Order in the matter of Inspection of Depository Participant Activities of Dayco Securities Pvt Limited

1.      Dayco Securities Pvt. Ltd (hereinafter referred to as DP) is a depository participant of National Securities Depository Limited (NSDL) and registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) under Certificate of Registration Nos. IN-DP-NSDL-28-97.

2.      Inspection of books of accounts, records, documents etc of the depository participant’s activities as DP was undertaken by a SEBI appointed CA firm, M/s Chaturvedi & Co. The inspection of DP was undertaken as Depository Participant of NSDL. During the inspection, certain irregularities, deficiencies and lapses on the part of DP were observed by the said CA firm. The same were communicated to the DP vide letter dated April 4, 2003 and they were given 15 days time to offer comments on the observations of inspection. DP vide its letter dated May 6, 2003 furnished their reply to the said observations.

3.      After considering the submissions made by DP, a show cause notice dated May 6, 2004 was issued to it  , advising it to show cause as to why ‘cease and desist’ order under section 11D of SEBI Act,1992, should not be initiated against it for the lapses and irregularities observed during the inspection. The following allegations were made in the show cause notice against DP:

a)           Beneficiary accounts were opened without obtaining proper proof of identity and address of the clients, the photo copies were not compared with the originals thereby violating the provisions of SEBI circular no.SMDRP/Policy/CIR-36/2000 dated August 04, 2000.

b)           Beneficiary accounts were opened without obtaining the signature of witness, without obtaining records of the MICR from the investor.

c)            Debit instructions slips (DIS) were accepted from the investors without time stamping. The guideline dated June 06, 2000 with respect to issuance, re-issuance, execution, time stamping etc, of debit instruction slips were not followed.

d)           Large number of dematerialization requests were rejected on account of the mistakes committed by DP. 38% of the rejected share certificates were lying with the custody of DP.

4.      DP was advised to send its reply to the said show cause and also indicate if it desired a personal hearing before the competent authority. A reply to the show cause notice was received from DP vide letter dated May 18,2004.The  DP while replying point wise to the show cause notice admitted that there were certain short comings and compliances to be fulfilled with respect to the inspection observations.  

5.      An opportunity of personal hearing was given to DP on October 18, 2004  and the same was adjourned on that date. Subsequently vide letter dated July 18, 2006 another opportunity of personal hearing was granted on July 27, 2006. DP appeared on the said date through his director as mentioned on the first page of this order and made submissions reiterating its written reply.  

6.       I have carefully considered the inspection report, the show cause notice, the reply of DP and the material available on record and my findings are as follows.

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6.1 With regard to the allegation that DP had opened beneficiary accounts without obtaining proper identity proof of the client, without obtaining address proof and the photo copies were not compared with the originals thereby DP violated the provisions of SEBI circular no. SMDRP/Policy/Cir-36/2000 dated 04.08.2000, DP contended that there were some cases wherein proof of identities and proof of addresses were present but they were not satisfactory as per the norms. It further admitted that in some cases rubber stamp indicating “verified against original” was omitted. DP has also stated that it followed up with the clients and collected proper proof of identities and addresses as per laid down procedure.

6.2 With regard to the allegation that the DP had opened beneficiary accounts without signature of witness, it stated that in some cases the signature of the witness from the side of DP was not affixed. It further stated that the deficiency was latter cured by getting the signatures.

6.3 From the above submissions, I find that the DP did not deny the violation alleged against them. The failure on the part of the DP in not getting the address and identity proof is in direct violation of the circular no. SMDRP/Policy/Cir-36/2000 dated 04.08.2000, though the subsequent curing of the deficiency can be considered to be a mitigating factor.

6.4 With respect to the charge of Beneficiary accounts being opened without obtaining the signature of as per circular of NSDL no.NSDL/PI/2000/2295 dated December 20, 2000 it is mandatory to provide complete bank address including 9-digit MICR code for the Beneficiary account holders to receive distribution of corporate benefits directly to their bank accounts. DP admitted that some clients did not provide the details of MICR proof. I also note that DP stated that details were later collected from the Beneficiary account holders. Therefore I hold that DP has violated the provisions of the above circular by not getting the proof of MICR details.

6.5 With respect to the Acceptance of debit instruction slips (DIS) from the investors without time stamping and the violation of guidelines dated June 06,2000 with respect to issuance, re-issuance, execution, time stamping etc, of debit instruction slips, it was submitted by DP that the cases where time stamp was not present on original copy of Delivery Instruction Slips, majority of those were issued by Dayco Securities Pvt.Ltd itself as a account holder and there was no delay in the execution of the instruction and further stated that the failure to put the date stamp on the Debit Instruction slip is neither willful nor malafide.

6.6  I have gone through the annexure III to the show cause notice and the reply given by the DP.It is true that in some of the cases Debit Instruction Slip was issued by Dayco Securities Pvt.Ltd. But the same does not dispense with the requirement of the date and time stamping being affixed on the DIS. Therefore I hold that DP has breached this requirement.

6.7 With reference to the rejection of dematerialization requests on account of the mistakes committed by DP and 38% of the rejected share certificates lying in their custody, DP submitted that in cases where Demat requests from the investors containing some small omissions/mistakes on the part of the account holders, DP had preferred getting those rectified by the investors themselves before sending the request to the Registrar and Transfer Agent,(RTA) so that the same should not be rejected by the RTA, hence the delay. Regarding rejected share certificates, to avoid the risk in physical transit of securities, reminders were posted and thereafter the physical securities. I find that no such reminder letter referred to in the reply has been produced before me to explain the delay in sending the rejected Demat requests to Investors. Further the explanation that the physical copies of securities accompanying the demat requests were not immediately sent to the investors, is not convincing for the reason that no such reminder mentioned by DP was produced before me.

7. In view of the above, in the interests of investors and to safeguard the integrity of the securities market, in exercise of powers conferred upon me by Section 19 read with Section 11D of the Securities and Exchange Board of India Act, 1992, I hereby direct Dayco Securities Pvt Limited to desist from repeating any of the aforesaid lapses. Any repetition of such violations would be viewed seriously and invite penal proceedings. This order shall come into force with immediate effect.