Case against Sebi, BSE laws begins

Mumbai: The Bombay High Court has started hearing the case filed by some brokers of the Bombay Stock Exchange (BSE) challenging two major contradictory laws formulated by the Securities and Exchange Board of India (Sebi) and the BSE.

As per the regulations issued by Sebi by its order dated 18 November 1993, a member-broker shall sell securities on behalf of a client only on receipt of a minimum margin of 20 per cent on the price of securities sold, unless the member has received the securities to be sold with valid transfer documents to his satisfaction prior to such sale. The member may not, if they so desire, collect such a margin from financial institutions, mutual funds and foreign financial institutions.

Sebi had implemented these regulations with effect from 1 January 1994. However, the bylaw 247A(3) of the BSE states that a member-broker shall make the full payment to their clients or deliver the securities purchased within two working days of the payout unless the client has requested otherwise. The stock exchange shall issue a press release immediately after the payout.

A few months back, in an appeal filed in the Bombay HC, some BSE members had challenged the contradiction in the law issued by the two governing bodies before the court, and the division bench comprising Chief Justice B P Singh and Justice D Y Chandrachud admitted the appeal.

The origin of the case was that R C Goenka, a BSE member, had sold and purchased shares for his client Anil Nahar in 1994. Thereafter, Nahar pressurised the said broker to pay the amount that was due to Nahar. But the broker was of the view that the amount that was due was being retained by him as deposit for the shares that have been sold by him as per Sebi norms. However, the investor went ahead and filed a compliant with the BSE as well as Sebi for non-payment of his dues. Sebi, in its order dated 17 February 2000, imposed a penalty of Rs 3,98,00 on Goenka under section 15(f)(b) of the Sebi Act, which had come into force on 25 January 1995.

The BSE broker, however, challenged the Sebi order before the Securities Appellate Tribunal (SAT), which, in its order dated 31 August 2001, reduced the penalty to a sum of Rs 1 lakh. The SAT order was again challenged by Goenka and some other brokers in the Bombay HC. The court admitted the appeal and stayed the recovery of penalty imposed by SAT in September 2001.