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SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: Dr. T. C. Nair, WHOLE TIME MEMBER
IN THE MATTER OF IPO INVESTIGATIONS - HDFC BANK
WTM/TCN/ISD/ 601 /06/11
DATE OF HEARING: 01.06.2006
APPEARANCE :
FOR NOTICEE : Shri Janak Dwarakadas, Senior Advocate Shri Sagar Divekar, Wadia Ghandy & Co Shri Rohini Verma, Wadia Ghandy & Co Shri G Subramanian, Head Audit and Compliance, HDFC Bank Shri A Rajan, Head–Operations, HDFC Bank Shri K R Phanindra , Depository Services, HDFC Bank
FOR SEBI : Shri R Ravichandran, Chief General Manager Shri J Ranganayakulu, Joint Legal Adviser
ORDER
(UNDER SECTIONS 11 AND 11B OF SEBI ACT, 1992)
1.1 By an ad interim ex-parte order dated April 27, 2006 (hereinafter referred to as the ‘Order’) under section 19 read with sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 and section 19 of the Depositories Act, 1996 pending enquiry and passing final Order, certain interim directions were issued against various market participants including HDFC Bank (hereinafter referred as ‘HDFC’).
1.2 The ad interim ex-parte order dated April 27, 2006 states that HDFC, Depository Participant of Central Depository Services Limited (CDSL) prima facie appears to have grossly failed in adhering to the Know Your Client (KYC) norms laid down by SEBI, thereby facilitating opening of demat accounts in fictitious/benami names and cornering the retail portion of shares in Initial Public Offerings (IPO). In view of the above preliminary finding, HDFC was directed not to open fresh demat accounts till further directions.
1.3 Para 17.18 of the ad interim ex-parte order dated April 27, 2006, stated that the said order shall be treated as show cause notice against the concerned entities named therein including HDFC. These entities were given an opportunity for filing their objections, if any, to the order within 15 days from the date of the order and if they so desire, avail of an opportunity of personal hearing at the SEBI Head Office, Mumbai within 15 days from the date of the order. They were also given an opportunity to avail the facility to inspect the relevant documents relied upon by the SEBI against them, prior to hearing.
2.0 Findings regarding HDFC in SEBI’s Ad Interim Ex-Parte Order
2.1 The focus of the SEBI investigations was on entities indulging in off-market transactions after allotment of shares prior to listing and commencement of trading on the stock exchanges, in connection with cornering of IPO shares in retail segment through benami/fictitious Demat Accounts.
2.2 At paragraphs 5.7 and 7.2 of the Order, it is stated that Shri Deepak Madhukant Patel (Client ID-10315404) received 8862 shares from 633 demat accounts in the IPO of Jet Airways(India) limited in his Demat Account held with HDFC.
2.3 At paragraph 8.3 of the Order, it is mentioned that based on the data furnished by NSDL (National Securities Depository Limited), HDFC had 1793 afferent accounts with NSDL
2.4 At paragraph 9.5 of the Order, it is mentioned that CDSL (Central Depository Services Limited) informed SEBI that in case of HDFC Bank, CDSL had found 787 accounts with same name / same address.
2.5 At paragraph 9.11 and 9.12 of the Order, it is mentioned that the verification by NSDL regarding genuineness of dematerialized account-holders revealed that HDFC had 10213 account holders with common address and HDFC had the largest number of demat account holders sharing common addresses in NSDL.
2.6 At paragraphs 12.72 and 12.73 of the Order, it is mentioned that various findings of Inspection of HDFC by CA Firm on random and test check basis including the finding that a common address was shared by numerous demat account holders.
2.7 At paragraphs 12.74 and 12.75 of the Order, it is stated that upon scrutiny of the documents relating to one 94 year old BO holding the demat account in HDFC, it was found that Shri Purshottam Budhwani’s bank account held with HDFC Bank, Ghatkopar (W), Mumbai with A/c.No.0601000173157 has been used for bank verification while opening the above BO’s demat account. Whereas the said account of Purshottam Budhwani does not contain the above account holder’s name and the payment of charges in respect of the account has been made through HDFC Bank Fort, Mumbai– S.B.A/c.No.0601000173113 which is the account of Purshottam Budhwani who is recognized as a key operator in the Order.
