Order in the matter of Atreyee Chakraborty

1. The Hon’ble High Court at Calcutta had, vide an Order dated March 12, 2010 disposed of a Writ Petition in W.P. No. 733 of 2007 (Atreyee Chakraborty vs. Securities and Exchange Board of India and others) with the following direction to the Securities and Exchange Board of India (hereinafter referred to as SEBI):

“ In the circumstances, I dispose of the 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 accordingly. 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.”

2. The brief facts of the case, according to Mrs. Atreyee Chakraborty (hereinafter referred to as the petitioner) are as follows: The husband of the petitioner, late Shri Manoj Ranjan Chakraborty was the registered holder of 1,100 equity shares of ITC Limited, which were held by him in physical form. After the demise of Shri Manoj Ranjan Chakraborty, the petitioner got in touch with one Jayanta Kumar Pyne (since deceased) who helped her in getting the shares duly transmitted to her. Thereafter, the petitioner desired to include the name her daughter, Ms. Saswati Chakraborty as a joint holder in respect of the said 1, of 100 shares. On the advice of Mr. Jayanta Kumar Pyne that a demat account was required for the said purpose, the petitioner had entrusted the task of opening a demat account to him. The petitioner had also handed over share certificates pertaining to the aforesaid shares and another share certificate representing 100 shares of ITC Limited which stood in the names of the petitioner and her daughter Ms. Chaiti Chakraborty, to Mr. Jayanta Kumar Pyne. Thereafter, the petitioner received, through Mr. Jayanta Kumar Pyne, two printed receipts dated June 23, 2003 and June 25, 2003 issued by G. M. Bosu & Co. Private Limited (hereinafter referred to as the depository participant) acknowledging the receipt of share certificates representing 1,200 shares of ITC Limited.

The petitioner states that, on the representation of Mr. Jayanta Kumar Pyne that her signatures were required in some forms for opening a demat account, she had signed a number of printed forms and other documents in good faith and was under the impression that the same were necessary for opening a demat account. According to the petitioner, she had received a letter dated September 16, 2003 from ITC Limited stating that there was a discrepancy in the signature of the ‘second holder’ on the transfer deeds relating to 100 shares which were allegedly sought to be transferred in favour of a third party, to which she had replied to the said company cautioning them about any attempt to transfer any of her shares and requested them not to take any steps in that regard. Thereafter, ITC Limited had also intimated the petitioner, vide letter dated October 15, 2003, that her 500 shares had already been transferred to third parties. The petitioner stated that Mr. Jayanta Kumar Pyne, vide letter dated October 21, 2003 had admitted that from the aforesaid shares, the remaining 600 shares were placed in the demat account by the depository participant and out of the same, 200 shares had been fraudulently transferred without the petitioner’s consent and knowledge.

The petitioner contended that though blank forms including delivery instruction slip (DIS) of the depository participant on which the petitioner’s signature were obtained by Mr. Jayanta Kumar Pyne, it was incumbent upon the depository participant to send her a statement after the transfer of the said 200 shares. It was her case that she had not received any such statement. She further contended that the depository/depository participant was to ensure that the transferor (the petitioner) had received the value of the shares so transferred and alleged that the depository [Central Depository Services (India) Limited (hereinafter referred to as CDSL)] and the depository participant had failed to ensure that the payments were received by the petitioner. The petitioner had filed a writ petition in W.P. No. 1368 of 2006 in the Hon’ble High Court at Calcutta (before the filing of W.P. No. 733 of 2007) inter alia praying for a direction to SEBI to consider and enquire into the grievances of the petitioner. The said petition was disposed of by the Hon’ble High Court, vide Order dated November 28, 2006. The said direction as observed in the Order dated March 12, 2010 of the Hon’ble High Court is reproduced below:

“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 respondent shall give a decision regarding the question whether complaints made by the petitioner called for initiation of proceedings under any provision of law. 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 give final decision 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.” 3. Pursuant to the aforesaid order, the petitioner was intimated by SEBI, vide letter dated January 11, 2007 that SEBI had no role to play in this regard and that her complaint did not call for initiation of proceedings by SEBI, as stated therein. Thereafter, the petitioner had filed another writ petition in W.P. No. 733 of 2007 before the Hon’ble High Court at Calcutta and the said petition was disposed of by the Hon’ble Court on March 12, 2010 with a direction to SEBI, as stated in paragraph 1 above in this Order.

