Inspection, Inquiry & Penalties — Depositories Act, 1996

Topic 33 — Chapter IV & V (Sections 17-22): SEBI Powers, Penalty Framework & Offences | SEBI Law Officer

Chapters IV and V of the Depositories Act, 1996 (Sections 17 to 22) create the enforcement framework — empowering SEBI to inspect depositories and their participants, conduct inquiries, and impose penalties for violations. The Depositories Act's penalty provisions must be read alongside the SEBI Act's civil and criminal enforcement provisions, since SEBI regulates depositories under both Acts simultaneously. Understanding the scope of inspection powers, the penalty schedule, and the appeal mechanism is essential for SEBI Law Officer examinations.

1. Section 17 — Power to Inspect

Section 17: SEBI may, either on its own motion or on receipt of a complaint from a beneficial owner or any person concerned, cause an inspection to be made, by one or more inspecting officers, of the books, accounts and other documents of any participant, for any of the following purposes.

Grounds for inspection under Section 17:

Ground	Explanation
(a) Protect investors' interests	Where there is reason to believe that investor interests are being harmed by DP conduct — misuse of demat accounts, incorrect transfers, excessive charges.
(b) Ensure compliance	Verify that the DP is complying with the Depositories Act, SEBI Regulations, and bye-laws.
(c) Investigate complaints	On receipt of a complaint from a beneficial owner or any concerned person — SEBI investigates through inspection.
(d) Any other reason	SEBI's suo motu inspection without a specific complaint — preventive regulation.

The inspecting officer has powers to:

Call for and examine all books, accounts, and documents of the participant.
Examine on oath any partner, director, manager, or employee of the participant.
Make copies of documents and take notes.
The participant MUST cooperate — refusal to allow inspection is a violation attracting penalty.

2. Section 18 — Obligation of Depositories and Participants during Inspection

Section 18: It shall be the duty of every director, manager, partner, member, employee, agent of the depository or participant, to produce before the inspecting officer all such books, accounts, documents and to furnish him with such statements and information in connection with the affairs of the depository or participant, as the inspecting officer may require within such time as the officer may specify.

Section 18 creates a mandatory cooperation obligation — stronger than a mere permission to inspect:

ALL persons associated with the depository/participant have a positive duty to PRODUCE documents and FURNISH information.
Failure to produce documents or furnish information as required is a violation subject to penalty.
False or misleading information provided to an inspecting officer attracts criminal liability under Section 19.

3. Section 19 — Penalty for Failure to Comply with Inspection

Section 19: Any person who fails to comply with the directions of the inspecting officer, or who furnishes false statements, conceals information, or destroys records — shall be liable to penalty.

Specific violations under Section 19:

Failure to produce books/accounts/documents as directed by the inspecting officer.
Furnishing false or misleading statements to the inspecting officer.
Concealing material information relevant to the inspection.
Destroying or tampering with records to obstruct the inspection.

4. Penalties under the Depositories Act — Sections 20–21

Section 20: Any person who contravenes or attempts to contravene or abets the contravention of any provision of this Act or any regulations or bye-laws made thereunder shall be punishable with imprisonment for a term which may extend to ten years, or with fine which may extend to twenty-five crore rupees, or with both.

Section 20 Maximum Penalty: 10 Years Imprisonment + ₹25 Crore Fine — Same as SCRA & SEBI Act

Section 20 is the omnibus criminal penalty provision — covering any contravention, attempt, or abetment. Key features:

Mirrors the penalty structure under SCRA Section 23(1) and SEBI Act Section 24.
Covers ALL violations of the Depositories Act, regulations, and bye-laws.
'Attempt' and 'abetment' are separate offences — the circle of liability is wide.
Cognizance of offences: as with the SEBI Act, only SEBI-authorised person can file complaint.

5. Civil Penalties under SEBI Act applicable to Depositories

In addition to Section 20 of the Depositories Act, SEBI can impose civil penalties under the SEBI Act for violations by depositories and DPs:

SEBI Act Section	Violation by Depository/DP	Penalty
15A	Failure to furnish information, returns, or reports to SEBI within specified time	₹1 lakh/day + ₹1 crore ceiling
15B	Failure to enter into agreements with clients (DP-BO agreements)	₹1 lakh/day + ₹1 crore ceiling
15C	Failure to redress investor grievances within prescribed time	₹1 lakh/day + ₹1 crore ceiling
15HB	Any other SEBI Act/regulation contravention not specifically covered	Up to ₹1 crore

6. Section 21 — Offences by Companies

Section 21: Where an offence under this Act has been committed by a company, every person who at the time of the offence was in charge of and responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence.

Section 21 mirrors SEBI Act Section 26 — creating dual corporate-individual liability for Depositories Act offences. The same two defences are available to the officer: (i) the offence was committed without their knowledge; (ii) they exercised all due diligence to prevent it.

7. Section 22 — Restriction on Cognizance

Section 22: No court shall take cognizance of any offence punishable under this Act except upon a complaint in writing made by the Board or any officer authorised by it in this behalf.

Section 22 mirrors SCRA Section 26 and SEBI Act Section 26A — restricting criminal prosecution to SEBI-authorised complaints only. Private complaints for Depositories Act offences are not maintainable.

8. Inspection vs Investigation — SEBI's Powers Compared

Feature	Inspection (Section 17 Depositories Act)	Investigation (Section 11C SEBI Act)
Target	Depositories and Depository Participants specifically	Any intermediary or person associated with securities market
Trigger	Investor complaint or suo motu or compliance verification	Reasonable grounds of violation or market harm
Officer powers	Call for documents; examine on oath; make copies	Civil court powers under CPC — summon, discovery, examination
Outcome	Inspection report → regulatory action; penalty under Section 20	Investigation report → enforcement action; penalty under SEBI Act
Cooperation obligation	Section 18 — mandatory positive duty to produce documents	Section 11C(7) — mandatory duty to preserve and produce

9. Model Examination Questions

Q1. Describe SEBI's inspection and inquiry powers under the Depositories Act. What are the penalties for contravention?

Inspection Powers & Penalties — Depositories Act

Model Answer — Section 17: SEBI may cause inspection of any participant's books and documents — either suo motu or on investor complaint. Four grounds: investor protection, compliance, complaint investigation, any other reason. The inspecting officer can call for documents, examine persons on oath, and make copies. Section 18: Every person associated with the depository/participant MUST produce documents and furnish information as directed by the inspecting officer — positive duty, not mere permission. Failure is a violation. Section 19: Penalties for failure to comply with inspecting officer's directions, furnishing false statements, concealing information, or destroying records. Section 20: Main criminal penalty — imprisonment up to 10 years + fine up to ₹25 crore (or both) for any contravention, attempt, or abetment of Depositories Act, regulations, or bye-laws. Section 21: Corporate dual liability — company + responsible officers. Defence: no knowledge + due diligence. Section 22: SEBI-authorised complaint only — no private prosecutions. Additionally, SEBI can impose civil penalties under SEBI Act Sections 15A-15C and 15HB for DP/depository violations.

🎯 EXAM POINTERS — Topic 33: Inspection, Inquiry & Penalties

Section 17: SEBI can inspect depository/DP books — suo motu OR on investor complaint.
Section 18: MANDATORY positive duty to PRODUCE documents — not just permit inspection.
Section 19: Penalties for non-cooperation with inspecting officer, false statements, concealment.
Section 20: Omnibus criminal penalty — 10 YEARS + ₹25 CRORE — mirrors SCRA Section 23(1) and SEBI Act Section 24.
Section 20: Covers contravention + ATTEMPT + ABETMENT — all three are separate offences.
Section 21: Corporate dual liability — company + officers. Same defences as SEBI Act Section 26.
Section 22: SEBI-authorised WRITTEN complaint ONLY — no private prosecutions for Depositories Act offences.
Civil penalties under SEBI Act also applicable to DPs: Section 15A (info), 15B (agreements), 15C (grievances), 15HB (catch-all).
Inspection (Sec 17 Depositories Act) vs Investigation (Sec 11C SEBI Act): inspection = DP/depository-specific; investigation = any market participant.
Section 17 inspection is regulatory/compliance; Section 11C investigation is for specific suspected violations.

← Topic 32: Transmission & Nomination | Next → Topic 34: Fungibility & Free Transferability under Depositories Act

Published on The Legal Bridge — Study Notes for SEBI Law Officer, Judiciary Aspirants, AIBE, CLAT & University Exams