JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up with the consent of parties for final disposal.
2. The appellant challenges the order passed by SEBI wherein SEBI has suspended the certificate of registration granted to the appellant as a depository participant for a period of six months. SEBI further held that in order to protect the interest of the investors having DP accounts with the appellant, one month’s time was given to the appellant for making alternative arrangement for such investors. The impugned order was to come into force after the expiry of one month from the date of order. The date of order is 2nd of July 2004.
3. The facts very briefly are the appellant was registered as Registrar and share transfer agent, Category-I (hereinafter referred to as ‘Registrar’) with effect from 1.11.1994. The appellant was also issued a certificate of registration dated 22.2.1999 as a depository participant (in broker category) of the National Securities Depository Ltd.(hereinafter referred to as ‘NSDL) with effect from 22.2.1999.
4. It is common ground that the appellant was recognised and registered as a depository participant (hereinafter referred to as ‘DP’) in the broker category. If a DP was in the broker category, there was a threshhold limit of doing business of not more than 100 times of his net worth as stipulated under regulation 19(a) of the SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred to as ‘Regulation’).
5. On 13th and 14th of September 2001, SEBI conducted an enquiry into the activities of the appellant and the enquiry revealed that the appellant had exceeded the permissible custody holdings as laid down in regulation 19 as a DP-cum-broker.
6. Pursuant to the preliminary enquiry, an Enquiry Officer was appointed to look into the allegations. The Enquiry Officer submitted the report on 23.9.2002. The Enquiry Officer in his report found the following violations:
(1) IEL-DP exceeded the permissible custody holdings as laid down in Regulation 19(a) (viii) of the Regulations.
(2) IEL-DP had opened new accounts in violation of the directive issued by SEBI.
(3) IEL-DP changed its status from broker DP to registrar and share transfer DP without taking specific approval from SEBI.
7. The Enquiry Officer recommended that the appellant’s certificate of registration as a DP be suspended for a period of six months.
8. A show cause notice was issued on 4.10.2002 in terms of regulation 67(1) of the said regulation. Regulation 67 has been omitted by SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 w.e.f. 27.9.2002.
8A. On a careful perusal of the impugned order, we find that the respondent has proceeded under the new Regulations relying on regulation 23 o f the 2002 Regulations, which saves proceedings commenced under the 1996 Regulations(see page 14 of the impugned order).
9. Coming back to the facts of the case, it is abundantly clear that the appellant is both a Registrar as well as a stock broker registered with SEBI. In 1998, the appellant sought to register itself as a DP under the DP Regulations. At the relevant time only stock brokers and not registrars were eligible to act as depository participants. The appellant being a stock broker got registered as a depository participant in the broker category on 22.2.1999. Since the appellant was a broker-DP, it was subject to a limit of custody holdings of 100 times its net worth as a DP.
10. It is also common ground de-materialization of shares did not proceed at the speed as anticipated by SEBI. It is only in these circumstances on 19.3.1999 SEBI widened the scope to include more entities as DPs.
11. With effect from 19.3.1999 even persons who were Registrars were eligible to seek registration as a DP. Accordingly, the Regulations were amended on 20.5.1999 to include Registrars to an issue as an eligible category of applicant to apply for grant of certificate of registration as a DP on certain conditions. The reasons for the amendment were clear. In the words of SEBI, the reasons were:
“This amendment will help increase the number of depository participants. This will also enable the system to get advantage of experience and infrastructure of RTIs/STAs. Further this would help speed up the process of dematerialisation.”
12. From the reasons given at the Board meeting, it is clear that the object of including Registrars as DP was to further liberalise and speed up the process of dematerialisation while taking into account the experience which a Registrar has to function as a DP.
13. Another change in the Registrar-cum-DP was that there was no monetary limit of the total demat holdings with respect to the net worth of ratio in contrast with the restrictions placed on broker-DP. After the amendment on 19.3.1999 all that was required for a Registrar-cum-DP was that it should have a minimum net worth of Rs.50 lakhs, which the appellant possessed and was entitled to be a Registrar-cum-DP. This minimum net worth the appellant possessed and therefore was entitled be a Registrar-cum-DP.
