Disposal of the representations of Gee Bee Securities Private Limited- in the matter of Illiquid stock options
- Order No.WTM/RKA/ISD/143/2016
Ratio decidendi
The rule this decision rests on
The interim restraint on the broker's dealings may be relaxed to the extent needed to protect client interests, where the broker shows that the frozen accounts were declared to the exchange as margin accounts and that the securities in them belong to clients. Relief is then limited to a new client margin account, into which client securities may be transferred only once the depository is satisfied that they pertain to clients. That relief is conditional. The broker may not deal in the margin account in a proprietary capacity, any sale of client securities must satisfy the exchange or depository that the defaulting client owns them and must be supervised by them, and the broker must provide a chartered accountant's certificate and an indemnity that the transferred shares are client shares and not its own. The relief remains subject to the supervision of the exchanges and depositories and to the outcome of the pending investigation.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
1. Securities and Exchange Board of India ("SEBI"), vide an ad interim ex-parte order dated August 20, 2015 (hereinafter referred to as “interim order”), restrained 59 entities, including Rakesh K Baid/ Gee Bee Securities Private Limited (PAN – AACCG3141P), (hereinafter referred to as the “broker”), from buying, selling or dealing in securities, either directly or indirectly, in any manner, till further directions.
2. Towards implementation of the said direction, the demat accounts, bearing DP ID - IN301348, Client ID – 20019506 and 20009579 held by the broker, have been frozen by the depositories for credit and debit of securities therein.
3. The broker vide letters/ email dated December 23, 2015, April 12, 2016, September 16, 2016 and October 3, 2016 represented to SEBI that it had opened demat accounts with ICICI Bank Limited (bearing DP ID - IN301348, Client ID – 20019506 and 20009579) for pledging its own shares and that of its clients, with NSCCL for getting margin benefits from Exchanges.
4. The broker also submitted that at the time of opening of these demat accounts, the concept of tagging the account as “Margin Account” did not exist and the accounts had been opened in the name of the entity, Gee Bee Securities Private Limited. It had shown the said two demat accounts as margin accounts during stock exchange inspections. On account of the interim order, the demat account of the broker was frozen and hence, it was unable to use the client’s shares as collaterals to exchanges or release its clients’ shares.
5. In support of aforesaid claims, the broker has submitted the transaction statement for the time period April 1, 2015 to December 18, 2015 and holding statement as on August 20, 2015, for the two demat accounts with ICICI Bank Limited (bearing DP ID - IN301348, Client ID – 20019506 and 20009579).
6. Further, NSE confirmed vide email dated January 15, 2016 that the said demat accounts had been declared by the broker as Margin account during the last regular inspection during 2014- 2015.
7. Considering the aforesaid submissions and evidences brought on record, I am of the view that to ensure that the client interest is not affected, the broker is allowed to operate account tagged as Disposal of the representations of Gee Bee Securities Private Limited client margin account whereby:
a. It can open a new account and tag it as client margin account. b. It can transfer clients’ securities from its beneficiary account (frozen) to the newly created client margin account pursuant to the satisfaction of the depository that these securities pertain to the clients. c. In the new client margin account, it can create pledge on clients' securities for the purpose of giving them margin benefits. In case of default by the client, it can invoke the pledge/ sell clients’ securities from the client margin account. d. It is allowed to close any existing pledge/ lien marked to its beneficiary account (i.e. frozen).
Subject to the following:
a. No proprietary dealing or buy or sale of securities in proprietary capacity shall be made from this newly created margin account by the broker. b. In case of sale of securities from the client margin account, the broker has to satisfy the exchange/ depository that the securities pertain to the client who has defaulted to pay the margin money. c. Sale of client's shares from the client margin account shall be under the supervision of Exchange/ Depository. d. It has to comply with requirements of Exchange/ Depository, if any, in this regard. e. Further an audit trail may be maintained for each and every transaction in the said account.
8. The broker shall provide to the Depository a certificate from the Chartered Accountant that the said demat accounts are margin accounts. The broker shall also provide an undertaking indemnifying that the shares that would be transferred out of the demat accounts with ICICI Bank Limited (bearing DP ID - IN301348, Client ID – 20019506 and 20009579) to the new client margin account, belong to the clients only and are not its proprietary shares.
9. The aforesaid shall be subject to the supervision of exchanges and depositories and shall be without prejudice to the findings of pending investigation in the matter.
10. Accordingly, the representations of the broker in this regard are disposed off.
Sd/- DATE: OCTOBER 10, 2016 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA
This page reproduces a public judgment and a summary of it. It is research material, not legal advice, and it is no substitute for advice from an advocate on your own facts.
Research this judgment with Miss Lucy
Ask what it holds, what has followed it, and what it means for your matter — in plain English, with the citations.
Try Miss Lucy free