2.8 At paragraph 12.76 of the Order, it is stated that a common correspondence address has been mentioned in respect of various dematerialized accounts though the election card carries different address of residence.
2.9 At paragraph 12.77 of the Order, it is stated that in some instances the signatures of various dematerialized account-holders appeared to be identical in the demat account opened in CDSL. However, the photographs as well as POI (Proof of Identity) and POA (Proof of Address) attached to the respective account opening documents were different.
2.10 At paragraph 12.78 and 12.79 of the Order, it is stated that Shri Purshottam Budhwani has 286 Savings Accounts under different Customer ID with various joint account holders with various branches of HDFC Bank. Out of the above 286 accounts, it is seen that the account having account no. 0602100001225 held with HDFC Bank, Fort branch has been used by Purshottam Budhwani as his principal account.
2.11 At paragraphs 12.81 to 12.85 of the Order, it is stated that in 471 instances out of 787 dematerialized account-holders sharing common addresses the DP-Client Agreement was not duly executed before account was activated in Centralized Depository Account System(CDAS). It is further stated that in some cases there are look-alike signatures for different BOs, the permanent address of the BO ID are not mentioned and the photo identity proof is not clearly visible.
2.12 At paragraph 12.86 and 12.87 of the Order, it is mentioned that HDFC had closed many of the Duplicate Accounts in Ahemadabad on 31st January 2006. It is further stated that during the course of the inspection CDSL noticed that the funds were received from few accounts and then the funds were transferred back to few Accounts like 0602100001225 (principal account of Shri Purshottam Budhwani), 1182100001204, 1182100001248 and 1182100001258, as a result of which the balances in the BO’s account at the end of a period was always close to minimum balance. At paragraph 12.89 and 12.90 of the Order, the summary of findings against HDFC are given.
2.13 In view of the above findings in the order, directions as mentioned at Para 1.2 above were issued to HDFC.
3.0 Oral hearing and submissions of HDFC.
3.1 HDFC has availed the opportunity given to inspect the documents relied upon by SEBI. HDFC filed its submissions vide letters dated May 11, 2006 and May 22, 2006. Further, HDFC appeared for personal hearing before me on June 1, 2006 through the persons as recorded on the first page of this order and made its oral submissions. HDFC has also handed over written submissions dated June 1, 2006. The submissions made by HDFC in the aforesaid letters and during the oral hearing are as under:
3.1.1 The main allegation against HDFC in the Order is that it opened multiple demat accounts with common names and common addresses. Law does not restrict opening of multiple demat accounts by the same account holders. Where there are two or more account holders, any change in the order/combination of the account holders will allow the account holders to open a separate demat account. HDFC as a DP does not have the authority to question the opening of such accounts provided the prescribed KYC norms have been complied with. In respect of each of the accounts mentioned having common names, as mentioned in the order, KYC norms as prescribed at that point of time have been duly complied with.
3.1.2 Out of the total alleged 10213 multiple accounts with common addresses, over 4800 accounts are opened by employees or ex-employees of corporate houses, where the address of the corporate house has been provided as the correspondence address. The accounts belong to genuine and identified demat account holders. Moreover in all these cases HDFC has complied with the requisite KYC norms and in possession of documents for POI and POA. Most of the remaining accounts are accounts held by various combinations of family members. Out of the said 10,213 accounts only about 1000 accounts relate to accounts opened by various persons supported by Electronic Clearing System of Shri Purushotam Budhwani and correspondence address of Shri Purushotam Budhwani. Such accounts are only 1000 out of the 9,00,000 accounts held with HDFC amounting to miniscule 0.11%.
