karvy final order - penalty) regulations, 2002 against karvy stock broking ltd, depository participant and member, national stock exchange of india ltd, bombay stock exchange ltd

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Text of karvy final order - penalty) regulations, 2002 against karvy stock broking ltd, depository...

  • Page 1 of 191

    WTM/GA/17/IVD/6/07

    BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

    CORAM: G. ANANTHARAMAN, WHOLE TIME MEMBER

    ORDER

    UNDER REGULATION 13(4) OF SECURITIES AND EXCHANGE BOARD OF

    INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND

    IMPOSING PENALTY) REGULATIONS, 2002 AGAINST KARVY STOCK

    BROKING LTD, DEPOSITORY PARTICIPANT AND MEMBER, NATIONAL

    STOCK EXCHANGE OF INDIA LTD, BOMBAY STOCK EXCHANGE LTD.

    AND HYDERABAD STOCK EXCHANGE LIMITED AND KARVY

    COMPUTERSHARE PRIVATE LIMITED, REGISTRAR TO THE ISSUE IN

    RESPECT OF DEALINGS IN THE INITIAL PUBLIC OFFERINGS.

    Date of Final Hearing: May 29, 2007.

    Appearances:

    For noticees: Shri Shyam Mehta, Advocate.

    Shri Vinay Chauhan, Advocate

    Shri C. Parthasarathy, Director of the noticee

    For Securities and Exchange Board of India: Shri. Sanjiv Dutt, Chief General Manager,

    Shri B J Dilip, Assistant General Manager

    Shri Vijayakrishnan. G, Assistant Legal Advisor.

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    1.0. Background:

    1.1.In October 2005, the stock exchanges submitted their preliminary observations on the

    Initial Public Offering (IPO) of Yes Bank Ltd. (YBL) which hinted at the possibility

    of large scale off-market transactions immediately following the date of allotment and

    prior to the listing on the stock exchanges. SEBI therefore carried out a preliminary

    scrutiny by calling for data from the depositories and the Registrar to the Issue (RTI).

    SEBI found that, many demat accounts in fictitious/ benami names were opened by

    certain entities (hereinafter referred to as the Key Operators) and these entities had

    cornered/ acquired the IPO shares, by making applications in fictitious/ benami names

    with each of the applications being of small value so as to make it eligible for

    allotment under the retail category. The aforesaid demat accounts are hereinafter

    referred to as afferent accounts for the sake of brevity. The investigation conducted

    by SEBI further revealed that subsequent to the allotment of IPO shares, the

    fictitious/benami allottees had transferred the said shares to their principals which

    were identified by SEBI as key operators / master account holders. The modus

    operandi as detailed above led to the prima facie view that the thousands of entities in

    whose names demat accounts and bank accounts had been opened and IPO

    applications made, were either benami, name lenders or non existent.

    1.2.On noticing the irregularities and widespread abuse, SEBI acted against the entities

    who were responsible for the irregularities by passing interim order dated December

    15, 2005 restraining them from participating in all future IPOs and also directing the

    depositories to effectively freeze their dematerialized accounts.

    1.3. It was noticed during the course of preliminary scrutiny of Yes Bank IPO, that all the

    dematerialized accounts in fictitious / benami names had been opened with the DP

    Karvy Stockbroking Ltd. (Karvy DP). Therefore, in the said interim order dated

    December 15, 2005 it was mentioned that Also, the role of Karvy-DP i.e. Karvy

    Stockbroking Ltd. that opened the dematerialized accounts of 6315 entities being

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    benamis of Roopalben Panchal and 1315 entities being benamis of Sugandh probably

    without taking adequate steps to ascertain the genuineness of these entities while

    acting as a facilitator in what appears to be an act of either gross negligence or active

    collusion ill behoves them as a SEBI registered market participant.

    1.4.In view of the prima facie finding as above, vide the interim order dated December

    15, 2005 in the matter of Yes Bank IPO, the following direction was issued by SEBI

    against Karvy DP:

    NSDL is directed to undertake a comprehensive inspection of Karvy-DP particularly

    focusing on the sytems and procedures, if any, put in place by Karvy-DP for

    implementing the know your client norms that DPs are required to follow. NSDL

    shall identify the deficiencies in Karvy-DP with regard to the above and also ascertain

    from Karvy-DP the particulars of other potential benami accounts more particularly

    those multiple accounts having the same contact address and / or having the same

    person / entity authorized to operate these dematerialized accounts. Karvy-DP is

    directed to fully co-operate with NSDL in the above inspection. NSDL shall submit a

    report to SEBI detailing the findings of its inspection in a time-bound programme.

