Supreme Court directs Securities Appellate Tribunal to reconsider penalty on PRRSAAR for financial irregularities: PRRSAAR vs. National Stock Exchange (2019)

Date of the Judgment: 22 July 2019
Citation: [Not Available in the source]
Judges: A.M. Khanwilkar and Dinesh Maheshwari, JJ.

Can a stock exchange impose a penalty beyond what is specified in its circulars? The Supreme Court of India recently addressed this question in a case involving a trading member accused of financial irregularities. This case examines the extent of disciplinary powers of the National Stock Exchange of India (NSE) and the scope of review by the Securities Appellate Tribunal (SAT). The Supreme Court, in this case, directed the Securities Appellate Tribunal to reconsider the quantum of punishment awarded to the appellant. The judgment was delivered by a two-judge bench comprising Justices A.M. Khanwilkar and Dinesh Maheshwari.

Case Background

M/S PRRSAAR, a trading member of the National Stock Exchange of India (NSE), was found guilty by the Disciplinary Action Committee (DAC) of the NSE for indulging in financial irregularities and misconduct in the conduct of business. The DAC imposed a fine of Rs. 10 lakhs and suspended PRRSAAR’s trading membership for five trading days. The appellant, M/S PRRSAAR, challenged the order of the DAC before the Securities Appellate Tribunal (SAT), arguing that the penalty was excessive and not in accordance with the NSE’s circulars. The SAT rejected the appeal, stating that the penalty was not unreasonable or excessive. Aggrieved by the SAT’s order, M/S PRRSAAR appealed to the Supreme Court.

Timeline:

Course of Proceedings

The Disciplinary Action Committee (DAC) of the National Stock Exchange of India Ltd. (NSE) found M/S PRRSAAR guilty of financial irregularities and misconduct, imposing a fine of Rs. 10 lakhs and a five-day suspension from trading. M/S PRRSAAR appealed to the Securities Appellate Tribunal (SAT), which rejected the appeal, stating the penalty was not excessive. M/S PRRSAAR then appealed to the Supreme Court of India.

Legal Framework

The case revolves around the interpretation of the National Stock Exchange of India’s (NSE) circulars and bye-laws. The appellant argued that the penalty should be limited to the amount specified in the Circular dated 27.06.2013, which states:

“19.Improper use of funds raised by placing of clients securities with bank/any other financial institutions viz. funds not used for respective client obligation/margins.Rs. 1,00,000/- or 0.1% of the value of misuse whichever is higher. Mis-utilization of clients’ funds and/or securities.”

The respondent, NSE, relied on Chapter IV Rule 1 of its bye-laws, which provides for disciplinary jurisdiction:

“Disciplinary Jurisdiction (1)The relevant authority may expel or suspend and/or fine under censure and/or warn and/or withdraw any of the membership rights of a trading member if it be guilty of contravention, non-compliance, disobedience, disregard or evasion of any of the Bye Laws, Rules and Regulations of the Exchange or of any resolutions, orders, notices, directions or decisions or rulings of the Exchange or the relevant authority or of any other Committee or officer of the Exchange authorized in that behalf or of any conduct, proceeding or method of business which the relevant authority in its absolute discretion deems dishonourable, disgraceful or unbecoming a trading member of the Exchange or inconsistent with just and equitable principles of trade or detrimental to the interests, good name or welfare of the Exchange or prejudicial or subversive to its objections and purposes.”

The bye-laws also specify the conditions for suspension of business:

“Suspension of Business: (8)The relevant authority may require a trading member to suspend its business in part or in whole: (a) Prejudicial Business: When in the opinion of the relevant authority, the trading member conducts business in a manner prejudicial to the Exchange by making purchases or sales of securities or offers to purchase or sell securities for the purpose of upsetting equilibrium of the market or brining about a condition of demoralization in which prices will not fairly reflect market value, or”

Arguments

Appellant’s Arguments:

• The penalty imposed should be limited to the amount specified in the NSE Circular dated 27.06.2013, which prescribes a fine of Rs. 1,00,000 or 0.1% of the value of misuse, whichever is higher.
• The suspension of trading membership could only be imposed if the conduct of the trading member was prejudicial to the Exchange as per Bye-law 8(a).
• The Disciplinary Action Committee (DAC) of NSE violated the NSE Circular dated June 27, 2013, by suspending the trading membership, as the circular does not contemplate suspension for the violations allegedly committed by the appellant.

Respondent’s Arguments:

• The NSE bye-laws, specifically Chapter IV Rule 1, grant the authority the power to suspend trading membership for misconduct.
• The relevant authority has ample power to suspend the trading membership of a member who indulges in prescribed misconduct.
• The order passed by the appropriate authority was correct and has been rightly affirmed by the Appellate Tribunal.

Submissions of the Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but considered the following:

• Whether the Securities Appellate Tribunal (SAT) properly examined the contention of the appellant regarding the appropriateness of the order suspending the trading membership.
• Whether the Securities Appellate Tribunal (SAT) properly examined the contention of the appellant regarding the quantum of penalty imposed by the appropriate authority.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court considered the following legal provisions:

• Circular dated 27.06.2013 of the National Stock Exchange of India (NSE) regarding penalties for improper use of funds.
• Chapter IV Rule 1 of the NSE bye-laws regarding disciplinary jurisdiction.
• Bye-law 8(a) of the NSE bye-laws regarding suspension of business.

