ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST M/s. CORE HEALTHCARE LIMITED
BACKGROUND:
1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated September 30, 2004 to enquire into and adjudge the alleged contravention of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 (for brevity’s sake referred to as the Regulations) read with Section 15HB of the SEBI Act, 1992 (hereinafter referred to as the Act) by M/s Core Healthcare Limited (hereinafter referred to as CHL in the matter of their failure to appoint a common share agency for handling share registry work both for the dematerialized and physical securities.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2. Adjudicating proceedings were initiated in the first instance against CHL by the issuance of a show cause notice dated December 31, 2003 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under CHL was asked to show cause as to why enquiry proceedings should not be held against them for the alleged violation of the provisions of Regulation 53A of the Regulations and as to why penalty should not be imposed upon them under section 15HB of the Act. CHL 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.
3. Even though the said notice was received by CHL, they did not respond to the said notice.
4. In view of the same, a notice of hearing dated June 10, 2004 was sent to CHL and vide the said notice, CHL was advised to attend the hearing proceedings to be held on July 19, 2004. However, nobody appeared on behalf of CHL on the scheduled date. Keeping in mind the principles of justice, another notice dated October 14, 2004 was sent to CHL and vide the said notice, they were advised to appear for the hearing proceedings to be held on November 18, 2004. CHL was further advised to note that in case they failed to appear for the said proceedings, the matter will be proceeded on the material available on record.
5. In reply to the same, the Company Secretary, CHL vide their letter dated November 09, 2004 stated that CHL had already informed SEBi vide letter dated June 26, 2004 that as it was a sick company and had been referred to the BIFR, they were facing severe financial problems. It was further stated that the shares of CHL are listed on the Mumbai, Ahmebadad and National Stcok Exchanges and very few transactions were taking place as regards the trading of the equity shares of the company in a demat form. While enclosing the copy of the said letter, the details of transactions in physical form for the last three years were also forwarded.
6. Further more, it was requested that the case be adjourned for hearing to the last week of December 2004. Accordingly, the case was adjourned to December 27, 2004 for hearing. However, CHL vide their letter dated December 20, 2004 once again requested for an adjournment for a period of one month on the ground that the 17th Annual General Meeting was likely to be held on December 28, 2004 during which the presence of the Company Secretary would be required. As proof of the said contention, a copy of the 17th Annual Report including the notice of the 17th AGM was also forwarded.
7. In view of the submissions made by CHL, a notice dated February 9, 2005 was sent to CHL with the advise to appear for hearing scheduled on March 01, 2005. CHL was further advised to note that no further extention would be granted that in case they failed to appear for the said proceedings, the matter would be proceeded based on the material available on record.
8. In reply to the said notice, the Company Secretary CHL vide their letter dated February 15, 2005 stated that he had attended adjudicating proceedings in the matter of investor complaints, before another Adjudicating Officer on January 25, 2005 and 10th February 2005. It was further stated that they had complied with all the queries of the investors and had submitted the same to SEBI vide their letter dated 10. February 2005. A copy of which was enclosed for perusal). On the said basis, it was requested that they be exempted from the personal hearing scheduled on 1st March 2005.
9. There after a notice dated February 22, 2005 was sent to CHL where in they were advised to note that the proceedings already attended by them was on account of adjudication proceedings initiated against them for their failure to redress the grievances of the investors making them liable under section 15C of the SEBI Act, while the present proceedings were on account of their non compliance of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996. In view of the above, CHL was advised to attend the hearing on March 21, 2005.
10. On the said date, Mr Kamlesh Shah, Company Secretary appeared before me and while reiterating the submissions advanced on behalf of CHL earlier, further submitted as follows:
i. As the financial status of the company had worsened from 1999-2000 onwards, they had made the reference to the BIFR on 19th January 2004.
ii. The transfer of the physical shares of CHL was being done in house while MCS Limited was appointed by them as their RTA for the transfer of the dematerlised shares of the company.
iii. 28 – 29% of the shares of the CHL are in the demat form while 22% are in the physical form. The balance shares that are also in the physical form, remain with the promoters.
iv. CHL receives around 20-25 share transfer request for the shares held in the physical form that are attended to in house.
v. As CHL was facing financial difficulties, they would have to incur an additional expenditure of around Rs.25,000/- per month to appoint a common share agency as required under said Regulations.
11. On the basis of the above, it is requested that they additional time be granted to them up to March 28, 2005 to submit the documents to substantiate their contentions and on the basis of which, a lenient view be taken while adjudicating the case on record.
12. As undertaken by CHL, vide their letter dated March 23, 2005, CHL forwarded the copies of the tripartite agreement entered into with National Securities Depositories Limited and Central Depositories Securities Limited (NSDL and CDSL respectively) as well as the copy of the reference made to the BIFR.
