ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES)
AGAINST
M/s. PREMIUM CAPITAL MARKET & INVESTMENT 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. Premium Capital Market & Investments Ltd (for brevity’s sake, hereinafter referred to as PCMIL) 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 view of the same, a notice dated February 20, 2006, was issued to PCMIL under Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) in terms of which PCMIL were advised to show cause as to why enquiry 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. Although the notice was acknowledged by PCMIL, and since PCMIL did not reply to the same, a notice of hearing dated May 12, 2006 was sent by registered post to them under Rule 4(3) of the Rules advising them to attend the proceedings scheduled on June 7, 2006 along with documents if any, in support of their contentions at the time of the hearing.
3. In their reply dated May 23, 2006, PCMIL informed that they had not received the notice to show cause, as their registered office had been shifted to a new premises from February 01, 2006 and that as their appeal on fee continuity matter was fixed for hearing before the Tribunal on June 06, 2006 i.e. the date on which the hearing for the present proceedings had been scheduled, an adjournment be granted. Subsequently, PCMIL sent a letter dated June 1, 2006, in which they inter-alia made the following submissions: -
a) PCMIL had entered into tripartite agreements for the electronic transfer of shares with the RTA; M/s Ankit Consultancy Pvt Ltd (Ankit), and the two depositories; NSDL and CDSL on May 16, 2001 and April 30, 2001 respectively. The copies of the said agreements had been earlier forwarded to SEBI vide letter dated June 13, 2005.
b) In the said letter, they had informed SEBI that the share registry work of the physical shares of the company before October 1, 2005 was being handled in house while the share transfer work relating to the demat shares of the company, was handled by an outside agency; Ankit.
c) Vide the said letter; they had also requested SEBI to grant them time upto September 2006 to appoint a common agency. However, from October 1, 2005, i.e. prior to the date of issue of the notice to show cause, they had appointed Ankit as the common agency to also handle the share transfer work relating to the physical shares of the company.
d) As such as on date, they had a common agency to handle the share registry work for both the electronic and physical securities in terms of Regulation 53A of the DP Regulations.
e) In view of the same, a lenient view may be taken.
4. PCML also forwarded a copy of the letter dated June 13, 2005, sent earlier to SEBI, the copy of the agreement dated November 16, 2005 entered into with Ankit, that was valid from October 01, 2005 to September 30, 2006, an undated copy of the tripartite agreement entered into with CDSL and Ankit as also the copy of the tripartite agreement dated November 15, 2002 entered into with NSDL and Ankit.
5. As these copies of the tripartite agreements entered into with NSDL and CDSL were different from the copies of the agreements on record dated May 16, 2001 and April 30, 2001 respectively and which were earlier forwarded to SEBI vide letter dated June 13, 2005, another notice of hearing dated June 6, 2006 was sent by registered post to PCMIL advising them to attend the proceedings scheduled on June 21, 2006 along with documents in support of their contentions. Although the notice was acknowledged by PCMIL, neither they nor their representative appeared for the said proceedings nor replied to the said notice.
6. Keeping in mind the variance in the dates of the tripartite agreements on record, a letter dated September 15, 2006 was sent to NSDL seeking the necessary clarification on the said issue. An email was also sent to CDSL on the same date seeking the same clarification. In their reply dated September 21, 2006, NSDL confirmed that both the said agreements had been entered into by them with PCMIL and Ankit but that the agreement dated May 16, 2001 was initially entered into at the time of joining NSDL in May 2001. It was however clarified that in May 2002, as PCMIL changed their electronic connectivity from Ankit to Mondkar Computer Pvt. Ltd, another agreement was signed between NSDL, PCMIL and Mondkar but when PCMIL changed their electronic connectivity from Mondkar to Ankit, the agreement dated November 15, 2002 was signed between NSDL, PCMIL and Ankit.
7. In their reply emailed on September 27, 2006, CDSL stated that the agreement dated April 30, 2001 was signed between PCMIL, CDSL and Ankit but that as the license of Ankit to act as a RTA was suspended by SEBI for six months with effect from April 1, 2002 till September 30, 2002, all companies serviced by Ankit were transferred to another RTA and accordingly Ankit entered into an agreement with Mondkar so that Mondkar could service all the said companies for the given period and accordingly a tripartite agreement was entered into by PCMIL with Mondkar and CDSL on April 4, 2002. It was clarified that when the suspension period was completed i.e. on September 30, 2002, PCMIL executed a fresh tripartite agreement with Ankit and CDSL on September 23, 2006.
8. It is thus clear that the tripartite agreements on record are in order.
9. As regards the issue of granting PCMIL another opportunity of hearing, I am of the opinion that as there has been adequate service of notice on PCMIL and despite the same, as they have failed to participate in the present proceedings, the case should be proceeded with based on the material available on record.
