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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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