ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES
AGAINST
M/s EASTERN SILK INDUSTRIES LTD (NOW MERGED WITH STELLA SILKS LIMITED)
1. These proceedings arise consequent to the order of the Securities and 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 DP Regulations and the Act respectively) by Sstella Silks Limited (SSL) which has since merged and amalgamated with M/s. Eastern Silk Industries Ltd (ESIL) by virtue of the orders of the Hon’ble High Courts of Karnataka and Kolkata 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 this context, a notice dated February 20, 2006 was issued to SSL 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, SSL 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 DP Regulations and why the penalty as prescribed under section 15HB of the Act should not be imposed upon them. SSL 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.
3. In their response to the said notice, SSL vide their letter dated March 9, 2006, inter alia made the following submissions:
· The matters relating to the transfer of securities, maintenance of records of holders of securities and establishing connectivity with the depositories was handled and maintained at one point by Tata Share Registry Ltd.
· The transfer of the physical securities was however being handled in house.
· When they were in the process of complying with the SEBI mandate, the process of amalgamation of SSL with Eastern Silks Industries Ltd (ESIL). was in the final stage.
· The scheme of amalgamation was made and filed with the Hon’ble High Courts at Karnataka and Kolkata. While the scheme was sanctioned immediately by the Kolkota High Court, the sanction of the Karnataka High Court was received only in December 2005. The appointed date of the scheme was 1st April, 2004.
· After the order of the Karnataka High Court was received, SSL transferred all their records of securities; both physical and demat to the registrar and share transfer agent (RTA) of ESIL, i.e., ABC Consultant Pvt. Ltd. which is also registered with SEBI.
· In view of the amalgamation process and as SSL was in the process of being wound up, a lenient view be taken.
4. Thereafter, a notice of hearing dated May 12, 2006 was sent by registered post to SSL under Rule 4(3) of the Rules advising them to attend the proceedings scheduled on June 6, 2006 and also to submit the documentary proof if any, in support of their contentions at the time of the hearing. However, the said notice returned undelivered with the endorsement “not claimed” as made by the postal authorities.
5. In view thereof, another notice of hearing dated July 7, 2006 was sent to SSL advising them to attend the proceedings scheduled on July 19, 2006 and also to submit the documentary proof if any, in support of their contentions at the time of the hearing. SSL were also advised to note that no further adjournment would be granted to them and that in case they failed to appear for the said proceedings, the matter would be proceeded with based on the material available on record.
6. On receipt of the notice, vide letter dated July 13, 2006, ESIL submitted that SSL had been amalgamated with ESIL as per the order of the Karnataka High Court and that the notice dated May 12, 2006 was not received by them. In view thereof they requested to be provided with a copy of the said notice to enable them to reply to the same and also sought for an extension of one month time.
7. Thereafter, under cover of the notice of hearing dated July 18, 2006, the copy of the notice of hearing dated May 12, 2006 was sent to ESIL. They were also advised to attend the personal hearing scheduled on August 14, 2006.
8. On the scheduled date of hearing, Shri Narayan Parekh, Company Secretary, authorized to appear on behalf of the ESIL, submitted that at the time of initiation of these proceedings, SSL was in the process of getting amalgamated with ESIL and that although the final order sanctioning the scheme of merger and amalgamation between Sstella Silks Ltd., Eastern Jingying Ltd. and Eastern Silks Industries Ltd. by the Kolkata High Court was passed on April 7, 2005 and by the Karnataka High Court on December 14, 2005, the copies of the said orders were received by ESIL only on April 11, 2005 and February 22, 2006 respectively. Shri Parekh also stated that ABS Consultants Pvt Ltd (ABS); the RTA of ESIL, acting as their common share agency in terms of Regulation 53A of the DP Regulations, would continue to operate as the common share agency of the merged entity also.
He also submitted the following documents to support his contentions:
(i) Copy of the order of the Kolkata High Court passed in Company Petition No.540 of 2004 connected with Company Application No.612 of 2004.
(ii) Schedule of the scheme of amalgamation of the three entities; Eastern Jingying Limited, SSL and ESIL.
(iii) Order of the Karnataka High Court passed in Company Petition No. 71 of 2005 connected with Company Application No. 994 of 2004.
(iv) Schedule I of the Scheme of amalgamation of Eastern Jingying Limited, SSL and ESIL including the schedule of assets of SSL to be transferred to ESIL.
(v) Letter of ABS Consultants Pvt. Ltd. confirming their working as the RTAs of both the physical and demat shares of ESIL in which SSL has been merged.
