ORDER UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF SURAT PEOPLES COOPERATIVE BANK LTD

1. I was appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to as SEBI) in terms of an order dated April 8, 2005 to inquire into and adjudge under Section 15-I read with Section 15 HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) the contravention of the provisions of SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as the DP Regulations) and directions issued by SEBI alleged to have been committed by the Surat Peoples Cooperative Bank Ltd. (hereinafter referred to as SPCB).

FACTS OF THE CASE

2. SEBI conducted an inspection of the books of accounts and other records of SPCB which is a depository participant of National Securities Depository Ltd (NSDL) with SEBI Registration Number IN-DP-NSDL-85-99. The period covered under the inspection was January 1, 2003 till February 24, 2004. During the inspection, various irregularities such as not following the prescribed procedure for opening of the beneficiary account and not exercising due diligence, skill, care and caution while opening the beneficial owner accounts in the participant system and failure in processing and timely dispatch of the dematerialization requests of the investors etc. were observed. In respect of the said violations alleged to have been committed by SPCB, adjudication proceedings were initiated against it.

SHOW CAUSE NOTICE

3. A Show Cause Notice dated August 3, 2005 under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Adjudication Rules) was issued to SPCB, requiring it to show cause as to why an inquiry should not be held against it for the violation alleged to have been committed by it.

SUBMISSIONS OF SURAT PEOPLES COOPERATIVE BANK LTD

4. SPCB vide letter dated August 22, 2005 submitted its reply to the show cause notice. Considering the reply of SPCB, it was felt that in the interest of justice, an inquiry should be conducted in the matter. Shri Deepak Shah and Shri Hemant J Desai attended the inquiry on September 6, 2005 as the authorized representatives of SPCB and made the submissions.

5. The charges leveled against SPCB, its submissions and the findings of the inquiry in respect of charge is mentioned below :

CHARGE: NOT FOLLOWING THE PRESCRIBED PROCEDURE FOR OPENING THE BENEFICIAL OWNER (BO) ACCOUNT AND NOT EXERCISING DUE DILIGENCE, SKILL, CARE AND CAUTION WHILE OPENING THE BO ACCOUNTS

6. It is alleged that SPCB did not follow the prescribed procedure for opening of the BO accounts and in this regard it failed to exercise due diligence, skill, care and caution. In this regard it was noted in the inspection that in 54 instances proof of identity and address proof of the applicant was not obtained. In respect of 3 corporate BO accounts, no proof of identity and address were found and further, 3 other corporate BO accounts did not contain the photographs of the persons authorized to operate the account. It was noted that in 4 instances the agreement was not filled in properly. It was noted that in 17 instances, photograph of the investor was stapled and not pasted. In this regard, the inspection reports points out that the practice of stapling the photo is prone to misuse, switching etc. It was further noted that in 13 instances the agreement was not filled in at all and in certain cases it was improperly filled or incomplete or signatures of witness were missing etc.

7. In view of the above mentioned discrepancies, SPCB is alleged to have violated the provisions of Regulation 54 of the Depository Regulations and SEBI circular SMDRP/POLICY/CIR-36/2000 dated August 4, 2000 issued in exercise of powers conferred under Section 11(1) of SEBI Act.

SUBMISSIONS

8. SPCB has submitted that in the initial stages of commencement of depository participant services which was a new business for SPCB, the said instances of non observance of prescribed procedure for account opening occurred. However, now a proper system has been put in place to take care of precautions for opening the accounts. SPCB has further submitted that it has been exercising due diligence, skill and care and caution while opening the BO accounts in its participation system. SPCB has committed to pay special attention to bring about further improvements in this regard.

FINDINGS

9. SPCB had admitted lapses on its part while opening the BO accounts in the instances as detailed above. Though it is noted from the submissions of SPCB that the said violations had taken place at the commencement of its depository’s participation activity and now a proper system has been implemented, it is pertinent to note from the observations of the inspection that a very small number of accounts opening applications were analyzed. It is also mentioned that had the sample size been increased, the number of instances would have been more.

10. In view of the fact that SPCB had admitted the lapses on its part while opening the beneficiary account, it is found that SPCB had violated the direction issued by SEBI vide circular SMDRP/Policy/Cir-36/2000 dated August 4, 2000 stipulating that a beneficiary account must be opened only after obtaining proof of identity of the applicant. It is also noted that the said circular also stipulates that the applicant’s signature and photograph must be authenticated by an existing account holder or by the applicant’s bank or after due verification made with the original of the applicant’s valid passport, voter ID, driving license or PAN card with photograph and further the account opening form should be supported with proof of address such as verified copies of ration card/ passport, voter ID/ PAN card/ driving license/ bank passbook.

