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ORDER UNDER RULE
5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE
ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15C OF THE SEBI ACT, 1992. AGAINST M/s PRUDENTIAL
CAPITAL MARKETS LIMITED 1.
M/S Prudential
Capital Markets Limited (for brevity�s sake hereinafter referred to as PCM) was
incorporated in March 1987 and then became a public limited company in January,
1991. The main objects of PCM inter alia enabled them to act as an investment
trust company, underwrite and sub underwrite, act as financial consultant,
receive and lend money etc. 2.
The Securities and
Exchange Board of India (for brevity�s sake, hereinafter referred to
as the SEBI) received several complaints from
the shareholders of PCM as regards the non redressal of their grievances
relating to debentures, share certificates and dividends. 3.
In view of the
same, SEBI
vide their letter dated April 29, 2003, called upon
PCM to resolve 424 complaints of their investors that were pending as on April,
24, 2003, within 30 days of the said letter failing which appropriate
proceedings under Section 15C of the SEBI Act, 1992 (for
brevity�s sake, hereinafter referred to as the Act) would be initiated against
them. Details of the said complaints were also forwarded
vide the aforesaid letter. However PCM did not reply to the said letter.
Further no action was initiated by PCM as regards resolution of the said
complaints/ grievances before the expiry of the stipulated period. ��������
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING: ��� 4.� Accordingly,
adjudication proceedings were initiated in the first instance by the issuance
of a notice dated August 19, 2003 by
the previously appointed adjudicating officer to PCM under Rule 4 of the SEBI
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer)
Rules, 1995, (Rules) where under PCM was
asked to show cause as to why proceedings should not be initiated against them and why penalty should not be imposed upon them under
Section 15C of the Act. PCM was advised to make their submissions, if any,
along with supporting documents that they wished to rely upon, within 14 days
from the date of the receipt of the notice, and were also advised that in case
they failed to reply within the stipulated period, it would be presumed that
they had no adequate explanations to offer. 5.
As the notice was
returned undelivered, the same was once again served through the Eastern
Regional Office (ERO) SEBI, vide letter dated September. 04, 2003. This time although
the notice was acknowledged on 6.
Thereafter the ERO,
SEBI vide their letter dated 12.02.2004 forwarded a copy of the letter of the OL
dated 11.02.2004, enclosing therein the copy of the Notification and winding up
order of the company by the Calcutta High Court. 7.
In the interim
period, I was appointed as the Adjudicating Officer vide order dated 8.
Accordingly, a notice
of hearing was issued to the OL to appear for the personal hearing on behalf of
PCM on 9.
In reply to the
same, vide notice dated January 27, 2005, the OL was advised that the leave of
the court in terms of Section 446 of Companies Act, 1956, was not needed in the
present adjudication proceedings, keeping in view the provisions of Section 15Y
of the Act. Accordingly, the OL was advised to appear for the hearing scheduled
for �� ������CONSIDERATION OF ISSUES: 10. I have taken
into consideration the facts and circumstances of the case as well as the
submissions made on behalf of PCM by OL regarding the maintainability of the
present proceedings as well as the material available on record. 11. I will first
proceed to deal with the preliminary objection raised by the OL as regards the
maintainability of the present proceedings. 12. The main facts
of the case leading to the initiation of the present ��proceedings are as follows:- PCM had applied to the Reserve Bank of 13. The Hon�ble
Court, vide its order dated July, 11, 2003 passed in CP No. 342/2002 � @
Prudential Capital Markets vs. RBI, ordered the winding up of PCM and the
appointment of an OL. Thereupon PCM was wound up and the OL was appointed as
the liquidator. I have noted that the 14. From the order
of the 15. In this context
Section 446(1) of the Companies Act, 1956 may be referred to which reads as
under � ����� �When
a winding up order has been made or the official liquidator has been appointed
as provisional liquidator, no suit or other legal proceedings shall be
commenced or if pending at the date of winding up order, shall be proceeded
with, against the company, except by leave of the court and subject to such terms
as the court may impose�. ��� �16.� �However in this regard I consider it relevant
