Harsh Shah And Others vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

Misc. Application No. 175 of 2020

There is a delay of 42 days in the filing the appeal and accordingly an application has been filed for condoning the delay. For the reasons stated in the

application, the delay in filing the appeal is condoned. The Misc. Application is allowed.

Appeal No. 204 of 2020

The present appeal has been filed by the appellants questioning the legality and validity of the order dated April 07, 2020 passed by the Whole Time

Member (“WTM†for convenience) of the Securities and Exchange Board of India (“SEBI†for convenience) partly allowing the

representation of the appellants by directing the appellants to open separate individual demat accounts and transfer 50% of the securities from their

joint demat accounts held with their mother Mrs. Bhavana Rajesh Shah.

The facts leading to the filing of the present appeal is, that the WTM passed an order dated August 12, 2016 against the Company known as

Platinum Corporation Limited and 39 other entities. Vashi Constructions Private Limited (“VCPL†for convenience) and its Directors Mrs.

Bhavana Rajesh Shah and Shri Rajesh Chandrakant Shah were debarred from accessing the securities market for a period of 3 and 5 years

respectively for violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 (“PFUTP

Regulations†for convenience) and SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 1997 (“Takeover Regulations†for

convenience). VCPL was also directed to disgorge the entire profit of Rs. 23,89,873 plus simple interest @ 12% per annum from February 2007 till

the date of payment.

Pursuant to the aforesaid order of the WTM of SEBI the bank account, and the demat account of the Company as well as of the Directors were

frozen.

VCPL and its Directors filed Appeal No. 298 of 2016 which was withdrawn by an order of the Tribunal dated January 14, 2017 with liberty to file

afresh. Pursuant thereto, a fresh Appeal No. 375 of 2017 was filed which was dismissed by an order of the Tribunal dated June 28, 2018. Thereafter,

the present appellants filed Appeal No. 465 of 2018 which was dismissed as withdrawn by an order dated December 13, 2018 and permission was

given to the appellants to make a representation before SEBI. Pursuant thereto, a representation dated January 02, 2019 was filed which was partly

allowed by the impugned order dated April 07, 2020.

Appellants no. 1 and 2 are the children of the Director Mrs. Bhavana Rajesh Shah. The appellants held a joint demat account with their mother. As

a result of the order of the WTM dated August 12, 2016 not only the demat accounts of the Company VCPL and its Directors Mrs. Bhavana Rajesh

Shah and Shri Rajesh Chandrakant Shah were frozen but the joint accounts of the appellants with their mother were also frozen and the appellants

were restrained from accessing their securities lying in their demat accounts.

The appellants before the WTM contended that there is no order of SEBI debarring them from accessing the securities market. The order of the

WTM only debars their mother. Further, the appellants have nothing to do with the business of VCPL or the affairs of that Company or its Directors.

Further, the appellants submitted that the securities lying in their demat accounts were purchased from their own funds much before the passing of the

order dated August 12, 2016 by the WTM. It was specifically stated that the securities were purchased from the own funds of the appellants which is

reflected in their income tax returns. Proof of this fact was filed by the appellants by filing the income tax returns of the last couple of years.

Certificate of the Chartered Accountant was also filed who certified that not only the transactions, but also the securities are reflected in their income

tax returns and that the securities were also purchased from the own funds of the appellants. In addition to the aforesaid, an affidavit of their mother

Mrs. Bhavana Rajesh Shah was also filed indicating that she had nothing to do with the securities lying in the joint demat account with her children and

that her name was entered in the demat account only for administrative convenience.

In addition to the aforesaid, the appellant no. 1 contended that he is a small retail investor and currently employed as an Institutional Research

Associate and is independent from his parents and has his own source of income. The appellant no. 1 further stated that he deals in the securities

market from his own funds and has knowledge about the securities market. Similarly, appellant no. 2 contended that she is currently employed as an

Assistant Manager and is independent from her parents and has independent source of income and deals in the securities market and also has

knowledge about the functioning of the securities market.

The WTM accepted the contention of the appellants as stated aforesaid and has not disputed the evidence that has been filed by the appellants to

show that the shares/ mutual funds lying in their demat accounts were purchased from their own funds and that their mother had nothing to do with

the shares which are lying in the demat account. It has also come on record that the demat account of the Company VCPL was also attached and a

sum of Rs. 1,71,88,367.82 has been frozen which is sufficient to clear the disgorged amount as per the order of the WTM dated August 12, 2016. The

WTM also found that the appellants were never Directors in VCPL and that there is no restraint order against them.

The WTM, however, came to a conclusion that since the demat account are in the joint names of the appellants and their mother Mrs. Bhavana

Rajesh Shah, the appellants as well as their mother are joint owners of the securities lying in their demat account. This conclusion has been arrived at

by taking recourse to the Central Depository Services (India) Limited (“CDSL) Bye Laws, namely, paragraph 5.3.13 and paragraph 5.3.13.3. The

WTM accordingly, allowed the release of 50% of the securities.

