ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15HB OF THE SEBI ACT, 1992.
AGAINST SOUTH GUJARAT SHARES
AND SHAREBROKERS LIMITED
BACKGROUND:
1 M/s South Gujarat Shares and Sharebrokers Limited (for brevity’s sake, hereinafter referred to as SGSSL) is a member of the National Stock Exchange Ltd, Mumbai (NSE) and registered with the Securities and Exchange Board of India, 1992 (SEBI) as a depository participant of the National Securities Depositories Services Limited (NSDL) with DP ID-IN-300425.
2. An inspection of the books of account, documents, records, infrastructure, systems and procedures of SGSSL was conducted by SEBI on the 24th and 25th of February 2004 under the SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as the “Regulations") and during the said course, SGSSL were inter alia found to have allegedly violated Regulation 54(4) of the said Regulations. While communicating the findings of the inspection to SGSSL vide letter dated August 10, 2004, SEBI also advised them to submit their reply to the same. As the response of SGSSL made vide letter dated August 23, 2004 was found to be unsatisfactory, adjudicating proceedings were initiated against SGSSL and in this context, I was appointed as the Adjudicating Officer, vide order of SEBI dated December 21, 2004 to inquire into and adjudge the inordinate delay on the part of SGSSL to furnish to the issuer, the details of the certificate of security (demat request form-DRF) received by them from the beneficial owners within the time specified under Regulation 54(4) of the Regulations.
NOTICE/ REPLY/ PERSONAL HEARING:
3. In view of the above, I issued a notice dated January 6, 2005 to SGSSL to show cause as to why enquiry proceedings should not be initiated against them in terms of Rule 4 of the SEBI (Procedure for holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) and penalty should not be imposed upon them under Section 15HB of the SEBI Act 1992 (hereinafter referred to as Act). SGSSL were advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and were also advised to note that in case they failed to reply within the stipulated period, it would be presumed that they had no adequate explanation to offer. SGSSL replied to the said notice vide their letter dated January 24, 2005, in which they inter-alia submitted that no penalty be levied as the delay, if any had not resulted in any loss to any of their clients.
4. Thereafter in terms of Rule 5(1) of the Rules, a notice of hearing dated January 27, 2005 was sent to SGSSL advising them to attend the proceedings on February 16, 2005. On the scheduled date, various official of SGSSL attended the hearing and reiterated the contentions earlier advanced by them. The said contentions were once again reiterated by them in their letter dated Febraury 16, 2005.
CONSIDERATION OF ISSUES:
5. I have taken into consideration the facts and circumstances of the case, the submissions advanced on behalf of SGSSL and the material available on record including the findings of the inspection report.
6. The charge leveled against SGSSL for which the present proceedings have been initiated, the submissions, if any, made by them in this regard and my findings on the same, are elaborated herein below: -
During the course of inspection, SGSSL were found in 139 instances to have delayed by more than 7 days furnishing to the issuer, the details of the certificate of security (demat request form-DRF) received by them from the beneficial owners, which amounted to a violation of Regulation 54(4) of the Regulations making them liable for action in terms of Section 15HB of the Act.
7. In their defense, SGSSL submitted that as soon as the demat requests were received from the clients and a demat request form (DRF) was submitted for the said purpose, the date was stamped and entered into the inward register as well as outward register and within 7 days from the date of stamp, the same was dispatched to the concerned R & T. It was stated that in respect of 6 instances DRN Nos 84314,84307,84308,84306,84300 and 84298 where there was a delay of 29 days, the client had opened a single account having four joint holders and thereafter had given SGSSL the DRF for the dematerialization of securities having their individual names for which a receipt of acknowledgement cum receipt No 47736, dated November 4, 2003 for the a/c client id 10135267 was issued. However upon noting the discrepancy, the beneficial owners were advised to open separate accounts i.e. four accounts, in their individual names and then surrender the securities for dematerialisation. Accordingly four separate accounts were opened by the beneficial owners and the bill was then adjusted to the old receipt no 47736 dated November 4, 2003. SGSSL stated that this exercise of closing the old account and opening the 4 new accounts took 29 days, giving rise to the impression that there was a delay of 29 days on their part in processing the demat requests although there was as such no delay or violation of Regulation 54(4) of the Regulations and the delay if any, was on account of the mistake on the part of the client.
