IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 159/2004
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Date of Hearing
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6.6.2005
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Date of Decision
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13.6.2005
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In the matter of:
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Karvy Consultants Ltd.
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Appellant – Represented by
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Mr. Atul Rajadhyaksha, Mr. G.M. Dave & Mr. M.V. Gupta, Advocates
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Versus
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Securities & Exchange Board
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Respondent –Represented by
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of India
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Mr. Kumar Desai, Advocate & Ms. Daya Gupta
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
C. Bhattacharya, Member
Per: Justice Kumar Rajaratnam, Presiding Officer
1. Appeal is taken up with consent of parties.
2. The appellant being aggrieved by the order of the adjudicating officer of SEBI dated 30.6.2004 has preferred this appeal. The appellant, according to the respondent, violated Clause 2, 3 & 30 of the Code of Conduct of the SEBI (Registrars to an issue and Share Transfer Agents) Regulation 1993 and has been imposed with a penalty of Rs. 10 lakh.
3. The facts briefly are as follows. The appellant was appointed as the Registrar and Transfer Agent (hereinafter referred to as “RTA”) for the public issue of UCO Bank of 20 crore equity shares at a price of Rs. 12 per share aggregating to Rs. 240 crore.
4. The issue opened on 3.9.2003 and closed within a week on 10.9.2003.
5. SEBI conducted inspection of the books of the appellant in October-November, 2003 to verify whether the shares allotted were in physical form or demat code in accordance with the wishes of the applicant.
6. The inspection report showed certain discrepancies. On the basis of the inspection report, a show cause notice dated 6.10.2004 was issued to the appellant alleging that 55868 applicants were allotted shares in physical form although they had opted for allotment in demat form.
7. The appellant submitted his reply to the show cause notice and stated frankly that in the case of 41186 applications, the appellant took suo moto action in transferring the shares in demat account as requested by the applicants at their own expense. The appellant also stated that there was an unprecedented volume of 1044000 applications received from the public.
8. Not satisfied with the reply, the respondent passed an order dated 30.6.2004 holding that the appellant was in violation of the code of conduct prescribed in the 1993 Regulation and imposed a penalty of Rs. 10 lakh. This order is impugned in this appeal.
9. The gamut of the allegation can be summed from a chart shown in the impugned order. The relevant portion of page 3 of the impugned order reads as follows:
“It is stated in the inspection report that 55868 applicants were allotted shares in physical form although they had opted for share in the demat mode as under:
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Category of rejection
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Description
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Applic-ants
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Apparently invalid DP ID and BO ID
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BO ID or DP ID incomplete in the application, rejected by RTI
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19,093
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Mis-match in names
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Names in the application not matching with that of the Depositories, rejected by RTI
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12,435
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DP ID and BO ID not valid/operative as per depositories
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These BO are closed as per the Depositories
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23,490
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Closed account
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These BO are closed as per the Depositories
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850
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Total
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55,868”
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10. From this chart it was alleged that there was lack of due skill, diligence and care by the RTA in violation of the 1993 Regulation. The defence was that the appellant had the best manpower infrastructure in the country and 1200 desktop servers with high speed data printers were working round the clock. Immediately after the closure, the appellant had employed about 1500 persons. More than 10 lakh applications were received and the allotment process had to be completed within 30 days of the closure of the issue.
11. Applications were collected at over 330 branches of the banks across the country. This resulted in the certain last minute receipt of bank schedules, since the time available for processing the application was only 12 days.
12. The learned senior counsel for the appellant also submitted that these applications were received at the central processing unit of the RTA. They were numbered and books created with lot numbers giving reference of the branch of the bank. Thereafter the applications were sent for data entry in the data entry module. There was a validation process for certain key fields which helps in ensuring that the data entry is accurate. There was also a complete physical verification of the application forms.
13. After this, there is a second check list. The errors are updated and again verified with reference to the application. Each application’s DP ID and Beneficiary ID are captured during the time of data entry and are sent to the depositories for confirmation and validation. The information received from the depositories are checked with the application.
14. It is submitted that the appellant is the only RTA in the country who appoints external auditors for double checking the system.
15. It was submitted that the allotment of shares in physical form were due to reasons beyond the control of the appellant such as, where the sequence of the names of the shareholders did not tally with the details.
16. The appellant also took us through the chart stating the basis for rejection of the applications in demat form. It was stated that in most of the cases which were rejected in demat form was rejected because of incomplete BO ID or DP ID data. In other cases because of mismatch and in some cases the respective depositories had rejected the application since they had closed the account. In some other cases, names were not properly given as to whether it was an HUF or not. The learned counsel vehemently argued that each of the defects allegedly found by the respondent was explained to the satisfaction of the respondent and the errors in the application were miniscule. Ultimately, the adjudicating officer concluded that out of 10 lakh applications dematerialisation did not take place with respect to only 2073 cases, who had given valid DP ID and BO ID although the show cause notice refers to total no. of cases as 55868.
17. This clearly indicates that the adjudicating officer has applied his mind and discharged the appellant with respect to the vast majority of cases. It has also been submitted by the learned counsel for the appellant that even with respect to these 2073 cases and with respect to the cases mentioned in the show cause notice the shares were dematerialised as expeditiously as possible at the expense of the appellant. In other words, the appellant did not charge the shareholders the amount which was to be paid as the cost for dematerialisations as far as RTA was concerned. This amount was waived and it is not in dispute that the appellants acted promptly to rectify the mistake of the shareholders.
