ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES
AGAINST M/s CORE EMBALLAGE LIMITED.
BACKGROUND:
1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated November 2, 2005 to enquire into and adjudge the alleged contravention of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 read with Section 15HB of the SEBI Act, 1992 (for brevity’s sake, hereinafter referred to as the Regulations and Act respectively) by M/s Core Emballage Limited (hereinafter referred to as CEL) in the matter of their failure to appoint a common share agency for handling their share registry work both for the dematerialised and physical securities.
NOTICE/ REPLY/ PERSONAL HEARING:
2. In view of the same, a notice dated February 20, 2006, was issued to CEL in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) in terms of which CEL was advised 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. CEL 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. In response to the said notice, CEL vide their letter dated March 1, 2006, inter-alia made the following submissions: -
a) They had already corresponded extensively with SEBI seeking exemption from the appointment of a common agency for the following reasons: -
1. They had established connectivity with both the National Securities Depository Limited (NSDL) and Central Depository Services (Inda) Limited (CDSL) and had appointed MCS Ltd, Ahmedabad as their R & T agent for the demateriazation of the shares of the company and were negotiating the price for transferring the shares of their company as the price quoted to them was too high.
2. They were a sick company and had made a reference to the Board for Industrial and Financial Reconstruction (BIFR).
3. By assigning the work relating to transfer of the physical shares of the company, they would be incurring additional expense and would also have idle staff on their hands.
b) As on December 31,2005, as per their records, 32.95% of their equity shares had been dematerialized and 57.98% of the shares were being held by the promoters of the company. That meant that only around 9.07% remained in the physical form, out of which some shares may be traded through physical form.
c) Since the introduction of the common agency rules, they had hardly received any complaints from their shareholders in respect of the transfer and dematerialization of shares. Of the total number of 39 complaints received by them from December, 21, 2004 to December 31, 2005, they had hardly received any complaints in respect to share transfers, while the complaints with regard to demat were only 23 while 16 complaints of another nature were received by them.
d) They had a well-established infrastructure for transfer of shares including the latest software and had qualified and competent employees having experience of more than 8 years who looked after the transfer and dematarialisation of shares.
e) They were providing better service to their shareholders in respect of transfer and dematerisation of shares than the R&T agents and in fact were quite dissatisfied by the service provided by MCS Limited to them.
f) Since the last 3 to 4 years, NSDL and CDSL were not granting connectivity to the companies whose net worth has been eroded more than 50%.
g) Appointment of a common agency would involve an additional expenditure of Rs 40,000 to Rs 50,000 per annum, which they could not afford.
In view of the above, CEL requested that they be exempted from the mandate to appoint a common share agency and no penalty be levied upon them.
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4. Thereafter, a notice of hearing dated March 8, 2006 was sent by registered post to CEL in terms of Rule 5(1) of the Rules whereunder, CEL was advised to attend the hearing proceedings to be held on March 24, 2006 and also to submit the documentary proof if any, in support of their contentions at the time of the hearing. On the said date, Shri Niraj Trivedi, Practicing Company Secretary and Shri Anand Padh, Executive, Secretarial and Legal appeared on behalf of CEL and while reiterating the submissions made earlier, made the following additional submissions :-
a. In view of their having established electronic connectivity with both the depositories and having appointed a R & T agent to handle the demat work, the entire purpose of Regulation 53A of the Regulations had been fulfilled by them.
b. In respect of the 9% of the shares of CEL remaining with the public, only 200 requests were made in a year for transfer of shares.
c. No investor complaints were made against them.
d. CEL had made a reference to the BIFR on April 26, 2003 and their case was registered as Case No.227/2003.
e. As per the one time settlement (OTS) with Financial institutions and banks i.e. ICICI Bank and South Indian Bank, the amount saved under OTS was considered as profit to the company. As a result their networth became positive and subsequently the company requested BIFR to remove the company as sick company. Accordingly, BIFR passed an order stating that the company does not qualify as a sick company within the purview of SICA.
f. Notwithstanding the same, CEL was presently running in losses.
5. Thereafter under cover of their letter dated March 23,2006, the representatives of CEL forwarded the certified true copy of the Balance Sheet of CEL for the last three years (i.e. 2002-2003, 2003-2004 and 2004-2005), copies of the tripatite agreements entered into with NSDL and CDSL respectively and the copy of the activation letter for demat of securities as also the certified true copy of the order dated 13-12-2005 passed by the BIFR for discharging the company from the purview of Section 3(1)(O) of SICA, as proof of the contentions earlier advanced by them.
CONSIDERATION OF ISSUES:
6. I have taken into consideration; the facts and circumstances of the case, the material available on record, and the submissions advanced on behalf of CEL as also the relevant regulatory provisions.
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.”
7. 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 physical and demat shares of the company, either in house or through a SEBI registered RTA.
8. Thus the provisions of Regulation 53A of the Regulations would be applicable only to that company whose shares have been dematerialized or to those companies whose shares are both in the physical and demat mode.
9. In such a case, before the admission of any security into the depository system, it would be necessary for the issuer company to establish electronic connectivity with both the depositories either directly or through a Registrar and Transfer Agent (RTA).
10. 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.
11. I have also perused the circular issued by SEBI bearing no.FITTC/DC/ Policy-Cir-01/2001 dated August 03, 2001 which advises all companies to establish connectivity with both the depositories on or before September 30, 2001 so as to facilitate compulsory trading in rolling settlement effective from January 2, 2002. In terms therein, all stock exchanges have been advised to submit a compliance report to SEBI by October 15, 2001.
