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ORDER UNDER RULE 5(1) OF THE
SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING
OFFICER) RULES, 1995 READ WITH SECTION 15HB OF THE SEBI ACT, 1992. AGAINST AND SHAREBROKERS LIMITED ��������� BACKGROUND: 1
M/s
South Gujarat Shares and Sharebrokers Limited (for brevity�s sake, hereinafter
referred to as SGSSL) is a member of the National Stock Exchange Ltd, Mumbai
(NSE) and registered with the Securities and Exchange Board
of India, 1992 (SEBI) as a depository participant of the National Securities
Depositories Services Limited (NSDL) with DP ID-IN-300425. 2. ����� An inspection of the books of account,
documents, records, infrastructure, systems and procedures of SGSSL was
conducted by SEBI on the 24th and 25th of February 2004 under
the SEBI (Depositories and Participants) Regulations, 1996 (hereinafter
referred to as the �Regulations") and during the said course, SGSSL were
inter alia found to have allegedly violated Regulation 54(4) of the said
Regulations. While communicating the findings of the inspection to SGSSL vide
letter dated ��������� NOTICE/
REPLY/ PERSONAL HEARING: 3.������ In view of the above, I issued a notice
dated January 6, 2005 to SGSSL to show cause as to why enquiry proceedings
should not be initiated against them in terms of Rule 4 of the SEBI (Procedure
for holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules,
1995 (Rules) and penalty should not be imposed upon them under Section 15HB of
the SEBI Act 1992 (hereinafter referred to as Act). SGSSL were advised to make
their submissions, if any, along with supporting documents that they wished to
rely upon, within 14 days from the date of the receipt of the notice, and were
also advised to note that in case they failed to reply within the stipulated
period, it would be presumed that they had no adequate explanation to offer.
SGSSL replied to the said notice vide their letter dated 4.
Thereafter
in terms of Rule 5(1) of the Rules, a notice of hearing dated ��������� CONSIDERATION
OF ISSUES: 5.������ I
have taken into consideration the facts and circumstances of the case, the
submissions advanced on behalf of SGSSL and the material available on record
including the findings of the inspection report. 6.������ The
charge leveled against SGSSL for which the present proceedings have been initiated,
the submissions, if any, made by them in this regard and my findings on the
same, are elaborated herein below: - �� ��During
the course of inspection, SGSSL were found in 139 instances to have delayed by
more than 7 days furnishing to the issuer, the details of the certificate of
security (demat request form-DRF) received by them from the beneficial owners,
which amounted to a violation of Regulation 54(4) of the Regulations making
them liable for action in terms of Section 15HB of the Act. 7.������ In their defense, SGSSL submitted that as
soon as the demat requests were received from the clients and a demat request
form (DRF) was submitted for the said purpose, the date was stamped and entered
into the inward register as well as outward register and within 7 days from the
date of stamp, the same was dispatched to the concerned R & T. It was
stated that in respect of 6 instances DRN Nos 84314,84307,84308,84306,84300 and
84298 where there was a delay of 29 days, the client had opened a single
account having four joint holders and thereafter had given SGSSL the DRF for
the dematerialization of securities having their individual names for which a receipt
of acknowledgement cum receipt No 47736, dated November 4, 2003 for the a/c
client id 10135267 was issued. However upon noting the discrepancy, the beneficial
owners were advised to open separate accounts i.e. four accounts, in their
individual names and then surrender the securities for dematerialisation. Accordingly
four separate accounts were opened by the beneficial owners and the bill was
then adjusted to the old receipt no 47736 dated 8.������ SGSSL further submitted that the remaining
cases of delay ranging between� 7 and 11
days occurred during the Diwali season when most of their staff were on leave
and the market was high and bullish and they were receiving 400 demat requests
per day. It was clarified that although the heavy work load and their inability
to appoint temporary staff without the knowledge and experience of participant related
work caused the delays, no losses were caused on account of these delays to any
of their clients nor were any complaints received by them in this regard from
their clients. SGSSL further submitted that they had taken ample steps to
ensure that this kind of delay would never recur in future and that thereafter
there was not a single case of delay which could amount to a violation of
Regulation 54(4) of the Regulations. It was emphasized that after the SEBI
inspection, another inspection by the NSDL was carried out in which not even a
single case of such delay was found by the inspecting authorities and that in
fact they had not received any compliant from any of their clients nor any
intimation of such complaints from the Investor Grievance Cell so far. Hence as
no loss had been caused to any of their clients, no penalty should be levied
