Negligence in transferring of mutual funds units from Demat accounts isn’t unfair trade practice: SAT

Case Details: Himanshu Arora v. Securities and Exchange Board of India - [2022] 137 taxmann.com 154 (SAT - Mumbai)

Judiciary and Counsel Details

• • Justice Tarun Agarwala, Presiding Officer
  • Amit Gupta and Ms. Kapila Mahendroo, Advs., Ms. Rajani Iyer, Sr. Adv., Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Aditi Palnitkar and Ms. Moksha Kothari, Advs. for the Appellant.

Facts of the Case

The appellant was one of the directors of a company, which was a depository participant of ‘NSDL’ under the Depositories Act. Certain complaints were filed with SEBI against the company regarding fraudulent/unauthorized transfer of Mutual Fund units of its clients.

The SEBI issued a show-cause notice against the company and its directors, which included the appellant. The SEBI concluded that the company’s conduct amounted to unfair trade practices and violated regulation 4(2)(p). By an impugned order of the SEBI, the appellant was debarred from accessing the securities market for a period of 3 years, and a penalty of Rs. 14 lakhs was imposed under sections 15HA, 15HB of SEBI Act, 1992, and section 19G of Depositories Act, 1996.

On appeal, the Appellate Tribunal held that since there was no material on record to show that the appellant had any direct role in the execution of fraudulent transfers of Mutual Fund units from accounts of the company’s clients, no fraud had been played by the appellant in fraudulent transfer of Mutual Fund units from Demat accounts of clients of the company and only a finding of negligence had been given against the appellant.

SAT Held

The SAT held that no case could be made out against the appellant for violation of regulation 4(2)(p). It was held that since the appellant had not conducted any fraudulent or unfair trade practice, he could not be penalized under section 15HA of the SEBI Act as the provision of section 15HA comes into the picture when a person is found to have indulged in fraudulent and unfair trade practices. The SAT quashed the penalty of Rs. 10 lakhs under section 15HA, however, affirmed the direction of debarment against the appellant and imposition of a penalty of Rs. 2 lakhs under each section 15HB and section 19G of the Depositories Act.