14. Realising the difficulty faced by broker-DP also, it appears, SEBI provided for change of existing broker-DPs., who were also registered as Registrars with SEBI, to convert themselves as Registrar-DPs. so that they would be able to provide demat facilities without any restrictions as to the limits, which were otherwise applicable to broker-DP.
15. Even with respect to broker-DP also, the cap was lifted on 16.6.2003. In other words, after 16.6.2003 there was no real distinction between broker -DP and Registrar-DP. However, this factor, strictly speaking, is not relevant since the alleged violation was prior to 16.6.2003 but only manifests the laudable aim of SEBI to increase the number of DPs.
16. Regulation 19 reads as follows: (The Regulation deals with certificate of Registration of DPs.)
“19. Consideration of application for grant of certificate of registration.- 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) the applicant belongs to one of the following categories,–
(i) a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);
(ii) a bank included for the time being in the Second Schedule to Reserve Bank of India Act, 1934 (2 of 1934);
(iii) a foreign bank operating in India with the approval of the reserve Bank of India;
(iv) a state financial corporation established under the provisions of section 3 of the State Financial Corporation Act, 1951 (63 of 1951);
(v) an institution engaged in providing financial services, promoted by any of the institutions mentioned in sub-clauses (I), (ii), (iii), (iv), jointly or severally;
(vi) a custodian of securities who has been granted a certificate of registration by the Board under sub-section (1A) of section 12 of the Act;
(vii) a clearing corporation or a clearing house of a stock exchange;
(viii) a stock-broker who has been granted a certificate of registration by the Board under sub-section (1) of section 12 of the Act;
Provided that the stock-broker shall have a minimum net worth of rupees 50 lakh and the aggregate value of portfolio of securities of the beneficial owners held in de-materialised form in a depository through him, shall not exceed the following limits:
100 times of the net worth of the stock broker.
Provided further that if the stock broker seeks to act as a participant in more than one depository, he shall comply with the criteria specified in the first proviso separately for each such depository; or
(ix) a non-banking finance company, having a net worth of not less than rupees fifty lakhs;
Provided that such company shall act as a participant only on behalf of itself and not on behalf of any other person;
Provided further that a non-banking finance company may act as a participant on behalf of any other person, if it has a net worth of Rs.50 crores in addition to the net worth specified by any other authority.
(x) a registrar to an issue or share transfer agent who has a minimum net worth of Rs.50 lakh and who has been granted a certificate of registration by the Board under sub-section (1) of section 12 of the Act:
(This clause was inserted by Amendment Regulation, 1999 vide Notification S.O. 357 (E) dated 20.5.1999)
(b) the applicant is eligible to be admitted as a participant of the depository through which it has made the application to the Board.
(c) the applicant has adequate infrastructure, systems, safeguards and trained staff to carry on activity as a participant; and
(cc) the applicant is a fit and proper person.
(d) the grant of certificate of registration is in the interests of investors in the securities market.”
17. We have carefully perused regulation 19. It provides for a stock broker registered under SEBI to be granted registration as DP on satisfying certain conditions. Regulation 19 also provides for a Registrar, who has minimum net worth of Rs.50 lakhs, to be granted certificate of registration as a DP. Resultantly, under regulation 19 there were two categories, which we are concerned with. (1) Registrar-DP and (2) Stock broker-DP. With regard to Registrar-DP to be eligible as a DP, the entity must have a minimum net worth of Rs.50 lakhs. Consequently, once you are in the category of Registrar-DP and if you have a minimum net worth of Rs.50 lakhs, you can have unlimited business, subject to scrutiny by SEBI.
