Know Ur Customers

Know your customers Brief Facts  Karvy Consultants Ltd was appointed as UCO Bank as its RTA (Registrar & Transfer Agents) for the public issue of equity shares valuing Rs. 20 crore at the price of Rs. 12 per share aggregating to Rs. 240 crore.  Applications were collected over 330 brancehes of the bank across the country. This resulted in the certain last minute receipt of bank schedules since the time available for processing the application was only 12 days.  Inspection of Karvy books by SEBI to verify whether the shares allotted are in physical form or demat form.  Issuance of notice from SEBI, based on inspection which resulted in discrepancies, alleging 55,868 applicants had been allotted shares in physical form, though opted in demat form  Applicants number could not be considered, as Karvy transferred 41,186 shares into demat form at its own expense, & it has received 10,44,000 aplications from public.  According to SEBI, Karvy violated the code of conduct prescribed in 1993 regulations & imposed penalty of Rs. 10,00,000  Karvy filed petition before Securities Appellant Tribunal (SAT)  Karvy stated that out 10,00,000 applications, 2073 applications has been dematerialized, but the cost of dematerialized had not been collected from public.

Applicable Law & Theory  The appellant according to the respondent Clause 2, 3 & 30 of the Code of Conduct of SEBI Regulations 1993 & was imposed with a penalty of Rs. 10 lakhs.  The Securities Appellant Tribunal (SAT) is now converted into a “Financial Services Appellant Tribunal”, to hear grievances against orders passed by various sub-sectoral regulators.  Currently SAT hears appeals only against orders passed by Securities Exchange Board of India (SEBI).  SAT was set up in 1995, but however over time it developed into robust institution – truly one of the best specialized tribunals in the country.

Relevant Judgment & Decisions In the facts and circumstances of the case, taking into account the unblemished account and the reputation of the appellant as an RTA, we feel it appropriate to state that this penalty ought not to be treated as a stigma by the respondent for the future growth of the securities market. Any amount paid in excess should be refunded to the appellant as the appellant has a good track record and the appellant is a RTA for number of companies.

Analysis The issue opened on 3rd September to 10th September, 2003, so the time span was very short for both the parties to carry on the work properly. There was a penalty of Rs.10 lakhs, imposed on Karvy Consultants, for violating the code of conduct. SEBI did this thinking on that there was a lack of due skill & diligence on the part of Karvy.

Conclusion Q. Were there serious violations of the Code of Conduct as prescribed in the regulations, 1993 ? Q. Was the violation of the Code of Conduct done with or mala fide intention ? According to the case there was some minor violation in the code of conduct of 1992 regulation, therefore there was no deliberate intention or mala-fide which could be attributed to the appellant We can conclude by saying that, the RTA has rectified the mistakes pointed out in the show cause notice, at their own expense.