ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995)
AGAINST
M/s CRAZY INFOTECH LIMITED
1. These proceedings arise consequent to the order of the Securities an Exchange Board of India (SEBI) 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 the Act respectively) by M/s Crazy InfoTech Limited (for brevity’s sake, hereinafter referred to as CIL) 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. Accordingly, a notice dated February 20, 2006 was issued to CIL under Rule 4(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) in terms of which, CIL were advised to show cause as to why the inquiry proceedings should not be initiated against them for the alleged violation of the provisions of Regulation 53A of the Regulations and why the penalty as prescribed under section 15HB of the Act should not be imposed upon them. CIL 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. As no reply to the same was received from CIL, a notice of hearing dated May 12, 2006 under Rule 4(3) of the Rules was issued to CIL advising them to attend the proceedings scheduled to be held on June 7, 2006 and to submit the documentary proof, if any, in support of their contentions at the time of the hearing.
4. In their reply dated May 30, 2006, CIL, while seeking an adjournment, confirmed receiving the notices sent to them in the present proceedings and also replying to the notice dated May 12, 2006 vide their letter dated March 11, 2006 (a copy of which was enclosed for due reference). In the said letter, CIL had stated that they had earlier appointed M/s Alankit Assignment Limited (Alankit) in the year 2000 to handle the share registry work relating to only the demat shares of the company while they themselves were handling the share registry work relating to the physical shares of the company and that they had now entered into a bipartite agreement dated March 10, 2006 with Alankit to handle the share registry work for both the demat and physical securities. CIL had also contended that they had executed the necessary tripartite agreements with NSDL and CDSL dated August 24, 2000 and August 09, 2000 respectively and further submitted that as they were a small company with a paid up capital of 290 lakhs of which approximately 82% of the shares were in the demat form while the remaining 18% shares were in the physical form being held by a few small share holders, a lenient view be taken.
5. In view of the request for adjournment, another notice of hearing dated June 16, 2006 was sent to CIL advising them to attend the proceedings scheduled to be held on July 3, 2006.
6. On the said date, Shri Anand Kumar Sahu, authorized representative, CIL, appeared before me and reiterated their contention of having appointed Alankit as their RTA in terms of Section 53A of the DP Regulations under an agreement dated March 10, 2006 and also executing the necessary tripartite agreements with NSDL and CDSL. While agreeing to the delayed compliance of Regulation 53A of the said Regulations, Shri Sahu attributed the same to the mistaken assumption of CIL that SEBI had granted them the permission to comply with the DP Regulation by March 31, 2006 since they had sent a letter dated March 11, 2006 to SEBI seeking permission to this effect. However he sought for additional time to submit the necessary documents evidencing their contentions.
7. Subsequently, the following documents under cover of letter dated July 07, 2006, were forwarded as proof of the contentions advanced by them during the course of the hearing.
a) Copy of the letter dated August 23, 2000 of Alankit to CIL enclosing copy of the tri-partite agreement dated August 24, 2000 entered into with CDSL and Alankit as the RTA along with the Master creation form for the record of CIL.
b) Copy of the letter dated September 16, 2000 of NSDL to CIL forwarding the copy of the tri-partite agreement dated August 09, 2000 entered into with NSDL and Alankit as the RTA.
In the said letter, CIL also gave the latest status of dematerialization of their shares i.e. 86.15% of the shares in demat form and the rest 13.85% in the physical form
CONSIDERATION OF ISSUES
8. 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.”
9. Thus the provisions of the said Regulation mandates 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, which can be done either in house or through a SEBI registered Registrar and Transfer Agent (RTA).
10. The object of the appointment of the common share agency which was brought out in SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, and is applicable to 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. Thus the provisions of Regulation 53A of the Regulations would be applicable only to that company, all of whose shares have been dematerialized or to those companies whose shares are both in the physical and demat mode but not to those companies all of whose shares continue to remain in the physical mode. As regards the shares in the demat mode, 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 RTA.