18. Originally Registrars were not included as eligible category of persons for becoming a DP. It was only in the year 1999 the Regulation was widened to bring in Registrar-DP. As stated earlier, the purpose for this amendment was to increase the number of depository participants for the rapid dematerialisation of accounts, which was one of the laudable objects of SEBI. It appears that like the appellant, several Registrars registered with SEBI as broker-DPs. were subject to monetary limits on the demat holdings. It would have been possible for the appellant to have made a fresh application to SEBI to be treated as a DP in the category of a Registrar. It is only in these circumstances on 16th of August 1999 SEBI allowed the conversion of broker-DPs. into Registrar-DPs. if they were registered with SEBI as a Registrar. A press release dated 16th of August 1999, granting conversion of a broker-DP into the status of that of a registrar-DP issued by SEBI, reads as follows:
“The Broker DPs who are also registered with SEBI as share transfer agents shall be allowed to change their broker DP status to that of a share transfer agent/Registrar DP”.
19. A careful perusal of the press release shows that the conversion of status is permissible only to persons who are registered with SEBI as Registrars and also registered with SEBI as DPs. and also registered under regulation 19. It is clear that the credentials of such a DP have already been checked by SEBI. It cannot be ruled out that the press release intended to eliminate the need of existing DPs., who are also registered as Registrars, to once again make an application to be registered as Registrar-DPs. It appears to us that once SEBI has considered an entity as fit and proper to act as a Registrar, it shall grant registration as a DP in the category of Registrar/DP.
20. The object of the whole exercise of conversion appears to us is to be to enable Registrars to function as DPs. in accordance with law for the early and expeditious dematerialisation of physical holdings of investors. It also appears to us that the press release dated 16th of August 1999 was for the laudable purpose of putting on par a broker-DP with that of a Registrar-DP on certain conditions. The conditions are set out in the press release. The first condition is that a person must be a broker-DP registered with SEBI. He must also be a Registrar registered with SEBI. If that be so, the broker-DP shall be allowed to change the status to that of a Registrar-DP. The word ‘shall’ clearly indicates the genuine aim of SEBI to allow more DPs. under its control to function as Registrar/DP than if they are Broker-DP. Otherwise there was no need for a press release. The press release, it is not disputed, is undoubtedly binding on SEBI. SEBI issues press release only in public interest and such press release is in the nature of a circular. Mr. Somasekhar, learned senior counsel for the appellant, relied on the pronouncement of the Supreme Court to establish that press notes issued by SEBI are binding. The Supreme Court in Paper Products Ltd. v. Union of India (1999-(007)-SCC-0084-SC) pronounced as follows:
“Not only are the Circulars issued by the CBEC binding on the Department, but the Department is also precluded from even in appeal challenging the correctness of such binding nature of CBEC Circulars. Whatever action the Department takes, therefore, will have to be consistent with the circular which is in force at the relevant time”.
Although the judgment relates to circular issued by CBEC, it is of equal force in regard to press notes issued by SEBI and therefore this judgment is relevant for that purpose.
21. The question therefore that arises for consideration is whether the words in the press release dated 16th of August 1999 gives an automatic migration or conversion from one category to another, if eligible ?. The words “shall be allowed to change” indicate that other things remaining equal, it is permissible for a registered broker with SEBI, who is a DP, to change the status to that of a Registrar-DP.
22. Mr. Kumar Desai, learned counsel for SEBI, submitted that there is no dispute that the words “shall be allowed to change” cannot give much discretion to SEBI to permit the appellant from changing its status from that of a broker-DP to that of a Registrar-DP but the main thrust of his submission was that such change in the status although formal should have the permission of SEBI.
23. When this question was posed to Mr. Somasekhar, the learned counsel for the appellant, as to why the appellant did not seek formal permission from SEBI for the migration/conversion of status as Registrar-DP, he submitted that the appellant cannot approach SEBI directly. The appellant can only approach the National Securities Depository Ltd. (NSDL) since the appellant is a depository participant of NSDL and having SEBI registration. Mr. Somasekhar further submitted that on 19th of April 2000 the NSDL wrote a letter recommending the appellant to grant registration to the appellant in the category of Registrar-DP.
24. The letter addressed by the NSDL to SEBI reads as follows:
“Integrated Enterprises (India) Limited which is a Depository Participant of NSDL having SEBI Registration No.IN-DP-NSDL.-83-99 has requested vide its letter dated March 30, 2000 (copy enclosed) that it intends to change its registration with SEBI as a Depository Participant, from the category of a ‘stock broker’ to ‘registrars to an issue and share transfer agent’.