4. As directed by the Hon’ble Court, an opportunity of hearing was granted to the petitioner, CDSL and the depository participant on May 31, 2010 at the Eastern Regional Office of SEBI at Kolkata. The petitioner appeared on the said date along with Mr. R.N.Banerjee and made submissions. The depository participant was represented by its director Mr. Somdutt Bose who made submissions. Mr. Satish L. Budhadkar, Vice President-Legal & Secretarial represented CDSL.

5. The Hon’ble High Court has directed SEBI to make an enquiry as to how the depository participant has ensured in terms of Regulation 32 of the Securities and Exchange Board of India (Depositories and Participants) Regulations,1996 (hereinafter referred to as the DP Regulations) that the depositor (the petitioner) was paid before effecting the transfer. The Hon’ble Court has also observed that the enquiry should be confined to the aforesaid issue only. Further, while disposing of the said writ petition, the Hon’ble High Court also observed “ ……this is entirely a civil dispute between the transferor of a share and her agent and the Securities and Exchange Board of India has ordinarily got nothing to do in the matter”. (emphasis supplied) Therefore, in accordance with the directions of the Hon’ble High Court, the limited issue for consideration is to find whether the depository participant had complied with Regulation 32 of the DP Regulations in respect of the transfer of the shares of the petitioner. As the entire issue revolves around Regulation 32 of the DP Regulations, the said regulation as it then was is reproduced hereinbelow for reference:

“Transfer to be effected only after payment – The depository shall satisfy the Board that it has a mechanism in place to ensure that the interest of the persons buying and selling securities held in the depository are adequately protected 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.”

6. In the present case, admittedly only 600 shares of ITC Limited were dematerialized. Out of the said 600 shares in the dematerialized form, 200 shares have been transferred out of the petitioner’s account for which she had alleged that she did not receive any consideration. Regulation 32 of the DP Regulations is applicable to a transfer of shares held in the dematerialized form. Therefore, in the facts and circumstances of the case, according to me, the issue to be considered in the matter is whether the depository/depository participant had complied with Regulation 32, in respect of the transfer of 200 shares from the petitioner’s demat account.

7. The transfer of 200 shares of ITC Limited from the demat account of the petitioner maintained with the depository participant has not been disputed. The grievance of the petitioner is that the said shares were fraudulently transferred from her demat account and the sale proceeds were misappropriated. However, the depository participant has taken a stand that the said transfer was not fraudulently effected but was made only on the basis of the DIS which had been duly signed by the demat account holder (the petitioner). I have perused the copy of the said DISs dated August 13, 2003 and August 25, 2003 which pertained to the transfer of the said 200 shares (100 shares transferred through each DIS). The petitioner has admitted that the said DISs were signed by her on the faith and trust reposed on Late Mr. Jayanta Kumar Pyne. She further stated that she was unaware of the securities market transactions and had relied on Mr. Late Jayanta Kumar Pyne. I note that one of the DISs dated August 13, 2003, is in respect of the transfer of 100 shares from the petitioner’s demat account. The said DIS contained, in addition to the name of the petitioner, the name of the scrip, number of shares to be transferred and the counter party beneficial owner ID as well as the counter party depository participant ID. The DIS dated August 25, 2003 also contained similar details.

8. During the course of hearing, the representative of the depository participant submitted that the DIS was signed by the petitioner and the share details were also filled up and that was the basis on which the impugned shares were transferred from her account. He further contended that the depository participant had taken all possible care in respect of the transfer and that it was not possible to look into the ‘receipt of payment’ as it was practically difficult to ensure the same. I cannot accept such a plea from a market intermediary which is bound to comply with the rules/regulations/circulars etc issued from time to time in respect of its functioning in the securities market. When a requirement is legally prescribed in the interest of investors, the persons to whom it is directed are duty bound to comply with the same without fail. If there is any non compliance, consequences would follow. The submission that it was practically difficult to ensure the receipt of payment before the transfer is therefore without any merit. It cannot be said that there was no system to ensure the receipt of payment. In this regard, I note the submissions of the learned representative of CDSL that the DIS contained provisions for indicating ‘cash transfers’ and that recently CDSL has instructed the depository participants to provide in the DIS a space for mentioning the consideration of the transaction. According to him, the said provisions were brought in force by CDSL to satisfy the requirements prescribed under Regulation 32 of the DP Regulations. As submitted by the CDSL representative, the provisions for indicating ‘cash transfers’ were also present in the two DISs signed by the petitioner and the relevant column in the DIS is mentioned below:

