Order in the matter of Jaypee Capital Services Limited

WTM/GM/EFD/90/2019-20 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Section 12 (3) of SEBI Act, 1992 read with Regulation 28 (2) of SEBI (Intermediaries) Regulations, 2008 in the matter of Jaypee Capital Services Ltd.

NOTICEE SEBI REGISTRATION NO Jaypee Capital Services Ltd IN-DP-NSDL-291-2008/IN-DP-CDSL-368-2006

Background 1.1 Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) granted a Certificate of Registration as a Depository Participant to Jaypee Capital Services Limited (JCSL/Noticee) in accordance with provisions of SEBI (Depositories and Participants) Regulations, 1996 (DP Regulations) initially for a period of five years which was valid from August 11, 2006 to August 10, 2011. The certificate of registration was, thereafter, renewed in 2011 for a further period of five years and the renewed certificate was valid till August 10, 2016.

1.2 SEBI received a letter dated April 05, 2016 from Central Depository Services (India) Limited (hereinafter referred to as ‘CDSL’) informing that it has terminated the agreement with the Noticee w.e.f April 04, 2016 due to non-compliance on the part of JCSL with the bye-laws of CDSL. CDSL vide the said letter also requested SEBI to cancel the certificate of registration granted to the Noticee at act as a Depository Participant with immediate effect. Thereafter, National Securities Depositories Limited (hereinafter referred to as “NSDL”) vide its letter dated April 22, 2016 informed SEBI that it has also terminated the agreement with JCSL w.e.f May 23, 2016 due to the non-compliance on part of JCSL with the various bye-laws of NSDL.

Order in the matter of Jaypee Capital Services Limited

1.3 Based on the information provided by the Depositories viz. CDSL and NSDL, as above, it was alleged that the Noticee was no longer eligible to be admitted as a participant of depository and had failed to inform SEBI about the termination of its agreements with CDSL and NSDL. Therefore, SEBI initiated enquiry proceedings against the Noticee under Chapter V of the SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations") and appointed a Designated Authority ("DA") to enquire into whether the alleged violation of Regulation 19 (b) of the DP Regulations and Clause 14 of the Code of Conduct for the DPs as given under the third schedule read with Regulation 20AA of the DP Regulations by the Noticee warranted cancellation or suspension of the certificate of registration granted by SEBI or any other action provided in Chapter V of the Intermediaries Regulations.

1.4 The Show Cause Notice (SCN) which was issued to the Noticee in terms of Regulation 25(1) of the Intermediaries Regulations, by the DA, was sent to the registered address of the Noticee – E-34, 1t Floor, Nehru Ground NIT, Faridabad, Haryana. The SCN came back undelivered with the remark ‘unclaimed’. Thereafter, the SCN was served on the Noticee at its alternate address viz. 27A/62, 2nd Floor, DLF Phase -I, Golf Course Road, Gurgaon pin -122001. The postal confirmation evidencing the proof of service of the said SCN is available on record. Despite the service of the SCN, the Noticee failed to submit its reply and the DA proceeded with the matter ex parte. On completion of the proceedings, the DA submitted the report on March 28, 2018 (DA’s Report) recommending that the Noticee’s certificate of registration as a depository participant be considered as cancelled.

1.5 Pursuant to this, a post enquiry SCN dated April 23, 2018 was issued to the Noticee, under Regulation 28 (1) of SEBI (Intermediaries) Regulations, 2008, to show cause as to why action, as recommended by the DA or any other action as considered appropriate by the Designated Member, should not be taken against the Noticee. A copy of the DA’s Report was also forwarded to the Noticee along with an advice to file reply, if any, within 21 days from the date of receipt of the notice. The Noticee did not file any reply to this notice.

1.6 Thereafter, vide letter dated February 05, 2019, both the depositories – CDSL and NSDL – were requested to arrange the service of the post enquiry SCN to the Noticee. Pursuant to this, the Noticee filed its reply dated March 30, 2019. It was stated by the Noticee in its reply that the Noticees were never served the SCN and they became aware of the present proceedings only on the receipt of a letter from CDSL dated March 05, 2019 forwarding the post enquiry SCN issued by SEBI.