8. SGSSL further submitted that the remaining cases of delay ranging between 7 and 11 days occurred during the Diwali season when most of their staff were on leave and the market was high and bullish and they were receiving 400 demat requests per day. It was clarified that although the heavy work load and their inability to appoint temporary staff without the knowledge and experience of participant related work caused the delays, no losses were caused on account of these delays to any of their clients nor were any complaints received by them in this regard from their clients. SGSSL further submitted that they had taken ample steps to ensure that this kind of delay would never recur in future and that thereafter there was not a single case of delay which could amount to a violation of Regulation 54(4) of the Regulations. It was emphasized that after the SEBI inspection, another inspection by the NSDL was carried out in which not even a single case of such delay was found by the inspecting authorities and that in fact they had not received any compliant from any of their clients nor any intimation of such complaints from the Investor Grievance Cell so far. Hence as no loss had been caused to any of their clients, no penalty should be levied against them.
9. I have considered at length the provisions of law alleged to have been violated by SGSSL as also the submissions advanced on their behalf that has been elaborated above.
10. Regulation 54(4) of the Regulations, which came into effect from September 2, 2003 mandates every participant to furnish to the issuer, details of the certificate of security along with the said certificate of security, within seven days of the receipt of certificate of security from the beneficial owners.
11. The process in such an event is such that all beneficial owners, desirous of dematerializing their holdings, submit the filled in dematerialization request form (DRF) along with the share / debenture certificate(s) to the participant, for dematerializing their securities. On receipt of the request, the details are required to be verified by the officer of the participant on the counter, by cross checking the number of certificates, availability of security in demat, ISIN number and names of holders etc. The receipt of the DRF is acknowledged at the counter and a receipt is then issued for the charges that have to be paid by the investor for the dematerialisation of the securities. This receipt acts as the future reference for the investor in case of any discrepancy. The DRF is sent to the back office of the participant for verification and data entry into the Depository Participant Module (DPM) system. After the verification process and data entry, the DRN (dematerialisation request number) is generated and the DRF along with a covering letter addressed to the concerned Share Transfer Agent/ the issuer company, is then forwarded to them for dematerialisation.
12. Keeping this process in mind, during the course of inspection, when the office of SGSSL regarding various aspects concerning dematerialization was inspected i.e., whether there was any delay in dispatch of the dematerialization requests, whether the processing of the requests was being done in a proper manner without any of the investors facing any problem for rejection of the dematerialization requests on account of faulty processing by the participant, etc, it was inter-alia noted that in several instances, SGSSL had not forwarded the DRF to the issuer company / RTA within seven days of its receipt in terms of Regulation 54(4) of the Regulations. This was apparent from an examination of the date of generation of the receipt (receipt for amount paid towards dematerialisation, given to the investor for submission of DRF) which when compared with the date of generation of the Dematerialisation Request Number (DRN) and further compared with the date of dispatch of the DRN with the courier company dispatch schedule, clearly indicated that in the following 139 instances which are not disputed by SGSSL the DRNs were dispatched late to the concerned share transfer agent/the issuer company i.e., beyond the stipulated period of seven days prescribed in the Regulations:
|
S NO
|
DATE OF RECEIPT
|
DATE OF DRN
|
DRN NO.