to consider the judgment rendered by the Supreme Court in the case of
Damji Valji Shah v. LIC of India passed in CA No. 675 and 677 of 1962, which inter
alia observed as under: �������������
�����Sub-section (1) of Section 446 of the Companies Act provides that
when a winding up order has been made or the Official Liquidator has been
appointed as a Provisional Liquidator, no suit or other legal proceeding shall
be commenced or, if pending at the date of the winding-up order, shall be
proceeded with against the company except by leave of the Court and subject to
such terms as the Court may impose.�
Sub-section (2) provides, inter alia, that the Court which is winding-up
the company shall, notwithstanding anything contained in any law for the time
being in force, have jurisdiction to entertain or dispose of any suit or
proceeding and any claim made by or against the company.� Sub-section (3) provides that any suit or
proceeding by or against the company which is pending in any Court other than
that in which the winding-up is proceeding may, notwithstanding anything
contained in any other law for the time being in force, be transferred to and
disposed of by that Court.� The question
is whether these provisions would affect the proceedings of the Tribunal. �In this connection, reference may be made to
Section 41 of the LIC Act which provides that no civil court shall have
jurisdiction to entertain or adjudicate upon any matter which a Tribunal is
empowered to decide or determine under that Act.� It is not disputed that the Tribunal had
jurisdiction to entertain the application of the Corporation and adjudicate on
the matters raised thereby.� The Tribunal
is given the exclusive jurisdiction over this matter ����. �������������
���. In view of Section 41 of LIC Act, the company court has no
jurisdiction to entertain and adjudicate upon any matter which the Tribunal is
empowered to decide or determine under this Act. It is not disputed that the
Tribunal has jurisdiction under this Act to entertain and decide matters raised
in the petition filed by the Corporation under Section 15 of the LIC Act. It
must follow that the consequential provisions of sub-section (1) of Section 446
of Companies Act will not operate on the proceedings which be pending before
the Tribunal or which may be sought to be commenced before it. Further,
the provisions of the special Act i.e. the LIC act, will override the
provisions of the general Act viz. the Companies Act which is an Act relating
to companies in general.� 17. For a clearer
understanding of the issue, the provisions of Section 41 of LIC Act are
extracted below: �41.No civil court shall have jurisdiction to
entertain or adjudicate upon any matter which a tribunal is empowered to decide
or determine under this Act�. � 18. Similar observations were
also made by the Supreme Court in� CA No.
2536 of 2000 @ Allahabad Bank vs. Canara Bank�
& Ors in which the Hon�ble Court while discussing the issue of
question of leave and control by the Company Court, reiterated the dicta laid
down in the case of Damji Valji Shah v. LIC of India that the
consequential provisions of sub-section (1) of Section 446 of the Companies Act
will not operate on the proceedings which be pending before the Tribunal or
which may be sought to be commenced before it.� (emphasis supplied) 19. Thus the
provisions contained in Section 41 of the LIC Act was held by the apex court,
to exclude the application of section 446(1) or (2) of the Companies Act, inter
alia on the footing that as the Company Court would not be competent to
entertain or transfer to itself and decide matters which are to be decided
exclusively by the Tribunal as per section 41, it is not necessary to obtain
its leave for continuation of any proceeding before the Tribunal. 20. The provisions
of Section 41 of the LIC Act, 1956 are similar to those contained in Section
15Y of the Act, which inter alia provides that no Civil Court shall has the jurisdiction to entertain any suit or
proceeding in respect of any matter which an adjudicating officer appointed
under the SEBI Act, 1992 or Securities Appellate Tribunal constituted under
this Act, is empowered by or under this Act to determine and no injunction
shall be granted by any Court or other authority in respect of any action taken
or to be taken in pursuance of any power conferred by or under this Act.
21. Thus on a
combined reading of section 446 of the Companies Act and Section 15Y of the
SEBI Act, the same logic would also apply to proceedings before the
adjudicating officer, appointed in terms of Section 15 of SEBI Act, 1992, who
would therefore be entitled to proceed ahead with all adjudication proceedings.