1.7 Subsequent to receiving the reply of the Noticee, an opportunity of personal hearing was given to the Noticee on July 23, 2019. At the hearing, Mr. Sumit Agarwal, Advocate and Mr. Mittu Choudhary, Advocate, represented the Noticee and made elaborate submissions on its behalf. Thereafter, vide letter dated July 25, 2019, the Noticee made further detailed submissions inter alia stating that,- a. The enquiry proceedings were conducted in their absence and they have been deprived from making a representation before the designated authority. b. Noticee was granted registration as a DP for five years from August 11, 2006 to August 10, 2011 which was renewed for another term from August 11, 2011 to August 10, 2016. c. During the period they were acting as a DP, no complaint of any nature was filed against them by any beneficial owner. They have never made any default in regard to their DP operations. d. The SCN was forwarded to them only vide March 05, 2019 letter sent by CDSL. Thereafter, they had submitted their preliminary response vide letter dated March 30, 2019.

e. The averment in the DA report that the SCN was served on them was contested. f. The manner in which SEBI is proceeding is completely contrary to the Principles of Natural Justice as no opportunity was provided to the Noticee to make a representation before the DA. g. The decision taken by CDSL and NSDL regarding the termination of their DP agreement was due to an error in calculating the Net Worth. h. There has been no complaint from any BO with respect to the DEMAT accounts held with them even after the termination of the DP agreements by the depositories. i. Jaypee Capital Services Ltd. is a member of NSE and BSE since 1995 and 2005 respectively and there has been no investor grievance against them during the last 24 years of their membership. j. CDSL vide letter dated December 09, 2015 informed them that in case net worth certificate and audited financial statements for the year March 31, 2015 is not received by December 29, 2015, then the Noticees would be restrained from opening new accounts. They submitted the requisite documents at CDSL office in Delhi along with the auditors Certificate which certified their compliance with prescribed net worth criteria. k. The Noticee made elaborate submissions regarding how the termination of the agreement by both NSDL and CDSL was not justified. They specifically made the following submissions with respect to the violations alleged against them,- i. Issue of minimum net worth

CDSL had found that the Noticee had reported its net worth without deducting 50% of its statutory contingent liability, deferred tax assets and receivables more than six months old. They had responded to this charge by stating that contingent liability was not considered as it did not exist at the time for which net worth was to be calculated ie. March 31, 2015.

The non-adherence to net worth was not on account of any action of the Noticee but on account of an illegal and untenable demand by the Income Tax Department which was set aside on appeal. This was made known to CDSL by the Noticees.

ii. Failure to inform SEBI about the termination of the Noticee’s DP agreements

Clause 14 of Schedule III of the DP Regulations requires the Noticees to inform SEBI of any action taken by Regulators. CDSL and NSDL are not regulators but depositories regulated by SEBI and hence this clause read properly does not require the Noticee to inform SEBI of any action taken by CDSL and NSDL. On the contrary, the depositories being SEBI regulated entities would have kept SEBI informed.

l. They also made reference to the order of the Hon’ble Securities Appellate Tribunal in the matter of Cabbot International where in it was held that it had to be seen whether the breach flows from a bonafide belief that the appellant was not liable to act in the manner prescribed by the statute. m. It was further submitted that any action by SEBI will trigger grave consequences and the Hon’ble Tribunal in the matter of MJ Patel had held that suspension or cancellation of registration is not to be treated lightly and such a penal action need be supported with reasonable evidence and also justification. n. It was further held that the fact that the party had rectified its errors and also that the mistakes did not have a wider impact on the market are relevant factors in accessing proportionality of punishment according to the Hon’ble Tribunal in Sushilabhai Rungata matter. In the present case too, the net worth criteria was (if at all) not met only for a brief period and the alleged breach did not have a wider impact on the market. o. They also submitted that the Hon’ble Tribunal had held in the matter of Intec that good track record of the party should be considered as a relevant factor at the time of assessing alleged violations and a harsh penalty should not be imposed.

Consideration

1.8 I have considered the Report submitted by the DA, the Post-Enquiry SCN issued to the Noticee, oral and written submissions of the Noticee along with the documents contained therein and other material available on record. 1.9 The scope of the present proceedings before me is restricted to the enquiry initiated against the Noticee under Chapter V of the SEBI (Intermediaries) Regulations, 2008 to determine whether the alleged violation of,- i. Regulation 19 (b) of the DP Regulations, and ii. Clause 14 of the Code of Conduct for the DPs as given under third schedule read with Regulation 20AA of the DP Regulations, by the Noticee warranted cancellation or suspension of the certificate of registration granted by SEBI or any other action provided under Regulation 27 of the Intermediaries Regulation.

