ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST M/s DSJ COMMUNICATIONS LTD
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 DSJ Communications Limited (hereinafter referred to as DSJ in the matter of their failure to appoint a common share agency for handling share registry work both for the dematerialised and physical securities.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2. Adjudicating proceedings were initiated in the first instance against DSJ 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 DSJ 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. DSJ 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. However the said notice was returned undelivered. Hence another notice dated August 9, 2004 was sent to DSJ. Once again the notice was returned undelivered with the remark ‘left”.
4. Keeping in mind the principles of natural justice, another notice of hearing dated February 3, 2005 was sent to DSJ and vide the said notice, DSJ was advised to attend the hearing proceedings to be held on February 18, 2005. DSJ 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 Director, DSJ vide their letter dated February 17, 2005 stated that they were authorizing Mr. Ratish Tagde, Practising Company Secretary to appear on their behalf on the scheduled date of hearing. On the said date, Mr Tagde along with Ms. Seema Batwalkar, Associate Company Secretary, appeared on behalf of DSJ and sought for an adjournment of the hearing proceedings for one week in order to obtain important documents related to the said proceedings. Accordingly the case was adjourned to March 03, 2005. On the said date, Shri Tagde advanced his submissions which are summarized as under:
i. Due to several financial setbacks, the operations of DSJ were closed as on date.
ii. In fact, due to the erosion of its net-worth, DSJ had made a reference to the BIFR which was however rejected.
iii. Subsequently, DSJ had filed an appeal before AAIFR which is pending as on date.
iv. DSJ is trying to revive its operations despite being referred to the AAIFR.
v. DSJ had earlier appointed M/s IIT Corporate Services Ltd., as their RTA and STA and also entered into tripartite agreements with both CDSL and NSDL.
vi. DSJ was in the process of appointing M/s Sharex Dynamic Shares Pvt. Ltd. as its new Share Transfer Agents to handle both demat as well as physical share registry work, after DSJ had settled the outstanding payments with the former RTA on record which had issued its NOC in this regard.
vii. Notwithstanding these set backs, DSJ had continued to maintain the electronic connectivity that was established with both the depositories way back in the year 2000.
viii. Copies of the tripartite agreements entered into with both the CDSL and NSDL were submitted.
6. On the said basis, Shri Tagde requested additional time upto March 07, 2005 to submit the documents to substantiate the contentions made by him in this regard. Shri Tagde further agreed that as on date they did not have a common share agency, although they had entered into separate tripartite agreements with NSDL and CSDL in the year 2000 and had continued to maintain electronic continuity with both the depositories till date.
7. Subsequently, vide letter dated March 10, 2005, Mr. Tagde requested for additional time upto March 14, 2005 in order to submit the relevant documents. Thereafter, DSJ forwarded the following documents to be taken on record, for consideration of the case:
i. Copy of the tripartite agreement between IIT Corporate Services Ltd., DSJ and NSDL/CDSL dated September 21, 2000.
ii. Bipartite agreement between DSJ and IIT Corporate Services Ltd. dated January 11, 2000.
iii. Agreement dated February 01, 2005 appointing Sharex Dynamic (India) Pvt. Ltd. as a new common agency for undertaking the share registry work.
iv. Letter dated January 25, 2005 of DSJ settling outstanding dues with IIT Corporate Services Ltd.
v. No objection certificate dated January 25, 2005 issued by IIT Corporate Services Ltd. in favour of Sharex Dynamic (India) Pvt.Ltd.
vi. Copy of the letter January 18, 2005 issued by the Appellate Authority for AAIFR.
On the basis of the above, it is requested that a lenient view be taken while adjudicating the case on record.
CONSIDERATION OF ISSUES:
8. I have taken into consideration the facts and circumstances of the case, the material available on record, the submissions advanced on behalf of DSJ as also the relevant regulatory provisions.
9. 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.”
10. 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.
11. 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.
12. 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).
13. Thus Regulation 53A of the Regulations is an important measure brought about by SEBI for the benefit of the investors.
14. From the facts earlier mentioned and on the basis of the documents submitted on behalf of DSJ, it is clear that only after granting several opportunities to DSJ did the company’s authorized representative appear before me to present their case. Be that as it may, from the contentions raised by Mr. Tagde, it appears that the company had made a reference, registered as Case No.315/98, to the BIFR for being declared as a sick unit. However, the said reference was rejected by the BIFR vide its order dated September 26, 2002, against which DSJ preferred an appeal before the AAIFR that was registered as Appeal No.369/02 which appears to have been posted for hearing on April 14, 2005. In support of the contentions advanced by them, as regards their financial status, DSJ has submitted copy of the document evidencing the pendency of the Appeal No.369/02 filed before the AAIFR against the order of the BIFR rejecting their reference filed under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.
15. DSJ on their part have contended that keeping aside their financial difficulties, they initially did make attempts in complying with the provisions of 53A of the Regulations in the year 2000 itself by entering into a bipartite agreement with the RTA; M/s IIT Corporate Services Ltd. to handle the share registry work relating to all the shares of the company which had been dematerialized. Further more they also entered into tripartite agreements, with both the CDSL and the NSDL vide agreements both dated September 21, 2000. However, due to their financial difficulties as mentioned above and the operational problems, DSJ was unable to pay their fees to the RTA which had therefore discontinued their services a couple of years later.
16. Consequently, there was no RTA on the records of the company for atleast three to four years to handle the share registry work, although the electronic connectivity established with both the depositories i.e., NSDL and CDSL continues till date.
17. However, DSJ has contended that they have now appointed a common share agency to handle the share registry work relating to both physical and demat shares of the company and as proof of the said contention, have submitted a copy of the agreement dated February 01, 2005 entered into with their new RTA i.e., Sharex Dynamic (India) Pvt Ltd. DSJ have also submitted documents evidencing their having cleared their dues with the previous RTA on record and have also obtained an NOC from the said RTA in favour of the new RTA which undertakes their commitment to provide the share registry services to DSJ till such time the data base and electronic connectivity is shifted to the new RTA by both the CDSL and the NSDL.
18. I have also examined the copies of the tripartite agreements entered into with both the depositories that is dated September 21, 2000, i.e., prior to the date when the Regulations came into effect, as proof of their contentions made earlier.
19. Notwithstanding the contentions advanced as regards the financial viability of the company, the fact remains that DSJ admittedly did not have a common share agency for a few years and hence did not comply with the provisions of Regulation 53A of SEBI (DP) Regulations, 1996, 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 in as much as consequent to their previous RTA on record having discontinued their services to DSJ, the said company did not have, till February 01, 2005, a common share agency as envisaged under the provisions of the Regulations.
20. 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.
21. 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.”
22. 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.
23. 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. However from the facts earlier mentioned, it does appear as if DSJ has now appointed common share agency to handle their share registry work relating to both physical and demat shares of the company.
24. 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 analysing the facts and circumstances of the present case, in the context of the mitigating factors, if any, I am inclined to hold that since DSJ did not have a common share agency for a considerable period in between and have now only appointed a common share agency on February 01, 2005, 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.
25. However, 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.10,000/-(Rupees Ten thousand only) on M/s DSJ Communications Ltd, for their failure, prior to the above referred to period, 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.
26. 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 07, 2005 ADJUDICATING OFFICER