Having heard the learned counsel Ms. Rinku Valanju along with Shri Pratham Masurekar, advocate for the appellants and Shri Pradeep Sancheti,

the learned senior counsel along with Shri Anubhav Ghosh, advocate for the respondent at some length through video conference we are of the

opinion, that the impugned order cannot be sustained. Reliance has been made on the Bye Laws of CDSL. For facility, the said Bye Laws are

extracted hereunder:-

“5.3.13. A participant shall, before opening any account or while acting upon the instruction of any Beneficial Owner:

…..

5.3.13.3. in case of joint owners of securities, obtain authority in writing from all such joint owners.â€​

A perusal of the aforesaid provisions, nowhere indicates that the joint holders of a demat account become joint owners of the securities. Paragraph

5.3.13.3 talks about joint owners of securities which has nothing to do with the joint holders of the demat account. We of the opinion, that a joint holder

of a demat account does not mean that the joint holders are automatically joint owners of the securities in their demat account.

Co-ownership is a relationship which springs from consensus and contract. Legislation has only imprinted, on the concept of co-ownership, certain

rights which have a supervening effect which are declaratory of the rights inter se as between co-owners. The legal relationship in a co-ownership is

always knitted in a framework of jointness and no one interested therein can predicate, with certainty, as to what portion of the property held in

common is his, and an element of inseparability is inherent in the doctrine of co-ownership. If the source of purchase price of the consideration

emanates from a common fund than the shares of each of the co-owners would be the same as their interests in the common fund. In the light of this

principle, there is no finding that the securities were purchased from a common fund nor there is any finding that there is a contract between the joint

holders that the value of the securities would be divided equally. On the other hand, there is a categorically assertion by the appellants that the

securities were purchased from the own funds of the appellants and that their mother Mrs. Bhavana Rajesh Shah had nothing to do with these

securities. These facts have been accepted by the WTM and, therefore, the conclusion drawn by the WTM to the effect that the securities in the

demat account are jointly owned by the appellants with their mother is patently erroneous and is based on surmises and conjectures.

Under the Income Tax Act, tax is normally payable by the first holder in a joint account. The Tax Authorities accepts it to be the income of the

first holder in a joint account. Similarly, the Companies Act, 2013 recognizes the first holder as the main shareholder. In case of a joint holder of a

share, the dividend is paid to the first holder under Clause 85 of Table F of Schedule-I of the Companies Act, 2013 and, in case where voting rights

has to be exercised then under Clause 52 (1) and (2) of Table F of Schedule-I, the voting rights can be exercised by the first holder who is registered

in the register of the members. For facility, Clause 85 and Clause 52 of Table F of the Companies Act, 2013 are extracted hereunder:-

“85. (i) Any dividend, interest or other monies payable in cash in respect of shares may be paid by cheque or warrant sent through the post

directed to the registered address of the holder or, in the case of joint holders, to the registered address of that one of the joint holders who is first

named on the register of members, or to such person and to such address as the holder or joint holders may in writing direct.

(ii) Every such cheque or warrant shall be made payable to the order of the person to whom it is sent.

(i) In the case of joint holders, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the

votes of the other joint holders.

(ii) For this purpose, seniority shall be determined by the order in which the names stand in the register of members.â€​

Thus, even under the Companies Act, 2013 in case of a joint holder of a share the dividend is only paid to the first holder and it is not distributed

equally to the joint holders and voting right can only be exercised by the person whose name is first entered in the registered of the members.

In the instant case, the appellants are the first holders of the demat account and their mother is the second holder which fact is admitted by the

respondent. In this regard, Section 226(3)(ii) of the Income Tax Act which is applicable in recovery proceedings initiated under Section 28A of the

SEBI Act, is relevant and is extracted hereunder:-

 “226(3)(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the

assesse jointly with any other person and for the purposes of sub-section, the shares of the joint-holders in such account shall be presumed, until the

contrary is proved, to be equal.â€​

The aforesaid provision indicates that in a case of a joint holder, notice is required to be issued to the joint holders and it is deemed that the shares of

the joint holders would be treated as equal until the contrary is proved. We find that without issuing notice to the appellants their accounts could not be

frozen. Notice was required to be issued before freezing the accounts of the appellants which in the instant case was not done. Further, the evidence

filed by the appellants clearly proves that the appellants are the owners of the securities lying in the joint demat accounts. The “contrary†has

been proved clearly by the appellants which fact has not been disputed by the WTM in its order. Consequently, the impugned order cannot be

sustained.

We find that for four years the appellants demat account has been frozen without any rhyme or reason. No fault was committed by them. Their

representation also was kept on the back bench and it took more than a year for the respondent to pass the impugned order. We are of the opinion,

that the appellants in the given case are entitled for costs.

In view of the aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed. The respondent is directed to defreeze

the demat accounts of the appellants forthwith. In the circumstances of the case, we direct the respondent to pay Rs. 25,000/- (Rupees Twenty Five

Thousand Only) to the appellants as cost of a litigation within four weeks from today.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on

behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally

signed copy sent by fax and/or email.