1.10 Regulation 19(b) of the DP Regulations reads as under, - “Consideration of application for grant of certificate of registration

19.For the purpose of grant of certificate of registration, the Board shall take into account all matters which are relevant to or relating to the efficient and orderly functioning of a participant and in particular, whether the applicant complies with the following requirements, namely :— (a)… (b)the applicant is eligible to be admitted as a participant of the depository through which it has made the application to the Board.”

1.11 I note that as per the DP regulations, the eligibility to be admitted as a participant of a depository is a sine qua non for granting certificate of registration to act as depository participant by SEBI. It is an admitted fact in the present proceedings that the Noticee’s agreement with both the depositories were terminated. 1.12 The eligibility conditions mandated under the regulations for grant of certificate of registration must be complied with by entities seeking registration not just at the time of registration, but they must continue to satisfy the specified criteria throughout the period of validity of their registration. Therefore, upon termination of the agreement by the depositories, the Noticee becomes non-compliant with the eligibility criteria prescribed under Regulation 19 of the DP Regulations. 1.13 The Noticee has made elaborate submissions before me contending that the termination of the agreement by the depositories was unjustified. I am, however, constrained to note that the decision of termination by depositories is not in appeal before me and the appropriate forum for raising the said objections would have been the appellate forum provided for in the bye-laws of the respective depositories. 1.14 Without prejudice to what is stated in para 1.13, I note that the Assessment Order of Deputy Commissioner Income Tax giving rise to the said contingent liability is dated March 29, 2015. The main contention of the Noticee is that termination of the agreement by the respective depositories was not justified, as the contingent liability on account of the tax dues - due to which the net worth of the Noticee fell below the minimum net worth prescribed under the regulation for FY 2015-16- did not exist as on March 31, 2015. However, I note that as the Assessment Order is dated March 29, 2015, any contingent liability arising out of it would have to be taken into consideration while computing the net worth for the said year, i.e FY 2014-15. I, therefore, find this contention raised by the Noticee to be untenable and does not merit consideration.

1.15 As regards the issue of violation of Clause 14 of the Code of Conduct for the DPs as given under third schedule read with Regulation 20AA of the DP Regulations by the Noticee on account of failure of the Noticee to inform SEBI about the termination of the agreement by the Depositories, I note as under,-

1.16 Regulation 20AA and clause 14 of the DP Regulations read as under,- “Participants to abide by Code of Conduct

20AA. The participant holding a certificate of initial or permanent registration shall, at all times, abide by the Code of Conduct as specified in Third Schedule. THIRD SCHEDULE CODE OF CONDUCT FOR PARTICIPANTS 14. A participant shall ensure that the Board is promptly informed about any action, legal proceedings, etc., initiated against it in respect of material breach or non-compliance by it, of any law, Rules, regulations, directions of the Board or of any other regulatory body.”

1.17 The Noticee in its reply has contended that the said clause only requires DPs to keep SEBI informed about actions initiated by regulatory bodies and since depositories are not regulatory bodies, the actions initiated by them would not get covered under the said clause.

1.18 I note that the eligibility criteria and manner of termination of the agreement with participants by depositories is governed by the bye-laws framed by the depositories, with prior approval of SEBI, under the powers vested under section 26 of the Depositories Act, 1996.

1.19 Depositories, like Stock Exchanges, are important Market Infrastructure Institutions, which also regulate conduct of their members through bye-laws which are enacted under the powers vested on them under Acts passed by the Parliament. The Hon’ble Delhi High Court in the matter of Debjyoti Gupta Vs Indiabulls Securities Ltd & Anr, O.M.P. 217/2006, has held that the bye-laws of stock exchanges have statutory force. I, therefore, note that similar effect would have to be given to bye-laws of depositories.

1.20 In view of the above, I note that the provisions of Clause 14 of the Code of Conduct are wide enough to cover the actions initiated by depositories under their bye-laws. The failure on the part of the Noticee to inform SEBI of the termination of the agreement by the depositories would therefore have to be considered as a violation of Clause 14 of the Code of Conduct for the DPs as given under third schedule read with Regulation 20AA of the DP Regulations.

1.21 In view of the above, I agree with the findings of the DA that the Noticee has violated the aforesaid provisions as detailed in the paragraphs 1.12 and 1.20 of this Order and is liable to be cancelled.

Order –

1.22 I, in exercise of powers conferred under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby cancel the certificate of registration granted to the Noticee / Jaypee Capital Services Limited (SEBI Registration No. IN-DP-NSDL-291-2008/IN-DP-CDSL-368- 2006) with immediate effect.

Place: Mumbai G. MAHALINGAM Date: March 31, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA