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SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: Dr. T. C. Nair, WHOLE TIME MEMBER
IN THE MATTER OF IPO INVESTIGATIONS- M/s. ING VYSYA BANK LIMITED
WTM/TCN/ 33 /ISD/06/07
DATE OF HEARING: 14.06.2006
APPEARANCE :
FOR NOTICEE: Shri Shantanu Ghosh, Country Head – Retail Banking Shri Ashok Rao, Chief – Corporate Audit Group Shri K Prabakaran, Advisor-Internal Audit Shri S Krishnan, Manager
FOR SEBI: Shri Sanjiv Dutt, Chief General Manager Shri V R Prasad, Deputy Legal Adviser
ORDER (UNDER SECTIONS 11 AND 11B OF SEBI ACT, 1992)
1.1 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) vide an ad interim ex-parte order dated April 27, 2006 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, issued certain interim directions against various market participants including ING Vysya Bank Limited (herein referred to as “ING Vysya”).
1.2 The ad interim ex-parte order dated April 27, 2006 states that ING Vysya, Depository Participant (DP) of National Securities Depository Ltd (hereinafter referred to as “NSDL”), 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 Offering (IPO). In view of the above preliminary finding, SEBI vide the said order directed ING Vysya 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 and the entities were required to file their objections, if any, to the order within 15 days from the date of the said order and if they so desire, avail of an opportunity of personal hearing. They were also given an opportunity to avail of the facility to inspect the relevant documents relied upon by SEBI against them, prior to hearing.
2.0 Findings regarding ING Vysya in SEBI’s Ad Interim Ex-parte Order
2.1 The focus of the SEBI investigations has been on entities indulging in off-market transactions prior to listing and commencement of trading on the stock exchanges, in connection with cornering of IPO shares in retail segment through benami / fictitious D.P. accounts.
2.2 At paragraph 8.3 of the order, it has been mentioned that out of 37240 afferent accounts (defined at Para 4.0 of the order) in NSDL as many as 544 afferent accounts were held with the Depository Participant ING Vysya.
2.3 At Para 9.11 of the order, it has been mentioned that around 1075 demat account holders of ING Vysya shared common addresses.
2.4 In view of the above findings in the order, directions as mentioned at Para 1.2 above were issued to ING Vysya.
3.0 Reply of ING Vysya
3.1 ING Vysya vide letter dated 10th May 2006 inter alia submitted as under;
a) with regard to non-availability of documents i.e., proof of identity and proof of address for one account, ING Vysya had obtained all the documents in all accounts and if they were not available in one account it could be clerical error and inadvertence which can not be construed as deliberate act of violation or defective control mechanism within the system.
b) With regard to 544 afferent accounts, except for passing reference made in the order, no other specific information furnishing details of accounts or the nature and extent of violations by ING Vysya has been mentioned. ING Vysya has a total of 82, 000 demat accounts of which 544 amounts to only 0.66%. This low percentage of aberration is attributed to adequate systems, controls, processes and training programs that are in place. Further operation of these 544 accounts has been frozen with effect from 28th April 2006.
c) With regard to 1075 demat accounts in ING Vysya had common addresses, the Bank’s Branches’ DP section have relied on the proof of address as evidenced in the bank statement of accounts / pass books, which is one of the acceptable proof of address in terms of NSDL Guidelines.
d) Despite the internal controls, key operators made the Bank a conduit in its game plan. Aberrations observed are due to the failure on the part of few individual personnel at the operational levels and it is not a failure of systems of bank nor is it a case of gross non-compliance to KYC norms.
e) Appropriate disciplinary proceedings have been initiated against the concerned members of staff including suspension of branch manager of Dadar branch. ING Vysya has embarked on exclusive and extensive training program on KYC and AML Regulations for operational staff to raise their level of understanding of KYC norms. As an abundant precaution, operation of 544 accounts has been frozen in addition to not opening any fresh accounts with effect from 28th April 2006.
3.2 In view of the above submissions, ING Vysya prayed that a lenient view be taken and treat the matter closed as far as the ING Vysya is concerned and permit ING Vysya to continue opening of fresh demat accounts and carry on its business as DP.
4.0 Personal hearing and submissions of ING Vysya
4.1 On 14th June 2006, ING Vysya was given an opportunity of personal hearing before me wherein ING Vysya was represented by Shri Shantanu Gosh, Country Head – Retail Banking, Shri Ashok Rao, Chief – Corporate Audit Group, Shri Prabakaran, Adviser-Internal Audit and Shri S. Krishnan, Manager. They reiterated the submissions made by ING Vysya in its letter dated 10th May 2006.
5.0 Consideration of the issues
5.1 I have carefully considered the prima facie findings as recorded in the ad interim ex-parte order and the submissions made by ING Vysya and noted that there are two important findings, i.e. opening of 544 afferent accounts and sharing of common address by 1075 demat account holders.
5.2 As regards opening of 544 afferent accounts, ING Vysya has submitted that they constitute only 0.66% of the total demat accounts opened with ING Vysya and such a low percentage of aberration is attributed to adequate systems, controls, processes and training programs that are in place. Further, it was also submitted that these accounts have been frozen with effect from 28th April 2006. I am not inclined to accept the submissions that negligible percentage of aberration is an indicator which reflects that the systems, controls, process etc of ING Vysya are adequate. It is the quality of the system and control which will determine its effectiveness and not merely quantitative analysis. Besides, I have noted that ING Vysya by virtue of being a depository participant is bound to exercise due care and diligence while complying with the KYC norms not only in form but also in spirit. Further, I have noted that SEBI vide its circular dated August 4, 2000 and August 24, 2004 prescribed that while opening a demat account, DPs are required to exercise due diligence in establishing the identity of the person to ensure safety and integrity of the depository system. Mere documentary compliance of KYC forms is not enough and Depository Participant should ensure that identity of the person is established before opening the accounts. Besides, all market intermediaries are expected to have adequate controls, systems and procedures so as to enable them effectively identify any transactions of suspect nature and take immediate corrective measures / steps. In this case, it has been observed that multiple demat accounts were opened with same address, which should have raised suspicions regarding the genuineness of the account holders and I observe that prima facie, ING Vysya failed to exercise due diligence while opening these accounts.
5.3 With regard to 1075 demat accounts having common address, ING Vysya submitted that the Bank’s Branches’ DP section has relied on the proof of address as evidenced in the bank statement of accounts / pass books, which is one of the acceptable proof of address in terms of NSDL Guidelines.
5.4 Further, I have noted that aberrations observed are due to the failure on the part of few individuals at the operational levels and it is not a failure of systems of bank nor is it a case of gross non-compliance to KYC norms. I disagree with the contention of ING Vysya because registered intermediary cannot escape the responsibility cast by the DP regulations upon the depository participant as regards the requirement to exercise due care and diligence while opening demat account by merely stating that certain employees have abused the system. Further, I have also noted that ING Vysya operates both banking and depository activities under same management, and therefore there is a need to ensure that adequate control and checks are in place which supplement each other. In this context, I have noted that Reserve Bank of India had imposed a penalty of Rs 5 lakh on ING Vysya Bank for violations of bank KYC norms.
5.5 I have noted that at para 17.10 of the ad interim ex parte order, SEBI had directed NSDL and CDSL 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. In the meanwhile, it appears that based on the prima facie findings of large scale opening of afferent (as defined at para 4 of the order) accounts and these accounts being used for the purpose of cornering the shares meant for retail investors in various IPOs, the DPs who have more than 500 such accounts have been asked not to open fresh demat accounts pending verification and enquiry. It is therefore clear that the prohibition of not opening fresh demat accounts was issued upon a serious suspicion on the genuineness of the afferent accounts subject to verification by the Depositories. It was not a punitive measure but a preventive step taken by SEBI in view of urgency, pending inquiry in the interest of investors and the securities market.
5.6 NSDL, vide its letter dated June 12, 2006 submitted its report to SEBI wherein it was observed that sample of 143 demat accounts of ING Vysya were selected for verification. NSDL has been asked by SEBI to submit further report as regards the verification carried out by it. However, considering that an Enquiry Officer has already been appointed. I am of the view that issues, if any, shall be taken up by him. Necessary action can be taken against ING Vysya if it is found guilty of violating any regulations of SEBI, by the Enquiry Officer. In the meantime, based on the material available on record and the submissions made by ING Vysya, I am of the view that the interim prohibition on ING Vysya may not be required to be continued.
6.0 Order
6.1 In view of as above, I , in exercise of the powers conferred upon me in terms of Section 19 read with Section 11 and 11B of the SEBI Act, 1992, hereby direct that there is no need to continue the directions issued to ING Vysya not to open fresh demat accounts.
6.2 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.
6.3 This order shall come into force with immediate effect.
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