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No penal consequences for mere technical lapses: JM Financial Order

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In a May 10, 2019 order, the adjudication officer of SEBI (AO) absolved JM Financial Limited (JMFL) of any negligence and held that a technical lapse on account of oversight does not deserve penal consequences.

SEBI had launched an investigation in a matter concerning insider trading and sought information from JMFL regarding connection of its employee, Mr. Atul Saraogi (Mr. Saraogi), with Smt. Vimla Devi Kalantri (Ms. Kalantari), one of the entities suspected of insider trading. On receiving a confirmation from Mr. Saraogi that he is not connected to Ms. Kalantari, JMFL relayed the information to SEBI. However, it later came to light that Mr. Saraogi had provided inaccurate information and he was connected to Ms. Kulkarni.

SEBI alleged that JMFL, a SEBI registered merchant banker was negligent in its duties. Denying the allegation, JMFL argued that as Mr. Saraogi was employed with JMFL for a long time, held a senior position, and had no prior issues, JMFL relied upon his declarations in good faith.

The AO observed that the standard of due diligence expected of a merchant banker is reasonable due diligence, and it is not expected of the merchant banker to suspect each and every information received by it and adopt a detective approach. Further, to support the allegation of negligence there should be a preponderance of probability to support it.

While stating that the facts and circumstances have to be looked at holistically, the AO observed that the preponderance of probability suggests that JMFL bona fide believed the information given by Mr. Saraogi to be accurate and thereby, could not adopt a suspicious approach. JMFL did not verify the information on account of error of judgement and oversight, but it was not negligent in believing the information given by Mr. Saraogi. In light of this, the AO held the mistake of JMFL was not a deliberate one, deserves benefit of doubt, and does not deserve penal consequences.

Instead of adopting a tick-box approach to imposing penalty, the AO has appreciated the lack of any deliberateness in the mistake of JMFL and passed the order by taking into account the various specific facts and circumstances of the matter. Such an approach renews faith in the regulator and avoids unnecessary litigation.