11. Failure to follow the provisions of Regulation 54 of the Depository Regulations and the directions of the said circular makes SPCB liable to the penalty under Section 15 HB of the SEBI Act.

CHARGE : FAILURE TO COMPLY WITH THE DE-MATERIALIZATION REQUESTS OF THE INVESTORS

12. Regulation 54(4) of DP Regulations provides that the depository participant shall within 7 days of the receipt of certificate of security referred to in sub regulation (1) furnish to the issuer, details specified in sub regulation (2) alongwith the certificate of security. It was noted in the inspection that in 171 instances, SPCB did not forward Dematerialization Request Form (DRF) to the Issuer Company / Registrar and Transfer Agent (RTA) within 7 days of its receipt. It is noted that the delay varies from a minimum of 4 to maximum of 21 days.

SUBMISSIONS

13. SPCB has submitted that delay in this regard was unintentional. The instances of delay given in the show cause notice occurred when there was tremendous upswing in share market and resultant extraordinary pressure of work which could not be coped up despite putting in humanly possible efforts.

FINDINGS

14. The explanation given by SPCB such as the delay was due to the extraordinary pressure of work as a result of the upswing in the market is not acceptable. A statutory requirement to safeguard the interest of the investors cannot be diluted by quoting the excessive work pressure. Further as many as 104 instances were noted where delay had occurred. In view of the failure on the part of SPCB in forwarding DRF within 7 days of its receipt, SPCB violated the provisions of Regulation 54 (4) of the DP Regulations and hence liable to penalty under Section 15 HB of SEBI Act.

15. It is noted from the above that the violation of Regulation 54 (4) and non compliance with the directions issued by SEBI vide its circular SMDRP/Policy/Cir-36/2000 dated August 4, 2000 levelled against SPCB is established. As discussed above the said violation attract a penalty under Section 15HB of the SEBI Act which provides as under…

“Whoever fails to comply with any provision of this Act, the Rules or the Regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to One Crore Rupees”.

16. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the Adjudicating Officer shall have due regard to the following factors namely :

a) the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default

b) the amount of loss caused to an investor or group of investors as a result of the default

c) the repetitive nature of the default

17. It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage made as a result of the default. Further, the amount of loss caused to an investor or group of investors also cannot be quantified on the basis of the available facts and data.

18. In this regard SPCB had stated that it is a 83 year old bank established in 1922. It was the first cooperative bank to have been registered under cooperative laws. Its net NPA is nil which is a rare achievement. It comes under the definition of well managed and strong bank as it fulfills the entire necessary criterion. It is enjoying this position since last 3 years. As of today it has 19 branches and staff strength of over 450 employees.

19. SPCB had further submitted that since March 1999, i.e. start of its depository operations, there had been 12 audits by NSDL and internal audits by SPCB as required by NSDL and the deficiencies pointed out in those audits had been rectified. SPCB has requested to condone the lapses and drop the inquiry and imposition of penalty, considering the foregoing and also the fact that all the irregularities/ lapses/violations as stated in the show cause notice were unintentional.

20. SPCB has further submitted that contraventions falling under the provision for section 15 HB can not be equated and treated as serious as contraventions mentioned in Section 15 A to Section 15 HA. If the contraventions were serious in nature there would have been specific section in the SEBI Act. The very fact that there is no specific section for the alleged offences, the same has to be looked at very leniently.

21. SPCB has further submitted that the power to adjudicate has been prescribed under Section 15 I which clearly states that the inquiry provided in the adjudication has to be in prescribed manner. The manner has been prescribed vide Adjudication Rules. Rule 4 of the said rules authorizes holding of the inquiry for only offences falling under Section 15 A to 15 H. Section 15 HB has not been covered under Rule 4 of the above referred rule and accordingly in the submissions of SPCB, inquiry proceedings can not take place unless the prescribed rules for section 15 HB are notified. SPCB is of the opinion that current inquiry suffers from jurisdiction.

22. SPCB has further submitted that even if it is assumed that there is a violation and the Adjudicating Officer has jurisdiction, the following factors may be considered :

a. Background of the bank as referred above.

b. The alleged violations at the most are technical in nature.

c. The bank has subsequently taken steps to strengthen its DP division.

d. The technical violations occurred were mainly due to market boom in December 2003.

e. Provisions of Section 15J should be considered.

