ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/s G R MAGNETS 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 G R Magnets Limited (hereinafter referred to as GRML) 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 GRML by the issuance of a notice dated January 05, 2004 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under GRML 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. GRML 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. However, the said notice was returned unacknowledged.
3. Hence another notice dated February 03, 2005 was forwarded to GRML through the Secretary, Kolkata Stock Exchange Association Limited and GRML were advised to appear for the personal hearing before me on February 18, 2005 along with any documentary evidence that they wished to rely upon. It was also made clear to GRML 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 GRML as the recorded address of GRML with the Exchange was at Bihar which was as follows:
“305, Jessore Road, Ground Floor,
Kolkata – 700 048
It was further stated that the trading of the shares of GRML had been suspended due to their non compliance of the provisions of the listing agreement of the Exchange and that the position remained unchanged till date.
4. As the address of GRML in Kolkata was the same address to which the notice dated January 05, 2004 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). From the information provided by them, it was inter alia noted that GRML had entered into tripartite agreements with both the CDSL and NSDL on January 19, 2001 and January 27, 2001 respectively as well as with MCS Limited i.e. their RTA on record. Upon further verification of the said facts with MCS Limited, it was clarified by them that GRML had entered into a tripartite agreement dated December 28, 2000 with CDSL and MCS Limited and another agreement dated January 27, 2001 with NSDL and MCS Limited. MCS Limited however informed that they had not entered into any bipartite agreement with MCS Limited to act as their common share agency for both the physical and demat shares of GRML. Further more they also forwarded the present address of the GRML.
5. In order to grant another opportunity to GRML to make their submissions, another notice of hearing dated February 24, 2005 was sent to the address given by MCS Limited. Vide the said notice GRML 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 GRML 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 notice was returned with the remark “not claimed” .
- Once again, another notice dated March 24, 2005 was sent to GRML through MCS Limited with the request that the same be forwarded to GRML. Vide the said notice GRML were advised to appear for the hearing scheduled on April 12, 2005. However nobody appeared on behalf of GRML on the said date, although MCS Limited confirmed that the said notice was received by GRML on April 11, 2005.
- As observed above, GRML 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 GRML, 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 GRML 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.
15. Further more 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 GRML 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 GRML.
16. In view of the above, MCS Limited were contacted, who confirmed that they had not entered into any bipartite agreement with GRML 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 although MCS Limited had established electronic connectivity with both Depositories prior to coming into effect of the Regulation 53A of the Regulations, they had not appointed any RTA for the purpose of handling the share registry work relating both the physical and the demat shares of their company in terms of Regulation 53A of the Regulations. However, the information provided by MCS Limited was sought to be further clarified from GRML and hence the notice of hearing was issued to them to present their case. However, as stated earlier, while one notice was returned with a remark “not claimed”, the subsequent notice served upon them was received by them although they have failed to attend the present proceedings.
17. Notwithstanding the fact that the latest notice sent to GRML has been received by them, it would also be relevant to discuss the issue as regards presumption of service, in case where a notice is returned as “unclaimed”. The Hon’ble Supreme Court in Civil Appeal No.1015 of 1999 vide its order dated September 29, 1999 in the case of K Baskaran Vs Sankaran, Vaidhyanbala and another was pleased to hold that a notice that has been sent back as “not claimed” by the noticee would be deemed to have been served on the notice, especially where the sender had dispatched the notice by post with the correct address written on it. In the present case, the correct address of GRML was obtained and accordingly the notice was dispatched and as stated above. received by the said entity. However, in the absence of GRML not claiming the said notice, the same would be deemed to have been served on it on the basis of dictum laid down by the Apex Court.
18. 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.
19. In the absence of GRML submitting any information evidencing their appointment of a common agency for the purpose of dealing with both the physical and demat securities of GRML 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.”
20. 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.
21. 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 noted from the information available on the National Stock Exchange Website, although w.e.f. July 26, 2004 GRML has been delisted from the NSE, as on date, the trading of its shares stands suspended in the Kolkatta Stock Exchange and Bombay Stock Exchange.
23. 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 a token penalty is very much necessitated.
24. In view of the fact that it has been established that M/s G R Magnets Limited (GRML) 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 G R Magnets Limited.
25. 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 13, 2005 ADJUDICATING OFFICER