|
DATE OF DESPATCH
|
NUMBER OF DAYS DELAY BEYOND 07 DAYS
|
|
1
|
4-Nov-03
|
8-Dec-03
|
84314
|
10-Dec-03
|
29
|
|
2
|
4-Nov-03
|
8-Dec-03
|
84308
|
10-Dec-03
|
29
|
|
3
|
4-Nov-03
|
8-Dec-03
|
84307
|
10-Dec-03
|
29
|
|
4
|
4-Nov-03
|
8-Dec-03
|
84306
|
10-Dec-03
|
29
|
|
5
|
4-Nov-03
|
8-Dec-03
|
84300
|
10-Dec-03
|
29
|
|
6
|
4-Nov-03
|
8-Dec-03
|
84298
|
10-Dec-03
|
29
|
|
7
|
5-Nov-03
|
17-Nov-03
|
82556
|
19-Nov-03
|
7
|
|
8
|
5-Nov-03
|
17-Nov-03
|
82554
|
19-Nov-03
|
7
|
|
9
|
5-Nov-03
|
17-Nov-03
|
82553
|
19-Nov-03
|
7
|
|
10
|
5-Nov-03
|
17-Nov-03
|
82551
|
19-Nov-03
|
7
|
|
11
|
5-Nov-03
|
17-Nov-03
|
82552
|
19-Nov-03
|
7
|
|
12
|
5-Nov-03
|
17-Nov-03
|
82550
|
19-Nov-03
|
7
|
|
13
|
5-Nov-03
|
17-Nov-03
|
82549
|
19-Nov-03
|
7
|
|
14
|
5-Nov-03
|
17-Nov-03
|
82548
|
19-Nov-03
|
7
|
|
15
|
5-Nov-03
|
17-Nov-03
|
82545
|
19-Nov-03
|
7
|
|
16
|
5-Nov-03
|
17-Nov-03
|
82546
|
19-Nov-03
|
7
|
|
17
|
6-Nov-03
|
14-Nov-03
|
82474
|
19-Nov-03
|
7
|
|
18
|
6-Nov-03
|
14-Nov-03
|
82473
|
19-Nov-03
|
6
|
|
19
|
7-Nov-03
|
17-Nov-03
|
82585
|
19-Nov-03
|
6
|
|
20
|
7-Nov-03
|
17-Nov-03
|
82581
|
19-Nov-03
|
5
|
|
21
|
7-Nov-03
|
17-Nov-03
|
82578
|
19-Nov-03
|
5
|
|
22
|
7-Nov-03
|
17-Nov-03
|
82576
|
19-Nov-03
|
5
|
|
23
|
7-Nov-03
|
17-Nov-03
|
82559
|
19-Nov-03
|
5
|
|
24
|
10-Nov-03
|
24-Nov-03
|
83242
|
25-Nov-03
|
8
|
|
25
|
10-Nov-03
|
24-Nov-03
|
83209
|
25-Nov-03
|
8
|
|
26
|
11-Nov-03
|
24-Nov-03
|
83167
|
25-Nov-03
|
7
|
|
27
|
11-Nov-03
|
24-Nov-03
|
83166
|
25-Nov-03
|
7
|
|
28
|
11-Nov-03
|
24-Nov-03
|
83154
|
25-Nov-03
|
7
|
|
29
|
11-Nov-03
|
24-Nov-03
|
83155
|
25-Nov-03
|
7
|
|
30
|
11-Nov-03
|
24-Nov-03
|
83150
|
25-Nov-03
|
7
|
|
31
|
11-Nov-03
|
24-Nov-03
|
83151
|
25-Nov-03
|
7
|
|
32
|
11-Nov-03
|
24-Nov-03
|
83149
|
25-Nov-03
|
7
|
|
33
|
11-Nov-03
|
24-Nov-03
|
83148
|
25-Nov-03
|
7
|
|
34
|
11-Nov-03
|
24-Nov-03
|
83144
|
25-Nov-03
|
7
|
|
35
|
11-Nov-03
|
24-Nov-03
|
83145
|
25-Nov-03
|
7
|
|
36
|
11-Nov-03
|
24-Nov-03
|
83146
|
25-Nov-03
|
7
|
|
37
|
11-Nov-03
|
24-Nov-03
|
83147
|
25-Nov-03
|
7
|
|
38
|
11-Nov-03
|
24-Nov-03
|
83143
|
25-Nov-03
|
7
|
|
39
|
11-Nov-03
|
24-Nov-03
|
83139
|
25-Nov-03
|
7
|
|
40
|
11-Nov-03
|
24-Nov-03
|
83140
|
25-Nov-03
|
7
|
|
41
|
11-Nov-03
|
24-Nov-03
|
83141
|
25-Nov-03
|
7
|
|
42
|
11-Nov-03
|
24-Nov-03
|
83137
|
25-Nov-03
|
7
|
|
43
|
11-Nov-03
|
24-Nov-03
|
83138
|
25-Nov-03
|
7
|
|
44
|
11-Nov-03
|
24-Nov-03
|
83136
|
25-Nov-03
|
7
|
|
45
|
11-Nov-03
|
24-Nov-03
|
83135
|
25-Nov-03
|
7
|
|
46
|
11-Nov-03
|
24-Nov-03
|
83134
|
25-Nov-03
|
7
|
|
47
|
11-Nov-03
|
24-Nov-03
|
83122
|
25-Nov-03