23. It is noted from the submissions of SPCB that power to adjudicate under Section 15I had to be in the prescribed manner provided in the Adjudication Rules and as Section 15 HB is not mentioned in the Adjudication Rules, no penalty can be imposed under the said provisions. In this regard, it is pertinent to note that the Adjudication Rules prescribe the manner in which the adjudication proceedings mentioned under Section 15I of the SEBI Act may be conducted. Though Section 15I clearly states that inquiry can be conducted for imposition of penalty under Section 15HB, Rule 4 of the Adjudication Rules does not mention the said provision. Merely because Adjudication Rules failed to state the said provision, the same shall not obviate the statutory mandate of Section 15 I and Section 15 HB of the SEBI Act. In any case, the procedure followed has been in accordance with the provisions of the Adjudication Rules and hence no prejudice has been caused to the entity. Hence the contention that no adjudication can be conducted in view of the provisions of Rule 4 of the Adjudication Rules is devoid of merit.

ORDER

24. Considering the facts and circumstances of the case though it is established that Surat People Cooperative Bank Ltd. failed to follow the procedure prescribed by SEBI for opening the Beneficial Owner accounts and delayed processing of the dematerialization requests, however considering the submissions of Surat People Cooperative Bank Ltd. that it has taken necessary measures to rectify the irregularities, a lenient view is taken with regard to the penalty. For the violations committed by Surat Peoples Cooperative Bank Ltd. as stated above in terms of the provisions of Section 15 HB of the SEBI Act, I, hereby impose a penalty of Rs.20,000/- (Twenty thousand) on Surat Peoples Cooperative Bank Ltd. In view of the facts and circumstances of the case, I am of the view that the said penalty is commensurate to the violation committed by Surat Peoples Cooperative Bank Ltd.

25. The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to Chief General Manager, Market Intermediaries Regulation and Supervision Department, Securities and Exchange Board of India, World Trade Centre, 29^th Floor, Cuffe Parade, Mumbai – 400 005.

26. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to Surat Peoples Cooperative Bank Ltd. and to the Securities and Exchange Board of India.