We hereby recommend to SEBI to grant registration to Integrated Enterprises (India) Limited in the category of ‘registrars to an issue and share transfer agent’ in place of ‘stock broker’. A notarised copy of its SEBI registration certificate as registrars to an issue and share transfer agent is enclosed.”
It was submitted by Mr. Somasekhar that this letter was given without prejudice to the appellant’s contention that there was a conversion or migration pursuant to the press note dated 16th of August 1999.
25. One can only presume the words in the press release dated 16.8.1999 would give the impression that SEBI itself considered that there was a migration or conversion into the category of Registrar cum DP. At any rate that impression cannot be ruled out taking into account the object of expediting dematerialisation of physical holding of investors.
26. It has also brought to our notice by Mr. Somasekhar that pending appeal perhaps taking note of the recommendation made by NSDL dated 19.4.2000, the respondent granted registration to the appellant in the category of Registrar and share transfer agent Category 1-cum-DP, subject to the result of the appeal on 15.10.2004. It is referred to as conditional registration which in effect means subject to the result of the appeal. All this leads to the inevitable conclusion that the appellant is entitled to function as a Registrar cum DP by virtue of certificate of registration dated 15.10.2004.
27. Mr. Somasekhar, learned counsel for the appellant relied on the judgment of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. v. State of UP reported in AIR 1979 SC 621. It held as follows:
“The Government cannot claim to be immune from the applicability of the rule of promissory estoppel and repudiate a promise made by it on the ground that such promise may fetter its future executive action.”
28. Reference was also made to the judgment of the Cabot International Capital Corporation v. SEBI. In that SAT observed that –
“When penalty for failure to carry out a statutory obligation could be imposed, it is to be seen as to whether the facts of the case warranted penalty. The facts to be considered are whether there is anything to show that the appellant acted deliberately in defiance of law, or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. It is also to be seen that whether the breach flows from a bonafide belief of the appellant that it was not liable to act in the manner prescribed by the statute.”
29. When a specific question was posed to Mr. Desai whether after 16.6.2003 a broker-Registrar to do unlimited business as a DP required permission from SEBI, Mr. Desai fairly submitted that no such permission is required. He however buttressed his argument by submitting that permission will only be required if there is a change of status from broker-DP to Registrar-DP.
29A. It is clear that the appellant had acted in a bona fide manner in the belief that there was an automatic migration. Notwithstanding this, it also approached its principal NSDL to apply on its behalf for registration as Registrar-cum-DP. The fact of the matter also is that on 15.10.2004 the respondent itself has granted registration for the appellant as Registrar-cum-DP, subject to the result of the appeal. Therefore we do not think that any fault can be found with the appellant since it had acted in a bona fide and transparent manner. The press note also gave the impression that there was automatic migration. Notwithstanding this, the appellant also made an application to SEBI through NSDL and SEBI considered the matter during the pendency of the appeal and granted the appellant registration as Registrar-cum-DP subject to the result of the appeal before us.
30. We have very carefully perused the press note and the letter addressed by NSDL dated 19th April 2000. We do not think that the appellant has committed any violation of any regulation in so far as migrating from one category to the other is concerned. We state this on the basis of the press note. we reiterate the press note for a proper understanding of the effect of the press note. The press note dated 16th of August 1999 reads as follows:
“The Broker DPs who are also registered with SEBI as share transfer agents shall be allowed to change their broker DP status to that of a share transfer agent/Registrar DP”.
31. It was further submitted that the impugned order is liable to be set aside since the impugned order was passed beyond one month after completion of enquiry and being contrary to Regulation 67 of the SEBI (Depositories and Participants) Regulations, 1996. The learned counsel for the appellant raised the question that the impugned order if it was not passed within 1 month from the date of completion of the enquiry by the respondent, the order is liable to be set aside. He further submitted that the matter is well settled by the judgment of the Tribunal in Atul Kanodia’s case and in First Global Stockbroking Pvt. Ltd. dated 3.12.2004.