|
7
|
|
48
|
11-Nov-03
|
24-Nov-03
|
83120
|
25-Nov-03
|
7
|
|
49
|
11-Nov-03
|
24-Nov-03
|
83094
|
25-Nov-03
|
7
|
|
50
|
11-Nov-03
|
24-Nov-03
|
83098
|
25-Nov-03
|
7
|
|
51
|
11-Nov-03
|
24-Nov-03
|
83107
|
25-Nov-03
|
7
|
|
52
|
11-Nov-03
|
24-Nov-03
|
83106
|
25-Nov-03
|
7
|
|
53
|
18-Nov-03
|
1-Dec-03
|
83891
|
3-Dec-03
|
8
|
|
54
|
18-Nov-03
|
1-Dec-03
|
83890
|
3-Dec-03
|
8
|
|
55
|
18-Nov-03
|
1-Dec-03
|
83882
|
3-Dec-03
|
8
|
|
56
|
18-Nov-03
|
1-Dec-03
|
83883
|
3-Dec-03
|
8
|
|
57
|
18-Nov-03
|
1-Dec-03
|
83867
|
3-Dec-03
|
8
|
|
58
|
18-Nov-03
|
1-Dec-03
|
83866
|
3-Dec-03
|
8
|
|
59
|
18-Nov-03
|
1-Dec-03
|
83868
|
3-Dec-03
|
8
|
|
60
|
18-Nov-03
|
1-Dec-03
|
83863
|
3-Dec-03
|
8
|
|
61
|
18-Nov-03
|
1-Dec-03
|
83865
|
3-Dec-03
|
8
|
|
62
|
18-Nov-03
|
1-Dec-03
|
83862
|
3-Dec-03
|
8
|
|
63
|
18-Nov-03
|
1-Dec-03
|
83859
|
3-Dec-03
|
8
|
|
64
|
18-Nov-03
|
1-Dec-03
|
83860
|
3-Dec-03
|
8
|
|
65
|
18-Nov-03
|
28-Nov-03
|
83795
|
29-Nov-03
|
4
|
|
66
|
19-Nov-03
|
28-Nov-03
|
83784
|
29-Nov-03
|
3
|
|
67
|
19-Nov-03
|
28-Nov-03
|
83785
|
29-Nov-03
|
3
|
|
68
|
19-Nov-03
|
28-Nov-03
|
83802
|
29-Nov-03
|
3
|
|
69
|
19-Nov-03
|
28-Nov-03
|
83779
|
29-Nov-03
|
3
|
|
70
|
19-Nov-03
|
28-Nov-03
|
83781
|
29-Nov-03
|
3
|
|
71
|
19-Nov-03
|
28-Nov-03
|
83782
|
29-Nov-03
|
3
|
|
72
|
19-Nov-03
|
28-Nov-03
|
83783
|
29-Nov-03
|
3
|
|
73
|
19-Nov-03
|
9-Dec-03
|
84385
|
10-Dec-03
|
14
|
|
74
|
19-Nov-03
|
28-Nov-03
|
83776
|
29-Nov-03
|
3
|
|
75
|
19-Nov-03
|
28-Nov-03
|
83780
|
29-Nov-03
|
14
|
|
76
|
22-Nov-03
|
8-Dec-03
|
84318
|
10-Dec-03
|
11
|
|
77
|
22-Nov-03
|
8-Dec-03
|
84319
|
10-Dec-03
|
11
|
|
78
|
22-Nov-03
|
8-Dec-03
|
84320
|
10-Dec-03
|
11
|
|
79
|
22-Nov-03
|
8-Dec-03
|
84321
|
10-Dec-03
|
11
|
|
80
|
22-Nov-03
|
8-Dec-03
|
84317
|
10-Dec-03
|
11
|
|
81
|
22-Nov-03
|
9-Dec-03
|
84371
|
10-Dec-03
|
11
|
|
82
|
22-Nov-03
|
8-Dec-03
|
84315
|
10-Dec-03
|
11
|
|
83
|
22-Nov-03
|
8-Dec-03
|
84311
|
10-Dec-03
|
11
|
|
84
|
22-Nov-03
|
8-Dec-03
|
84312
|
10-Dec-03
|
11
|
|
85
|
22-Nov-03
|
8-Dec-03
|
84299
|
10-Dec-03
|
11
|
|
86
|
24-Nov-03
|
8-Dec-03
|
84302
|
10-Dec-03
|
9
|
|
87
|
24-Nov-03
|
8-Dec-03
|
84289
|
10-Dec-03
|
9
|
|
88
|
24-Nov-03
|
8-Dec-03
|
84290
|
10-Dec-03
|
9
|
|
89
|
24-Nov-03
|
8-Dec-03
|
84291
|
10-Dec-03
|
9
|
|
90
|
24-Nov-03
|
8-Dec-03
|
84292
|
10-Dec-03
|
9
|
|
91
|
24-Nov-03
|
8-Dec-03
|
84293
|
10-Dec-03
|
9
|
|
92
|
24-Nov-03
|
8-Dec-03
|
84294
|
10-Dec-03
|
9
|
|
93
|
24-Nov-03
|
8-Dec-03
|
84296
|
10-Dec-03
|
9
|
|
94
|
24-Nov-03
|
8-Dec-03
|
84295
|
10-Dec-03
|
9
|
|
95
|
24-Nov-03
|
8-Dec-03
|
84297
|