Authorities Considered by the Court

Judgment

The Supreme Court set aside the order of the Securities Appellate Tribunal (SAT) and directed it to reconsider the issue of the quantum of punishment awarded to the appellant. The Court noted that the SAT had failed to address the appellant’s arguments regarding the applicability of the NSE circular and the specific conditions for suspension under the bye-laws.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court noted that the appellant contended that the penalty should be limited to the amount specified in the Circular dated 27.06.2013 of the National Stock Exchange of India (NSE).
• The Court acknowledged that the respondent relied on Chapter IV Rule 1 of the NSE bye-laws to justify the suspension and fine.
• The Court noted that the appellant argued that the suspension could only be imposed if the conduct was prejudicial to the Exchange as per Bye-law 8(a) of the NSE bye-laws.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the lack of reasoning by the Securities Appellate Tribunal (SAT). The SAT had summarily dismissed the appellant’s arguments without addressing the specific points raised regarding the applicability of the NSE circular and the conditions for suspension under the bye-laws. The Court emphasized that the SAT should have examined these contentions and provided reasons for its decision.

Logical Reasoning:

The Court’s decision was based on the principle that appellate tribunals must provide reasoned decisions, especially when dealing with issues that have been specifically raised by the parties. The Court did not delve into the merits of the case but focused on ensuring that the SAT fulfilled its duty to provide a reasoned judgment.

The Court quoted the following from the impugned order:

“… 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…”

The Court also observed that:

“The Appellate Tribunal, however, has not examined this contention but proceeded to reject the appeal on the specious ground that the penalty imposed by the appropriate authority cannot be said to be unreasonable or excessive.”

The Court emphasized that:

“These arguments have not been dealt with by the Appellate Tribunal at all.”

Key Takeaways

• Appellate tribunals must provide reasoned decisions, especially when dealing with specific arguments raised by the parties.
• The quantum of punishment imposed by regulatory bodies should be in accordance with their circulars and bye-laws.
• The Securities Appellate Tribunal (SAT) has a duty to examine the contentions of the parties and provide reasons for its decisions.
• The Supreme Court can intervene if the appellate tribunal fails to provide reasoned judgment.

Directions

The Supreme Court directed the Securities Appellate Tribunal (SAT) to reconsider the appeal filed by M/S PRRSAAR, specifically on the issue of the quantum of punishment awarded to the appellant. The SAT was also directed to pass appropriate orders regarding the amount deposited by the appellant pursuant to the order dated 27.02.2017 passed by the Supreme Court. The Court clarified that the SAT should not go into technicalities of the effect of withdrawal of the appeal by the appellant bearing No. 60/2017 and must decide the restored appeal on the issue of quantum of punishment afresh expeditiously.

Specific Amendments Analysis

[Not Applicable as there is no specific amendment discussed in the judgment]

Development of Law

The ratio decidendi of this case is that appellate tribunals must provide reasoned decisions, especially when dealing with specific arguments raised by the parties. This judgment reinforces the principle of procedural fairness and the requirement that regulatory bodies adhere to their own rules and regulations. This case does not change the previous position of law, but emphasizes the importance of reasoned decision-making by appellate tribunals.

Conclusion

The Supreme Court’s decision in this case underscores the importance of reasoned decision-making by appellate tribunals. By directing the Securities Appellate Tribunal (SAT) to reconsider the quantum of punishment awarded to M/S PRRSAAR, the Court has emphasized that regulatory bodies must act within the confines of their own circulars and bye-laws and that appellate tribunals must address specific arguments raised by the parties. The case serves as a reminder that regulatory actions must be fair, transparent, and in accordance with the established legal framework.

Category

Parent category: Securities Law
Child categories: Disciplinary Proceedings, National Stock Exchange of India, Securities Appellate Tribunal, Trading Member, Financial Irregularities, Suspension of Trading Membership, Penalty, Circular dated 27.06.2013, Chapter IV Rule 1, Bye-law 8(a)

Parent category: National Stock Exchange of India
Child categories: Circular dated 27.06.2013, Chapter IV Rule 1, Bye-law 8(a)

FAQ

Q: What was the case about?
A: The case was about a trading member, M/S PRRSAAR, who was penalized by the National Stock Exchange of India (NSE) for financial irregularities. The Supreme Court directed the Securities Appellate Tribunal (SAT) to reconsider the quantum of punishment.

Q: What did the NSE Disciplinary Action Committee (DAC) do?
A: The DAC found M/S PRRSAAR guilty of financial irregularities and imposed a fine of Rs. 10 lakhs and suspended their trading membership for five days.

Q: What did the Securities Appellate Tribunal (SAT) do?
A: The SAT rejected the appeal of M/S PRRSAAR, stating that the penalty was not unreasonable or excessive.

Q: What was the argument of M/S PRRSAAR?
A: M/S PRRSAAR argued that the penalty should be limited to the amount specified in the NSE circular and that the suspension could only be imposed if the conduct was prejudicial to the Exchange.

Q: What did the Supreme Court decide?
A: The Supreme Court set aside the SAT order and directed it to reconsider the quantum of punishment, emphasizing that the SAT had not addressed the specific arguments raised by the appellant.

Q: What is the key takeaway from this judgment?
A: The key takeaway is that appellate tribunals must provide reasoned decisions and address all the specific arguments raised by the parties.