18. The learned counsel for the appellant rightly pointed out that the appellant is a leading RTA and has been engaged by companies of great reputation and the appellant is known for its integrity, impartiality and skill in the work as an RTA. In fact, the appellant has been engaged by other companies as a trouble shooter wherever there has been any lack of facility in such matters.
19. The learned counsel for the appellant also relied on the precedents of this Court as well as the orders passed by SEBI where SEBI has taken a lenient view of the matter. Reliance was placed on paragraph 7 of the judgement of Chona Financial Services in appeal 95/2003, which is extracted below:
“7. The appellant submitted a few cases namely M/s. Bakliwala Investment, J.M. Morgan Stanley Retail Services Pvt. Ltd., Bama Securities as under, which have been found to contain by and large similar irregularities and have been only served with a letter of warning by SEBI.
i. M/s. Bakliwala Investment
Irregularities
Ø Provision for Tax for the interim period from April 1 to September 30, 2000 not made
Ø Confirmations have not been obtained from Banks, Creditors and debtors by the broker.
Ø Broker had not time stamped the order slip/records
Ø Contract notes not serially numbered except for computer generated numbers on day-to-day basis which have no control.
Ø Contract notes not issued within the specified time.
Ø Consolidated stamp duty not paid.
Ø Client Registration forms were not completed
Ø Order book was not maintained.
Ø Delay in payment of funds
Ø Delay in delivery of securities
Ø One client account being adjusted against another client without any authorization
Ø Transactions with associate firms/companies separate set of ledger accounts as clients and others not maintained.
Ø Compliant register not maintained.
Ø Client account were used for other purposes
Ø Margin money not collected
Ø In 10 cases, deals were done outside the NEAT System
Order
1. Irregularities are basically technical lapses and do not deserve a substantive punishment.
2. Minor Penalty – Warning
ii. M/s. J.M. Morgan Stanley Retail Services Pvt. Ltd.
Irregularities
Ø Failure to obtain client registration forms and agreement
Ø Failed to maintain separate client account.
Order
Warning
iii. M/s. Bama Securities
Irregularities
Ø Contract notes were missing
Ø Acknowledgement from the clients not obtained
Ø Not maintaining client registration forms
Order
Warning
8. Reliance has been placed on a few other judgments as under in which similar irregularities were found and were served with a letter of warning.
iv. M/s. Ratanbali Capital Markets Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Contract notes
Ø Non-collection of margins from clients
Ø Misuse of client’s funds
Ø Share lending/borrowing
Ø Non-segregation of clients accounts with own account and for not reporting off-the-floor transactions to Stock Exchange
Order
Warning
v. M/s. Twenty First Century Shares & Securities Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Delay in payment to clients
Ø Misuse of client’s funds
Ø Non-segregation of clients accounts with own account and for not reporting off-the floor transactions to Stock Exchange
Ø Booking payment in different clients account.
Ø Loan against shares of holding company and loan transaction in clients account.
Order
Warning
vi. M/s. Sanjay C. Bakshi
Irregularities
Ø Not maintaining margin registers
Ø Dealing with unregistered sub-brokers
Ø Not entering into agreement with few clients
Ø Non-segregation of clients funds with own funds
Ø Dealing with broker of other Stock exchange without getting registered as a sub-broker
Ø Irregularities in respect of contract notes
Ø Delay in payment/delivery of funds/shares to clients
Order
Warning
vii. M/s. Mahesh Kothari Share & Stock Brokers Pvt. Ltd.
Irregularities
Ø Non-maintenance of books of accounts
Ø Dealing with unregistered sub-brokers
Ø Irregularities in issuance of contract notes
Ø Non-segregation of clients account with own account, misuse of client’s fund
Ø Delay on delivery of securities and not reporting off the floor transactions
Order
Warning
viii. M/s. Mukesh Sawhany
Irregularities
Ø Non-maintenance of document registers
Ø Irregularities in issuance of contract notes
Ø Non-maintenance of separate client account
Ø Non-segregation of separate client account with own account
Ø Not reporting off the floor transactions
Ø Non redressal of investor complaints
Order
Warning”
20. The learned counsel for the appellant relied on a judgement of this Tribunal in Cameo Corporate Services Ltd. vs. SEBI reported in (2005) 57 SCL 294 (SAT-MUM), where this Court has taken the view that due recognition must be given for a RTA who has immediately complied with the defects pointed out by SEBI. The penalty imposed on the appellant does not appear to have any basis. Section 15J of the Act reads as follows:
“While adjudging the quantum of penalty under Section 15-I, the adjudicating officer shall have due regard to the following factors namely:-
i. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
ii. the amount of loss caused to an investor or group of investors as a result of the default;
iii. the repetitive nature of the default”
21. None of the factors in our view have been seriously considered by the adjudicating officer. There is no doubt that there has been some oversight and carelessness on the part of the appellant. However, as pointed out by the High Court in SEBI vs. Cabot International Capital Corporation reported in (2004) 51 SCL 307 (BOM.) one cannot take a strict liability in cases of this nature. It all depends on the burden of work and the will and ability to rectify mistakes promptly as soon as the mistakes are pointed out by the shareholders. We do not expect the impossible from RTAs. At the same time, we expect the RTAs to act promptly to rectify any mistakes that are pointed out to them.
22. In this case, we have no hesitation in concluding that the RTA has suo moto rectified the mistakes pointed out in the show cause notice, at their own expense.
23. We therefore hold that there has been some minor violation of the Code of Conduct of 1993 Regulation. All be it, no deliberate intention or mala fide can be attributed to the appellant, as can be seen in the remedial steps taken by the appellant. (See Cabot International case)