ORDER
Kumar Rajaratnam, J. (Presiding Officer)
1. The Appellant being aggrieved by the order of the Respondent dated 15-10-2003 wherein the registration of the Appellant was suspended for a period of 7 days has preferred this appeal.
2. The facts very briefly are that the Appellant is a Member of the National Stock Exchange and is registered with SEBI, the Respondent herein as a Stock Brokers.
The Respondent after holding an enquiry and complying with the principles of natural justice came to the conclusion that the Appellant committed a misconduct in acting as sub-broker without being registered with the SEBI and had transacted one transaction as a sub-broker in the Delhi Stock Exchange as a sub-broker. The transaction was for 3,600 shares amounting to Rs. 32,785. The Appellant acted as a sub-broker to Poddar & Co., and received a brokerage of Rs. 400. This transaction, it is alleged, was between 3-1-2001 and 29-1-2001.
3. It is not in dispute that the appellant was registered with SEBI and was also a member of the National Stock Exchange. The Appellant, however, was not registered, with SEBI as a sub-broker with respect to Delhi Stock Exchange.
4. In other words the gamut of the charge was that the Appellant could not have acted as a sub-broker without holding a certificate from the respondent.
5. The Securities and Exchange Board of India Act (hereinafter referred as ‘the SEBI Act’) has been empowered to frame regulations under Section 30.
6. Accordingly, Securities & Exchange Board of India (Stock Broker and Sub-Broker) Regulations, 1992 was introduced. This regulation is in conformity with the avowed aims of the Act to protect the interests of investors in securities and to regulate the securities market. This 1992 Regulation clearly stipulates that brokers as well as sub-brokers are required to ensure strict compliance with the Code of Conduct.
7. As per the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992, no broker or sub-broker shall buy, sell or deal in securities until he holds a certificate granted by the SEBI under the said Regulations.
8. In fact Section 12 under Chapter V of the Act also stipulates that no broker or sub-broker shall buy, sell or deal in securities except in accordance with the conditions of the certificate of registration obtained from the Board in accordance with the regulations. Chapter V of the Act deals with registration certificate Section 12 mandates a broker as well as a sub-broker to obtain a certificate from the Board in accordance with the Regulation.
9. By this it is amply clear that even a sub-broker cannot buy, sell or deal in securities unless he is registered with the SEBI. The purpose of such regulation is to enable SEBI to monitor and control the brokers as well as sub-brokers. Mr. Pradeep Sancheti, Senior Counsel for the Appellant submitted that since the Appellant was registered with BSE and is a member of the National Stock Exchange as a Broker, that would give him a licence as a sub-broker to trade in shares in the Delhi Stock Exchange. In other words, it was submitted that one need not be a registered sub-broker if he is already a broker in any stock exchange. We are unable to persuade ourselves to accept this proposition since the Act read with the Regulations and the Rules makes it clear that the person or a body must be registered with SEBI even as a sub-broker in that Stock Exchange which he deals with.
10. In this case admittedly, the Appellant was not registered as a sub-broker with SEBI
11. An Inquiry Officer was appointed by SEBI under Section 4 of the Act to inquire into violations of Broker Regulations. It is only then that this violation was detected. The Enquiry Officer has given a finding, on the basis of materials after complying with the principles of natural justice, that the Appellant was not registered as a sub-broker with SEBI. The finding of the Inquiry Officer was accepted by SEBI.
12. This Tribunal will be slow to interfere with the finding of the fact recorded by the Inquiry Officer even in a first appeal. In this case admittedly the Appellant was given every opportunity to answer the allegations since a show-cause notice was issued to the Appellant and on the material before the Enquiry Officer, it is clear that the Appellant had acted contrary to the regulations by trading in a share as a sub-broker without being registered with the SEBI. We find that the appellant had acted in violation with Act, Regulation & Rules.
13. The next question that arises for consideration is whether the penalty of suspending the registration of the Appellant for a period of 7 days is shockingly disproportionate to the nature of the misconduct. It was submitted by the Counsel for the Appellant that the Appellant was registered as a Stock Broker with SEBI and was a Member of the National Stock Exchange. It was further submitted that by oversight it acted as a sub-broker for M/s. Podar & Co., and it is not in dispute that M/s. Podar & Co., was a registered broker. It was further submitted that only one transaction by oversight was dealt with by the Appellant as a sub-broker to Podar & Co. That transaction too fetched the Appellant a brokerage of Rs. 400. It was further submitted that the Respondent had proceeded under the provisions of the SEBI (Procedure for Holding Inquiry) Regulations, 2002 against the Appellant as if it was a minor penalty.