(vi) Written submissions dated August 3, 2006.
9. Shri Parekh was however advised to submit on or before September 4, 2006, the copies of the tripartite agreements entered into by ESIL with NSDL and CDSL along with the copy of the bipartite agreement stated to have been already entered into with the RTA.
10. Accordingly on September 4, 2006, Shri Parekh once again appeared before me and stated that the Board of Directors of both the companies, SSL and ESIL had decided to merge the two companies with effect from April 1, 2004 and hence the delay in complying with the SEBI mandate was around 7 months only. It was submitted that SSL had a carry forward loss of around Rs 4.91 crores as of March 31, 2004 and in support of the said contention submitted the copies of profit and loss account and the balance sheet of SSL as on March 31, 2003 and March 31, 2004 respectively. He also submitted the following documents:-
· Tripartite agreement between the ESIL, ABS and CDSL dated February 14, 2001;
· Tripartite agreement between ESIL, ABS and NDSL dated January 30, 2001;
· Bipartite agreement entered into between ESIL and ABS;
· Certificate of Registration dated June 14, 2004 of ABS; and
· Letter dated January 2, 2006 of ESIL to ABS informing them about the scheme of amalgamation under which SSL and Eastern Jingying Ltd were to be amalgamated.
CONSIDERATION OF ISSUES
11. 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.”
12. 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).
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. On the basis of the documentary evidence placed before me, I have noted that SSL was incorporated under the Companies Act, 1956 and had its registered office situated at Bangalore, Karnataka. The paid up equity share capital of SSL comprised of 1,47,95,186 equity shares of Rs.10/- each of which 50,47,276 and 97,47,910 shares are held in the demat and physical form respectively. The total number of shareholders was about 7500 and with the shares of SSL being held both in the physical and demat mode, the same necessitated the said company appointing a common share agency, in term of the mandate prescribed in the Regulations. It is however a matter of record that SSL had appointed Tata Share Registry Ltd as their RTA to handle the share transfer work relating only to the demat shares of the company, while the transfer of the physical securities was being handled in house. As such, SSL did not have a common agency to handle the share registry work relating to both the physical and demat shares of their company. In other words, prior to the merger of SSL with ESIL, SSL had not complied with the mandate prescribed in Regulation 53A of the DP Regulations.
19. One of the ground raised in defense, is the financial unsoundness of SSL for the past several years and the fact that being in the same line of business as ESIL, they had approached ESIL for a merger proposal and that a scheme of amalgamation to this effect was made, which was sanctioned by the Hon’ble High Courts of Kolkata and Karnataka. The appointed date of the scheme was 1st April, 2004 and accordingly, SSL was wound up without dissolution and merged with ESIL with retrospective effect from 1st April, 2004. Apparently the orders of the Kolkata High Court and the Karnataka High Court were received only 11th April 2005 and 22nd February, 2006. In terms thereof, the share swap ratio between SSL and EEIL was (1) one share of ESIL for every six (6) share held in SSL with the total number of shares issued on account of amalgamation was 24,65,864. These shares are already listed and trading permission has been received from the National Stock Exchange of India Limited.
20. I have also noted the contention advanced to the effect that earlier to this amalgamation and merger, SSL, being a financially weak company was not in a position to set up the infrastructure for taking over the management of the demat shares from their RTA apart from the handling of the transfer of shares in the physical category, mainly held by the promoters, their relatives and associates, which was negligible and diligently being handled by the company and that it was also not viable for SSL to entrust the maintenance of the physical shares to their RTA for a short period i.e. from the date of coming into effect of the provisions of Regulation 53 of the DP Regulations i.e. September 02, 2003 and the appointed date of the scheme of amalgamation i.e. 1st April, 2004.
21. The shares of ESIL are also both in the physical and demat mode. The documents submitted by ESIL testifies to the fact that they have established connectivity with both the depositories to facilitate the share transfer work relating to the demat shares of the company and entered into the necessary tripartite agreements with ABS and NSDL on February 14, 2001, and with ABS and CDSL on January 30, 2001 in this regard. It is also a matter of record that ESIL had appointed ABS as a common share agency in terms of Regulation 53A of the DP Regulations and entered into a bipartite agreement with ABS on June 1, 2000. However it has been brought to my notice that after the receipt of the orders of the Courts, ABS; was acting as the common agency for handling all the share registry work for both physical and demat securities of the merged entity in terms of Section 53A of the DP Regulations. This contention stands supported by the letter dated August 2, 2006 issued by the Director of ABS in which they have confirmed working as the Registrars and Share Transfer Agent, under both the physical and demat segment of ESIL in which SSL has merged.
