The Hon'ble Securities Appellate Tribunal ("SAT") passed an order on November 06, 2023, in the matter of Choice Equity Broking Private Limited v. Multi Commodity Exchange of India Limited [Appeal No. 818 of 2023] wherein it emphasized the importance of following a fair and transparent procedure for imposing penalties by the exchanges.

By way of background, the appellant in this case, is a trading member of the Multi Commodity Exchange of India Limited (MCX). The appellant's client executed trades on their own using the appellant's online trading application. Subsequently, MCX raised concerns, alleging that the trades executed by the client of the appellant appeared to be abnormal/non-genuine and instructed the appellant to furnish comprehensive details of the trades and authenticate the legitimacy of such trades. In adherence to MCX's directions, the appellant promptly submitted the requisite information for scrutiny. Surprisingly, and notably without issuing a formal show cause notice ("SCN"), MCX proceeded to levy a penalty of Rs. 18,93,750/- solely based on an email communication. The Hon'ble SAT found that the alleged SCN, which was in the form of an email, did not provide the grounds for the proposed action or the penalty to be imposed against the appellant.

Additionally, the email also did not indicate the particular penalty that was being considered. Consequently, the court concluded that the email could not be treated as a valid SCN. The court, drawing upon the precedent set by the Supreme Court in Gorkha Security Services vs. Government (NCT of Delhi) & Others (2014) 9 SCC 105, underscored that imposing a penalty in the absence of issuing a show cause notice and denying the opportunity for a hearing constitutes a breach of the fundamental principles of natural justice.

Furthermore, the court noted that the Bye-laws and Rules of MCX lacked a specified procedure for the imposition of penalties, despite the existence of prescribed powers for such actions. As a result, the court issued a directive for MCX to formulate a procedural framework governing the initiation of penalty proceedings against its members.

The judgment emphasizes that to follow the principles of natural justice is a 'sine qua non' to administrative proceedings. The Hon'ble Tribunal, in instructing MCX to devise a fitting procedure for commencing penalty proceedings, serves as a poignant reminder to both market participants and regulatory bodies. This underscores the imperative of adhering to fair and transparent processes within the securities market.

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