3.1.3 The relevant portion of CDSL communiqué Number CDSL/OPS/DP/477 dated September 28, 2004 states as under
“Further it has been brought to our notice by many DP’s that some opt their BO’s wish to receive their correspondence on the address of some other entity such as POA holder for NRI, financiers for IPO/margin financing etc. In view of this, its has been decided that in cases of such BO’s SEBI specified proof of address documents in the name of such other entities should be accepted as proof of correspondence address of the BO provided that same is mentioned in the account opening form……….”
This clearly suggests that financing of IPOs by entities other than the demat account holders is an accepted industry practice. The fact that numerous demat accounts are opened during an IPO process is also acknowledged by NSDL, as noted in NSDL’s circular No.NSDL/PI/2004/0386 dated March 1, 2004.
3.1.4 Since SEBI permits demat account holders to enter into financing arrangement with the financier and consequently permits the DP to register an address for the purpose of correspondence the address of some other entity, there would be no occasion for DP to question the basis for the same as long as the KYC norms have been fulfilled. Although, law permits IPO financing, if at all any of these accounts were utilized for the purpose of IPO financing the same cannot be held against HDFC in as much as HDFC has not advanced any monies for IPO financing as alleged nor could HDFC have any reason to suspect otherwise at the time the accounts were opened. The responsibility of distinguishing a valid financing arrangement from a benami transaction cannot be imposed on HDFC. HDFC’s responsibility at the time of account opening was limited to ensuring that the customer interested in opening these accounts is genuine, proof of which was provided to HDFC when HDFC conducted KYC procedures.
3.1.5 To comply with HDFC’s internal due diligence requirements HDFC had extended the requirement to include the proof of address of the Demat account holder himself, to ensure the identity and genuineness of the Demat account holders. None of the accounts in question are fictitious accounts as proper KYC norms have been carried out by HDFC. HDFC cannot be blamed or victimized by the mischief of certain fraudulent operations just as NSDL/CDSL or SEBI or the retail investors and the market at large. It is clearly a failure of the system as a whole. SEBI has also not provided checks to prevent against such use or abuse of the system.
3.1.6 HDFC has neither participated with a fraudulent intent or otherwise in synchronizing any off-market transfers to any common master account, nor have HDFC aided and/or assisted in exercising control by that master account holder in moving those accounts, which have no existence of their own. None of HDFC’s account holders are fictitious. Whether or not they are benami could never be known to HDFC and it is only after investigation that SEBI has discovered the facts. Furthermore, once an account is duly opened, HDFC has no suo moto authority to refuse transfers or to disregard the account holders written directions for transfers. HDFC also no authority or power to cross examine an account holder as to the reasons for or details of any such transfers or the consideration for the same.
3.1.7 The demat account of Shri Deepak Madhukant Patel (Client ID-10315404) was opened on or about 21st February, 1999. All the necessary original documents as prescribed by NSDL with respect to KYC norms, at the relevant time were received and verified by HDFC before opening the account. The documents which established the proof of identity and the proof of address of the account holder, were received and verified in respect of the demat account number 10315404 of Mr. Deepak Madhukant Patel. Hence, there is any violation of any of the prescribed norms by HDFC. HDFC had complied with all the prescribed norms by NSDL with respect to KYC prevalent at the relevant time and HDFC cannot be held responsible for any movement of shares taking place in the Client account.
3.1.8 Mr. Deepak Madhukant Patel is only one of HDFC’s more than nine lakh account holders and in the entire Order relating to 105 IPOs, this is the only account allegedly involved in the so called IPO scam, and that too only in respect of 8862 shares of one IPO of Jet Airways which was for 1,72,66,801 shares.
3.1.9 With respect to 684 demat accounts that had acted as conduits, HDFC has already submitted the details of accounts in question to NSDL vide letter No. HDFC / Depository / 2504 dated 25th April, 2006. As per the letter the KYC documents as per the then requirements establishing the proof of identity and the proof of address of the account holders had been obtained by HDFC while opening the accounts and hence HDFC had complied with all the required norms prescribed by SEBI/NSDL/CDSL in this regard.