12. Subsequently SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001 had brought out the list of all the scrips that had established connectivity with the depositories. In terms of the said circular, the shares of the companies which have not established connectivity with the both depositories as on October 31, 2001 are to be traded on the ‘Trade for Trade’ settlement mode and not on the normal rolling settlement.
13. Thus on date, there are companies that have not yet dematerialized their shares and instead have continued to retain their shares in a physical mode and the transfers, maintenance of record of the holders of securities and handling of the said physical securities in such cases is continued to be done in-house or through a share transfer agent.
14. In the present case, it appears that CEL have established connectivity with both the depositories in the year 2000 itself to facilitate dematerialization of their shares, although admittedly, all the shares of CEL have not been dematerialized. It is noted that about 32% of their shares are in demat form and the remaining 68% continue to remain in the physical mode, of which around 57.98% of the shares are held by the promoters of the company and 9.07% of the shareholding remains in the physical form.
15. In this regard CEL have contended that they receive only around 200 requests per year for transfer of the shares in the physical shares which is handled in house and that they have appointed M/s MCS Limited as their RTA only for the transfer of the demat shares of the company. It is also their contention that the service rendered by MCS is far from satisfactory. Notwithstanding the same, it is a matter of record that CEL have failed to appoint a common share agency to handle the share registry work of both the physical and demat shares of the company, which is not in terms of the objective of Section 53A of the Regulations as brought out earlier.
16. CEL have however contended that incurring an expenditure of around Rs 50,000 for the appointment of the common agency for the transfer of the physical shares of the company which constitute only 9.07% of the shareholding of CEL would not be in order especially when they are running in losses.
17. To verify the authenticity of this contention, I have perused the balance sheets of CEL as submitted by them for the last three years. In page 17 of the auditor’s report (for the year ending March 2003) dated June 23, 2003, I have noted that CEL have indeed been referred to as a sick industrial company within the meaning of Clause (O) of subsection (1) of Section 3 of SICA, 1985 and accordingly CEL made a reference to the BIFR vide letter dated May 22, 2003 and their case was registered as Case No. 227/ 2003. The loss figures as on March 31, 2003 was 6.86 crores and after adding the losses suffered by them during the previous year (i.e.2001-2002) deficit goes to 117.21 crores. The loss figures as on March 31, 2004 was 7.78 crores and after adding the losses suffered by them during the previous year (i.e.2002-2003) deficit goes to 124.99 crores. The profit after tax shown for the year ended 31 March, 2005 was Rs 27.96 crores, which figures were arrived at after considering the interest benefit that CEL got for financial restructuring which was Rs 35.65 crores. Based on the said figures, it appears that the BIFR in its order dated December 13, 2005 discharged CEL from the purview of Clause (O) of subsection (1) of Section 3 of SICA, 1985 since CEL has a positive networth.
18. In view of the above, the contention of CEL that they are presently a sick company or that they are facing a financial crunch to appoint a common agency stands refuted. In any case, the Regulations do not envisage the grant of any exemption from the applicability of the Regulations.
19. As brought out earlier, the object behind the appointment of a common agency is the efficient handling of all share registry work of the company relating to both the physical and demat shares of the company at a single point, to avoid any delay either in dematerialization or in reconciling the shareholdings of the investors which would in turn adversely affect the interest of the investors. Furthermore, the direction to all issuer companies to appoint a common share agency in terms of provisions of Regulations 53A of the Regulations was meant to address issues of admission criteria, delays in demat and disputes of issuer companies with the RTAs as well as to overcome problems relating to mismatching of equity figures when they are reconciled. The scenario existing prior to the issuance of the said regulatory requirement was full of delays in dematerialization and non-reconciliation of share holdings due to a lack of proper co-ordination among concerned agencies/ departments resulting in the interest of the investors being adversely affected.
20. Moreover the compulsory dematerialization of the company was introduced by SEBI to maintain the integrity of the market and protect the interest of the investors in the capital market. It was perceived and has proved to be an effective way of curbing/ resolving investor complaints that arise on account of fraudulent transfer of shares / securities.
21. As such, the object of the appointment of common share agency appears to have been defeated by CEL due to their admittedly failure to appoint a common agency on their records as on date, to handle the share registry work for both the physical and demat shares of the company as required to be done in terms of the provisions of Regulation 53A of the Regulations. Hence their violation of Regulation 53A of the Regulations stands established.
22. 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.
23. To levy the appropriate penalty on CEL in this regard, Section 15HB of the Act is to be invoked which prescribes the penalty upto Rs.1 crore to be levied in cases of non compliance with any provision of the Act, the rules or the regulations made or directions issued by the Board for which no separate penalty has been provided.
24. 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.
26. 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 is bound to have caused an unquantifiable loss to the investor class as a whole and is continuing till date. However, 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 analysing all the material available on record, the rationale behind the requirement of the appointment of a common share agency, the mitigating factors, i.e., the financial status of the company, 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.
ORDER:
27. In view of the fact that it has been established that M/s. Core Emballage Limited 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 the demat and physical shares of their company, 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. 1,00,000/-(Rupees One lakh only) on M/s. Core Emballage 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, 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 7, 2006 |
ADJUDICATING OFFICER |