SAT Order: Stock Exchanges not to Follow SEBI’s Circulars and Directions Mechanically

[Anand Narayan is a corporate and securities lawyer currently working as an in-house counsel in Mumbai]

One has lately witnessed a trend that the stock exchanges, such as NSE, BSE and NCDEX, are following the circulars and directions issued by the Securities and Exchange Board of India (SEBI) mechanically without application of mind, which has not gone down well with the market participants. Much to the relief of the market participants, the Securities Appellate Tribunal (SAT) has passed an order in GRD Securities Ltd v National Stock Exchange Ltd on 10 June 2019, wherein it has been stated that the stock exchanges and their disciplinary authorities should not follow or implement SEBI’s circulars mechanically without their own application of mind. Moreover, in cases where SEBI’s circulars mandate mandatory imposition of penalty for ‘x’ violation, the stock exchange has to interpret those circulars keeping in mind the principles of doctrine of proportionality. In other words, where circumstances so warrant, the stock exchanges may assign a penalty less than the threshold defined by SEBI’s circulars.

In this case the SAT, NSE, during a regular inspection of the books and records of the GRD Securities Ltd, noticed that GRD falsely reported margin amounting to Rs. 2,05,43,947/- in the CD segment in respect of two clients on two occasions. The Disciplinary Action Committee (DAC) of NSE directed GRD Securities Ltd to pay a penalty of Rs. 2,05,43,900/- and face suspension of one trading day in the currency derivatives segment of the Exchange. The DAC imposed the said sanctions by taking shelter under SEBI’s circular dated 10  August 2011 which, inter-alia, states the following:

If during inspection it is found that a member has reported falsely the margin collection from clients, the member shall be penalized 100% of the falsely reported
amount along with the suspension of trading for one day in that segment.

The SAT held that the said circular does not differentiate between situations involving upfront collection of cheques but late depositing or late crediting of the said amount and no upfront collection at all and, hence, suffers from the proportionality
principle. In fact, the SAT held that proportionality is a basic principle to be
adhered to while interpreting any provisions relating to punishment where the consequences are serious, as in the instant case. Accordingly, the argument advanced by NSE and SEBI that the said circular provides no discretion to NSE while imposing penalty once the violations are established were summarily rejected by the SAT.

Further the SAT also observed that the word ‘shall’ in the circular has to be read as ‘may’ as it would enable the exchange authorities to distinguish between no collection of margin at all and delayed collection of margin, particularly in situations that have no impact on the settlement or market at all. This order from the SAT will perhaps provide relief to the market participants in their respective cases where stock exchanges are blindly following SEBI’s circular or directions, without applying their own mind.

Anand Narayan

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