APPEAL NO. 8/2000

In the matter of:

Radheyshyam Chiranjilal Goenka                           Appellant


Adjudicating Officer, SEBI and
Securities and Exchange Board of India                   Respondents


Mr.Prakash Ganwani
(Instructed by Ashok Varma
Advocate, High Court)

Mr. Ravi Goenka
Representative of the Appellant                      for the Appellant

Ms.Poonam A Bamba
Division Chief, SEBI

Mr. Rajendran
Legal Officer, SEBI                                              for the Respondents


This is an appeal under section 15T of the Securities and Exchange Board of India Act, 1992 whereby the Appellant is challenging the order dated 16.2.2000 made by the Respondent Adjudicating Officer imposing penalty of Rs.3.98 lakhs on the Appellant.

The Appellant is a member of Bombay Stock Exchange. He was carrying on stock broking business till January 1995 and thereafter he discontinued that business, as there was a massive fire in his office, causing heavy damage. The Appellant while doing business of stock broking had done business for one Shri Anil Nahar, a non-resident Indian. It has been stated that the said Nahar complained to the stock exchange authorities and to the Respondents that the Appellant was not paying the sum of money due to him from the transaction. Shri Nahar though started with a claim of Rs.4, 97,970 in July 1995 ultimately accepted Rs.2 lakhs in a mutual settlement arrived at sometime in August 1999. Full payment was made in September 1999. In the meantime the Respondent�s initiated adjudication proceedings against the Appellant for the alleged violation of section 15F (b) of the Act. The adjudication resulted in imposition of monetary penalty of Rs.3.98 lakhs. The Appellant is aggrieved by the order of the Respondent, and hence this appeal.

Shri Prakash Ganwani, learned Counsel for the Appellant, submitted that since the contract for sale of shares was entered into in the year 1994, section 15F (b) of the Act has no application as the said section came into force with effect from 25.1.1995. Therefore, the penalty provided therein cannot be enforced against the Appellant. He contented that Adjudicating Officer�s version that article 14 of the Limitation Act had no application to the case of the Appellant. It was also urged that the Respondent had initiated the inquiry on the basis of a complaint from Shri Nahar and that during the currency of the inquiry itself the Appellant had paid full amount to the satisfaction of the said Nahar. That being the case, the Respondent should not have proceeded with the inquiry and issued the impugned order, imposing monetary penalty.

While explaining the back ground and the factual position, the learned Counsel had tried hard to establish that there was no intentional delay on the part of the Appellant in making payment to Shri Nahar. He submitted that there was massive fire in his office on 2nd August, 1994 resulting in huge loss of property including important records relating to his trade transactions,. Since the loss was so huge and that most of the records were also destroyed, he had closed down the broking business from January 1995. He admitted that Shri Nahar was one of the esteemed clients who had sold shares worth about Rs.35 lakhs through the Appellant. But coming to the claim made by Shri Nahar he submitted that the claimant was not sure of the precise sum of money due to him from the firm and was wavering. In January 1995 he had made a claim of Rs.497970.50 Thereafter in April 1996 he himself admitted that only an amount of Rs.357878/- was due. Afterwards in August 1999 he agreed to settle the claim for Rs.2, 38,922. Which were about 50% less than the original claim put forth by him in January 1995. Subsequently again by way of mutual settlement in August, 1999 he agreed for a sum of Rs.2 lakhs, which the Appellant paid in September, 1999. There was no complaint from him thereafter alleging any "pressure" from the Appellant as alleged by the Respondent. It was also submitted that the Appellant had to protect his interest against had deliveries, as Shri Nahar was not easily accessible, being a non-resident. Learned Counsel invited the Tribunal�s attention to the Appellants letter dated 28.11.1995 to the Investors Cell, BSE, Mumbai informing them in the context of Shri Nahar�s complaint that out of shares amounting to Rs.35 lakhs sold for the complainant most of them were standing either in his name or in the name of his family members that these shares were coming back as bad deliveries; that since the complainant was staying in Muscat, the bad delivery shares had to be sent to Muscat and the Appellant had to shell out considerable amount on the complainant�s behalf in various bad delivery sessions, leaving little security left with the Appellant to recover the money from him. In the light of the bad deliveries and consequences thereof on the Appellant, appropriate authorities were requested to suggest him a suitable solution. He cited another correspondence in this connection from BSE to the Respondent (letter dated 15.1.1996), therein BSE had stated "it appears from the reply that the complainant had sold through the member shares worth Rs.35 lakhs and now the shares are coming under objection and the member is required to make payment to broker parties in bad delivery. As the complainant is staying at Muscat, it is difficult for the member to hand over bad deliveries to the complainant and to collect rectified deliveries from him.