32. It was submitted by the counsel for the appellant that show cause notice was issued by the respondent on the basis of the enquiry report under 67(1) of the old Regulation on 4.10.02. The appellant gave his reply on 9.10.2002. A further detailed representation was given on 18.10.2002. The opinion of a former Chief Justice of India was also submitted to the Chairman stating that the appellant had not committed any violation. There was a personal hearing on 18.12.2002 and written submissions were given on 26.12.2002. Certain clarifications sought for by SEBI was given on 10.1.2003 and SEBI passed the impugned order on 2.7.2004, after a period of 18 months totally in violation of Section 67 of the old Regulation. Since as we have stated earlier in the First Global Stockbroking case the Regulation 23 of the SEBI (Procedure for Holding Enquiry by an Enquiry Officer and Imposing Penalty) Regulation, 2002 saves action taken under the old Regulation as if those Regulations are not amended. Regulation 23 reads as follows:
“(1) Notwithstanding amendment of the regulations as specified in Regulation 21, anything done or any action taken including any proceeding for inspections or investigation or enquiry commenced or any notice issued under the said Regulations before the commencement of these regulations shall be deemed to have been done or taken under the corresponding provisions of these regulations.
(2) In particular and without prejudice to the generality of the provisions of sub-regulation (1) –
(i) an enquiry proceeding initiated by the Board under the relevant Regulations and pending before the Board before the commencement of these regulations shall be conducted and completed under the relevant Regulations as if those are not amended as specified in regulation 21.
(ii) any order appointing an enquiry officer under the relevant Regulations and pending before such enquiry officer immediately before the commencement of these regulations shall be deemed to have been ordered under the corresponding provisions of these regulations.”
33. On a careful perusal of Regulation 23 the 30 day period after the enquiry does not apply to the 2002 Regulations if the matter is pending before the Chairman by virtue of Regulation 23. Regulation 23 of the 2002 Regulation clearly indicates that any action done under the old Regulation shall be deemed to have been done or taken under the corresponding provisions of new 2002 Regulations. Under the 2002 Regulations the SEBI Board has to pass the order “as soon as possible”. Therefore Regulation 67 of the old Regulations will have no application to the facts of this case since the order has been passed as expeditiously as possible, as rightly pointed out by Mr. Desai, learned counsel for the respondent.
34. The impugned order speaks about the registration being cancelled for 6 months. This order cannot be implemented since if the certificate of registration granted to the appellant as a depository participant is suspended for a period of six months, it would cause grave injustice to, the investor public as all the branches of the appellant will have to be closed down. The demat shares will have to be transferred to other DPs. The entire work force of the appellant will have to be without work for six months. Importantly the appellant has taken all steps through NSDL by way of abundant caution for transfer of status as Registrar-DP, which has been granted on 15.0.2004, subject to the result of appeal.
35. We accordingly set aside the impugned order and since any suspension of certificate of registration would cause untold misery to the investors and since there was a bonafide impression that there was automatic migration to the status of Registrar cum DP pursuant to the press note by SEBI dated 16.8.1999. We do not think that it is fair and equitable to act against thousands of investor who have their account with the appellants. It is submitted that the appellant has an excellent track record and branches all over the country and thousands of clients in the category of DP. It is also brought to our notice, as stated earlier, that the cap fixed on brokers has also since been lifted to enable them to be DPs. The object of the whole exercise is to expedite the dematerialization of physical holdings of investors. Even by way of abundant caution the appellant has also applied to the respondent through NSDL for registration as registrar cum DP and has been granted the same on 15.10.2004 subject to the outcome of the appeal.
36. It is common ground that during the pendency of the appeal the appellant has been granted certificate of registration in the Category of Registrar of Share Transfer Agent on 11.10.2004 and as also Depository Participant on 15.10.2004, subject to the outcome of the appeal and is presently functioning without a blemish as Registrar-cum-DP.
37. Taking all these factors into account the impugned order is set aside.
38. Apart from the merits of the case, if there are any investor grievances that is brought to the notice of SEBI, Mr. Somasekhar , learned senior counsel for the appellant assures the Tribunal that they will be redressed forthwith, if brought to the appellant’s notice.
39. The appeal is allowed with the above directions. No order as to costs.