3.1.10 No details of the 1793 afferent accounts had been furnished to HDFC till the passing of the said Order. Further vide letter dated 2nd May 2006, HDFC had requested SEBI to furnish the details in this regard to enable HDFC to give its response to the same. NSDL has vide letter dated 10th May 2006 forwarded to the account numbers of the said 1793 Demat Accounst. Due to paucity of time, HDFC has done a random check, as of date for more than 1000 accounts out of the so called “afferent accounts” and all these Demat accounts comply with, all the KYC norms and HDFC has all the relevant documents with regard to the said accounts.
3.1.11 HDFC has obtained the necessary details as per the prescribed norms of all the 787 accounts with same name / same address at the time of the opening of these accounts. HDFC has verified and checked the originals and obtained copies of the said original documents establishing the POI and the POA of all the 787 account holders. The said documents were shown to the chartered accountant appointed by SEBI at the time of inspection. The said documents were subsequently handed over to CDSL on February 16, 2006. HDFC has also verified and checked that the account holders of each of the 787 accounts are of different persons and have different names.
3.1.12 With regard to violations noted by the CA firm appointed by SEBI as well as CDSL, HDFC has by its letter dated May 9, 2006 already requested SEBI to provide it with the copy of the report submitted by the CA alongwith its enclosures to enable HDFC to respond to the same. As regards the inspection by the CA’s firm appointed by CDSL, CDSL had furnished a copy thereof to HDFC and HDFC has duly replied to the same to the satisfaction of CDSL. While apparently taking cognizance of the said report, the said Order has apparently ignored or omitted to take into account HDFC’s reply to the same.
3.1.13 With regard to the various savings / current bank accounts held in HDFC Bank in the name of various entities mentioned therein and the alleged involvement of funds from / to the same, HDFC has taken due care to comply with the KYC norms as per the prescribed norms. All cash transactions mentioned in the above paragraphs 11.16 to 11.18 were monitored by HDFC as per the guidelines issued by Reserve Bank of India. All these transactions were valid and there was no reason for HDFC to suspect otherwise. HDFC deny that there is any violation of any of the prescribed norms by them. In any event, the said Order does not allege any fault or violation by HDFC in respect of the said accounts or the movements of funds to / from the same.
3.1.14 In connection with the bank accounts maintained by HDFC referred in paragraphs 11.25 to 11.29 of the order, HDFC had obtained all the necessary KYC documents and information while opening these accounts. In the case of all these accounts the original documents were checked and verified by HDFC and copies of the originals were obtained as per the guidelines issued by RBI from time to time.
3.1.15 The account holders are genuine and proof of the same can be provided on request in relation to the account holders mentioned in Para 11.30 of the Order i.e. Hansmukhlal Vora HUF and Jayesh P. Khandwala HUF.
3.1.16 Mr. Purshottam Budhwani’s account as mentioned in paragraphs 11.31 to 11.38 of the said Order was opened after obtaining all the necessary documents and information while opening the account. In his case as in all cases the original documents were checked and verified by HDFC and copies of the originals were obtained as per the guidelines issued by RBI from time to time. HDFC deny that there is any violation of any of the prescribed norm. As far as his dealings are concerned with all the other entities mentioned in the paragraphs under reply, HDFC is not in any way connected or concerned with the same, nor have HDFC aided and assisted Mr. Purshottam Budhwani in any of his dealings.
3.1.17 The voter ID card of Maniben Hirji Dand who was mentioned at paragraphs 12.73 to 12.75 of the Order produced as identity shows her age as 81 years on 01.01.1995 and not on 01.01.1991 as incorrectly stated in the order. Law does not restrict or prohibit any person from opening a Dematerialised account merely because he/she is above a certain age. All KYC documentary requirements and norms have been fully complied with in this case.
