ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATION 53A of SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 1996 AND SECTION 15HB OF THE SEBI ACT, 1992.
AGAINST
M/s EUROPEAN SOFTWARE ALLIANCES 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 European Software Alliances Ltd (hereinafter referred to as ESAL) in the matter of their alleged failure to appoint a common share agency for handling share registry work both for the dematerialised and physical securities.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
2. In view of the above, adjudicating proceedings were initiated in the first instance by the issuance of a show cause notice dated December 31, 2003 to ESAL in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 where under ESAL 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 why penalty should not be imposed upon them under section 15HB of the Act. ESAL 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 response was received from ESAL, a notice dated June 28, 2004 in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, was issued to ESAL to attend the adjudication proceedings on July 9, 2004. However, the same was returned undelivered by the postal authorities with a remark “Left”.
4. Subsequently, keeping in mind the principles of natural justice, another opportunity was granted to ESAL, by the undersigned, to attend the hearing proceedings to be held on November 19, 2004 and also to submit the documentary proof if any in support of their contentions. It was also made clear to ESAL 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 hearing proceedings were adjourned to November 23, 2004.
5. On November 23, 2004, Mr. Sitaram, Officer, ESAL appeared and made the following submissions
b) ESAL had vide their letter dated January 12, 2004 forwarded the copy of an agreement dated November 7, 2003 entered into between ESAL and M/s. Sharex India Pvt Ltd for maintaining the physical shares of the company.( A copy of the said agreement stated to have been sent to the then adjudicating officer although the same was not available on record, was enclosed for perusal.
c) The said agreement had been forwarded to the Stock Exchange, Mumbai pursuant to Clause 47 (e) of the Listing Agreement, under cover of their letter dated November 17, 2003. Copies of the said documents were also enclosed.
d) ESAL had informed SEBI that they had already appointed M/s. Sharex (India) Pvt Ltd for transfer of the shares in physical form and for maintaining the records.
e) Some of the physical records of the company were at their Registered Office, Kanpur, and some of them were at their Mumbai office, while all the electronic records were with M/s. Sharex (India) Pvt Ltd. In order to transfer the physical records to the RTA and enter into an agreement for the said purpose, the company had to compile the records. Hence the said exercise took them some time
f) There was no malafide intention for not appointing the RTA for the physical transfer of shares. However, due to administrative problems, the same was delayed and the final MOU with RTA was executed on November 7, 2003.
g) The company had entered into a tri-partite agreement with the RTA and NSDL on May 5, 2000, and another tri-partite agreement with the RTA and CDSL on June 29, 2000. Copies of the said documents which were not stamped were submitted. In view of the same, Shri Sitaram agreed to submit the stamped copies of the said documents on November 24, 2004 and hence sought for adjournment on that account.
6. However, no body appeared on behalf of ESAL on the said date. Instead ESAL sent a letter dated November 24, 2004 that was received by me on December 10, 2004 wherein they requested that 15 days time may be granted to them to enable them to obtain the necessary documents from the Registrar at Kanpur. However, no documents have been submitted by ESAL till date. In fact all efforts made to remind ESAL telephonically of the same, have not elicited any reply till date.
CONSIDERATION OF ISSUES:
7. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of ESAL, the material available on record, the relevant regulatory provisions as also the rationale behind the said provisions.
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. In view of the above, it is imperative for all issuer companies to appoint a common share agency either in house or through a SEBI registered RTA for the share registry work relating to physical and demat shares of the company.
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 a lack of proper co-ordination among the concerned agencies or departments, which was adversely affecting the interest of the investors.
11. 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).
12. Thus Regulation 53A of the Regulations is an important measure brought about by SEBI for the benefit of the investors.
13. 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.
14. Subsequently SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001 has brought out the list of all the scrips that have 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.
15. 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.
16. From the facts earlier mentioned, it is clear that despite granting them sufficient opportunities, ESAL did not avail any of the opportunities granted to them. Till date no document has been furnished by them, evidencing the compliance of Regulation 53A of the Regulations in terms of their appointing a common share agency for the purposes envisaged in the Regulations and it is not even known as to whether they have instead actually started functioning as a common share registrar for both physical and demat securities in terms of the provisions of the Regulations.
17. Notwithstanding the same, I have tried to obtain the necessary information from the respective websites of the two depositories, namely, Central Depository Services Ltd (CDSL) and National Securities Depositories Ltd (NSDL). From the same, I have noted that although ESAL is registered with both the depositories, they have not appointed a common agency to handle a share registry work relating to both the physical and demat shares. In the absence of ESAL providing any documentary evidence to substantiate that they had appointed a common share agency, it would be reasonable to presume that they have not complied with Regulation 53A of the Regulations which requires all listed companies to engage a common share agency for the purposes envisaged in the Regulations. Furthermore, they have kept themselves away from the hearing proceedings.
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. Section 15HB 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. While adjudging the quantum of penalty, the adjudicating officer is required to have due regard to the factors laid down in Section 15 J of the Act which are as under:-
a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
b) the amount of loss caused to an investor or group of investors as a result of the default;
c) the repetitive nature of the default
21. These provisions also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995.
22. Although ESAL may not have enjoyed any gain or unfair advantage as a result of the default, the same was bound to have caused an unquantifiable loss to the investor class, as a whole. Moreover, the default 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 absence of any response by ESAL to a regulatory directive, as well as the mitigating factors, I am inclined to hold that although the penalty need not be imposed in terms of the provision provided in Section 15HB of the Act, the imposition of penalty is very much necessitated.
ORDER:
23. In view of the foregoing, 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 penalty of Rs. 75,000/-(Rupees seventy five thousand only) on M/s European Software Alliances Limited for their failure to appoint a common share agency for both the dematerialized and physical shares of the company under Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996.
24. 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.
| Date: DECEMBER 22, 2004 |
G. BABITA RAYUDU |
| Place: Mumbai |
Adjudicating Officer |