Therefore the member has retained the money as deposit and had requested the exchange to take action against the complainant. In view of this it is better the complainant should sort out the matter with the member mutually". According to the learned Counsel, the cited letter of BSE endorsed the stand taken by the Appellant. Further he pointed out that the Appellant was never wanting in his efforts to sort out and resolve the dispute. He had readily agreed to submit to the exchange�s Investor Grievances Committee�s decision and also at great risk even issued a cheque for the settled amount of Rs.2, 38,922, which because of the Income Tax attachment of his account, could not be encashed. Since the Appellant was facing fund crisis and at the same time eager to repay the amount to the complainant, the exchange was requested to dispose of certain shares standing in his name and to make payment from the sale proceeds. He submitted that there was absolutely no intentional delay on his part to meet with the requirements of making prompt payment to the complainant. Destruction of property and records was a matter unexpected, which in effect had resulted in closing down his business. It was also submitted that he had at no point of time put any pressure on the complainant to settle for any amount, that the complainant had made complaint to BSE and the Respondent only to pressurise the Appellant and to take advantage out of the crisis the Appellant was facing in the aftermath of fire in his office. He pointed out that the claimant, if he was so sure of his claim, did never seek recourse to arbitration, which is available under BSE bye laws to settle disputes between a client and a broker; Further, he has not made any complaint even after getting the money back alleging any pressure, which he could have done, if there was any such pressure on him as alleged. In support of the contention that the Appellant was too willing to sort out the matter amicably, relied on several documents annexed to the Memorandum of Appeal. According to him, there was no justification to proceed against him and impose monetary penalty, which was almost 100% of the amount claimed and settled in the dispute.

Countering the argument that section 15F (b) had no application to this case Ms.Poonam A Bamba, learned Representative of the Respondent submitted that the default under the Act being a continuing one fresh cause of action arises under the said provisions for each day during which the failure continued. She submitted cases of continuous default wherein a fresh cause of action arises in each day, while the default continues is not hit by law of limitation. The subject matter of the inquiry has been the default/failure by the Appellant in making payment within the specified period, and that default/ failure under the instant proceeding had been in the nature of continuous default. Therefore, article 14 of the Limitation act had no application to the adjudication and inquiry proceedings under section 15F (b) of the Act. She further submitted that payment of money to the complainant was belatedly made and this itself won�t absolve the Appellant from the offence already committed. She cited the requirement of Bye - law 247 of BSE, which require the broker to make payment to the clients, within two working days of pay out unless the client has requested otherwise. She pointed out that under rule 4(b) of the SEBI (StockBrokers and Sub Brokers) Rules, 1992 redressal of grievances of the client by the broker within the stipulated time is a condition of registration. Attention was also invited to schedule II i.e. Code of conduct � under regulation 7 (1) of SEBI (StockBrokers and Sub Brokers) Rules, 1992. According to her, even if the records were destroyed in the fire accident it would have been possible for the Appellant to find out the actual amount due to the complainant from the client�s account required to be maintained with the Bank. She submitted that it was the duty of the Appellant to quantify the claim and make payment without waiting for any claim request from the investor. She pointed out that according to the Appellant�s own admission in the letter dated 5.6.1998 in the meeting held in the Investors Services Cell on 20.5.1998 he had handed over to the complainant his bad delivery and had assured to pay Rs.2, 38,922 and had also agreed to pay this amount in two installments one each in June, 1998 and July, 1998. But then this commitment was not honoured as the cheque issued for the purpose could not be en- cashed as the account was under attachment. This fact was known to the Appellant and still with a view to buy time he entered into a settlement, issued cheque, and thereafter asked BSE to sell certain shares standing in his name to Shri Nahar. All well designed delay tactics. Thereafter, after a lapse of 1 year another settlement was reached at with Shri Nahar on 12.8.1999 to pay Rs.2 lakhs, which he paid, by September 1999. She pointed out that there was no doubt about the fact that the Appellant owed money to the complainant and he was dilly dallying to delay the payment on some count or the other. She submitted that the complainant was put under pressure to reduce his claim from Rs.4.97 lakhs to Rs.2 lakhs and the pressure tactics continued for nearly 5 years and ultimately made the complainant to satisfy with whatever he can get! She further submitted that there was no dispute about the claim, and that is why the Investor Grievance Cell did not refer the matter to arbitration. She said that the Appellant�s excuse of holding back the money to safe guard his interest against bad deliveries was not genuine as he could have made use of margin money in that event.