12. Accordingly, SEBI had earlier brought out a circular bearing no.FITTC/DC/ Policy-Cir-01/2001 dated August 03, 2001 in terms of which, all companies were advised 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 were advised to submit a compliance report to SEBI by October 15, 2001.
13. It appears that vide SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001, a list of all the scrips that had established connectivity with the depositories was brought out. In terms of the said circular, the shares of the companies that had not established connectivity with the both depositories as on October 31, 2001 were to be traded on the ‘Trade for Trade’ settlement mode and not on the normal rolling settlement.
14. Thus on date, there continue to be 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 registered share transfer agent.
15. Keeping in mind these facts and circumstances and the documents on record, the limited issue that arises for my consideration is the extent of liability if any, on the part of CIL as regards the delayed compliance with Regulation 53A of the said Regulations.
16. The documents submitted by CIL testifies to the fact that they had entered into the tripartite agreements with Alankit Assignment Ltd and NSDL on August 24, 2000 and with Alankit Assignment Ltd and CDSL on August 9, 2000 respectively, to facilitate the dematerialization of their shares. Moreover they also entered into a bipartite agreement dated March 10, 2006 with Alankit Assignment Ltd evidencing the appointment of a common share agency in terms of Section 53A of the DP Regulations. It is also a matter of record that earlier to this appointment, CIL had appointed M/s Alankit Assignment Ltd. as their RTA in the year 2000, only for the transfer of the demat shares of the company while CIL were handling in house, the processing of share transfers for the physical shares of the company. , apparently to avoid costs and as the number of transfers received by them were minimal.
17. Considering that approximately about 15% of the shares of CIL are in the physical form while the remaining 85% are in the demat form, it is evident that from 2000 till 2006 (the time of the appointment of Alankit as common share agency under an agreement dated March 10, 2006 effective from April 01, 2006) there was no common agency to handle the share registry work relating to both the physical and demat shares of the said company. However connectively had been established with both the depositories in the year 2000 itself to enable the shareholders of CIL to dematerialize their shares as is evident from the documents submitted during the course of the present proceedings.
18. It is thus evident that in the interim period, there has admittedly been a non compliance of the mandate prescribed in Regulation 53A of the said Regulations. CIL have however sought exoneration of their liability as regards this non compliance to the fact that they were a small company and hence wished to avoid costs especially as the number of transfers received by them were minimal as also their mistaken assumption of being granted the tacit consent of SEBI permitting them to appoint a common share agency by March 31, 2006.
19. The object behind the timely appointment of a common agency has been discussed in detail earlier which thus appears to have been defeated by CIL due to the reasons afore discussed. Hence their belated compliance of the said Regulation stands established.
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 said Regulation would become redundant.
21. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the Regulations, no cognizance would have been taken for the belated compliance of Regulation 53A of the Regulations. However as this is a case involving a delay of more than two years in complying with the provisions of the said Regulation and no adequate justification has been given for the same, necessary cognizance of the non adherence of the mandate laid down in the Regulations is very much necessitated.
22. Accordingly in order to levy the appropriate penalty on CIL, Section 15HB of the Act is to be referred to 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. I have also considered the following factors as provided in 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 part of CIL nor any 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, CIL have not appointed a common share agency to handle their share registry work relating to both physical and demat shares of the company within the period stipulated in the Regulations and have thereby not complied with the said Regulations.
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, I am inclined to hold that since CIL did not have a common share agency for a considerable period of time and have only recently appointed a common share agency, i.e. under an agreement dated March 10, 2006, 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.
PENALTY
25. Accordingly 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 token penalty of Rs.20,000/-(Rupees Twenty thousand only) on M/s Crazy Infotech Limited for their belated compliance of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 in the matter of appointment of a common share agency to handle the share registry work relating to the dematerialized and physical shares as required there under.
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, General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: AUGUST 4, 2006 |
ADJUDICATING OFFICER |