10-Dec-03
|
9
|
|
96
|
25-Nov-03
|
8-Dec-03
|
84279
|
10-Dec-03
|
8
|
|
97
|
25-Nov-03
|
8-Dec-03
|
84286
|
10-Dec-03
|
8
|
|
98
|
25-Nov-03
|
8-Dec-03
|
84276
|
10-Dec-03
|
8
|
|
99
|
25-Nov-03
|
8-Dec-03
|
84277
|
10-Dec-03
|
8
|
|
100
|
25-Nov-03
|
8-Dec-03
|
84269
|
10-Dec-03
|
8
|
|
101
|
25-Nov-03
|
8-Dec-03
|
84270
|
10-Dec-03
|
8
|
|
102
|
25-Nov-03
|
8-Dec-03
|
84282
|
10-Dec-03
|
8
|
|
103
|
25-Nov-03
|
8-Dec-03
|
84281
|
10-Dec-03
|
8
|
|
104
|
25-Nov-03
|
8-Dec-03
|
84280
|
10-Dec-03
|
8
|
|
105
|
25-Nov-03
|
8-Dec-03
|
84284
|
10-Dec-03
|
8
|
|
106
|
25-Nov-03
|
8-Dec-03
|
84283
|
10-Dec-03
|
8
|
|
107
|
25-Nov-03
|
8-Dec-03
|
84271
|
10-Dec-03
|
8
|
|
108
|
25-Nov-03
|
9-Dec-03
|
84373
|
10-Dec-03
|
8
|
|
109
|
25-Nov-03
|
8-Dec-03
|
84287
|
10-Dec-03
|
8
|
|
110
|
27-Nov-03
|
9-Dec-03
|
84394
|
10-Dec-03
|
8
|
|
111
|
27-Nov-03
|
8-Dec-03
|
84265
|
10-Dec-03
|
6
|
|
112
|
27-Nov-03
|
8-Dec-03
|
84266
|
10-Dec-03
|
6
|
|
113
|
27-Nov-03
|
8-Dec-03
|
84267
|
10-Dec-03
|
6
|
|
114
|
27-Nov-03
|
8-Dec-03
|
84262
|
10-Dec-03
|
6
|
|
115
|
27-Nov-03
|
9-Dec-03
|
84430
|
10-Dec-03
|
6
|
|
116
|
27-Nov-03
|
8-Dec-03
|
84260
|
10-Dec-03
|
6
|
|
117
|
27-Nov-03
|
8-Dec-03
|
84258
|
10-Dec-03
|
6
|
|
118
|
27-Nov-03
|
8-Dec-03
|
84259
|
10-Dec-03
|
6
|
|
119
|
27-Nov-03
|
8-Dec-03
|
84263
|
10-Dec-03
|
6
|
|
120
|
27-Nov-03
|
9-Dec-03
|
84432
|
10-Dec-03
|
6
|
|
121
|
27-Nov-03
|
9-Dec-03
|
84426
|
10-Dec-03
|
6
|
|
122
|
27-Nov-03
|
9-Dec-03
|
84425
|
10-Dec-03
|
6
|
|
123
|
27-Nov-03
|
9-Dec-03
|
84423
|
10-Dec-03
|
6
|
|
124
|
27-Nov-03
|
9-Dec-03
|
84424
|
10-Dec-03
|
6
|
|
125
|
27-Nov-03
|
9-Dec-03
|
84421
|
10-Dec-03
|
6
|
|
126
|
27-Nov-03
|
9-Dec-03
|
84422
|
10-Dec-03
|
6
|
|
127
|
27-Nov-03
|
9-Dec-03
|
84395
|
10-Dec-03
|
6
|
|
128
|
27-Nov-03
|
8-Dec-03
|
84252
|
10-Dec-03
|
6
|
|
129
|
27-Nov-03
|
8-Dec-03
|
84251
|
10-Dec-03
|
6
|
|
130
|
27-Nov-03
|
8-Dec-03
|
84254
|
10-Dec-03
|
6
|
|
131
|
27-Nov-03
|
8-Dec-03
|
84250
|
10-Dec-03
|
6
|
|
132
|
27-Nov-03
|
8-Dec-03
|
84249
|
10-Dec-03
|
6
|
|
133
|
27-Nov-03
|
9-Dec-03
|
84396
|
10-Dec-03
|
6
|
|
134
|
27-Nov-03
|
9-Dec-03
|
84397
|
10-Dec-03
|
6
|
|
135
|
28-Nov-03
|
8-Dec-03
|
84322
|
10-Dec-03
|
5
|
|
136
|
1-Dec-03
|
8-Dec-03
|
84367
|
10-Dec-03
|
2
|
|
137
|
1-Dec-03
|
8-Dec-03
|
84366
|
10-Dec-03
|
2
|
|
138
|
1-Dec-03
|
8-Dec-03
|
84341
|
10-Dec-03
|
2
|
|
139
|
1-Dec-03
|
8-Dec-03
|
84340
|
10-Dec-03
|
2
|
13. I have carefully examined the submissions made by SGSSL in their defense as well as the documentary evidence submitted by them.