against them. 9. ����� I have considered at length the provisions
of law alleged to have been violated by SGSSL as also the submissions advanced
on their behalf that has been elaborated above. 10.���� Regulation 54(4) of the Regulations, which
came into effect from September 2, 2003 mandates every participant to
furnish to the issuer, details of the certificate of security along with the
said certificate of security, within seven days of the receipt of certificate
of security from the beneficial owners. 11.������ The process in such an event is such
that all beneficial owners, desirous of dematerializing their holdings, submit
the filled in dematerialization request form (DRF) along with the share /
debenture certificate(s) to the participant, for dematerializing their
securities. On receipt of the request, the details are required to be verified
by the officer of the participant on the counter, by cross checking the number
of certificates, availability of security in demat, ISIN number and names of
holders etc. The receipt of the DRF is acknowledged at the counter and a
receipt is then issued for the charges that have to be paid by the investor for
the dematerialisation of the securities. This receipt acts as the future reference
for the investor in case of any discrepancy. The DRF is sent to the back
office of the participant for verification and data entry into the Depository
Participant Module (DPM) system. After the verification process and data entry,
the DRN (dematerialisation request number) is generated and the DRF along with
a covering letter addressed to the concerned Share Transfer Agent/ the issuer
company, is then forwarded to them for dematerialisation. 12.���� Keeping this process in mind, during the
course of inspection, when the office of SGSSL regarding various aspects concerning
dematerialization was inspected i.e., whether there was any delay in dispatch
of the dematerialization requests, whether the processing of the requests was being
done in a proper manner without any of the investors facing any problem for
rejection of the dematerialization requests on account of faulty processing by
the participant, etc, it was inter-alia noted that in several instances,
SGSSL had not forwarded the DRF to the issuer company / RTA within seven days
of its receipt in terms of Regulation
54(4) of the Regulations. This was apparent from an examination of the date of
generation of the receipt (receipt for amount paid towards dematerialisation,
given to the investor for submission of DRF) which when compared with the date
of generation of the Dematerialisation Request Number (DRN) and further
compared with the date of dispatch of the DRN with the courier company dispatch
schedule, clearly indicated that in the following 139 instances which are not
disputed by SGSSL the DRNs were dispatched late to the concerned share transfer
agent/the issuer company i.e., beyond the stipulated period of seven days prescribed
in the Regulations:
�13.��� I
have carefully examined the submissions made by SGSSL in their defense as well
as the documentary evidence submitted by them. � 14.���� I have perused the relevant documents submitted
by SGSSL to substantiate their contentions as regards the cases involving a
delay of 29 days, I have observed that in the said instances the original DP
account was opened on October 29, 2003 and upon issuance of the DRF for the
dematerialization of securities with their individual names, an acknowledgement
cum receipt dated November 04, 2003 was issued by SGSSL.� It appears that (on being advised by SGSSL) thereafter
the clients had opened fresh accounts on � 15.���� Even otherwise, I have noted several other
cases involving delay ranging between 7 and 11 days for which once again adequate
justification has not been given.� The contention
that the delays occurred during the Diwali season when most of their staff were
on leave and the market was high and bullish and they were receiving 400 demat
requests per day, does not in any way absolve them from their failure to
discharge their duties as a prudent participant, in terms of the statutory
obligations cast upon them. Assuming that their work load was heavy, nothing
prevented them from recruiting temporary staff.�
Their counter argument that temporary staff with the adequate knowledge
and experience of participant related work was unavailable; seem to be lame
excuses relied upon as a last recourse to justify their aberrations. 16.���� I have considered the contention advanced
by SGSSL that as no complaint were received from any of their clients; no
losses were caused on account of these delays to any of their clients. �In this regard, I consider it relevant to
refer to the inspection report which also highlights the fact that SGSSL was
found to be maintaining a register for the complaints received from the
investors, called the complaints register only from November 2001 onwards and that
a few complaints pertaining to the year 1999 are being maintained separately. It
is also noted that SGSSL did not have any system for recording the complaints
received through phone, walk in, email etc. 17.���� It is apparent that in case