CONSIDERATION OF ISSUES:
10. 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.”
11. 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).
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. On the basis of the documentary evidence placed before me, it is clear that the shares of PCMIL are both in the physical and demat mode and hence the same would necessitate PCMIL appointing a common share agency in term of the mandate prescribed in the Regulations. The documents on record testify to the fact that PCMIL have established connectivity with both the depositories and entered into the necessary tripartite agreements with the said depositories and the RTA; Ankit to facilitate the share transfer work relating to the demat shares of the company. It is also a matter of record that PCMIL have entered into an agreement dated November 16, 2005 with Ankit, that is valid from October 01, 2005 to September 30, 2006 evidencing the appointment of a common share agency in terms of Section 53A of the DP Regulations and that earlier to this appointment, PCMIL had appointed Alankit as their RTA in the year 2001, only for the transfer of the demat shares of the company was processing in-house, the share transfers of the physical shares of the company, apparently to avoid costs as they were facing a financial crunch and as the number of transfers received by them was being easily handled by the staff already in place. PCMIL have however not given the extent of the shares held by the company in the physical and demat form nor have they forwarded any details relating to the validity period of the bi-partite agreement entered into with the RTA being extended.
18. Notwithstanding the same and on the assumption that the agreement entered into on October 01, 2005 has been extended and continues to be valid till date, the fact remains that prior to the said date, they did not have a common agency to handle the share registry work relating to both the physical and demat shares of the said company.
19. In other words, in the interim period, there has admittedly been a non compliance of the mandate prescribed in Regulation 53A of the DP Regulations. As brought out earlier, PCMIL have however sought exoneration of their liability by bringing to my attention the fact that they had requested SEBI to permit them to carry out the share processing work relating to the physical shares of the company upto September 2006 where after they would be in a position to comply with the SEBI directive as they were then facing adverse market conditions and had suffered losses of Rs 300 lacs and were in no position to incur additional costs. However, no documents are submitted to support this contention.
20. Keeping in mind these facts and circumstances of the case and the documents on record, the limited issue that arises for my consideration is the extent of liability if any, on the part of PCMIL as regards the delayed compliance with Regulation 53A of the DP Regulations.
21. The object behind the timely appointment of a common agency has been discussed in detail earlier which thus appears to have been defeated by PCMIL due to the reasons afore discussed. Hence their belated compliance of the said Regulation stands established.
22. Any non adherence to the regulatory provisions issued by the regulator in the interests of the investors 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 said Regulation would become redundant.
23. PCMIL have contended that they had appointed a common agency before the initiation of the present proceedings, i.e. before the date of the issuance of the notice dated February 20, 2006 and hence the admitted delay should be condoned. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the Regulations, no cognizance would have been required for the belated compliance of Regulation 53A of the DP Regulations. However as this is a case involving a delay of more than two years in complying with the directive specified in the said Regulations and the justification given for the same is not acceptable, necessary cognizance of the non adherence of the mandate laid down in the Regulations is very much necessitated.
24. Accordingly in order to levy the appropriate penalty on PCMIL, Section 15HB of the Act is to be referred to which prescribes the penalty upto Rs.1 crore to be levied in cases of non compliance with any provision of the Act, the rules or the regulations made or directions issued by the Board for which no separate penalty has been provided. I have also considered the following factors as provided in 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.
25. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the part of PCMIL nor any figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. However from the facts earlier mentioned, PCMIL did not have a common share agency to handle their share registry work relating to both physical and demat shares of the company for a considerable period and hence the same would have affected the interests of he investors.
26. As brought out earlier, PCMIL did not have a common share agency for a considerable period of time and had only recently appointed a common share agency, under an agreement dated October 01, 2005, which appears to be valid only upto September 30, 2006. PCMIL have not forwarded any documents to evidence the extension of the validity of the said agreement, despite verification sought in this behalf. On a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated in Section 15J of the Act, as well as after analysing the facts and circumstances of the present case, I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a penalty is very much necessitated.
PENALTY
27. 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, and in the interest of justice, equity and good conscience, on the assumption that the validity of the bi partite agreement entered into with M/s Ankit Consultancy Pvt Ltd would have been extended, I think it appropriate to order that a token penalty of Rs.25,000/-(Rupees Twenty five thousand only) be levied upon M/s Premium Capital Market & Investments Ltd for their belated compliance of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 in the matter of appointment of a common share agency to handle the share registry work relating to the dematerialized and physical shares as required there under. However if it is found that the said bipartite agreement has not been extended beyond September 30, 2006, I consider this a fit case for a penalty of Rs.1,00,000/-(Rupees One lakh only) to be levied upon M/s Premium Capital Market & Investments Ltd.
28. 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, 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 08, 2006 |
ADJUDICATING OFFICER |