3.1.18 The allegation that the payment of charges in respect of the Demat account of Ms. Dand were made out of the bank account of Mr. Purshottam Budhwani is factually as well as even otherwise not indicative of either any connivance or fraud or any suspicious dealings.This because: (i) Ms. Dand and Mr. Purshottam Budhwani already held a joint bank account with HDFC Bank being account number 0601000173157. (ii) This joint bank account was opened much prior in point of time i.e. on 18th December, 2003 (iii) The demat account came to be opened subsequently on 13th October, 2004. (iv) Since Ms. Dand and Mr. Purshottam Budhwani were already joint bank account holders the Bank verified the Proof of Identity and Proof of Address of Ms. Dand for the purpose of opening the Demat account in the name of Ms. Dand. (v) The fact that the payment of charges in respect of the Demat account of Ms. Dand were made from the saving bank account of Mr. Purshottam Budhwani also would not arouse any suspicion because Ms. Dand and Mr. Purshottam Budhwani already shared a common joint bank account.
3.1.19 Proof of permanent addresses of all Demat account holders were also obtained and filed along with the account opening forms with regard to the allegation that in para 12.76 which states that “further it is seen that a common correspondence address has been mentioned in respect of various dematerialized accounts though the election card carries different address of residence.” There are no restrictions in customers providing a correspondence address which is not the same as the permanent address.
3.1.20 The applications received at the various branches are forwarded by all the branches to the Centralised Processing Unit (CPU). The forms get distributed to the various processing officers at the CPU. It is possible that forms containing signature was verified by different processing officers and therefore a comparison with all signatures may not have been made. HDFC deny that there is any violation of any of the prescribed norms.
3.1.21 The accounts of Purushottam Budwani in question were opened over a period of 6 years and on several different occasions. All savings accounts are opened by HDFC centrally. The applications received at the various branches across India are forwarded to the CPU where the applications get distributed amongst the various processors. In the aforesaid circumstances and since there is no restriction on the number of accounts that a person can hold, there was no reason for HDFC to have been alerted and to keep a close watch on the activities of Purshottam Budhwani.
3.1.22 The allegation that agreements were not duly executed before the account was activated in the Depository System is factually incorrect since in all the said cases the accounts were activated only after the agreements are duly executed by the customer.
3.1.23 With regard to the allegation that in some cases the permanent address of the BO ID are not mentioned and instances of BOs having same correspondence address have been cited, HDFC has obtained the required proof of the permanent residence of the account holders and this proof has been filed along with the account opening documents.
3.1.24 With regard to the allegations at paragraphs 12.89 and 16.46 of the Order, the reply of HDFC is as follows. (a) All the required documents as prescribed at the relevant time were obtained by HDFC while opening the accounts in question. (b) The documents obtained i.e. voter’s ID card, ration card and PAN card, etc. clearly established the Proof of Identity and Proof of Address of all the account holders and there were no fictitious / benami entities. (c) No proof or evidence of any alleged irregularities and / or non adherence to the prescribed KYC norms as have been brought out in the inspection reports or in the said order. (d) HDFC has in fact shown all the relevant documents to prove adherence to the prescribed KYC norms to the chartered accountant at the time of inspection. (e) The conclusions drawn by the chartered accountant are completely unfounded. (f) The said accounts in question have been opened over a period of 6 years; it would not be possible for any DP / Bank to visualize or foretell any malafide plan of action on the part of the account holders. HDFC has taken due care and diligence while opening all accounts and as along as all customers furnish the documents / proofs required by law, HDFC is not required by law to cross examine customers for their intentions and motives so as to drive them away. HDFC would be driving our prospective customers away if HDFC were to look at them with suspicion or as alleged fraudsters. The depositories market is a very competitive market and there are over 200 DPs in the market. (g) No proof or evidence, whatsoever has been produced to jump to the far-reaching conclusion that HDFC have in any manner, colluded in, been connected or concerned with or have aided or assisted in any plan of action to open/submit multiple Demat accounts and channelise funds in a manner that would bury the Audit trail as wrongly alleged or otherwise.