22. Keeping in mind these facts and circumstances, ably supported by the documents on record, the limited issue that arises for my consideration is the extent of liability if any, on the part of ESIL, as regards the non compliance by SSL with Regulation 53A of the said Regulations, considering that SSL stands merged and amalgamated with ESIL by virtue of the orders of the High Courts at Kolkota and Karnataka passed on April 7, 2005 and December 14, 2005 respectively.
23. In this regard, it would be relevant to refer to certain extracts of the orders passed by the Hon’ble Courts. The High Court of Karnataka in Company Petition No. 71/2005 connected with Company Application No.994/2004 on December 14, 2005 inter alia ordered as under:
…………That all the liabilities and duties of the transferor company M/s. Sstella Silks Ltd. be transferred without further act or deed to the transferee company and accordingly the same shall pursuant to Section 394(2) of the Companies Act, 1956 be transferred to and become the liabilities and duties of the transferee company ; and
That all proceedings now pending by or against the transferor company M/s. Stella Silks ltd. be continued by or against the transferee company……
Similarly the High Court of Calcutta in Company Petition No. 540/2004 connected with Company Application No. 612 of 2004 on April 7, 2005 inter alia ordered as under:
……That all the debts, liabilities, duties and obligations of the said transferor company now be transferred from the said transfer date without further action deed to the said transferee company and accordingly the same shall pursuant to Section 394(2) of the Companies Act, 1956 be transferred to and become the debt, liabilities, duties and obligations of the said transferee company ; and
That all proceedings and / or suits and/or appeals now be pending by or against the said transferor company now be continued by or against the said transferee company……
24. By virtue of the said orders, it is clear that all debts, liabilities, duties and obligations of SSL would stand transferred to ESIL, who would now be held accountable for the same.
25. Having thus determined that the proceedings initiated against ESIL for the non compliance by SSL with Regulation 53A of the said Regulations are maintainable, the question now arises as to the action, if any, that needs to be initiated against ESIL for the said non compliance, considering the facts and circumstances of the case.
26. As brought out earlier, ESIL had established connectivity with both the depositories and entered into the necessary tripartite agreements in the year 2001 itself. It is also a matter of record that ESIL had appointed a common share agency on June 1, 2000 itself, i.e. prior to the coming into effect of Regulation 53A of the DP Regulations. The fact that between September 02, 2003 and 1st April, 2004 i.e. the appointed date of the scheme of amalgamation; SSL (prior to its merger with ESIL) did not have on their records, a common share agency is not in dispute. However, it would also be important to consider the time normally involved in the procedures relating to mergers/amalgamation. It is possible that the process of amalgamation of SSL with ESIL would have been in the final stage, at this juncture. In fact, it is on record that earlier to this amalgamation and merger, SSL, being a financially weak company was on the look out for a viable partner or entity. Accordingly SSL was wound up without dissolution and merged with ESIL with effect from 1st April, 2004. Thereafter the common agency already appointed by ESIL, handled the share registry work relating to both the physical and demat segment of ESIL, in which SSL had merged.
27. Keeping these facts in mind, although there has been a delay of around 7months in adhering to the mandate stipulated by SEBI, in the contextual facts of the case, I am inclined to believe that the liability of the management of SSL should not be shifted to the new management of ESIL, unless negligence on their part is proved. The submissions made on behalf of ESIL and the documents on record corroborate the finding that ESIL have taken all due care, having regard to their duty and responsibility, and had affected the necessary compliance immediately after the merger of the said entities. Besides, there is no evidence on record, evidencing any loss suffered by the shareholders of ESIL, viz. complaints against ESIL etc. In view thereof, I am of the considered opinion that it would not be in order to take cognizance of the belated compliance of Regulation 53A of the Regulations.
28. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the issues enumerated above as well as after analysing all the material available on record and taking into consideration the facts and circumstances of the present case as well as factors laid down in Section 15J of the SEBI Act, 1992, i.e. the amount of disproportionate and unfair advantage wherever quantifiable as a result of the default, the amount of loss to an investor or a group of investors as a result of the default, the repetitive nature of the default, all of which are in the negative, 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, am inclined to hold that the imposition of any penalty in the present matter is not warranted and accordingly the proceedings initiated against M/s. Eastern Silk Industries Ltd. are hereby dropped.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: DECEMBER 13, 2006 |
ADJUDICATING OFFICER |