SEBI circulars do not permit a member of exchange to borrow funds from a group company: SAT

Case details: Edelweiss Broking Ltd. v. National Stock Exchange of India Ltd. - [2021] 129 taxmann.com 289 (SAT - Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwal, Presiding Officer
  • DR. C.K.G. Nair, Member and M.T. Joshi, Judicial Member
  • Somasekhar Sundaresan, Adv., Sameer Pandit and Ms. Krina Gandhi, Advs. for the Appellant.
  • Venkatesh Dhond, Sr. Adv., S. Vivek, Aditya Sikka, Ms. Drishti Das and Siddhant Sattur, Advs. for the Respondent.

Facts of the Case

The appellant was a member of the stock exchange in the capital market and futures and options sector in the matter at hand. The appellant’s records were examined, and the appellant was accused of violating the leverage and exposure limits while providing margin trading services.

It was alleged that the appellant had granted an excess exposure on an aggregate basis at member level to a tune of Rs. 175 crores and the said exposure was calculated as Member and Core Settlement Guarantee Fund Committee (Committee) excluded funds borrowed by the appellant from sources that were not approved by SEBI.

ITAT Held

In response, the appellant claimed that, while the SEBI circular allowed brokers to borrow funds from promoters, it had taken out a loan from one of its group entities. However, the Committee found that only borrowing from the promoter was authorized and that the term “promoter” did not cover a group organization; as a result, a penalty of Rs. 1.75 crore was levied.

In view of circulars of SEBI, only borrowing of funds by issuance of Commercial Paper, subject to compliance with appropriate RBI guidelines, and an unsecured loan from promoters and directors were permitted and at time of obtaining a loan from group entity and the appellant was aware that SEBI circular did not permit same, as a result, finding of Committee did not require interference.

However, because the appellant only took a loan from its group organization, which was a 100% subsidiary of the founders, the penalty of Rs. 1.75 crore was deemed excessive, and it was lowered to Rs. 25 lakh.

List of Cases Referred to

• • Vanguard Fire & General Insurance Co. Ltd. v. Fraser & Ross AIR 1960 SC 971 (para 11)
  • K.P. Varghese v. ITO [1981] 7 Taxman 13/131 ITR 597 (SC) (para 11)
  •  Smt. Pushpa Devi v. Milkhi Ram [1990] 2 SCC 134 (para 11)
  • K.V. Muthu v. Angamuthu Ammal [1997] 2 SCC 53 (para 11).