Wednesday, March 25, 2015

SEBI’s Restraint Order: Impact on Joint Accounts

[The following post is contributed by Yogesh Chande, who is an Associate Partner with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal.

The author discusses a recent SEBI order regarding the scope of a restraint passed by it earlier on a noticee from dealing in securities. By now clarifying that joint accounts too are within the purview of the prohibition, it has the effect of expanding the scope of the restraint order, but at the same time it may be considered necessary to prevent a circumvention of the restraint.]

In a recent order, the Whole Time Member (“WTM”) of SEBI refused to grant relief to two daughters of a noticee to allow operation of their two separate beneficiary demat accounts which were frozen on account of a restraint imposed by the interim order of SEBI on their mother, who happened to be the second holder with the daughters in their respective demat accounts. As per the submissions made by the daughters, the mother was made the second holder of the demat accounts only for convenience.

Earlier, based on a preliminary examination in the trading of the scrip of a particular listed company, SEBI, by its ad interim ex-parte order dated December 04, 2013 (interim order), had restrained certain entities including the mother from accessing the securities market and further prohibited them (including the mother) from buying, selling or dealing in securities in any manner whatsoever, until further directions.

It was also submitted by the daughters that no restraint has been placed on them from buying, selling or dealing in securities as per the interim order. Restraint, if any, is on their parents. Therefore, operations in the aforesaid beneficiary demat accounts may be permitted.

The WTM however refused to grant relief on the following grounds:

(a) The daughters claimed that the securities lying in the beneficiary demat accounts have been purchased using funds from their respective bank accounts, which are also held by them along with their mother as the joint holder; however, the daughters failed to substantiate this claim on the basis of any evidence. No material was brought on record before the WTM to prove that the securities lying in the aforesaid beneficiary demat accounts were purchased by both the daughters using their own funds.

(b) The contract notes produced by the daughters before the WTM only showed the purchases made from the respective trading accounts and were not considered sufficient proof of ownership of securities lying in the respective beneficiary demat account of the daughters.

(c) The copies of income tax returns submitted by the daughters only showed the income/ capital gains or losses made by them and the same did not reflect the beneficial owner of the securities lying in their demat accounts.

(d) The WTM also observed that the first holder (each of the daughter) is the joint beneficial owner of the securities lying in the joint account with the second holder i.e. the mother in terms of section 2(i)(a) of the Depositories Act, 1996. Thus, the legal presumption that the mother is joint beneficial owner of the securities lying in the aforesaid beneficiary demat accounts cannot be rebutted merely on the basis of a certificate issued by a chartered accountant.

The WTM concluded by stating that, if the request of the daughters is acceded to, it is likely that the said beneficiary demat accounts would be used by the mother for sale or purchase of securities, thereby defeating the purpose of the interim order and ongoing investigation.

- Yogesh Chande

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