SAT | In cases where penalty is imposed for wrongly reporting margin short fall, same cannot be modified on submission that such reporting was merely a technical error

Securities Appellate Tribunal (SAT): The Coram of Justice Tarun Agarwala, (Presiding Officer) and Justice M. T. Joshi (Judicial Member), and Dr C. K. G. Nair (Member) dismissed the appeal filed by the appellant to modify the order passed by the National Commodity and Derivatives Exchange Limited.

On 21-09-2018, the respondent had imposed a penalty of Rs 25,53,000 on the appellant on three separate counts. Aggrieved by this order, the appellant filed an appeal with SAT.

As per the records, the respondent had carried out the inspection of the appellant trader in 2016. Through this inspection, it was found that the appellant had a wrongly reported margin provided by their client, particularly, on 26-10-2015 and 28-10-2015 for which a penalty of Rs 25 lakh was imposed. Secondly, it was found that the appellant had used the client’s bank account for the purpose other than specified by the exchange for its own use. Therefore, a penalty of Rs 50,000 was imposed. Lastly, a penalty of Rs 3,000 was imposed for misdeclaration given in the annual compliance report after the inspection.

Parties submitted that the appellant made wrong reporting of the margin of Rs 1,69,71,959 for the trading on the above referred two dates. As per the appellant, there were huge volatility in Dhaniya (coriander) contracts on October 26 and 27. The clients, however, had stocks held in the sister concern of the appellant. In the circumstances, though cheques were issued by the respective clients, at their request the cheques were not encashed and later on the accounts were squared off. The appellant by giving this explanation had admitted that there was a shortfall.

Advocate Rajesh Khandelwal on behalf the appellant argued that it was due to the volatility in the market that there was a margin shortfall and therefore wrong reporting of the margin in 22 cases had occurred. Since a sufficient margin of the same client was available with the sister concern in the form of security, wrong reporting of margin money was merely a technical error. Therefore, a lesser penalty should have been imposed.

Tribunal was of the opinion that the order of the respondent needed no interference. A huge shortfall in margin was wrongly reported by the appellant. In such circumstances, a 100% penalty could have also been imposed according to the relevant circulars SEBI. The explanation that the clients had requested for not encashing the cheques as they had provided securities to sister concern was not accepted by the Tribunal stating that the market integrity must be maintained at all costs. [Pumarth Commodities (P) Ltd. v. National Commodity and Derivatives Exchange Ltd., 2019 SCC OnLine SAT 199, decided on 07-11-2019]

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