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 KLG SYSTEL 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 KLG Systel Ltd (hereinafter referred to as KSL) in the matter of their 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 against KSL by the issuance of a show cause notice dated January 12, 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 KSL 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. KSL 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, as the said show cause notice was returned undelivered, a copy of the same was once again sent on July 30, 2004 to KSL. However KSL neither acknowledged the said notice nor provided any explanation for their failure to reply to the same.
3. In view of the same, another show cause notice dated August 09 2004 was sent to KSL at their office at Gurgaon. KSL replied to the said notice vide their letter dated August 27, 2004 and stated that they had established connectivity with both the depositories namely, NSDL and CDSL and had also appointed M/s. MAS Services Pvt Ltd, New Delhi as their Registrar and Share Transfer Agent for both demat and physical securities.
4. Therefore, a notice of hearing dated November 29, 2004 was sent to KSL in terms of Rule 5(1) of the Rules, and vide the said notice, KSL was advised to attend the hearing proceedings to be held on December 17, 2004 and submit the documentary proof if any, in support of their contentions.
5. In response to the same, KSL vide their letter dated December 15, 2004 while requesting for a waiver of personal hearing, made the following written submissions and also submitted certain documents in support of the said contentions.
a. KSL had already complied with the provisions of Regulation 53A of the Regulations by appointing M/s. MAS Services Pvt Ltd and all share registry work was being handled at a single point. A certificate from M/s. MAS Services to the effect that they are acting as RSTA since September 1, 1999 was enclosed as proof.
b. They had also established connectivity with both the depositories (copies of the tri-partite agreements entered into with NSDL on September 8, 1999 and with CDSL on October 29, 1999 were enclosed for perusal)
CONSIDERATION OF ISSUES:
6. I have taken into consideration, the facts and circumstances of the case, the material available on record, as also the relevant regulatory provisions.
7. 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.”
8. 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.
9. 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.
10. 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.
11. 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).
12. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI.
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 or through share transfer agent.
16. From the facts earlier mentioned, it is noted that KSL had established connectivity with both the depositories in the year 1999 to enable the shareholders to dematerialize their shares and also appointed a common agency, M/s. MAS Services Pvt Ltd, to handle the share registry work relating to both the physical and demat shares. The same is also evident from the information available with both the depositories (NSDL & CDSL) which aspect has been verified by me from the respective websites.
17. Since KSL had established connectivity with the depositories to facilitate dematerialization of their shares and has entered into tri-partite agreements with both NSDL and CDSL and have also appointed a common share agency, well before Regulation 53A of the Regulations came into effect, KSL cannot be held liable for non compliance of Regulation 53A of the Regulations.
18. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the facts brought out above, and after analysing all the material available on record, I am of the considered opinion that the imposition of any penalty in the present matter is not necessitated.
ORDER:
19. 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, the proceedings initiated against M/s.KLG Systel Ltd are hereby dropped.
| Date: December 22, 2004 |
G. BABITA RAYUDU |
| Place: Mumbai |
Adjudicating & Officer |