SHOW CAUSE NOTICE

SUBMISSIONS OF SURAT PEOPLES COOPERATIVE BANK LTD

SUBMISSIONS

FINDINGS

SUBMISSIONS

FINDINGS

PLACE: MUMBAI BIJU. S

SEPTEMBER 29, 2005 ADJUDICATING OFFICER

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ORDER UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF SURAT PEOPLES COOPERATIVE BANK LTD 1. I was appointed as the Adjudicating Officer by the Securities and Exchange Board of India (hereinafter referred to as SEBI) in terms of an order dated April 8, 2005 to inquire into and adjudge under Section 15-I read with Section 15 HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) the contravention of the provisions of SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as the DP Regulations) and directions issued by SEBI alleged to have been committed by the Surat Peoples Cooperative Bank Ltd. (hereinafter referred to as SPCB). FACTS OF THE CASE 2. SEBI conducted an inspection of the books of accounts and other records of SPCB which is a depository participant of National Securities Depository Ltd (NSDL) with SEBI Registration Number IN-DP-NSDL-85-99. The period covered under the inspection was January 1, 2003 till February 24, 2004. During the inspection, various irregularities such as not following the prescribed procedure for opening of the beneficiary account and not exercising due diligence, skill, care and caution while opening the beneficial owner accounts in the participant system and failure in processing and timely dispatch of the dematerialization requests of the investors etc. were observed. In respect of the said violations alleged to have been committed by SPCB, adjudication proceedings were initiated against it. SHOW CAUSE NOTICE 3. A Show Cause Notice dated August 3, 2005 under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Adjudication Rules) was issued to SPCB, requiring it to show cause as to why an inquiry should not be held against it for the violation alleged to have been committed by it. SUBMISSIONS OF SURAT PEOPLES COOPERATIVE BANK LTD 4. SPCB vide letter dated August 22, 2005 submitted its reply to the show cause notice. Considering the reply of SPCB, it was felt that in the interest of justice, an inquiry should be conducted in the matter. Shri Deepak Shah and Shri Hemant J Desai attended the inquiry on September 6, 2005 as the authorized representatives of SPCB and made the submissions. 5. The charges leveled against SPCB, its submissions and the findings of the inquiry in respect of charge is mentioned below : CHARGE: NOT FOLLOWING THE PRESCRIBED PROCEDURE FOR OPENING THE BENEFICIAL OWNER (BO) ACCOUNT AND NOT EXERCISING DUE DILIGENCE, SKILL, CARE AND CAUTION WHILE OPENING THE BO ACCOUNTS 6. It is alleged that SPCB did not follow the prescribed procedure for opening of the BO accounts and in this regard it failed to exercise due diligence, skill, care and caution. In this regard it was noted in the inspection that in 54 instances proof of identity and address proof of the applicant was not obtained. In respect of 3 corporate BO accounts, no proof of identity and address were found and further, 3 other corporate BO accounts did not contain the photographs of the persons authorized to operate the account. It was noted that in 4 instances the agreement was not filled in properly. It was noted that in 17 instances, photograph of the investor was stapled and not pasted. In this regard, the inspection reports points out that the practice of stapling the photo is prone to misuse, switching etc. It was further noted that in 13 instances the agreement was not filled in at all and in certain cases it was improperly filled or incomplete or signatures of witness were missing etc. 7. In view of the above mentioned discrepancies, SPCB is alleged to have violated the provisions of Regulation 54 of the Depository Regulations and SEBI circular SMDRP/POLICY/CIR-36/2000 dated August 4, 2000 issued in exercise of powers conferred under Section 11(1) of SEBI Act. SUBMISSIONS 8. SPCB has submitted that in the initial stages of commencement of depository participant services which was a new business for SPCB, the said instances of non observance of prescribed procedure for account opening occurred. However, now a proper system has been put in place to take care of precautions for opening the accounts. SPCB has further submitted that it has been exercising due diligence, skill and care and caution while opening the BO accounts in its participation system. SPCB has committed to pay special attention to bring about further improvements in this regard. FINDINGS 9. SPCB had admitted lapses on its part while opening the BO accounts in the instances as detailed above. Though it is noted from the submissions of SPCB that the said violations had taken place at the commencement of its depository’s participation activity and now a proper system has been implemented, it is pertinent to note from the observations of the inspection that a very small number of accounts opening applications were analyzed. It is also mentioned that had the sample size been increased, the number of instances would have been more. 10. In view of the fact that SPCB had admitted the lapses on its part while opening the beneficiary account, it is found that SPCB had violated the direction issued by SEBI vide circular SMDRP/Policy/Cir-36/2000 dated August 4, 2000 stipulating that a beneficiary account must be opened only after obtaining proof of identity of the applicant. It is also noted that the said circular also stipulates that the applicant’s signature and photograph must be authenticated by an existing account holder or by the applicant’s bank or after due verification made with the original of the applicant’s valid passport, voter ID, driving license or PAN card with photograph and further the account opening form should be supported with proof of address such as verified copies of ration card/ passport, voter ID/ PAN card/ driving license/ bank passbook. 