ORDER
UNDER RULE 5 OF THE SECURITIES CONTRACTS (REGULATION) (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 2005
AGAINST
M/s PETRON ENGINEERING CONSTRUCTION LIMITED
(PAN NO. AACCP8775G)
1. The Securities and Exchange Board of India (SEBI) had initiated an investigation into the alleged market manipulation and irregularities in the trading of the shares of M/s Petron Engineering Construction Limited (Petron). The scrip of Petron was listed on the National Stock Exchange (NSE) and the Stock Exchange, Mumbai (BSE) at the time of investigation.
2. During the course of investigation, it was inter alia noted that although Petron had incurred a loss of Rs 8.69 crores for the year ending 31st March, 2002, it had shown a profit of Rs 29 Lakh and 3.29 crores for the years ending 31st March 2003 and 31st March 2004 respectively. During these years, the company had doubtful debts to the extent of Rs. 6.52 crores and Rs. 3.09 crores respectively. The company was alleged to have arrived at the above mentioned profits for the two consecutive years since they had failed to make adequate provision in the auditors’ qualification for the doubtful debts referred to in the final accounts for the year end March 31, 2003 and had not dealt with it in the published unaudited results for the quarter ended September 30, 2003 and December 31, 2003. As per Clause 41 of the Listing Agreement entered into with the stock exchange, every company is required to disclose the auditors’ qualifications in the audited account of the previous year, which has a material impact on the profit of the company, along with the unaudited quarterly financial results which were published and furnished to the stock exchange. Further, an explanation is also required to be given as to how these qualifications have been addressed in the unaudited financial results. However, as Petron failed to do so for the quarter ended September 30, 2003 and December 31, 2003, they were alleged to have failed to have comply with the provisions of Clause 41 of the Listing Agreement resulting in the violation of Section 21 of the Securities Contracts (Regulation) Act, 1956 (SCRA) which rendered them liable for penalty under Section 23E of the said Act.
3. In view thereof, SEBI ordered adjudicating proceedings against Petron and in this context appointed me as the Adjudicating Officer vide order dated April 7, 2006. Accordingly I issued a notice dated June 12, 2007 upon Petron with an advise to them to show cause as to why an inquiry should not be held against them in terms of Rule 4 of the Securities Contracts (Regulation) (Procedure for holding inquiry and imposing penalties by Adjudicating Officer) Rules, 2005 (Rules) and why penalty should not be imposed upon them under Section 23E of the SCRA. Petron were also 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, and also indicate whether they were desirous of a personal hearing.
4. In reply to the same, vide letter dated June 27, 2007, Shri Naresh Shah, Vice President/Company Secretary of Petron, requested that they be granted a personal hearing. Hence I issued a notice of hearing dated July 3, 2007 to Petron advising them to appear for the hearing scheduled on July 11, 2007 which was then rescheduled to July 24, 2007. On the said date, Shri Naresh Shah, appeared before me and made his submissions. He further requested that they be permitted to make additional written submissions on or before August 17, 2007. Thereafter detailed submissions were forwarded vide letter dated August 2007, in which it was inter alia contended that the notice to show cause was not legally tenable in that the adjudication proceedings were sought to be initiated without any statutory support.
CONSIDERATION OF ISSUES:
5. I have considered the facts and circumstances relevant to this case, the provisions of law applicable to the present proceedings as also the submissions advanced on behalf of Petron.
6. Before proceeding on the merits of the case, the preliminary issue that arises for my determination is the issue relating to the maintainability of the present proceedings.
7. In that context, I have perused at length the provisions of the SCRA that arise in the context of the present case i.e. the provisions of Sections 21 and 23(2) of the SCRA.
8. Section 21 as amended by the Securities Laws (Amendment) Act 1995, provides as under: Where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.
9. Section 23(2) as amended by the Securities Laws (Amendment) Act 1995, provides as under: Any ‘person’ who enters into any contract in contravention of the provisions contained in Section 15 or who fails to comply with the provisions of Section 21 or Section 22 shall on conviction be punishable with fine which may extend to one thousand rupees.
10. It is a matter of record that in the present proceeding, the offence relates to the non reporting of the auditors’ qualification in the quarterly results of September 30, 2003 and December 31, 2003.
11. Thus on the said date, in terms of the provisions of Section 23 (2) of the SCRA, which was incorporated in the said statute with effect from January 25, 1995, the penal consequences of the failure of a listed company to comply with the conditions of the Listing Agreement rendered the defaulting company liable with fine which extended to one thousand rupees to be imposed by the competent court of law.
12. However, effective from October 12, 2004, by virtue of the Securities Laws (Amendment) Act, 2004, such a defaulting company became liable for monetary penalty under the provisions of Section 23E of the SCRA which provides as under: If a company or any person managing collective investment scheme or mutual fund fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof; he shall be liable to a penalty not exceeding twenty five crore rupees. Thus the amendment to the provisions of SCRA enabled SEBI to appoint an Adjudicating Officer, who under the provisions of the Securities Contracts (Regulation) Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 2005 (effective from April 11, 2005) was empowered to adjudge under Section 23 E of the SCRA, the failure of a company to comply with the listing conditions by imposing a monetary penalty to the extent of twenty five crore rupees for the said offence.
13. Based on a conjoint reading and analysis of the above mentioned facts and provisions of law, it is apparent that the present proceedings which primarily deal with the alleged violation relating to the non-reporting of the Auditors’ qualification in the Quarterly Results of 30th September 2003 and 31st December 2003, cannot be adjudicated under Section 23E of the SCRA which came into effect from October 12, 2004, in as much as these provisions being penal in nature are operative prospectively and have no retrospective application.
14. Consequently, the present proceedings are not maintainable and the case is disposed off accordingly.
PLACE : MUMBAI G. BABITA RAYUDU
DATE : AUGUST 24, 2007 ADJUDICATING OFFICER