I have carefully considered the rival contentions. The Appellant�s contention that since the contract was executed in 1994, provisions of section 15F(b) brought in January 1995 have no application is unfounded. Section 15F(b) is on the failure to deliver any security or failure to make payment of the amount due to the investors within the period specified in the regulation. Admittedly, the failure to make payment to the complainant in the case occurred, after incorporation of section 15F(b) with effect from 25.1.1995. One of the conditions for grant of certificate of registration to the Appellant was that he would follow the requirements of rule 4(b) of the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Rules, 1992, that he shall abide by the rules, regulations and bye laws of the stock exchange of which he is a member. In terms of regulations 7 of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, a stock broker holding a certificate of registration is required to abide by the code of conduct as specified at schedule II to the Regulation and that in terms of clause B (1) of the said Regulations, a stock broker is required to make prompt payment in respect of securities sold and arrange for prompt delivery of securities purchased by clients. The Appellant is a member of Bombay Stock Exchange and as such he is bound by the Rules, Byelaws and Regulations of the said exchange. In terms of Bye-law 247 A(3) of BSE, a member broker is required to make payment to his clients or deliver the securities purchased within two working days of pay our unless the client has requested otherwise. Thus it is clear that, since the default in payment occurred after the new section 15F (b) was incorporated in January, 1995 and the default is of a continuing nature till such time it is made good in terms of the said section and that failure to make payment to the investor in the manner prescribed, and that the Appellant having failed to make prompt payment, I have no hesitation to hold that the matter is falling within the scope of the said section enabling the Respondent to adjudicate and impose monetary penalty.

About the applicability of article 14 of the Limitation Act, it is seen that Appellant himself had acknowledged the claim in no uncertain terms, the settlement reached on 20.5.1998 and thereafter again August 1999. So it cannot be said that the matter cannot be proceed with on the ground that it is hit by limitation. Further, an adjudication under section 15I for default under section 15F cannot be said to be hit by Article 14 of the Limitation act, as the default identified thereunder being a continuing one, till such time it is made good. In the instant case the default was made good only in September 1999, whereas the adjudication proceedings had commenced much earlier as way back in the year 1998.

The argument that, since the amount has been already paid to Shri Nahar, the complainant, on the basis of mutual settlement, the adjudication commenced on the basis of his complaint does not stand any more, is unsustainable. The complaint has served only as a source of information and the adjudication was directed to find out the extent of compliance of the requirement of the statutory requirement. Mutual settlement of the claim or withdrawal of a complaint cannot stall an adjudication and imposition of penalty in the event of the default established.

It is seen from the impugned order that at no point of time the complainant had established the actual amount due to him. While in July 1995 the complainant called upon to pay Rs. 4, 90, 917/- By October he demanded Rs.4, 97, 970. It is an admitted fact that the complainant had sold shares of Rs. 35 lakhs through the Appellant and there were many bad deliveries and returns, requiring the Appellant to meet the inter broker obligations. It is not fair to claim that the complainant should be paid in full and that the bad delivery returns, the broker should suffer and make claim separately from the client, that too from a person who is not easily accessible, being a non resident. The Respondent�s contention that the Appellant could have worked out the quantum from the clients account in the absence of back up accounts, is difficult to accept as the client�s account is a "common kitty" in which the monies due to all the clients are credited and from that bank account each party-wise credit is not accurately ascertainable. The Appellant had expressed his inability to readily work out the claim figures in view of the fire havoc in his office destroying properties and records. It goes unrebutted that since 1995, he stopped broking business itself. The Respondent�s contention that margin money should have been used to meet the bad delivery obligation is not correct as the margin money is retained for specific purpose and further that was quite meager in the context of sale involving shares of Rs. 35 lakhs. In this context letter dated 15.1.1996 from BSE to the Respondent, in the context of the reason putforth by the Appellant for retaining money, suggesting that "it would be better that the complainant should sort out the matter with the member mutually" is worth taking cognizance. In all fairness, it is the net amount, in the event of any dispute, be considered as the amount due to the claimant and not the gross amount ignoring the counter claims arising out of the bad deliveries returned. In any case, Rs. 2, 38, 922 was accepted as the amount due, by both the parties in a settlement reached in a meeting held on 20.5.1998 under the auspices of the Investor Services Cell, of BSE, which is a non partisan agency. This amount is the admitted quantum. It is true that the Appellant could not pay this amount within the time limit agreed to make the payment. However, the complainant in his wisdom thereafter in August 1999 decided to accept a lower amount of Rs 2 lakhs and the Appellant has paid the same. It is not correct to say that the Appellant had admitted the net amount payable as Rs. 3, 57, 878 in February, 1996 itself as even at that time bad delivery problem had not been completely sorted out by his own version.