Moreover, the present proceedings for which the provisions of Section 15C of
the Act have been invoked, relate to pending investor grievances against PCM
i.e. the issues relating to non receipt of refund orders, allotment advice, non
receipt of dividends, non receipt of shares, non receipt of debentures etc.
Hence the initiation of present proceedings becomes all the more important. 22.I would also
like to state here that various courts in the country including the Apex Court,
through a plethora of judgements, have highlighted the role of an OL to interalia
include the right to institute or defend any suit or �prosecution, or other legal proceedings, civil
or criminal, in the name and on behalf of the company for discharging its
duties including the right to have disputed cases, adjudicated upon. ���� 23. Furthermore, in the present
proceedings, the official liquidator attached to the Calcutta High Court has
been appointed to take charge of the assets of the company and collect the book
debts of the company. Consequently, the statement reflecting the affairs of the
company relating to its assets, its debts and liabilities, the details of the creditors�
alongwith the secured and unsecured debts etc as observed under Section 454 of
Companies Act, 1956 would also be present with the OL. Under those circumstances
the necessity of the OL, appearing on behalf of PCM in the present proceedings
becomes all the more relevant. 24. In view of the
foregoing, keeping in view the provisions of the Section 15Y of SEBI Act, 1992
and the dicta of various apex court judgments cited above, I am of the belief
that this forum does not require the leave of the court to proceed ahead. 25. As regards the
main issue under consideration, I have taken note of the fact that PCM was
informed by SEBI vide their letter dated April,�
29, 2003, that they had yet to resolve 424 complaints of their investors
as on 24.04.2003 and hence called upon them to resolve the same, within 30 days
thereof.� Details of the said complaints
were also forwarded vide the aforesaid letter. 26. I have perused
the contents of the said letter and have noted that the categorization of these
424 complaints was as under:- ��� Type I � �����21��
��� Type II� ������ 5 ��� Type III ���� 94 ��� Type IV �� 284 ��� Type V� ���� 20 ����������������
-------- ��� Total�����
��424 ��������������� ----------- ��������� The
nomenclature of Type I to Type V includes the following types of ���������
complaints:- �������� Type I: non receipt of A.
Refund order/
Allotment Advice B.
Cancelled stock
invest C.
Allotment advice
against encashed stock invest D.
Refund order sent
for revalidation E.
Refund order after
furnishing the required details like application number, bank serial number etc F.
Duplicate refund
order in lieu of original refund order printed in wrong name/ beneficiary and
returned to the company for correction G.
Duplicate refund
order in lieu of original refund order printed for wrong� amount and returned to the company for
correction H.
Duplicate refund
order in lieu of original refund order printed with wrong bank details and
returned to the company for correction I.
Copy of encashed
instruments in misappropriated cases J.
Balance amount
against short refund made� byt eh co. due
to some error K.
Duplicate refund
order against an undertaking/ duly executed indemnity bond sent to the company Type
II: Non receipt of A�� Dividend
on shares ��� Type III : Non receipt of A�� Share
certificate in exchange of allotment letter B� Share
certificate after transfer C� Share
transfer after transmission D� Share
certificates after conversion E�� Share
certificates after endorsement F�� Share
certificates after consolidation G� Share
certificates after splitting H� Bonus
shares I��� Share
certificate against duly executed indemnity bond sent to the company ���� Type IV : Non receipt of A.
Interest on
Debentures B.
Redemption amount of
debentures C.
Debenture
certificate in exchange of allotment letters D.
Debenture
certificate after transfer E.
Debenture
certificates after transmission F.
Debenture
certificate after endorsement G.
Debenture
certificate after consolidation H.
Debenture
certificate after splitting I.
Debenture
certificates against duly executed indemnity bond sent to co. J.
Interest on delayed
payment of interest on debentures K.