Cash Transfer No Yes Not Required

The transferor was expected to select the appropriate column (‘no’, ‘yes’ or ‘not required’) to indicate whether he/she received the consideration or not. Further, the CDSL representative submitted that for transactions in the nature of gifts, there would be no consideration and in such cases, the transferor was to indicate “not required”.

9. I find that in the DIS dated August 13, 2003, the above mentioned provisions for indicating cash transfers were kept blank. It is surprising as to how the depository participant proceeded to act upon an incomplete DIS and transferred the shares. The details sought in the said form have necessarily been prescribed with a specific purpose in mind viz. of safeguarding the investors. Such stipulations cannot be ignored by a regulated entity while processing the delivery instructions. A prudent person would first check whether all the relevant columns in a form are filled up before acting upon the same. If the depository participant had exercised due diligence and prudence, he could have stopped the processing of the said DIS and reverted back to the petitioner for clarification. This was not done at all. A market intermediary, like a depository participant in the present case, is expected to exercise more diligence and care as he is dealing with the property (shares) of the demat account holders. When seen in the background of having a specific provision in the DIS pursuant to Regulation 32 of the DP Regulations to indicate cash transfers, I find that the depository participant had miserably failed in its duties. In this regard, I also note the following provision in the bye-laws of CDSL:

“7.2. OFF MARKET TRADES SETTLEMENT 7.2.1. In respect of Off Market Trades, CDSL shall debit and/or credit the account of the Beneficial Owner entitled to such credit or debit, as the case may be, after receipt of confirmation from the delivering Beneficial Owner and the receiving Beneficial Owner through their respective participants confirming the details of securities and the receipt of payment in respect thereof.”

According to the aforesaid provision, it becomes the responsibility of the depository participant to confirm the details of the securities so transferred and the receipt of payment. The said bye-law also required CDSL to debit or credit, after receipt of confirmation as stated above. Being obligated even by the bye-laws of CDSL, the depository participant has not taken any steps to ensure whether the transferor (the petitioner) had received the payment or not, more so when the said DIS does not indicate about the cash transfer. Therefore, from the above, I come to a conclusion that the 100 shares of ITC Limited transferred from the petitioner’s demat account under the DIS dated August 13, 2003 was done owing to the fact that the depository/depository participant did not exercise due diligence and prudence while processing the said transfer request.

10. As far as the second DIS dated August 25, 2003 was concerned, I note that in the column cash transfer, “not required” was selected. In respect of the same, I am of the view that the depository participant would have processed the said instruction on a belief that the cash transfer was not required for the transaction. Therefore, unlike the other DIS dated August 13, 2003 the depository/depository participant cannot be faulted for the transfer of 100 shares of ITC Limited under the DIS dated August 25, 2003.

11. During the course of the hearing, the depository participant had contended that in terms of Section 7 (1) of the Depositories Act, 1996, its role was to transfer shares as per the client’s instructions and that the obligation under Regulation 32 of the DP Regulations and the duty under Section 7 of the aforesaid Act were for ‘cross purposes’. CDSL through its authorized representative had also submitted that a DIS never comes to it and is being retained by the depository participants. The CDSL representative also submitted that though there is an obligation under Regulation 32 of the DP Regulations, the Depositories Act does not mention about ensuring receipt of payment before effecting transfer from the transferor’s account. In support of his contention, he had placed reliance on Section 7 of the Depositories Act. It was further submitted that the CDSL Bye laws provide for the transfer immediately after the instruction for any transfer is received. Having given a thoughtful consideration to the said contentions, I am of the view that the same are without merit. The obligation under Section 7 of the Depositories Act, 1996 and Regulation 32 of the DP Regulations have their own import. They are mutually exclusive of each other and the depository and the depository participant are expected to comply with both the provisions though the obligation under Regulation 32 would be a condition precedent before complying with the duty under Section 7 of the said Act. Regulation 32 was intended to ensure that the shares in the demat form are transferred after the receipt of consideration by the transferor. Incidentally, I also note that Regulation 32 was amended in the year 2008 and the requirement of registering the transfer only after ensuring the receipt of payment by the transferor was removed. However, the said provision (ensuring the payment) was in force in 2003 when the transfers had happened from the petitioner’s account and therefore, the depository and the depository participant were bound to comply with the same.