14. I have perused the relevant documents submitted by SGSSL to substantiate their contentions as regards the cases involving a delay of 29 days, I have observed that in the said instances the original DP account was opened on October 29, 2003 and upon issuance of the DRF for the dematerialization of securities with their individual names, an acknowledgement cum receipt dated November 04, 2003 was issued by SGSSL. It appears that (on being advised by SGSSL) thereafter the clients had opened fresh accounts on November 22, 2003. Although the contention of SGSSL that these procedural lapses took time, may be accepted, there does not appear to be any reasonable explanation for the delay of 18 days, in the opening of the new accounts or the delay of 29 days for processing the demat requests of the clients. As brought out earlier, on receipt of any demat request, the details are required to be verified by the officer of the participant on the counter, by cross checking all relevant details viz; the number of certificates, availability of security in demat, ISIN number, names of holders etc. In the facts of the instant case, assuming without accepting the argument advanced on behalf of SGSSL, a delay of a day or two or even a few days, beyond the stipulated period of 7 days would have been acceptable. There is no justification for a delay involving 29 days. Consequently, the contention of SGSSL that they had done their bit after opening of their said accounts does not speak for much. Exercise of due diligence, in on going transactions, is a continuous process and is not a one time measure, to be adhered to while processing the demat requests. Hence, there is no merit in the contention of SGSSL that the delay of 29 days was not on their account but due to the mistake on the part of their client.
15. Even otherwise, I have noted several other cases involving delay ranging between 7 and 11 days for which once again adequate justification has not been given. The contention that the delays occurred during the Diwali season when most of their staff were on leave and the market was high and bullish and they were receiving 400 demat requests per day, does not in any way absolve them from their failure to discharge their duties as a prudent participant, in terms of the statutory obligations cast upon them. Assuming that their work load was heavy, nothing prevented them from recruiting temporary staff. Their counter argument that temporary staff with the adequate knowledge and experience of participant related work was unavailable; seem to be lame excuses relied upon as a last recourse to justify their aberrations.