3.1.25 With regard to allegations in paragraphs 12.90 and 16.47 of the Order HDFC replied as follows;
(a) HDFC denies that any of the bank account transactions, as examined by SEBI, and / or by the CA firm engaged by SEBI are of suspicious nature or appear to be tarred with any brush or that there is any violation on its part as DP. (b) The monetary penalty which came to be levied by RBI was only on account of certain alleged lapses on part of the HDFC in complying with the KYC norms for the opening of the bank accounts. (c) While levying the monetary penalty RBI has not reached a conclusion that the opening of any bank accounts were either fictitious or benami or for providing IPO funding. (d) Always during the proceedings before the RBI, HDFC maintained and continue to maintain that there were no lapses of the KYC norms. (e) HDFC has always complied with the KYC norms prescribed by the RBI from time to time. Further, the Bank had not provided any IPO funding. (f) Although HDFC is not in agreement with the findings of the RBI in this regard, however, pursuant to HDFC’s management decision, HDFC paid the penalty imposed. (g) The allegation that the RBI inspection resulted in a finding that any of the bank accounts opened by HDFC were fictitious / benami or for providing IPO funding is wholly misplaced and wholly unwarranted and unjustified and displays total non-application of mind in as much as in the order passed by the RBI there is no such finding. The RBI order no where mentions or suggests that HDFC had been fraudulent in its operations or acted in connivance or acted as conduit or abetted or assisted in the perpetration of any fraud.
4.0 Consideration of the issues
4.1 I have carefully considered the prima facie findings against HDFC as recorded in the ad interim ex-parte order and the submissions made by HDFC. There are basically four prima facie findings in the ad interim ex-parte order dated April 27, 2006. They are demat account holders sharing common address, opening of 1793 afferent accounts, number of multiple bank accounts opened by Purshottam Bhudwani as the joint holder with other persons which facilitated opening of demat accounts and failure to exercise due diligence in opening demat accounts.
4.2 At the outset, I have noted that HDFC has raised objections with regard to the finding in the Order that it had opened multiple demat accounts for the same account holders. It was contended that law does not restrict opening of multiple demat accounts by the same account holders. It is further submitted by HDFC that being a DP, it does not have the authority to question the opening of such accounts provided the prescribed KYC norms have been complied with.
4.3 I am not inclined to agree with the contentions of HDFC merely on the ground that there is no bar in opening of multiple demats accounts. I have noted that SEBI vide its circulars dated August 4, 2000 and August 24, 2004 clearly laid down guidelines regarding opening of demat accounts which provides for depository participants to exercise due diligence while establishing the identity of the person to ensure the safety and integrity of the depository system. Therefore, it is clear that SEBI had prescribed guidelines primarily to ensure that all the demat account holders in the depository system are genuine and are not benami / fictitious. The material available on record prima facie shows that HDFC did not exercise due diligence.
4.4 As regards the opening of 10,213 demat accounts with common address at NSDL, HDFC submitted that out of 10,213 accounts, over 4,800 accounts were opened by employees or ex employees of corporate houses, where the address of the corporate house has been provided as the correspondence address. Further HDFC also clarified that these accounts belong to genuine and identified demat account holders and requisite KYC norms complied with. Remaining accounts are held by various combinations of family members. HDFC also submitted that out of 10,213 accounts, only 1000 accounts pertain to Purshottam Bhudwani which constitutes a miniscule percentage of 0.11% out of total 9,00,000 demat accounts. In respect of opening of 787 demat accounts with common address at CDSL, HDFC submitted it has obtained the necessary details as per the prescribed norms of all the 787 accounts with same name / same address at the time of the opening of these accounts. HDFC has verified and checked the originals and obtained copies of the said original documents establishing the POI and the POA of all the 787 account holders.
4.5 While considering the above submissions of HDFC, I have also noted that SEBI had carried out inspection of HDFC DP after perusing observations of NSDL and CDSL regarding large scale opening of demat accounts with common address i.e. 10,213 demat accounts on NSDL and 787 demat accounts on CDSL. Therefore, it is clear that such large scale opening of demat accounts with common address naturally lead to serious suspicion regarding the genuineness of the account holders which in turn are concerns for the safety and integrity of the depository system. In this context, I have noted that market intermediary cannot escape the regulatory requirement of exercising due diligence while opening the demat account by establishing the identity of the client as prescribed by SEBI vide circulars dated August 4, 2000 and August 24, 2004. Therefore, HDFC DP as a market intermediary cannot escape the responsibility by merely stating that the number of demat account of Purshttam Bhudwani, a Key Operator named in the interim order, is miniscule. As stated above the spirit of SEBI circulars reiterates the need of having genuine demat accounts for the safety and integrity of the depository system.