12. Further, I also do not approve of the conduct of the petitioner, who appears to be a literate and able to converse in English, to blindly sign forms/papers/documents presented to her by Mr. Jayanta Kumar Pyne. A prudent person is expected to fully understand the nature and contents of the papers, before signing the same. If only she had exercised her diligence and care, she would have not been in her present unfortunate plight of losing her shares and not receiving the consideration.

13. After having considered the case on its merits, I find that the depository and the depository participant have not ensured compliance with the requirements of Regulation 32 of the DP Regulations in respect of the transfer of 100 shares of ITC Limited transferred under the DIS dated August 13, 2003. As discussed above, the depository participant has processed the same even though the relevant columns were left blank. Had the depository participant acted diligently, the fraudulent transfer of 100 shares under the aforesaid DIS could have been prevented. Having arrived at such a finding, I am of the view that suitable action needs to be taken against the depository participant and the depository. It would be in the interest of justice that the petitioner is compensated for the loss of the aforesaid 100 shares owing to the lack of exercise of diligence and care by the depository participant. As the transfer had occurred due to the lack of exercise of diligence, care and prudence of the depository participant, the lost 100 shares along with all the benefits in terms of stock split and bonus issue that would have accrued all the years (from the date of transfer till date) needs to be recovered from the depository/depository participant for the purpose of compensating the petitioner.

In this regard, it is noted that there was a stock split of the shares of ITC Limited with face value Rs 10/- to Re1/- per share on September 21, 2005. Further, on the said date, there was also a bonus issue of 1 share for every 2 shares held. In view of the same, 100 shares of ITC Limited held by Mrs. Atreyee Chakraborty would have become 1,500 shares as on date. Therefore, the same needs to be compensated by the depository/depository participant to the petitioner. 14. In view of the foregoing, in compliance with the directions of the Hon’ble High Court at Calcutta, I find as below: a. The depository and the depository participant are found responsible for not complying with the requirements of Regulation 32 of the DP Regulations in respect of 100 shares of ITC Limited of the petitioner, transferred under the DIS dated August 13, 2003. b. No lapse would be attributable to the depository/depository participant in respect of the transfer of 100 shares of ITC Limited of the petitioner under the DIS dated August 25, 2003, for the reasons stated above in this Order. 15. In view of the foregoing, I in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 and 11B thereof, hereby direct the depository participant, G.M.

Bosu & Co. Private Limited and the depository, Central Depository Services (India) Limited to show cause as to why SEBI should not direct them jointly and severally to compensate the petitioner, Mrs. Atreyee Chakraborty in respect of the 1,500 shares of ITC Limited that would have accrued to her in respect of the aforesaid 100 shares of ITC Limited from the date of transfer till date.

16. This Order shall be considered as a show cause notice for the purposes of paragraph 14 above. G.M. Bosu & Co. Private Limited and Central Depository Services (India) Limited may appear for hearing before me at 4:00 p.m. on June 23, 2010 at the Head Office of the Securities and Exchange Board of India in Mumbai. They may also submit their reply to this show cause notice before the said date. If no reply is received within the time stipulated and they do not appear for the hearing on the date and time mentioned above, it would be assumed that they do not have any explanation to offer and in such a case, SEBI would proceed with the matter on merits and pass an Order on the basis of the available material on record. 17. Copy of this Order shall be forwarded to Mrs. Atreyee Chakraborty, G. M. Bosu & Co. Private Limited and Central Depository Services (India) Limited, immediately.

DR.K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: JUNE 4, 2010