SEBI Exercises Review Power: Imposes Rs. 5 lacs fine on Broker set free by Adjudicating Officer

Securities Laws (Amendment) Act, 2014 has recently amended the SEBI Act, 1992 providing Power of Review through introduction of new section 15-I (3) in SEBI Act. Exercising this newly vested power, SEBI has recently reviewed an Adjudication Order issued against a Mumbai based broker who was alleged of carrying fraudulent self-trades in scrips of a company and violating SEBI regulations and was relieved by the Adjudication officer (“AO”) on no charges being established. The SEBI Member, on reviewing the order in terms of section 15-I (3) has now affirmed the violation of SEBI Provisions and levied a penalty of Rs. 5,00,000 (Rupees Five Lakh).

The newly inserted section 15-I (3) reads as following:

    “(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:
    Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:
    Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.“
Brief Facts of the Case

In wake of the wide powers vested through the aforesaid amendment, SEBI has for the first time exercised its novel power of review by examining the adjudication order against Crosseas Capital Services Private Limited (“CCSPL” or “broker”), in the matter of Bharatiya Global Infomedia Limited (“BGIL”). During an investigation in the initial public offer (“IPO”) of the BGIL, carrying out of fictitious self-trades by CCSPL in the scrips of BGIL was found by SEBI and an SCN dated May 06, 2013 was issued to the broker alleging the violation of-
  1. Section 12A (a), (b) and (c) of the SEBI Act, 1992; and
  2. Regulation 3(a), (b), (c) & (d) and 4(1), 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”); and
  3. Regulation 7 read with Clause A of the Code of Conduct as specified under schedule II of the SEBI (Stock Broker and sub-brokers) Regulations, 1992 (“Broker Regulations”)

Pursuant to the SCN, enquiry was conducted by the AO and it was concluded through his order dated April 30, 2014, that “the charges leveled against the broker do not stand established and the matter was, accordingly, disposed of without levying any penalty”.

Further, after almost 2 months of the adjudication order, SEBI by exercising its power under section 15-I (3), called the records of the proceedings of the matter and issued SCN to the broker. After conducting detailed enquiry in the case and providing reasonable opportunity of being heard to the noticee, Hon’ble Member concluded that the broker has not exercised due care and diligence in the conduct of its business and compliance with statutory requirements, as required under Clause A of the Code of Conduct for stock brokers and has carried out self-trades which are fraudulent in nature and thus violated the provisions of PFUTP Regulations and other SEBI laws. Hence, in terms of Section 15HA and 15HB of the SEBI Act, 1992, a penalty of Rs. 5, 00,000 (Rupees Five Lakh) has been levied on the broker.

Our Comments:

The newly inserted section which has retrospective effect i.e. from 28-03-2014, vests in SEBI, power to-
    a. Call for examining the records of adjudication proceedings; and
    b. Review and examine the erroneous order of adjudicating officer(s) (“AO”) which is not in the interests of the securities market; and
    c. Enhance the quantum of penalty levied through such erroneous order.
The powers have been vested with SEBI to allow the Board to review the orders of its own Adjudicating Officers (and not orders of Members) found not to be in the interest of Securities Market. The Adjudicating officers till now have enjoyed independent status with their orders being able to be reviewed only by the Securities Appellate Tribunal. Now with the powers vested with SEBI Board itself they can now revise the penalties (higher side) if they feel that the order is not well justified. Till date none of the Appeal has been preferred by SEBI at SAT against its own AOs as the same would have been detrimental to the image of both the AO as well the board itself.

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