No doubt the Appellant had attempted to establish his bonafides to show that the delay was not intentional and that he had even at the risk of criminal prosecution issued cheque to the party in 1998 to effect payment which could not be honoured because of attachment of accounts by Income Tax authorities and that more than once he had requested BSE to dispose off certain shares standing in his name and make use of the sale proceeds to pay to the complainant. He had also submitted that the complainant had failed to prove his claim and still he had agreed to a mutual settlement and the amount finally agreed upon has been paid. On the other hand the Respondent�s contention is that the Appellant had failed to comply with the requirement of prompt payment required under the rules and bye-laws and the fact that the complainant being a non-resident was not in a position to pursue the matter was taken advantage and pressure was put on him to come for settlement for a smaller amount. The suggestion of BSE referred to above advising mutual settlement cannot be viewed casually. But for sufficient reasons, an independent and non partisan institution would not have suggested mutual settlement and the fact that both the parties agreed to the proposal is also note worthy. BSE�s letter under reference strengthens the Appellant�s version that shares were returning and thereby fastening liability on him. In the absence of any material before the Adjudicating Officer, his view that the claimant had agreed to a lower figure because of the pressure tactics from the Appellant is not acceptable blindly. Since the Appellant had admitted the claim of Rs.238922 and issued cheque for paying the said sum, I would consider the same as the amount due to the party. Concession of Rs.38, 922 in the subsequent settlement by the claimant does not change the amount which was due. So I hold that an amount of Rs. 2, 38, 922/- was due to the complainant and though it was ascertained in 1998 liability to pay the same can be traced back to 1995 it.

Since the arithmetical basis on which the penalty has been quantified has been furnished by the Adjudicating Officer, I consider it proper to look into the same to find out the reasonableness of the quantification. It is difficult to agree to the conclusion that the amount originally agreed to be paid was Rs.2,38,922 and actually only Rs.2,00,000 was paid and the balance amount is a loss to the complainant. In this connection it may not be forgotten that both these quantums were mutually agreed amounts and since the complainant himself had agreed to receive Rs.2.00 lakhs by way of final settlement, in the absence of any other evidence, it cannot be said that he has been put to a loss of Rs.38.922. It is not known as to in what circumstance the claimant agreed to accept Rs.2 lakhs. It is all the more relevant to remember that there was no complaint from the complainant even after settlement to show that he was pressurised to agree to accept Rs.2 lakhs. So the said " presumed loss" cannot be a ground for imposition of penalty. It is true that even though the final dues were crystallized sometime in 1998 and thereafter the amount was further reduced to Rs.2 lakhs by way of mutual settlement, that the amount was due from a transaction relatable t the year 1995, it is reasonable to hold the Appellant liable to pay interest on the amount from the date on which it was due. The Adjudicating Officer has worked interest @ 12% for the period and quantified the same at Rs.92, 226/- and considered this as loss to the investor. The rate of interest or the quantum arrived at and the period for which interest has been charged has not been objected to by the Appellant.

In terms of section 15F (b) the broker who had failed to make payment of the amount due to the investor is liable to a penalty not exceeding five thousand rupees for each day during which such failure continues, This section provides for the maximum penalty leviable. As far as actual quantum of penalty payable is concerned, the Adjudicating Officer is required to take into consideration the following factors stated in section 15J. Said section 15J clearly states that:

"While adjudging quantum of penalty under section 15I the adjudicating officer shall have due regard to the following factors namely:-
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of default;
(b) the amount of loss caused to investor or group of investors as a result of the default

(c) the repetitive nature of the default.

Having worked out the loss suffered by the complainant due to delayed payment as Rs, 1, 31, 148 (i.e. loss in principal amount Rs. 38, 922 and sum of interest at Rs.92, 226) the Adjudicating Officer imposed a monetary penalty of Rs. 3, 98, 000, which according to him was worked @ Rs.1,00,000 per day for the default period commencing from 20.8.98 to 22.9.99 being the date on which Rs. 2, 38, 922 was agreed to be paid and the date on which the final installment was paid.

In the light of the facts and circumstances explained by the parties, and that loss suffered by the claimant by way of interest as quantified by the Adjudicating Officer being Rs. 92, 226 imposition of Rs. 3, 98, 000 as penalty against a settled claim of Rs. 2, 00, 000 appears to be too harsh and not in tune with the guidelines provided under section 15J. There is no indication that the Appellant is a habitual defaulter or that he had made any disproportionate gain or unfair advantage. Thus the only guiding factor which the Adjudicating Officer had relied upon was the loss to the investor, that too he has arithmetically worked out as Rs. 92, 226/-. In these circumstances I do not find any justification to impose Rs.3.98 lakhs as penalty. However, since it has been established that the Appellant had failed to make prompt payment of the sum due to the claimant, imposition of reasonable sum as penalty is justified.

Taking into consideration all the relevant factors, I hold that a sum of Rs 1 lakh as penalty would meet with the situation and accordingly the quantum of Rs. 3.98 lakhs imposed as monetary penalty by the Adjudicating Officer stand modified to Rs.1 lakh. To this extent the order stands modified. The impugned order, as thus modified sustains.

The appeal is disposed of on the above lines.

Place: Mumbai
Date: August 2000