4.6 I have noted that afferent accounts as defined at Para 4 of the order are fictitious / benami accounts involved in manipulation for unfair gains to the key operators and it needs thorough verification/enquiry. I have also noted that at para 17.10 of the order, SEBI had directed both depositories to conduct inspection of DPs in order to verify whether all the account holders of these DPs are genuine and KYC norms laid down by SEBI have been duly complied with. However, it appears that based on the prima facie findings of large scale opening of afferent accounts and these accounts being used for the purpose of cornering the shares meant for retail investors in various IPO, the DP’s who have more than 500 such accounts have been asked not to open fresh demat account pending verification and enquiry. It is, therefore, clear that the prohibition on opening fresh demat accounts was issued upon a serious suspicion on the genuineness of the afferent accounts subject to verification by CDSL / NSDL.
4.7 As regards the opening of 1793 afferent accounts, HDFC submitted that they had conducted random check of around 1000 such accounts and found that these demat accounts complied with the KYC norms. In this context I find that verification based on random check of sample benami/ fictitious demat accounts will not suffice as it requires detailed and thorough verification of account holders in order to establish the genuineness of the account holders and also compliance of KYC norms as prescribed in the SEBI circulars dated August 4, 2000 and August 24, 2004. Based on the submissions made by HDFC, it appears that they have neither carried out the verification process of the above stated afferent accounts of Purshottam Bhudwani and Kelan Atulbhai Joshi nor commented on the genuineness of these afferent accounts.
4.8 Based on the perusal of the list of 1793 afferent accounts, it is observed that 393 demat account holders have the address of Purshottam Bhudwani i.e. B/2 Himalaya Society, Govind Nagar Asakfa, Ghatkopar West, Mumbai, 400084. Similarly, another 383 demat account holders have the address of Kelan Atul Bhai Joshi i.e. 68 Samast B Soc, Opp Pinakin Road, Paldi, Ahmedabad, 380007. Further,it is also observed that these accounts have been suspended/ closed by HDFC.
4.9 I have noted that Purshottam Bhudwani and Kelan Atul Bhai Joshi have been named as key operators as defined in the ad interim order dated April 27, 2006. Therefore, I am of the view that HDFC had prima facie failed to exercise due diligence while opening these afferent accounts, as could be observed from the fact that these accounts share common address of the said key operators.
4.10 Besides, I have also noted that NSDL vide its letter dated July 27, 2006 submitted its report to SEBI, wherein it is observed that out of 4,125 account holders of HDFC selected for in-person verification, 3,842 account holders have not appeared for verification at all. Further, in respect of KYC compliance, NSDL indicated that out of 4277 accounts selected, 749 accounts either have no proof of identity or have inadequate proof of identity. Similarly 484 accounts have either no proof of address or proof of address is not adequate. In view of the above, NSDL has been advised to provide detailed report vide letter dated August 17, 2006. NSDL vide letters dated October 16, 2006 and September 18, 2006 submitted certain information which was forwarded to the Enquiry Officer. Similarly, CDSL vide its letter dated June 27, 2006 submitted to SEBI, the inspection report of HDFC Bank conducted by Shah & Paurana. The said report brought out discrepancies like proof of identity not obtained, proof of address not obtained etc. It was also stated that no suspect accounts were reported by auditor and therefore no physical verification was carried out.
4.11 I have noted that Purshottam Bhudwani, a key operator named in the order had opened large number of demat accounts with HDFC DP with his correspondence address and also opened corresponding bank accounts in joint names with similar modus operandi with the sole purpose of ensuring control over such accounts. I have noted that, prima facie, HDFC failed to have effective internal control, checks and balances to identity and check such misuses by the key operators.