Interest on delayed
payment of redemption amount of debentures �������� Type V B������ Non
receipt of letter of offer for Rights D������ Non
receipt of Interest on delayed payment of refund orders. 27. From an
analysis of the complaints pending redressal by PCM, it is apparent that the majority
of the said complaints i.e. 284 out of 424 pertain to Type IV, relating to
debenture related issues i.e. non receipt of interest / redemption amount� or non receipt of debenture certificates in
exchange of allotment letters or after transfer / transmission/ endorsement /
consolidation / splitting etc. to the issue of debentures, while around 94
complaints pertain to Type III relating to share certificates. 28. I have noted
that the complaints relating to debentures (i.e. Type IV) are pending redressal
since May, 1997 onwards, although, some of them were received thereafter. 29. A debenture is
an instrument issued by a company, in the form of certificate of indebtedness,
whereby the company acknowledges its obligations to repay the sum at a
specified rate, with the interest component involved. The said certificate
specifies the date of redemption, repayment of principal and interest on
specified dates as mentioned therein.� 30. From the facts
on record, it appears that PCM had raised the loan capital in the form of
debentures from the investors but did not repay them and did not send the interest
on time or failed to send the debenture certificates due to the investors to be
sent after transfer / transmissions / splitting / endorsement. As brought out
above, the debenture holders are in fact the creditors of a company who have
provided the loan to the company of a specified amount, which is to be repaid
after a due date. However in the present matter, PCM after having raised the
said sums, from their shareholders, failed to the meet the monetary obligations
due to them. These investors have thus suffered monetary losses due to the
failure of PCM to repay their debts. 31. As regards the
other complaints pending against PCM pertaining to the Type III category which
relate to the non receipt of share certificates in exchange of allotment letter
/ or after transfer/ transmission/ conversion/ endorsement / consolidation /
splitting etc, the same have been pending redressal since March, 1997. 32. Transfer of
share certificate does not involve any funds to be incurred by the company except
expenses towards postal charges. On the contrary, it is the investor who is at the
ultimate loss in as much as the non receipt of such share certificates within
the stipulated time frame deprives them of an opportunity to sell the said
shares at an opportune time.� 33. Section 113 of
the Companies Act, 1956, requires every company, within 3 months after the
allotment of shares, debenture or debentures stock and 2 months after the
receipt of application for the registration of transfer of shares, to deliver
the certificates of all the shares, debentures and debentures stocks, allotted
or transferred. 34. Further SEBI vide
its Circular SMD/Policy/ Cir-10/2002 dated 7th May, 2002 had also
advised the stock exchanges to amend their listing agreement to incorporate after
sub-clause (1) of Clause 12A, the new sub clause (1a)� as under:- �The company agrees that in respect of the transfer
of shares where the company has not effected transfer of shares within 1 month
or where the company has failed to communicate to the transferee, any valid
objection to the transfer within the stipulated time period of 1 month, it shall
compensate the aggrieved party for the opportunity losses caused during the
period of the delay. � 35. It is noticed
that despite the aforesaid provisions of the Listing Agreement and the
provisions of the Companies Act, 1956, PCM did not transfer the shares in
favour of their shareholders thereby acting in contravention of the aforesaid
provisions. As noted from the case file, the requests for transfer were pending
even for cases beginning from January 2001. Thus the action of PCM not only violates
the above quoted provisions of law and the Listing Agreement but also amounts
to prejudicially affecting the interest of the investors who have been deprived
of the opportunity to sell their shares at an opportune time.� 36.� I have noted that there are certain other
pending complaints as on date: i.e. 21 complaints which pertain to Type 1 and relate
to the issue of non receipt of refund orders, allotment advice etc. while 5 complaints
pertain to Type II and relate to non payment of dividend. The 20 remaining
complaints pertain to Type V and are miscellaneous in nature. �37. Taking into consideration these facts, PCM
was advised by SEBI vide its letter dated 38.� Any evasion of the regulatory
provisions issued by the regulator in the interests of the investors or non
adherence to the same for any reason whatsoever is bound to affect the
interests of such investors. Although such a loss cannot be specifically
computed in monetary terms, the fact remains that all regulatory provisions
have a specific purpose behind their enactment.�
