ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/s EASTERN SUGAR & INDUSTRIES 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 Eastern Sugar & Industries Limited (hereinafter referred to as ESIL) in the matter of their failure to appoint a common share agency for handling share registry work, both for their dematerialised and physical securities.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2. Adjudicating proceedings were initiated against ESIL by the issuance of a 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 ESIL 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. ESIL 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. Even though the notice was acknowledged, ESIL did not reply to the same.
3. In view of the above, a notice of hearing dated June 10, 2004, in terms of Rule 5(1) of the Rules, 2004 was sent to ESIL and vide the said notice, ESIL was advised to attend the hearing proceedings to be held on July 20, 2004 and submit the documentary proof if any, in support of their compliance with Regulation 53A of the said Regulations. However, the said notice was return undelivered by the postal authorities with a remark “office closed”. In view of the same, another notice dated February 03, 2005 was forwarded to ESIL through the Secretary, Kolkata Stock Exchange Association Limited wherein ESIL were advised to appear for the personal hearing on February 18, 2005 along with any documentary evidence that they wished to rely upon. It was also made clear to ESIL that in case they failed to appear for the said proceedings, the matter would be decided solely on the basis of the material available on record. However, the Secretary, Kolkata Stock Exchange Association Limited vide their letter dated February 10, 2005 intimated that the said letter could not be delivered to ESIL as the recorded address of ESIL with the Exchange was at Bihar which was as follows:
“Hanuman Sugar Mills, Motihari,
East Champaran, Bihar – 845 401
4. It was further stated that the trading of the shares of ESIL had been suspended due to the non compliance of the provisions of the listing agreement of the Exchange and that the position remained unchanged till date.
5. As the address of ESIL in Bihar was the same address to which the notice dated December 31, 2003 was sent, additional information as regards the said company was sought from both the Central Depositories Services Limited (CDSL) and National Securities Depositories Ltd (NSDL). On the basis of the information provided by them, it was inter alia noted that ESIL had entered into tripartite agreement with both the CDSL and NSDL dated September 15, 2000 and August 18, 2000 respectively as well as with MCS Limited ie., their RTA on record. Upon further verification of the said facts with MCS Limited, it was clarified that they had entered into tripartite agreement dated August 18, 2000 with NSDL and ESIL and another tripartite agreement dated August 24, 2000 with CDSL and ESIL. MCS Limited further informed that they had entered into a bipartite agreement with ESIL only on February 01, 2005 to act as their common share agency for both the physical and demat shares of ESIL. Further more they also forwarded the present address of the ESIL.
6. Accordingly, in order to grant a final opportunity to ESIL to make their submissions, another notice of hearing dated February 24, 2005 was sent to them wherein ESIL were advised to appear before me on March 28, 2005 and also submit the documentary proof, if any in support of their contentions. It was also made clear to ESIL that in case they failed to appear for the said proceedings, the matter would be decided solely on the basis of the material available on record. However, although the said notice was acknowledged, nobody appeared on behalf from ESIL on the schedule date.
7. As observed above, ESIL were granted sufficient opportunities to appear before me and present their case. Despite the same, they failed to avail the said opportunities.
CONSIDERATION OF ISSUES:
8. In the absence to any representation from ESIL, the matter is proceeded with on the basis of the facts and circumstances of the case, the material available on record 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 to handle the share registry work relating to both the physical and demat shares of the company either in house or through a SEBI registered RTA.
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, it is clear that despite granting ESIL sufficient opportunities to appear in person and present their case, they not only failed to participate in the present proceedings or respond to any of the notices sent to them but also failed to provide any proof of their compliance of Regulation 53A of the Regulations. Till date no document has been furnished by them evidencing compliance of the Regulations and no information is forthcoming from their end as regards the possibility of them having actually started functioning as a common share agency for both their physical and demat securities or appointing any common agency for the said purpose in terms of the provisions of Regulation 53A of the Regulations.
15. As stated earlier, in order to obtain the relevant information in this regard, both the CDSL and NSDL were contacted. On the basis of the information received from them, it was noted that although ESIL had established electronic connectivity with both the depositories to enable the shareholders to dematerialize their shares much before Regulation 53A of the Regulations was made effective, i.e., on September 02, 2003, and in this regard had entered into tripartite agreements with NSDL and CDSL and MCS Limited (RTA) for the said purpose and the same was also evident from the information available in the websites of both the depositories (NSDL & CDSL), there was no information as regards the appointment of any common share agency by ESIL.
16. In view of the above, MCS Limited were contacted who then provided the information that they had entered into an agreement for three years with ESIL dated February 01, 2005 to handle the share registry work relating to the physical shares of their company. On the basis of the above, it could be presumed that MCS Limited was appointed by ESIL to handle the share registry work relating to the demat shares of the company prior to coming into effect of the Regulation 53A of the Regulations, but had entered into a bipartite agreement with ESIL only on February 01, 2005 for the purpose of handling the share registry work relating to the physical shares of the company. That is to say MCS Limited had been appointed as common share agency of ESIL in terms of Regulation 53A of the Regulations only on February 01, 2005 to handle the share registry work relating to both the physical and demat shares of the company ie., much after the coming into effect of the said Regulation. However, this is only a presumption that was sought to be further clarified from ESIL and hence the notice of hearing was issued to them to present their case. However, as stated earlier, although ESIL acknowledged the said notice, they did not appear the hearing on the scheduled date.
17. 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.
18. In the absence of ESIL submitting any information evidencing their appointment of a common agency for the purpose of dealing with both the physical and demat securities of ESIL as required to be done in terms of the provisions of Regulation 53A of the Regulations, their violation of Regulation 53A of the Regulations stands established and hence 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:
“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.”
19. 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.
20. 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, the said default which is bound to have caused an unquantifiable loss to the investor class as a whole is continuing till date. Further more as per the information provided by the Exchange, the shares of ESIL has been suspended due to the company not complying with the provisions of the Listing Agreement of the Exchange.
21. 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 and after analysing all the material available on record, the rationale behind the requirement of the appointment of a common share agency, and the refusal of the company to respond to regulatory directives, I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of penalty is very much necessitated.
22. In view of the fact that it has been established that M/s Eastern Sugar and Industries Limited (ESIL) have not complied with the provisions of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 by failing to appoint a common share agency for their demat and physical shares, I 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, in the interest of justice, equity and good conscience, think it appropriate to levy a penalty of Rs. 75,000/-(Rupees seventy five thousand only) on M/s Eastern Sugars and Industries Limited.
23. 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 06, 2005 ADJUDICATING OFFICER