16. I have considered the contention advanced by SGSSL that as no complaint were received from any of their clients; no losses were caused on account of these delays to any of their clients. In this regard, I consider it relevant to refer to the inspection report which also highlights the fact that SGSSL was found to be maintaining a register for the complaints received from the investors, called the complaints register only from November 2001 onwards and that a few complaints pertaining to the year 1999 are being maintained separately. It is also noted that SGSSL did not have any system for recording the complaints received through phone, walk in, email etc.
17. It is apparent that in case of improper maintenance of the complaints register, there is bound to be a difficulty to ascertain the redressal mechanism of SGSSL or the time taken by them to redress various grievances. Keeping the same in mind, due credence cannot be afforded to the contention of SGSSL that no losses occurred to any of their clients due to the defaults earlier discussed as there were no complaints on record against them.
18. In view of the facts above stated, the violation of Regulation 54(4) of the Regulations by SGSSL stands established thereby making them liable under the provisions of Section 15HB of the Act, which inter alia provides that whoever fails to comply with any provisions of the Act, the rules or Regulations made or directions issued by the Board there under, for which no separate penalty has been provided, would be liable to a penalty which may extend upto rupees one crore.
19. The essence of Regulation 54(4) of the Regulations which came in to effect on September 02, 2003 is to avoid any delay in dematerialization which would result in any opportunity losses to the investors. Hence, Regulation 54(4) is an important measure brought about by SEBI for the benefit of the investors and consequently any violation or deviolation from same should be viewed seriously.
20. Upon an analysis of the facts of the case and the rational behind the incorporation of Regulation 54(4) of the Regulations, it is apparent that the failure on the part of SGSSL in the delayed dispatch of these demateraisation request forms to the issuer company /RTA within seven days of their receipt, would undoubtedly have caused opportunity losses to the investors, in that when the market is high and bullish and the investors wish to take advantage of these trends in the market, they are unable to do so, as the dematerialization of the shares are delayed. There are also other aspects to consider in such cases. The investor is compelled to spend additional time in re-submitting the share certificates for dematerialisation and also incur, in all probability, additional cost for dematerialisation of the share certificates once again.
21. Any evasion of the regulatory provisions issued by the regulator in the interests of the investors or non adherence to the same for any reason whatsoever is bound to affect the interest of such investors. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose behind their enactment. The very purpose of enacting any legislation is due adherence to the procedures laid down there under to ensure the sound and smooth functioning of the capital market. If adequate cognizance is not taken of the breach of any of these provisions and sufficient liability is not fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.
22. SGSSL have impressed upon me the fact that there has not been any recurrence of such delays on their part and that after the SEBI inspection, in the subsequent inspection carried out by NSDL, no such violation was pointed out.
23. There are a plethora of judgments passed by the Securities Appellate Tribunal to the effect that when there is a rectification of the deficiencies pointed out in the inspection report, the same should be viewed leniently.
24. Keeping the same in mind, although Section 15HB of the Act calls for the imposition of the penalty up to a maximum of Rs.1 crore for violation of this nature, I am of the considered opinion that the facts of the instant case do not call for the imposition of penalty to the extent specified in Section 15HB of the Act.
25. Moreover for the purpose of adjudging the quantum of penalty, I have also considered the factors laid down in Section 15 J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain or unfair advantage made as a result of the said default, the amount of loss caused to the investors and the repetitive nature of default. Some of these pre-requisites are in the negative and are in favour of SGSSL. However the opportunity losses caused to the investors in 139 such instances cannot be discounted.
PENALTY
26. In view of the foregoing, on a judicious exercise of the discretion conferred upon me, bearing in mind the facts and circumstances of this case as well as after analysing all the material available on record, in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, in the interest of justice, equity and good conscience, I think it appropriate to levy a penalty of Rs.1,50,000/- (Rupees One Lakh Fifty Thousand Only ) upon M/s South Gujarat Shares and ShareBrokers Limited for the violation of Regulation 54(4) of the SEBI (Depositories and Participants) Regulations, 1996.
27. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India” and payable at Mumbai which may be sent to Shri Suresh Menon, General Manager, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400005.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: JUNE 15, 2005 ADJUDICATING OFFICER