ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995)
AGAINST
M/s PEACOCK INDUSTRIES 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 M/s Peacock Industries Limited (for brevity’s sake, hereinafter referred to as PIL) 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 PIL 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, PIL 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. PIL were 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 response to the said notice, PIL vide their letter dated March 7, 2006, inter-alia made the following submissions: -
a) PIL was a sick industrial company and was so declared by the BIFR on December 21, 1998.
b) PIL was carrying out all the share transfer work of the physical shares in- house regularly and as per the satisfaction of the shareholders and at present neither were any shares pending for transfer nor were there any pending complaints. They had also constituted a committee titled “Share transfer and grievances committee”.
c) With the introduction of demat facilities to the shareholders, PIL had appointed “Intime Spectrum Registry Ltd. Mumbai (Intime) as their STA and more than 85% of the shares of PIL had been dematted.
d) To comply with the requirement of the appointment of a common agency, PIL had contacted their transfer agent; Intime who had quoted a high amount for carrying out the share transfer work relating to the physical shares of the company in addition to that of the demat shares. However due to the financial crisis, such that the company was unable to met the day to day expenses and pay the salaries of the employees in time, and being an already sick company, PIL were unable to bear these charges.
e) PIL had however submitted a revival plan to the IDBI, appointed by the BIFR as their operating agency and to the BIFR. A foreign investor was interested to invest funds in their company and by virtue of this, they would be able to pay all the dues and safeguard the interest of all the employees, labors and shareholders.
f) PIL would try to appoint a common share agency shortly and hence the present proceedings may be withdrawn.
4. Thereafter, a notice of hearing dated May 12, 2006 was sent by registered post to PIL under Rule 4(3) of the Rules advising them to attend the proceedings scheduled on June 6, 2006 along with documents if any, in support of their contentions at the time of the hearing. In their reply dated May 29, 2006, while reiterating the contentions advanced earlier, PIL gave an assurance that they would be in a position to appoint a common share agency within six months. On the scheduled date of hearing, Shri Dinesh Jain, authorized representative of PIL appeared on behalf of the company and made his submissions and also undertook to submit the necessary documents evidencing reference of PIL to the BIFR and the declaration thereof of PIL as a sick company as also the copies of the tripartite agreements entered into by PIL with Intime and CDSL and NSDL respectively.
5. Thereafter under cover of their letter dated June 7, 2006, while forwarding the copies of the documents as mentioned below, the representatives of PIL once again requested for the instant proceedings to be dropped and assured that they would be in a position to appoint a common share agency within six months.
· Copy of the letter dated September 29, 2005 communicating the proceedings of BIFR being held on September 15, 2005.
· Copy of the summary record of the proceedings of the BIFR held on September 15, 2005, evidencing the declaration of PIL as a sick company in the year 1998 with their case registered as 218/98 and the IDBI being appointed as their operating agency. The proceedings inter-alia discussed the possibility of the company being wound up.
· Copies of the correspondence exchanged with secured creditors
· Copy of the undated secretarial audit report for the quarter ended 31-3-2006 showing details of shares in physical and dematerialized form
· Copy of the tripartite agreements both dated July 24, 2000 entered into with Intime and CDSL and NSDL respectively along with copies of the letters received from NSDL, CDSL and Intime.
CONSIDERATION OF ISSUES:
6. Regulation 53A of the DP 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.”
7. 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).
8. 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 a lack of proper co-ordination among the concerned agencies or departments, which was adversely affecting the interest of the investors.
9. The provisions of Regulation 53A of the DP Regulations would thus 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, 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.
10. 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.
11. 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.
12. 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.
13. Keeping in mind these facts and circumstances, the limited issue that arises for my consideration is whether the present proceedings are maintainable given that PIL have been declared as a ‘sick company’ by the BIFR and if so, the determination of the alleged violation of the provisions of Regulation 53A of the DP Regulations and the extent of their liability as regards the same.
14. As regards the maintainability of these proceedings, the relevant provision to refer to is Section 22(1) of SICA which reads as under:-
“Suspension of legal proceedings, contracts, etc. – (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.”
15. A reading of the aforesaid provision makes it clear that where an enquiry is pending under section 16 of the SICA before the Board (read BIFR) or any scheme referred to in section 17 of the SICA is under preparation or consideration or a sanctioned scheme is under implementation relating to an industrial company, or an appeal is pending under Section 25 of the SICA Act, then no proceedings would lie against it for its winding up or for execution, distress or the like against any of its properties except with the consent of the Board.
16. SICA is undoubtedly a special Act which was enacted with a view of rehabilitate sick companies by preparing schemes for their rehabilitation and it clearly provides that till such time the matter is being enquired into by the Board or schemes for their rehabilitation are under preparation or consideration, such companies need to be protected from being proceeded against for the recovery of money due from them. It was enacted primarily to assist sick industrial companies which inter alia failed to meet their financial obligations. That is to say, this section of the Act ensures cessation of the coercive activities of the type mentioned in Section 22(1) of the said Act to permit the BIFR, to consider what remedial measures it should take with respect to the sick industrial company i.e. only those proceedings would be barred which are in the nature of winding up or for recovery of monies or are for the enforcement of any security against the sick company.