    1.5.Thereafter, SEBI examined the dealings in another major IPO of IDFC wherein the

    very same players were suspected to have played a major role in cornering the shares.

    SEBI issued ad interim orders in the case of IDFC also along the similar lines as done

    in the case of Yes Bank. In the interim order dated January 12, 2006 in the case of

    IDFC IPO, SEBI inter alia observed as below:

    11.16. Further the reports of inspection of Karvy-DP submitted to SEBI by NSDL

    and CDSL shows that Know your client norms have not been adhered at all while

    opening the dematerialized accounts.

    11.17. Further, Karvys internal e-mail correspondences given as Annexure to the

    NSDL inspection report show that even during November 2005 the top management

    of Karvy-DP were aware of the issue of multiple dematerialized accounts opened

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    with the same address. It appears that the management of Karvy-DP, on coming to

    know of the same in the wake of a query from SEBI in some other case had, as early

    as November 2005, internally decided to process these multiple dematerialized

    accounts bearing the same address for closure. The above goes to confirm that

    Karvy-DP had knowledge about the fictitious nature of such multiple accounts.

    11.18. Also, some of the documents collected by CDSL during the course of

    inspection show that Karvy-DP has obtained letters purported issued by the

    concerned banks such as Bharat Overseas Bank as proof of identity and proof of

    address of the person for the purpose of opening dematerialized accounts. It is seen

    that one branch manager has on the same date signed as authorized signatory of

    different branches of the bank. This raises a doubt as to the authenticity of the bank

    documents obtained by Karvy-DP for opening dematerialized accounts. SEBI is

    making reference to RBI regarding such apparent irregularities in the bank documents

    submitted to Karvy-DP for the purpose of opening the dematerialized accounts.

    11.19. It is also noted that in view of significant irregularities noticed during the

    course of inspection of Karvy-DP, both NSDL and CDSL have directed Karvy-DP

    not to open new dematerialized accounts till the issue of verifying the genuineness of

    multiple dematerialized account-holders having the same address is addressed to the

    satisfaction of the depositories.

    11.20. The above facts cast grave doubts as to the genuineness of the thousands of

    IPO applicants who have apparently furnished the address of Roopalben Panchal or

    Sugandh or Purshottam Budhwani as their address. The findings of the

    investigation/Inspection of the concerned banks by RBI has fortified the initial

    findings of SEBI that Karvy-DP has actively colluded with the above entities in

    opening multiple/benami bank accounts and dematerialized accounts in the names of

    fictitious persons.

    1.6.In view of the findings as above, SEBI in the interim order dated January 12, 2006 in

    the matter of IDFC IPO, inter alia, issued the following directions against Karvy DP:

  • Page 5 of 191

    12.5. Thousands of dematerialized accounts being opened on the same day with

    the same branch and being introduced by the same bank should have alerted the

    DPs at the time of opening of the dematerialized accounts. However the fact that

    DPs failed to exercise even this basic due diligence gives rise to a suspicion that

    they have actively colluded with the perpetrators. It is a matter of serious

    concern that Karvy-DP has opened such apparently benami / fictitious accounts

    working out to over 95% (42,056 nos) of the multiple dematerialized accounts in

    relation to IDFC IPO. I note that Karvy-DP has already been directed by the

    depositories to verify the genuineness of the dematerialized account-holders and to

    close those dematerialized accounts where it is unable to verify the genuineness of

    identity and address of the dematerialized account-holders. The depositories have

    prohibited Karvy-DP from opening new dematerialized accounts till the above

    process has been completed. I hereby direct Karvy-DP and Pratik-DP to complete the

    process of verifying the identity and address of dematerialized account-holders and to

    close / freeze the dematerialized accounts where they are unable to do the verification

    not later than January 31, 2006. Further, Karvy-DP and Pratik-DP shall put in place

    systems and procedures to ensure that in future no non-genuine dematerialized

    accounts are opened by them. Karvy-DP and Pratik-DP shall submit a detailed report

    to SEBI narrating the actions taken by them in this regard and also give an

    undertaking that the SEBIs above directions have been fully complied with. I furt