Purposes of the DP Regulations-investor protection and ensuring regulation of the market

Purposes of the DP Regulations-investor protection and ensuring regulation of the market

SEBI imposes Rs. 1 lakh fines on Reliance Securities Limited following inspection for rule violations

Securities and Exchange Board of India (SEBI) conducted inspections of Depository Participants of National Securities Depository Limited (NSDL) and/or Central Depository Services (India) Limited (CDSL) inter alia for the purpose as specified in regulation 59 of the SEBI (Depositories and Participants) Regulations, 1996 (DP Regulations).

Inspection of M/s. Reliance Capital Limited (the Noticee) was ordered. Subsequently, CDSL had informed that Depository Participant functions had been transferred from the Noticee to M/s. Reliance Securities Limited (RSL) and all the relevant records/documents were transferred to RSL. Thereafter, vide anOrder inspection of the Depository Participant (DP) RSL was ordered.

During the inspection, it was observed that certain complaints {viz, R. Duraisamy / Palanisamy / Malinga D (forwarded by CDSL letter dated 13 January 2011) and Jayanth Sarmah (forwarded by CDSL letter dated 17 June 2011) were received against the Noticee, however, replied to Depository / Beneficial owner (BO) were sent by Sameer Khobrekar, an employee of RSL.

RCL delegated its DP functions to RSL. Subsequently, it was observed that CDSL granted approval for the assignment of DP operations of the Noticee to RSL and thereafter vide Deed of Assignment dated 6 January 2012, the Noticee assigned its DP operation to RSL.

In terms of regulation 52 of the DP Regulations, the DPs are restricted from delegating its functions as a participant to any other person, without the prior approval of the depository. Therefore, in view of the above, it was alleged that the Noticee had violated the provisions of regulation 52of DP Regulations and clause 2 of the Code of the Conduct specified under regulation 20AA of the DP Regulations.

While imposing a consolidated monetary penalty of Rs. 1 lakh only on Noticee viz., Reliance Capital Limited, it was observed that in terms of regulation 52 of the DP Regulations, the DPs are restricted from delegating its functions as DP to any other person, without the prior approval of the depository.

It was noted from the record that in the process of investor grievance redressal mechanism, there were certain complaints against RCL as DP and in reply to those complaints, the replies were given by RSL in the capacity of DP to CDSL/the Complainants. It was further noted from the record that the DP functions of RCL were transfer to RSL way later than the filing of those replies to CDSL/the Complainants.

Hence, a view was taken that the Noticee had delegated its function as DP to RSL and thus, in violation of the provisions of regulation 52 of DP Regulations and clause 2 of the Code of the Conduct specified under the Third schedule read with regulation 20AA of the DP Regulations.

As per regulation 42(2) and 42(3),the Noticee was obligated to transfer of securities to or from a beneficial owner account only on receipt of an instruction from the beneficial owner. As alleged in the SCN and more specifically in para 5 of this order, the Noticee failed to provide any receipt of instruction (electronic or otherwise). Therefore, the Noticee had violated the provisions of regulation 42(2) and 42(3) of DP Regulations and clause 2 and 4 of the Code of the Conduct specified under the Third schedule read with regulation 20AA of the DP Regulations.

Further, SEBI vide Circulars dated 2 April 2010 and later clarified by 31 August 2010 instructed the Stock Broker and DP that PoA executed in favour of Stock Broker and DP by the client should 'be revocable at any time, without notice". Vide aforesaid circulars it was also directed that stockbrokers shall take necessary steps to implement the circular dated 23 April 2010 latest by 31 May 2010 for the new clients and ensure to take necessary steps latest by 1 September 2020 to revoke those authorization given by the existing clients to the stockbrokers and DP.

However, from the record, it was noted that the complaints as alleged in the SCN were post the issuance of the circulars where the RCL had not revoked the PoA of the complainants.

Thus, it implied that the aforesaid complaints would not have occurred in the first place, if the RCL had revoked the PoA and implemented the circular dated 23 April 2020. Therefore, in view of the above, it was held that RCL had violated the SEBI circular dated 23 April 2010 and 31 August 2010.

It was noted that the violations pertain to the year of 2010 and there was nothing on record that there were investor complaints pending, as on date, against the Noticee. It was also noted that the SEBI circular dated 23 April 2010 read with circular dated 31 August 2010 related to the execution of PoA by the client in favour of stockbroker & DP, and same were issued in the interest of the investors and to protect them from any misuse of the clauses under PoA. Any non-adherence of the same could not be considered as a mere technical omission.