CONSIDERATION OF ISSUES:
13. I have taken into consideration the facts and circumstances of the case, the material available on record, the submissions advanced on behalf of CHL as also the relevant regulatory provisions.
14. Regulation 53A of the Regulations which came into force on September 02, 2003 reads as under:
“All matters relating to the transfer of securities, maintenance of records of holders of securities, handling of physical securities and establishing connectivity with the depositories shall be handled and maintained at a single point i.e. either in-house by the issuer or by a Share Transfer Agent registered with the Board.”
15. In view of the above, it is imperative for all issuer companies to appoint a common agency either in house or through a SEBI registered RTA for the share registry work relating to physical and demat shares of the company.
16. The object of the appointment of the common share agency as is evident from the SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, which required all issuer companies to appoint a common agency for handling all share registry work is to avoid:
a) any delay in dematerialization, and
b) Non-reconciliation of the share holding due to lack of proper co-ordination among the concerned agencies or departments, which was adversely affecting the interest of the investors.
17. Hence before the admission of any security into the depository system, it is necessary for the issuer company to establish electronic connectivity with both the depositories either directly or through a Registrar and Transfer Agent (RTA).
18. Thus Regulation 53A of the Regulations is an important measure brought about by SEBI for the benefit of the investors.
19. From the facts earlier mentioned and on the basis of the documents submitted on behalf of CHL, it is clear that only after granting several opportunities to CHL, did the company’s authorized representative appear before me to present their case. Be that as it may, from the contentions raised by Mr. Kamlesh Shah, it appears that the company had made a reference i.e., case No.32/2004 to the BIFR for being declared as a sick unit. The reference is pending and yet to be decided. CHL on their part have further contended that they are unable to comply with the provisions of Regulation 53A of the Regulations due to their financial difficulties in that the appointment of a common share agency would involve an additional expenditure of Rs.25000/- which they could ill afford.
20. On the basis of the submissions made on behalf of CHL, I have noted that for the 28-29% of the shares of CHL which remain in the demat form, CHL appointed MCS Limited as their RTA to handle the share registry work relating to the said shares. As regarding the balance shares of the company which are in the physical form, most of which remain with the promoters, the share transfer requests are attended to in house.
21. CHL have contended that despite their financial problems, they had established electronic connectivity and entered into tripartite agreements with both the CDSL and NSDL dated March 30, 2000 and March 31, 2001 respectively and as proof of the said contention, have submitted a copy of the said agreement dated 30th March 2000 entered into with CDSL and MCS Limited and also a copy of the agreement dated March 31, 2001 with NSDL and MCS Limited.
22. I have examined the copies of the tripartite agreements which were entered into with both the depositories prior to the date when the Regulations came into effect. In support of the contentions advanced by them, as regards their financial status, CHL has submitted a copy of the letter dated 19th January 2004, issued by the Registrar, BIFR stating that the reference has been registered as case No.32/2004.
23. Thus from the facts above stated, it appears that CHL does not have a common share agency to handle the share registry work relating to both the physical and demat shares of the company. Admittedly, around 20-25 share transfer requests for the physical shares of the company are received which are attended to by CHL.
24. Even though CHL has raised several issues as regards the financial viability of the company, the fact remains that no action has been taken by the BIFR on the reference made to it. Further more CHL has not provided any further information as regards the status of the said reference as on date.
25. Notwithstanding the above, the fact remains that due to the failure on the part of CHL not to have a common share agency, there has been non compliance by them of the provisions of Regulation 53A of the Regulations, which clearly mandates the appointment of a common share agency, effective from September 02, 2003 for both the physical and the demat shares for the purposes envisaged in the Regulations.
26. Any non adherence to the regulatory provisions issued by the regulator in the interests of the investors 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.
27. From the facts mentioned above, it is clear that CHL have not appointed a common share agency as envisaged under the said Regulations. Hence their violation of Regulation 53A of the Regulations stands established and consequently they are liable for the non compliance of Regulation 53A of the Regulations in terms of the provisions of 15HB of the Act, which reads as under:
28 Section 15HB reads as under:
“Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”
29. To determine the quantum of penalty, I have considered 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.
30. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the company. There are also no figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. More over, from the facts earlier mentioned, it is clear that the default is continuing as on date.
31. Hence, on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated in Section 15J of the Act, as well as after taking into consideration the facts and circumstances of the present case, as well as after analysing all the material available on record, the mitigating factors, if any, I am inclined to hold that since CHL has not appointed a common share agency, although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a token penalty is very much necessitated.
32. In view of the foregoing, 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.50,000/-(Rupees Fifty Thousand only) on M/s Core Healthcare Ltd. for their failure to have appointed a common share agency to handle the share registry work relating to the dematerialized and physical shares as required under Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996.
33. 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 V S Sundaresan, Deputy General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: APRIL 11, 2005 ADJUDICATING OFFICER