14. Although no distinction is being made with regard to the nature of inquiry between minor penalties and major penalties the Respondent obviously treated the misconduct as minor penalty under Regulation 13(1) of the SEBI (Procedure for Holding Inquiry) Regulations, 2002. The Regulation 13(1) reads as under :
“Imposition of penalty.–(1) The enquiry officer shall, after considering the written statement and the oral submission, if any, of the intermediary and the provisions of the relevant Regulations, submit a report to the Chairman or a Member designated in this behalf and recommend for the imposition of any of the following penalties buy the Chairman or the member as the case may be, with the justification of the imposition thereof:–
(a) Minor penalties–
(i) warning or censure;
(ii) prohibiting the intermediary to take up any new assignment or mandate or launch a new scheme for a period upto six months;
(iii) debarring a partner or a whole-time director of the intermediary from carrying out the activities as intermediary in the intermediary firm or company and other capital market related institutions for a period upto six months;
(iv) suspension of certificate of registration for a period upto three months;
(v) debarring a branch or an office of the intermediary from carrying out the activities for a period upto six months.
(b) Major penalties–(i) to (iii)
15. The Respondent imposed a suspension of 7 days as a minor penalty exercising power under Regulation 13(1)(iv). Mr. Kumar Desai the learned Counsel for the Respondent submitted that no doubt the minor penalty was imposed on the Appellant but the fact is that the disciplinary authority has exercised this power after taking into account all factors.
16. It is settled law that the Court can interfere with the quantum of punishment in any domestic enquiry if it is shockingly disproportionate to the misconduct. Once the court helds that the misconduct is shockingly disproportionate to the nature of the misconduct as a general rule, the Courts will remand it to the disciplinary authority to reconsider the matter on the quantum of punishment. No doubt in rare cases it is permissible to substitute the penalty in order to put an end to the litigation rather than to remit it to the disciplinary authority. It must be understood that this power should be exercised sparingly. The general rule is if the punishment is shockingly disproportionate it should remit it to the disciplinary authority. In this case in the reply filed by SEBI it is stated in ground No. 20 as follows:
“20. It is stated that during the course of the transaction of M/s. Munga Holdings Ltd., with SKG Share and Stock Brokers Ltd., M/s. DASL has not complied with the basic formality of getting itself registered as a sub-broker of Delhi Stock Exchange with SEBI and therefore this amounts to a lacuna.” [Emphasis supplied]
Even in ground No. 22 of the Reply it is stated by SEBI that before the Appellant entered into any transaction the Appellant should have fulfilled its obligation to get itself registered as a sub-broker. The Respondent proceeded with the matter as if it was a minor penalty for the simple reason that the Respondent thought that it was a technical lapse after taking into account that only one transaction was undertaken and the brokerage of Rs. 400 only was received by the Appellant. It is the admitted case of the Respondent that there was no other dealing by the Appellant anywhere before or after this transaction.
17. The Supreme Court in B.C. Chaturvediv. Union of India [1995] 6 SCC 749 has pronounced that in rare cases the court may substitute the penalty. The Supreme Court has taken a similar view in Chairman & Managing Director, United Commercial Bank v. P.C. Kakkar [2003] 4 SCC 364. In Dev Singh v. Punjab Tourism Development Corporation. Ltd. [2003] 8 SCC 9 the Supreme Court pronounced that substitution can be made if the penalty is shockingly disproportionate to the misconduct. The Supreme Court specifically stated that it would be open to a court to substitute punishment if it is shockingly disproportionate. The Court held further that it may also impose a lesser punishment to shorten litigation. However these are all exceptions to the general rule that the Courts must not interfere with the quantum of punishment by itself. Having said this it will be necessary to hold that the 7 days’ suspension although is a minor penalty will be catastrophic as far as the future of the Appellant is concerned.
18. It was submitted that the Appellant would be suspended from the NSE and the stigma of suspension will affect is reputation and tarnish his image. Even the Respondent has treated the misconduct of the Appellant as, a minor penalty. One of the minor penalties is warning or censure under Regulation 13(1)(a)(i). We feel it appropriate that a warning or censure for this technical violation would meet the ends of justice as any other punishment would ruin the business of the appellant for this technical default. It is not in dispute that the offence is technical as rightly stated by the Counsel for the SEBI. Such a technical flaw should not be visited with a penalty that would ruin the business of the appellant.
19. In that view of the matter we confirm the order of SEBI with respect to the misconduct. However, substitute the penalty to one under Regulation 13(1)(a)(i) of the SEBI (Procedure for Holding Inquiry) Regulations, 2002. Accordingly we set aside the penalty imposed by the Respondent and direct the Respondent to give a suitable warning to the Appellant.
20. Appeal disposed of accordingly. No costs.