BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.183 of 2010
Date of decision: 15.2.2011
G.M. Bosu & Co. Private Limited
7, Lyons Range, 3rd Floor,
Room No.2B, Kolkata.
….. Appellant
Versus - Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A,
G Block, Bandra Kurla Complex,
Mumbai. - Central Depository Services (India) Limited
Phiroze Jeejeebhoy Towers,
17th Floor, Dalal Street, Fort,
Mumbai. - Mrs. Atreyee Chakraborty
23K, Fern Road, Kolkata.…...RespondentsMr. Deepak Dhane, Advocate for the Appellant.
Dr. Poornima Advani, Advocate with Mr. Ajay Khaire and Ms. Amrita Joshi, Advocates
for Respondent no.1.
Mr. Zal Andhyarujina, Advocate with Ms. Bhavini Menon and Mr. Devang Kanakia,
Advocates for Respondent no.2.
None for Respondent no.3
CORAM : Justice N.K. Sodhi, Presiding Officer
P.K. Malhotra, Member
S.S.N. Moorthy, Member
Per : Justice N.K. Sodhi, Presiding Officer G.M. Bosu & Co. Private Limited, the appe llant before us is a participant of the
Central Depository Services (India) Limited, a depository under the Depositories Act,
1996 and it is respondent no.2 in this appeal. It shall be referred to hereinafter as the
depository. The appellant is also a stock br oker registered with the Securities and
Exchange Board of India (for short the Boar d) and a trading member of the Calcutta
Stock Exchange. Mrs. Atreyee Chakraborty is the third responde nt and she has not
appeared despite service. Her husband late Manoj Ranjan Chakraborty was a registered
holder of 1100 equity shares of ITC Limited (for short the company) which were held by 2
him in physical form. After the death of Ma noj Ranjan Chakraborty, respondent 3 got in
touch with one Jayanta Kumar Pyne (since dece ased and hereinafter referred to as Pyne)
who helped her in getting the shares transferre d in her name. On the advise of Pyne that
a demat account was required for the said purpos e, respondent 3 entrusted the task of
opening such an account to him. She handed over to him the share certificates pertaining
to the aforesaid shares and another share certificate representi ng 100 shares of the
company which stood in her name and in th e name of her daughter. Pyne opened the
demat account with the appellant which issued printed receipts acknowledging the receipt
of share certificates representing 1200 shares of the company. It is pertinent to mention
here that Pyne was an ex-employee of th e appellant and had been working for the
husband of respondent 3 and was, thus, known to both of them. It is the case of the third
respondent that on the representation of Pyne that her signatures were required on some
forms for opening a demat account, she had signed a number of blank printed forms and
other documents including delivery instruction slips (DIS) in good faith and was under
the impression that those documents were n ecessary for opening a demat account. It is
also the case of respondent 3 that Pyne was responsible for fraudulently transferring some
of the shares to third parties and some in his own name. The dispute in this appeal is only
in regard to 100 shares of the company which have over the years become 1500 due to
stock split of the shares from10 to1 per share and also because of corporate benefits.
Since respondent 3 felt that Pyne had defrauded her, she ma de a complaint to the police
and it appears that the police had summoned both the parties. We are not concerned with
what transpired before the police but the f act of the matter is th at Pyne, by his hand
written note dated October 21, 2003 duly signed by him, confessed that he had cheated
respondent 3 and had obtained her signature s on some forms including DIS without her
consent and transferred the shar es illegally. The relevant pa rt of his hand written note
reads as under:
“I have taken the signatures of A. Chakraborty without her consent in
order to deceive her and to transfer it illegally. (200) shares sold to
Soumitra Roy Chowdhry, (100) deposited with B.K. Guha, (100)
Surapati Mukherjee, (100) shares to Sanjay Chakraborty. I have taken
all the sale proceeds and I misappropr iated the money. I have cheated
Mrs. Atreyee Chakraborty. 3
I have also forged the signature of Chaity Chakraborty on the transfer deed
daughter of Atreyee Chakraborty.
Schedule of Payment - I will make the delivery of (120) ITC Limited shares within 8/11/2003.
- I will make delivery of (580) shares within 8/02/04 of ITC Ltd.
If I do not pay the dues within the stip ulated time or in my absence my
legal heirs Madhavi Pyne and Delejani Mullick will be liable to pay the
dues with interest to Mrs. Atreyee Chakraborty.”
Sd/-
JayantaKumar Pyne
21.10.2003”
The hand written note by Pyne has been w itnessed by respondent 3 and one Sanjay
Chakraborty. - It appears that soon after executing the aforesaid hand written note, Pyne expired
and the commitment made by him regarding the delivery of shar es to respondent 3
remained unfulfilled. Respondent 3 then made some complaints to the Board making a
grievance that she had been defrauded of th e shares by Pyne and that she had suffered a
financial loss amounting to3 lacs. As already stated above, the dispute before us is only in regard to 100 shares which are stated to have been fraudulently transferred by Pyne. Alongwith the complaint, respondent 3 had sent to the Board a copy of the hand written note executed by Pyne accepting his liability to deliver the shares to her. She also made a complaint to the appellant with which she had her demat account alleging that she had been defrauded of the shares of the co mpany by Pyne and she further alleged that Pyne was acting as a sub-broker of the appell ant and, therefore, she claimed damages to the tune of3 lacs for harassment and loss suffered by her. Since she did not get any
response from the Board in regard to her complaint, she filed Writ Petition no.1368 of
2006 in the High Court of Calcutta for a ma ndamus to direct the Board to initiate
proceedings against the depository and its participant, the appellant. The Writ Petition
was disposed of on November 28, 2006 and the operative part of the order passed by the
High Court reads as under:
“For these reasons, I dispose of the writ petition ordering that after giving
reasonable opportunity of hearing to the petitioner and the second and
third respondents, the first responden t shall give a decision regarding the
question whether complaints made by the petitioner called for initiation of
proceedings under any provisions of la w. Such decision shall be given
within four weeks from the date of communication of this order. If the
first respondent holds that proceedings are to be initiated, then requisite
proceeding shall be initiated at once and after making necessary enquiries
in which the parties concerned shall be involved, the first respondent shall 4
give final decision in th e proceedings within twelve weeks from the date
of initiation of the proceedings. The decision taken by the first respondent
shall be communicated to all concerned immediately. It is made clear that
nothing in this order shall influence the consumer forum in course of
adjudication of proceedings pending before that forum. There shall be no
order for costs in the case.”
In compliance with the directions issued by the High Court, the Board summoned the
depository, the appellant and also respondent 3 and after hearing them and perusing the
relevant documents submitted by them came to the conclusion that the complaint of
respondent 3 did not call for in itiation of proceedings by the Board. This decision was
communicated by the Board to respondent 3 as per letter dated January 11, 2007 the
relevant portion of which reads thus:
“After hearing you and other concerned parties (i.e. CDSL and M/s. G.M.
Bosu & Co. Pvt. Ltd.) and perusing the relevant documents submitted in
this regard, it is observed that M/ s. G.M. Bosu & Co. Pvt. Ltd., the
Depository Participant opened your De pository Account on the basis of
application form singed by you on June 23, 2003. You had handed over
the shares of ITC to Late Jayanta Kumar Pyne. You had also signed the
Delivery Instruction Slips (DIS) an d Transfer Deeds (TD) and handed
over the same to Late Jayanta Kumar P yne. The said shares of ITC were
transferred on the basis of your signed DIS and TD.
It is also observed that you had submitted a copy of the written confession
of Late Jayanta Kumar Pyne admitting that he had transferred the shares
and misappropriated the sale proceeds. Late Jayanta Kumar Pyne also
confessed in writing that he had cheated you. Theref ore, it is a case of
private arrangement between you and Late Jayanta Kumar Pyne, where
Late Jayanta Kumar Pyne acted contrary to your instructions.
Since this is a case of private arrangement between you and Late Jayanta
Kumar Pyne, an unregistered entity, SEBI has no role to play in this
regard and your complaint does not cal l for initiation of proceedings by
SEBI.”
Respondent no.3 was not satisfied with the de cision of the Board and again approached
the High Court by filing Writ Petition no.733 of 2007 in the High Court of Calcutta. She
made a grievance that the depository and the appellant, its participant were negligent in
not ensuring that payment had been received by her before they transferred her shares in
the name of third parties and, therefore, they violated Regulation 32 as it then stood of the
Securities and Exchange Board of India (D epositories and Partic ipants) Regulations,
1996 (for short the regulations). A learned single judge of the High Court took note of
the earlier Writ Petition filed by respondent 3 and the order passed therein and also 5
noticing the provisions of regul ation 32 of the regul ations, disposed of the writ petition
on March 12, 2010 and the operative part of the order reads as under:
“In the circumstances, I dispose of th e writ application by directing the
SEBI to make an enquiry as to how this depository participant has ensured
in terms of Regulation 32 that the depositor was paid before effecting
transfer, upon notice to the participant and upon hearing the necessary
parties including the Writ Petitioner and by a reasoned order. If it is found
that proper “mechanism” under Regulation 32 was not in place of the
Regulation steps may be taken accordi ngly. I make it clear that enquiry
should be confined to this issue only and should be concluded within 8
weeks from the date of communication of this order.”
In compliance with the aforesaid directions of the High Court, the whole time member of
the Board summoned the appellant, the depository and respondent 3 and after affording a
personal hearing to them on May 31, 2010 passe d a detailed order on June 4, 2010
running into 12 pages holding that the appellant and th e depository had violated
regulation 32 of the regulations as it then stood and treating this order as a show cause
notice called upon the appellant and the depository to show cause why they should not be
directed jointly and severally to compensate respondent 3 in respect of 1500 shares of the
company that would have accrued to her in respect of the or iginal 100 shares which are
the subject matter of the pres ent dispute. The appellant filed its detailed reply denying
that it had violated regulation 32. The enti re history as to how the demat account had
been opened and the manner in which Pyne had duped respondent 3 by transferring the
shares had been stated in the reply. The case of the appellant is that the DIS is required to
be filled by the client and the appellant as a pa rticipant, is only to ensure the transfer of
securities as per the instructions contained therein. The appellant claims to have enquired
from both respondent 3 and Pyne about the validity of the DIS and the relevant payment
and only on being informed that everything was in order, the appellant recommended the
transfer of the securities. It was pleaded that the appellant had complied with
regulation 32 of the regulations. On a consid eration of the material on the record and
after hearing the appellant and the deposito ry, the whole time member reiterated his
earlier findings recorded in the order da ted June 4, 2010 which was treated as a show
cause notice and held that both the appellan t and the depository were negligent in not
ensuring that respondent 3 had received the payment before transferring her shares and
were, thus, guilty of violating regulation 32 of the regulations. Curiously enough, by his 6
order of August 20, 2010 he directed only the appellant to credit 100 shares of the
company along with further benefits that w ould have accrued to respondent 3 (which
come to 1500 shares now) in her demat account within a period of 30 days from the
receipt of the order. The appellant was furt her directed to file a compliance report with
the Board to that effect. The appellant was informed that in case of failure to comply
with the direction, the Board would initia te appropriate proceedings against it in
accordance with law. This direction has been issued by the whole time member
exercising powers under sections 11 and 11B of the Securities a nd Exchange Board of
India Act, 1992 (hereinafter called the Act). It is against this order that the present appeal
has been filed. - We have heard the learned counsel for the parties who have taken us through the
record and are of the view that the impugned order cannot be sustained. Regulation 64 of
the regulations provides that a depository or a participant who contravenes any of the
provisions of the Act, the Depositories Act, the bye-laws, agreements and the regulations
shall be dealt with in the manner provide d under Chapter V of the Securities and
Exchange Board of India (Intermediaries) Re gulations, 2008 (hereinafter referred to as
the intermediaries regulations). The learne d counsel appearing for the appellant and the
depository strenuously contended before us that their clients had not violated the
provisions of regulation 32 of the regulations . They further contended that assuming,
without admitting, that there was a violation, the only course open to the Board was to
proceed against them under Chapter V of the intermediaries regulations and that it was
not proper for the Board to exercise power s under section 11B of the Act and issue
directions. There is force in this argument. Regulations 32 as it then stood and the
relevant part of regulation 64 of the regula tions are reproduced hereunder for facility of
reference:
“ Regulation 32 - Transfer to be effected only after payment – The depository shall
satisfy the Board that it has a mechan ism in place to ensure that the
interest of the persons buying and sell ing securities held in the depository
are adequately protected and shall register the transfer of a security in the
name of the transferee onl y after the depository is satisfied that payment
for such transfer has been made. 7
Regulation 64
Liability for action in case of default
- A depository or a participant who-
(a) contravenes any of the provisions of the Act, the Depositories Act, the
bye-laws, agreements and these regulations;
(b) …………..
(c) ……………
(d) ……………
(e) ……………
(f) ……………
shall be dealt with in the manner provide d under Chapter V of the Securities and
Exchange Board of India (Intermediaries) Regulations, 2008”
Regulation 32 requires a depository to satisfy the Board that it has a mechanism in place
to ensure that the interest of persons buying and selling securities is adequately protected.
It is no one’s case before us that the depository did not have such a mechanism in place.
This regulation also required a depository at the relevant time to transfer a security only
after satisfying itself that payment for the transfer had been made. The whole time
member has found that this part of the regulation had been violated by the depository and
also by the appellant since they did not satisfy themselves that payment for the transfer of
shares had been received by respondent 3 before they were transferred from her account.
The plain language of regulation 32 makes it clear that the obligation to satisfy itself is
only on the depository and no such duty is cast on the participant. A participant is only
an agent of the depository. It is relevant to point out that this obligation of the depository
has also been done away with when this regulation was amended with effect from
August 8, 2008. The words “and shall register the transfer of a security in the name of
the transferee only after the depository is satisfied that payment for such transfer has been
made” were deleted. We cannot, therefore, agree with the Board that the appellant
violated this regulation. Assuming (though not holding) that there was such a violation,
regulation 64 of the regulati ons requires that the depository or a participant who
contravenes any provision of the regulations “ shall be dealt with in the manner
provided under Chapter V of the Securi ties and Exchange Board of India
(Intermediaries) Regulations, 2008.” The word ‘manner’ means that the procedure
laid down in Chapter V of the intermediaries regulations shall have to be followed.
Regulations 24 to 30 in that chapter provide the detailed manner/procedure according to
8
which the delinquents are to be dealt with. These provisions envisage a two stage inquiry
before taking any action against the delinquent. A designated authority is required to be
appointed which shall issue a show cause notice to the deli nquent and after holding an
inquiry, a report shall be submitted. The report will then be considered by the designated
member after issuing a notice to the delinquent who will also be furnished with a copy of
the report. It is onl y then that the designated member can take any one or more of the
actions referred to in regulation 27 of the intermediaries regulations keeping in view the
facts and circumstances of the case. Admittedly, this procedure has not been followed
and neither the appellant nor the depository were dealt with in the manner prescribed in
Chapter V of the intermediaries regulations. Instead, directions have been issued under
section 11B of the Act to compensate respond ent 3. It is true th at the powers of the
Board under section 11B are wide enough to i ssue directions to any intermediary or
person associated with the securities market but such powers are to be exercised only to
protect the interests of invest ors in securities or for orde rly development of securities
market and to preserve its integrity. These directions cannot be punitive in nature and
cannot be issued to punish a delinquent . Punitive action against any delinquent
intermediary could be taken onl y in accordance with the interm ediaries regulations. In
this view of the matter, the direction i ssued by the whole time member directing the
appellant to compensate respondent 3 on th e ground that it (appellant) had violated
regulation 32 of the regulations cannot be sustained.
- We are also of the considered view that , in the facts and ci rcumstances of this
case, a direction of the kind issued by the whole time member was not called for. It is the
third respondent’s own case that she had been cheated and duped by Pyne who got her
signatures on blank forms including DIS on the basis of which he transferred the shares
without her consent. If Pyne had duped her, is it fair to direct the appellant to
compensate her. We do not think so. Her remedy, if any, would lie against the heirs of
Pyne. We think the Board was right when it rejected her complaint by its letter of
January 11, 2007 and it was rightly observed that it had no role to play as the matter was
between the third respondent and Pyne. Moreover, why did she sign the blank DIS
form(s) which are like cheques and since she did that, she has herself to blame. 9 - We are conscious of the fact that the second writ petition f iled by respondent 3
had been disposed of by the Calcutta High Court with a directi on to find out whether
there was any violation of regulation 32 of the regulations. If the Board was of the view
that there was any such violation, it coul d only proceed against the delinquent(s) in
accordance with law. A direction of the kind impugned in this appeal is not the answer.
In the result, the appeal is allowed and the impugned order set aside with no order
as to costs.
Sd/-
Justice N.K.Sodhi
Presiding Officer
Sd/-
P.K. Malhotra
MemberSd/-S.S.N. Moorthy
Member
15.2.2011
Prepared and compared by
RHN 10