17. On the other hand, the SEBI Act, 1992 and the Regulations made thereunder, cover specific areas of legislation relating to the capital market. The mandate laid down by the SEBI in Regulation 53A of the DP Regulations and the Act to appoint a common law agency, and upon such a failure to do so, to levy a penalty under the Act, does not involve the sick industrial company paying its creditors the amounts due to them and also cannot be likened to proceedings initiated for the recovery of these amounts. Hence the instant proceedings also do not come under any of the above mentioned purposes but are meant to ensure that the interests of the investors are adequately protected in that the provisions of Regulation 53A of the said Regulations primarily addresses issues of admission criteria, delay in demat and disputes of issuer companies with the RTAs and seeks overcome problems relating to mismatching of equity figures when they are reconciled.
18. In other words, PIL being declared as a sick industrial company by the BIFR does not in any way preclude any action being initiated for the alleged violation of Regulation 53A of the DP Regulations.
19. Admittedly PIL have not complied with the provisions of Regulation 53A of the DP Regulations till date, and in fact have two separate agencies instead of a common agency to take care of the share transfer work related to the physical and demat shares of the company, which is not in terms of the objective of Regulation 53A of the said Regulations as brought out earlier. However they have established connectivity with both the depositories and have submitted the copies of the tripartite agreements both dated July 24, 2000 entered into with Intime and CDSL and NSDL respectively along to evidence the same.
20. However their non compliance of Regulation 53A of the DP Regulations has been attributed to their financial unsoundness due to which they were declared as a ‘sick company’ under the Sick industrial Companies (Special Provisions) Act, 1995 (SICA) by the BIFR in the order passed in the year 1998 itself. In this regard, I have thoroughly examined the documents submitted by PIL in support of their contentions. The order of the BIFR in Case No. 218/98 passed as against PIL does bring out the fact that PIL fulfilled the criteria of being a ‘sick industrial company’ in terms of Section 3(1)(o) of the SICA (and hence was so declared by the BIFR) and that the IDBI was appointed as the operating agency to examine the financial viability of PIL and formulate a rehabilitation scheme for its revival. The copies of the correspondence exchanged by PIL with several of their secured creditors and the annual reports of PIL as submitted by them for the last three years also, is indeed a testimony of their financial unsoundness and the efforts made by them to repay in timely installments, all their debtors as also their failed attempts to revive the company earlier. PIL have however brought to my notice the fact of a revival plan submitted to the BIFR and to the IDBI (which however remains unaccepted) and have stated the possibility of a foreign investor being interested to invest funds in their company, which would enable them to repay all their dues. In fact PIL in their reply dated May 29, 2006 to me and during the hearing held on June 6, 2006, gave an assurance of appointing a common share agency within six months. The fact however remains that even though more than six months have elapsed; there is no intimation from PIL till date as regards the appointment of a common share agency.
21. Thus since the violation of Regulation 53A of the DP Regulations stands established, the question now arises as to the quantum of penalty that needs to be levied upon PIL for their admitted failure to comply with Regulation 53A of the said Regulations. In this regard, I have considered the following factors as provided in the 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.
22. It is clear that although PIL would not have enjoyed any gain or unfair advantage as a result of the default, the said default would have certainly caused an unquantifiable loss to the investor class as a whole for the reasons above discussed which default is continuing till date. Hence 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 the rationale behind the requirement of the appointment of a common share agency and considering the mitigating factors, I am inclined to hold that it would not be just, fair and proper, to impose a penalty upon PIL in terms of the quantum prescribed in Section 15HB of the Act.
PENALTY
23 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, notwithstanding the assurance given by PIL to appoint a common agency within a period of six months, which period has since elapsed but which is kept in mind at the time of passing this order, instead of straight away penalizing PIL by imposing a quantified sum, which amount could be used for the purpose of appointing a RTA, in the interest of justice, equity and good conscience as well as the interest of the investors, I think it appropriate to grant a period of three months to M/s Peacock Industries Ltd to comply with the directive of appointing a common share agency for the demat and physical shares of the company in terms of the Regulation 53A of the (Depositories and Participants) Regulations, 1996.This time period would commence from the date of receipt of this order. It is however directed that in case M/s Peacock Industries Ltd fail to so appoint a common share agency within the stipulated period, a penalty of Rs. 1,00,000/-(Rupees One lakh only) be levied upon M/s Peacock Industries Limited under Section 15HB of the Act.
- The penalty amount if required to be paid in terms of the order specified above, shall be paid within a period of 45 days from the date of expiry of the stipulated period of three months 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, SEBI Bhavan, Plot No.C4-A, G Block, B Wing, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: DECEMBER 07, 2006 |
ADJUDICATING OFFICER |