that plea because it was not raised before the DAC in the Review Application.
- Recorded oral submissions by the appellant (proprietor Ved Prakash Gupta) included admissions of the violations, an apology, attribution of operational control to a relative (NKG) due to ill health, statements that he was unaware of misuse until Exchange observations, inability to take legal action against the relative, and assurance that the securities had been recouped and reconciled and that violations would not recur.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The tribunal found no merit in the appellant's contentions and proceeded as follows:
- It noted the factual findings from NSE's inspection and the show cause notice dated November 04, 2015, which alleged (a) differences between back office registers and beneficiary account holding statements and (b) receipt of securities not from respective clients.
- The tribunal reviewed the appellant's affidavit reply dated November 20, 2015 and the oral submissions before the DAC (recorded in the DAC's October 25, 2016 order) in which the appellant admitted the violations, apologized, stated that operations had been handed to a relative (Naveen Kumar Gupta), and said client securities had been recouped and reconciled.
- On the undisputed material, the tribunal concluded that the appellant had indeed committed the violations: moving client securities to the demat account of Naveen Kumar Gupta (a relative) and thereafter transferring securities to another account (Global Fincap) violated NSE norms.
- When counsel for the appellant attempted to raise alleged errors in quantification of amounts diverted, the tribunal refused to permit that plea because it had not been raised in the Review Application before the DAC. The tribunal further held that even if there were discrepancies as to the quantum moved, the fact of moving client funds and securities itself sufficed to establish violation of exchange norms.
- The tribunal further observed that Naveen Kumar Gupta executed sale transactions without holding the scrips and that sale obligations were met using securities of other clients, establishing utilization of clients' securities to meet pay-in obligations in gross violation of the code of conduct for exchange members.
- The appellant's reliance on the NSE Circular dated June 27, 2013 was rejected by the tribunal: the circular permits serious action depending on the gravity of violations, and the tribunal found the violations in this case to be serious, justifying the DAC's stern action.
- Accordingly, the tribunal concluded that the penalty of Rs. 10 lac and the 5 trading day suspension could not be characterized as unreasonable or excessive in the circumstances presented.
Holding and Implications
APPEAL DISMISSED.
Direct consequences for the parties:
- The DAC's orders stand: the penalty of Rs. 10,00,000 remains imposed on the appellant.
- The suspension of the appellant's trading membership in all segments for 5 trading days from Monday, 27 February 2017 to Friday, 3 March 2017 remains in effect.
- The appeal was dismissed with no order as to costs.
The opinion does not discuss broader legal implications or establish any new precedent; it applies the DAC's disciplinary findings to the facts of this case and upholds the disciplinary sanctions.
J.P Devadhar, Presiding Officer (Oral):— Not on Board. Taken up for hearing by consent of both parties.
2. Appellant is aggrieved by the order passed by the Disciplinary Action Committee (“DAC” for short) of National Stock Exchange of India Limited (“NSE” for short) dated February 03, 2017. By the said order the DAC of NSE has declined to consider the Review Application filed by the appellant against the decision of the DAC of NSE dated October 25, 2016. As a result, penalty of Rs. 10 lac imposed against the appellant and suspension of the trading membership of the appellant in all segments for a period of 5 trading days from Monday 27 February 2017 to Friday 3 March, 2017 has attained finality.
3. Mr. Prakash Shah, learned counsel appearing on behalf of the appellant submitted that total ban/prohibition from trading for 5 days is erroneously imposed on the appellant in a “casual, nonchalant and blasé manner”. He submitted that the decision of the DAC of NSE is in violation of NSE Circular dated June 27, 2013, because, as per that circular suspending the trading is not contemplated for the violations allegedly committed by the appellant. Counsel for the appellant further submitted that all remedial and corrective measures to ensure that the lapse, if any, found during inspection carried out by NSE does not recur again have been taken and hence the impugned order deserves to be quashed and set aside.
4. We see no merit in the above contentions.
5. During the course of regular inspection conducted by the NSE it was inter alia noticed that the funds and securities of the clients of the appellant were used for other than respective clients and accordingly, show cause notice was issued to the appellant on November 04, 2015 alleging the following two violations:—
a) Difference in quantity of securities as per back office register of securities and holding statement of beneficiary accounts.
b) Receipt of securities not from respective clients.
