SEBI’s Interim Order in the Sharepro Case

Last week, SEBI issued an ex-parte
ad-interim order
in a case involving Sharepro Services (I) Private Limited,
which is a registrar and transfer agent (RTA) for a number of companies. Based
on certain complaints, SEBI began investigating into the affairs of Sharepro
and found a number of irregularities. For example, dividends which were to be
transferred into the Investor Education and Protection Fund were instead
diverted to the accounts of certain parties related to the promoters and a
senior employee of Sharepro. Similarly, dividends payable to registered
shareholders were instead paid to certain related parties. Share transfers too
were incorrectly effected to benefit such related parties at the cost of the
real owners of the shares. In all, the facts of the case are egregious and
indicate a deliberate set of actions on the part of Sharepro to enrich its
promoters, senior management and their related parties to the detriment of the
companies that are its clients (as well as their shareholders). Moreover,
Sharepro appears to have taken efforts to mask the trail of transactions, and
also to mislead the investigation process.
Based on its investigation and the information
currently available before it, SEBI passed the order restraining certain
persons from accessing the capital markets. It also asked companies who are
clients of Sharepro to conduct a thorough audit of the records with respect to
dividends and transfer of securities. SEBI finally advised clients to switch
their activities to an alternative RTA or move those in-house.

The purpose of this post is not to discuss the
merits of Sharepro case, which is subject to further determination by SEBI (as
this is only an interim order). Instead, this post touches upon the
effectiveness of the interim order. While the order restraining the parties from
accessing the capital markets is understandable, it leaves the victims to
resort to self-help. The order does not provide any protection as such to the
shareholders who have been deprived of their rights due to the actions of
Sharepro and its promoters and management. Granted this is only an interim
order, but it is somewhat intriguing that Sharepro’s clients have been “advised”
to take their own action in moving activities either in-house or to an
alternative RTA. The question arises as to whether further preventive measures
ought to have been ordered at this stage. As Mobis Philipose
these measures may to too little too late. Professor J.R. Varma
to argue that the control of Sharepro must be taken over by the
Government, as was the case with Satyam Computers. Although a number of
possibilities exist, rapid action would be of the essence to prevent any
further damage, and to protect the interests of various stakeholders.

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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