of improper maintenance of the complaints register, there is bound to be a
difficulty to ascertain the redressal mechanism of SGSSL or the time taken by
them to redress various grievances. Keeping the same in mind, due credence
cannot be afforded to the contention of SGSSL that no losses occurred to any of
their clients due to the defaults earlier discussed as there were no complaints
on record against them. � 18.���� In view of the facts above stated,
the violation of
Regulation 54(4) of the Regulations by SGSSL stands established thereby
making them liable under the provisions of Section 15HB of the Act, which inter alia provides that
whoever fails to comply with any provisions of the Act, the rules or
Regulations made or directions issued by the Board there under, for which no
separate penalty has been provided, would be liable to a penalty which may
extend upto rupees one crore.� 19.���� The essence of Regulation 54(4)
of the Regulations which came in to effect on 20.���� Upon an analysis of the facts of the case
and the rational behind the incorporation of Regulation 54(4) of the
Regulations, it is apparent that the failure on the part of SGSSL in the
delayed dispatch of these demateraisation request forms to the issuer company
/RTA within seven days of their receipt, would undoubtedly have caused
opportunity losses to the investors, in that when the market is high and
bullish and the investors wish to take advantage of these trends in the market,
they are unable to do so, as the dematerialization of the
shares are delayed. There
are also other aspects to consider in such cases. The investor
is compelled to spend additional time in re-submitting the share certificates
for dematerialisation and also incur, in all probability, additional cost for
dematerialisation of the share certificates once again. 21.���� Any evasion of the regulatory provisions
issued by the regulator in the interests of the investors or non adherence to
the same for any reason whatsoever is bound to affect the interest of such
investors. Although such a loss cannot be specifically computed in monetary
terms, the fact remains that all regulatory provisions have a specific purpose
behind their enactment.� The very purpose
of enacting any legislation is due adherence to the procedures laid down there
under to ensure the sound and smooth functioning of the capital market. If adequate
cognizance is not taken of the breach of any of these provisions and sufficient
liability is not fixed there upon, the entire purpose of incorporating the
provisions in the said enactments would become redundant. 22.���� SGSSL have impressed upon me the fact that
there has not been any recurrence of such delays on their part and that after
the SEBI inspection, in the subsequent inspection carried out by NSDL, no such
violation was pointed out.� 23.���� There are a plethora of judgments passed by
the Securities Appellate Tribunal to the effect that when there is a
rectification of the deficiencies pointed out in the inspection report, the
same should be viewed leniently.� 24.���� Keeping the same in mind, although Section
15HB of the Act calls for the imposition of the penalty up to a maximum of Rs.1
crore for violation of this nature, I am of the considered opinion that the facts
of the instant case do not call for the imposition of penalty to the extent
specified in Section 15HB of the Act. 25.���� Moreover for the purpose of adjudging the
quantum of penalty, I have also considered the factors laid down in Section 15 J
of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for
holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995
i.e. the amount of disproportionate gain or unfair advantage made as a
result of the said default, the amount of loss caused to the investors and the
repetitive nature of default. �Some of these pre-requisites are in the
negative and are in favour of SGSSL. However the opportunity losses caused to
the investors in 139 such instances cannot be discounted. �PENALTY 26.���� In view of the foregoing, on a judicious
exercise of the discretion conferred upon me, bearing in mind the facts and
circumstances of this case as well as after analysing all the material
available on record, in exercise of the powers conferred upon me under Rule 5
of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the
Adjudicating Officer) Rules, 1995, in the interest of justice, equity and good
conscience, I think it appropriate to levy a penalty of Rs.1,50,000/- (Rupees
One Lakh Fifty Thousand ������������������������������������������������Only ) upon M/s South
Gujarat Shares and ShareBrokers Limited for the violation of Regulation 54(4) of
the SEBI (Depositories and Participants) Regulations, 1996. 27.���� The penalty
amount shall be paid within a period of 45 days from the date of receipt of
this order through a cross demand draft drawn in favour of �SEBI- Penalties
remittable to the Government of India� and payable at Mumbai which may be sent
to Shri Suresh Menon, General Manager, World Trade Centre,
29th Floor, Cuffe Parade, Mumbai 400005. PLACE: MUMBAI�������� ��������� ��������������� �� G. BABITA RAYUDU
DATE:
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