11. Failure to follow the provisions of Regulation 54 of the Depository Regulations and the directions of the said circular makes SPCB liable to the penalty under Section 15 HB of the SEBI Act. CHARGE : FAILURE TO COMPLY WITH THE DE-MATERIALIZATION REQUESTS OF THE INVESTORS 12. Regulation 54(4) of DP Regulations provides that the depository participant shall within 7 days of the receipt of certificate of security referred to in sub regulation (1) furnish to the issuer, details specified in sub regulation (2) alongwith the certificate of security. It was noted in the inspection that in 171 instances, SPCB did not forward Dematerialization Request Form (DRF) to the Issuer Company / Registrar and Transfer Agent (RTA) within 7 days of its receipt. It is noted that the delay varies from a minimum of 4 to maximum of 21 days. SUBMISSIONS 13. SPCB has submitted that delay in this regard was unintentional. The instances of delay given in the show cause notice occurred when there was tremendous upswing in share market and resultant extraordinary pressure of work which could not be coped up despite putting in humanly possible efforts. FINDINGS 14. The explanation given by SPCB such as the delay was due to the extraordinary pressure of work as a result of the upswing in the market is not acceptable. A statutory requirement to safeguard the interest of the investors cannot be diluted by quoting the excessive work pressure. Further as many as 104 instances were noted where delay had occurred. In view of the failure on the part of SPCB in forwarding DRF within 7 days of its receipt, SPCB violated the provisions of Regulation 54 (4) of the DP Regulations and hence liable to penalty under Section 15 HB of SEBI Act. 15. It is noted from the above that the violation of Regulation 54 (4) and non compliance with the directions issued by SEBI vide its circular SMDRP/Policy/Cir-36/2000 dated August 4, 2000 levelled against SPCB is established. As discussed above the said violation attract a penalty under Section 15HB of the SEBI Act which provides as under… “Whoever fails to comply with any provision of this Act, the Rules or the Regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to One Crore Rupees”. 16. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the Adjudicating Officer shall have due regard to the following factors namely : a) the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default b) the amount of loss caused to an investor or group of investors as a result of the default c) the repetitive nature of the default 17. It is noted that no quantifiable figures are available to assess the disproportionate gain or unfair advantage made as a result of the default. Further, the amount of loss caused to an investor or group of investors also cannot be quantified on the basis of the available facts and data. 18. In this regard SPCB had stated that it is a 83 year old bank established in 1922. It was the first cooperative bank to have been registered under cooperative laws. Its net NPA is nil which is a rare achievement. It comes under the definition of well managed and strong bank as it fulfills the entire necessary criterion. It is enjoying this position since last 3 years. As of today it has 19 branches and staff strength of over 450 employees. 19. SPCB had further submitted that since March 1999, i.e. start of its depository operations, there had been 12 audits by NSDL and internal audits by SPCB as required by NSDL and the deficiencies pointed out in those audits had been rectified. SPCB has requested to condone the lapses and drop the inquiry and imposition of penalty, considering the foregoing and also the fact that all the irregularities/ lapses/violations as stated in the show cause notice were unintentional. 20. SPCB has further submitted that contraventions falling under the provision for section 15 HB can not be equated and treated as serious as contraventions mentioned in Section 15 A to Section 15 HA. If the contraventions were serious in nature there would have been specific section in the SEBI Act. The very fact that there is no specific section for the alleged offences, the same has to be looked at very leniently. 21. SPCB has further submitted that the power to adjudicate has been prescribed under Section 15 I which clearly states that the inquiry provided in the adjudication has to be in prescribed manner. The manner has been prescribed vide Adjudication Rules. Rule 4 of the said rules authorizes holding of the inquiry for only offences falling under Section 15 A to 15 H. Section 15 HB has not been covered under Rule 4 of the above referred rule and accordingly in the submissions of SPCB, inquiry proceedings can not take place unless the prescribed rules for section 15 HB are notified. SPCB is of the opinion that current inquiry suffers from jurisdiction. 22. SPCB has further submitted that even if it is assumed that there is a violation and the Adjudicating Officer has jurisdiction, the following factors may be considered : a. Background of the bank as referred above. b. The alleged violations at the most are technical in nature. c. The bank has subsequently taken steps to strengthen its DP division. d. The technical violations occurred were mainly due to market boom in December 2003. e. Provisions of Section 15J should be considered. 23. It is noted from the submissions of SPCB that power to adjudicate under Section 15I had to be in the prescribed manner provided in the Adjudication Rules and as Section 15 HB is not mentioned in the Adjudication Rules, no penalty can be imposed under the said provisions. In this regard, it is pertinent to note that the Adjudication Rules prescribe the manner in which the adjudication proceedings mentioned under Section 15I of the SEBI Act may be conducted. Though Section 15I clearly states that inquiry can be conducted for imposition of penalty under Section 15HB, Rule 4 of the Adjudication Rules does not mention the said provision. Merely because Adjudication Rules failed to state the said provision, the same shall not obviate the statutory mandate of Section 15 I and Section 15 HB of the SEBI Act. In any case, the procedure followed has been in accordance with the provisions of the Adjudication Rules and hence no prejudice has been caused to the entity. Hence the contention that no adjudication can be conducted in view of the provisions of Rule 4 of the Adjudication Rules is devoid of merit. ORDER 24. Considering the facts and circumstances of the case though it is established that Surat People Cooperative Bank Ltd. failed to follow the procedure prescribed by SEBI for opening the Beneficial Owner accounts and delayed processing of the dematerialization requests, however considering the submissions of Surat People Cooperative Bank Ltd. that it has taken necessary measures to rectify the irregularities, a lenient view is taken with regard to the penalty. For the violations committed by Surat Peoples Cooperative Bank Ltd. as stated above in terms of the provisions of Section 15 HB of the SEBI Act, I, hereby impose a penalty of Rs.20,000/- (Twenty thousand) on Surat Peoples Cooperative Bank Ltd. In view of the facts and circumstances of the case, I am of the view that the said penalty is commensurate to the violation committed by Surat Peoples Cooperative Bank Ltd. 25. The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to Chief General Manager, Market Intermediaries Regulation and Supervision Department, Securities and Exchange Board of India, World Trade Centre, 29^th Floor, Cuffe Parade, Mumbai – 400 005. 26. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to Surat Peoples Cooperative Bank Ltd. and to the Securities and Exchange Board of India. PLACE: MUMBAI BIJU. S SEPTEMBER 29, 2005 ADJUDICATING OFFICER