4.12 Further, I have also noted that HDFC in its submissions at para 3.1.3 above referred to the CDSL communiqué wherein reference is made to circumstances when correspondence address could be considered. I have noted that the communiqué referred is not relevant as DP cannot escape the requirement of exercising due diligence as prescribed by SEBI circular dated August 4, 2000. Further, it has been observed that Purshottam Budwani, a key operator does not belong to any of the categories of persons mentioned in the said communiqué.
4.13 It has been stated by HDFC that their reply dated March 17, 2006 forwarded to CDSL was not taken into account and SEBI had relied upon the findings of the special inspection conducted by CA firm appointed by CDSL. I have however noted that CDSL had forwarded the copy of the special inspection vide their letter dated February 17, 2006 which was relied upon and whose findings were already incorporated in the interim order dated April 27, 2006. I have also noted that the HDFC’s letter dated March 17, 2006 which inter-alia covers their reply / comment to the special inspection conducted by CA firm i.e. Sarda & Pareek was addressed to CDSL. Further, CDSL vide its letter dated May 4, 2006 forwarded the same to SEBI i.e. after the passing of interim order dated April 27, 2006. On a perusal of the same, I find that the comments of HDFC in the said letter does not materially change the findings of the CA firm appointed by CDSL.
4.14 HDFC had contended that it could not have ever come to know that these accounts are benami as it has only come to know about the same after SEBI discovered the facts. Furthermore, it has submitted that once an account is duly opened, HDFC has no suo moto authority to refuse transfers or to disregard the account holders written directions for transfers. I am not inclined to accept the contention of HDFC because HDFC as a market intermediary is expected to exhibit highest standards of professional expertise whereby any transactions of suspicious nature should be reported to relevant authorities and take proactive measures to ensure that system is not misused by any entity / person. Market intermediary cannot merely ignore such misuse on the tenuous ground that they do not have any system to identity whether they are benami or otherwise.
4.15 I have noted that payment of charges of demat account of Ms. Dand was made out of the bank account of Mr Purshottam Bhudwani and this indicates that Ms. Dand is purely a name lender to Bhudwani. Budhwani appears to be actual beneficiary which can be corroborated from the fact he had opened large number of savings accounts on joint name with similar modus operandi. The details of the saving bank accounts opened by Bhudwani are mentioned at para 12.78 of the interim order.
4.16 Further, I have noted that many of key operators / financiers have also opened their bank accounts with HDFC reflecting large scale transfer of huge funds as indicated at para 11.18 of the interim order.
4.17 I have noted from the RBI’s report, copy of which was forwarded to SEBI that HDFC Bank had violated RBI guidelines relating to opening of accounts, KYC / AML Norms etc and had also not followed prudent banking practices etc with regard to the conduct of the accounts. This has facilitated easy flow of funds to accounts of benami / fictitious and non existent individuals / group of individuals which were used for cornering of the retail portion of the primary issues in the market. I have further noted that RBI vide its order dated January 23, 2006 imposed a penalty of Rs 5 lakhs relating to opening of accounts and monitoring of transactions for adherence of KYC / AML norms.
4.18 I have noted that the irregularities indicated in the inspection report of Sarda & Pareek, Charted Accountant appointed by CDSL are significant enough which need to be examined further. As Enquiry Officer has already been appointed, I consider it appropriate for the enquiry officer to go into details of the findings including the submissions made by HDFC Bank.
5.0 Order
5.1 In view of the above, I, in exercise of the powers conferred upon me in terms of section 19 read with section 11 and 11B of SEBI Act, 1992, hereby direct that there is no need to continue the directions issued to HDFC Bank not to open fresh demat accounts.
5.2 It is clarified that the present order gives only a prima-facie finding as to the necessity of interim directions at this stage and accordingly all issues and contentions are left open to be considered by the Enquiry Officer and to be decided in subsequent proceedings pursuant to his report.
5.3 This order shall come into force with immediate effect.
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