The very purpose of enacting any legislation is due adherence to the
procedures laid down there under to ensure the sound and smooth functioning of
the capital market. If no cognizance were to be taken of any breach of these
provisions and no liability fixed there upon, the entire purpose of
incorporating the provisions in the said enactments would become redundant. 39.� ��Section 15C of SEBI Act, 1992 in this regard reads
as under:- �If any listed company or any person who is
registered as an intermediary, �after
having been called by the Board in writing, to redress the grievances of
investors, fails to redress such grievances within the time specified by the
Board, such company or intermediary shall be liable to a penalty of one lakh
rupees for each day during which such failure continues or one crore rupees,
whichever is less.� ������� �40. In view of the above, it is clearly
established that PCM has failed to comply with the provisions of Section 15C of
the Act. Consequently, they would be liable for such penalty as I think fit to
impose in accordance with the provisions quoted above. 41. However, while
adjudging the
quantum of penalty to be levied, it would also be necessary to consider the following
factors as provided in the section 15J of the Act, which also
find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and
imposing penalty by the Adjudicating Officer) Rules, 1995, i.e., the amount of
disproportionate gain or unfair advantage, wherever quantifiable, made as a
result of the default; the amount of loss caused to an investor or group of
investors as a result of the default and the repetitive nature of the default. 42. As regards the
disproportionate gain or unfair advantage there are no quantifiable figures
available on record with respect to the default of the company. Although the
said default is bound to have caused an unquantifiable loss to the investor
class as a whole in as much as the complaints are pending since 1997, much
before PCM was wound up pursuant to the order of the Calcutta High Court, there
are however, no figures or data available on record viz, details of the amount of
interest, the principal amount due to the debenture holders, the stake of the
equity holders etc; to quantify the amount of loss caused to an investor or
group of investors as a result of the default. What is however, most apparent
is the failure
on the part of PCM to heed the requests of the investors to resolve their
complaints is, a large extent, indicative of the manner in which PCM was
functioning. Moreover the complaints of the investors remain unresolved till
date and that the default of PCM is continuing till date. �43.�� However, I am cognizant of
the financial state of PCM, as is evident from the fact that PCM stands wound
up as on date and the provisional liquidator of the Calcutta High Court has
been appointed as the OL to take charge of the remaining assets of the company,
including discharge of its debts. Moreover the OL has also brought to my
attention the fact that there are insufficient funds to invite claims from the
creditors or repay their creditors. However, the losses suffered by the
investor cannot be ignored at the same time. 44.�� Hence on a judicious exercise of the
discretion conferred upon me, bearing in mind the factors enumerated above as
well as after taking into consideration the facts and circumstances of the
present case as well as after analyzing all the material available on record,
the mitigating factors, i.e., the financial status of the company, I am
inclined to hold that although the penalty to be imposed upon PCM, need not be
imposed in terms of the quantum specified in Section 15C of the Act, the
imposition of a penalty is very much necessitated. ������� ��������� �ORDER: 45.
�In view
of the clear violation of section 15C of the SEBI Act, 1992, and the gravity of
the charges established against PCM, in exercise of the powers conferred upon
me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty
by the Adjudicating Officer) Rules, 1995, and in the interest of justice,
equity and good conscience, I think it appropriate to levy a penalty of Rs. 10,
00,000/-(Rupees ten lakhs only) on M/s
Prudential Capital Markets Ltd for their failure to redress the grievances of
the investors within the time specified by SEBI, which default is in fact
continuing till date. The said penalty shall be payable by the Official
Liquidator appointed by the Calcutta High Court, from the reserves of M/s
Prudential Capital Markets Ltd. ��� 46. The
penalty amount shall be paid within a period of 45 days from the date of
receipt of this order through a cross demand draft drawn in favour of �SEBI-
Penalties remittable to the Government of India� and payable at Mumbai which
may be sent to Shri. Shri Sujit Prasad, Deputy General Manager,
Securities and Exchange Board of India, Exchange Plaza, IVth Floor, Bandra
Kurla Complex, Bandra E, Mumbai 4000 51. � ������ PLACE: MUMBAI��������������������� ������ ����G. BABITA RAYUDU
��� DATE:
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