6. With reference to the first violation alleged by NSE, the appellant in the affidavit in reply dated November 20, 2015 stated as follows:—
“On verification of our records related with securities, posting of securities in our back office software was not done properly as well as ISIN Code and Scrip name were also not updated as per the actual records, due to this such records were not reconciled with our actual holding as per holding statement of beneficiary account.”
7. With reference to the second violation alleged by NSE, appellant in the affidavit in reply dated November 20, 2015 stated as follows:—
“As per our previous submission regarding the inspection, the shares lying in the account of Mr. Naveen Kumar Gupta (Client Code H1) belonging to the other clients and the same was as per mutual understanding between Mr. Naveen Kumar Gupta and respective clients, and were used by Mr. Naveen Kumar Gupa by their consent only.”
8. It is further interesting to note that the oral submission made by the appellant as recorded in the order of DAC of NSE dated October 25, 2016 reads thus:—
“Prrsaar's oral submissions before DAC
7. Prrsaar was represented by its Proprietor, Mr. Ved Prakash Gupta, who made the following oral submissions:
a) He has been a Member in Commodity market since 2004 and in Capital market since 2009. He has worked in rural and semi-urban area. He has also authored a book.
b) He admitted to all the violations pointed out in Exchange show cause notice dated November 4, 2015 and offered apologies to DAC for the inconvenience caused because of the same.
c) Because of his ill health, he had handed over operations of the firm to NKG. NKG was a relative. Shri Ved Prakash Gupta came to know about the misutilization of client securities by NKG only when the Exchange shared its observations, however he was not aware of the usage of funds raised by such misutilization.
d) As a proprietor of the firm, he could not take any legal action against NKG who cheated him because he is a close relative.
e) He has no knowledge on how NKG used the money raised by the misuse of client securities. However, he has recouped all clients' securities and the balance of Register of Securities and that of client beneficiary account is now reconciled.
f) He assured that such violations will not be repeated in future.”
9. From the aforesaid submissions made by the appellant before the DAC of NSE which are not in dispute, it is apparent that the appellant had in fact committed the violations alleged in the show cause notice. Moving the clients securities from the clients beneficiary account to demat account of Naveen Kumar Gupta a relative of Mr. Ved Prakash Gupta proprietor of the appellant and thereafter transferring the said securities to the account of Global Fincap was in gross violation of the norms laid down by NSE.
10. Counsel for the appellant sought to argue that there are several errors in quantifying the amounts alleged to have been diverted from the clients beneficiary accounts to the demat account of Naveen Kumar Gupta. However, we have not permitted counsel for the appellant to raise that plea, because, firstly, no such plea was raised in the Review Application filed by the appellant before the DAC of NSE. Secondly, even if there are some discrepancies in the quantum of amounts moved from the clients beneficiary accounts, very fact that the appellant has moved funds and securities from the clients beneficiary accounts itself is sufficient to hold the appellant to be guilty of violating the norms required to be followed by a member of the exchange.
11. Apart from the above, in the present case Naveen Kumar Gupta, operating on behalf of the appellant had executed sale transactions without holding the scrips and in fact, the appellant has accepted that the sale obligations of Naveen Kumar Gupta were met by using securities of other clients. Thus, it is established that in the present case securities belonging to the clients' of the appellants have been utilized to meet the pay in obligation of Naveen Kumar Gupta which is in gross violation of the code of conduct prescribed for members of the exchange. Reliance placed by the appellant on the Circular of NSE dated June 27, 2013 is totally misplaced. The said circular clearly stipulates that serious action could be taken depending upon the gravity of the violations committed. In the present case, the violations committed by the appellant being serious DAC of NSE was justified in taking stern action.
12. In these circumstances, penalty of Rs. 10 lac and suspending the trading membership of the appellant for 5 trading days cannot be said to be unreasonable or excessive.
13. For all the aforesaid reasons we see no reason to entertain the appeal and accordingly the appeal is hereby dismissed with no order as to costs.
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