In an appeal filed before the Securities Appellate Tribunal against an order dated 28-11-2023 by the National Stock Exchange of India Ltd (NSE) (respondent) whereby a monetary penalty of Rs. 5,35,000/- including a sum of Rs. 5,00,000/- with a direction to submit a restructuring/disinvestment plan and quarterly compliance reports was imposed upon KBS India Ltd. (appellant), a Bench comprised of Justice P.S. Dinesh Kumar (Presiding Officer), Ms. Meera Swarup (Technical Member), and Dr. Dheeraj Bhatnagar (Technical Member) set aside the impugned judgment to the extent it related to Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR).
NSE had recorded a finding that KBS India had engaged as a principal in a business other than that of securities involving personal financial liability in violation of Rule 8(1)(f) and Rule 8(3)(f) of SCRR read with Exchange circular dated 07-01-2022. It was submitted that by the said circular, NSE had set out an illustrative list of twelve activities which would be construed as non-compliance with the said Rules if undertaken by a member. The said circular was challenged before the Bombay High Court, wherein it was submitted by the Union of India that clarifications, if any, would be issued by the Government.
The Department of Economic Affairs, Ministry of Finance, by amendment, inserted a proviso to Rule 8(1)(f) and Rule 8(3)(f) of the SCRR to the effect that investments by a member would not be construed as business except when such investments involve client funds or client securities or relate to arrangements which are in the nature of creating a financial liability on the broker. Thereafter, NSE deleted point no. 10 of the illustrative list in the said circular.
It was submitted that by further modification done by the NSE, non-compliance with the two Rules were only confined to two activities i.e., (i) issuing corporate guarantee towards credit facilities availed by any entity, including group companies, and (ii) deposit pledged with a bank for overdraft facilities availed by any entity, including group companies. KBS India refused to press the appeal for any other issues and undertook to pay the penalty of Rs. 35,000/- imposed by the impugned order.
SAT noted that the allegations against KBS India were under Rule 8(3)(f), which related to inter-corporate deposits/advances extended by the appellant and to the investments made by the appellant in its group companies/subsidiaries, which did not fall within the two clauses of the illustrative list. It was held that NSE’s findings were based on clauses which stood deleted and hence, the penalty imposed was unsustainable. SAT also held that NSE’s prayer for remand was unnecessary.
Thus, the appeal was partly allowed, the impugned order was quashed and set aside insofar it related to Rule 8(3)(f) and the penalty collected thereunder was directed to be refunded to the appellant within two weeks.
