ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995)
AGAINST
M/s UNIMIN INDIA LTD.
1. The limited issue that arises for my consideration in these proceedings initiated vide order of Securities and Exchange of India (SEBI) dated November 2, 2005 is to determine whether there has been, as alleged, a non compliance on the part of M/s Unimin India Limited (for brevity’s sake, hereinafter referred to as UIL) with the provisions 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) 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 UIL 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, UIL 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 Regulations and why the penalty as prescribed under section 15HB of the Act should not be imposed upon them. UIL 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. In the absence of any response from UIL to the same, a notice of hearing dated May 12, 2006 was sent to UIL advising them to attend the proceedings scheduled to be held on June 7, 2006.
3 UIL responded to the notice on June 2, 2006, in which while making a reference to their earlier letter dated June 18, 2005 (enclosed to their reply) it was stated that as they had not received any favorable response from SEBI to their letter, they were in the process of finalizing and appointing a common agency very shortly and would submit the documentary evidence in this regard during the hearing on June 7, 2006. It was also brought to my notice that in view of their continuing losses, the net worth of UIL was fully eroded as on the year ending March 31, 2006 and hence they had made a reference to the BIFR on May 11, 2006 and that their case was registered as Case No 44/2006 and hence requested for a sympathetic view. In the letter dated June 18, 2005, UIL had inter alia submitted that they had appointed Intime Spectrum Registry Ltd(Intime) as the RTA for transactions related to the electronic mode from June 29, 2002 and M/s. Allied Computer Tech Pvt. Ltd. Delhi,(Allied) was working as their RTA since long but due to difficulties at Allied and their closure, UIL were compelled to take back the work from Allied in July 2002 and that hence UIL had established an in-house share department immediately and purchased a renowned software for which they were getting technical support. It was also stated that UIL was running into losses and were not in a position to bear the additional burden of appointing a common agency or assigning the work to the existing RTA for electronic mode and that the shifting of work would also result in the loss of jobs of the existing employees, trained in running the in-house share department. On the said basis and as the volume of their transaction were stated to be very low, they requested to be granted an exemption from appointing a common agency.
4. On June 7, 2006, Shri Rajesh Mittal, authorized representative of UIL, appeared before me and while reiterating the contentions advanced earlier, made the following submissions:-
a. UIL had also requested SEBI to exempt them from the applicability of Regulation 53A of the DP Regulations on the grounds of erosion of their net worth and the losses that the company had suffered, but that no exemption was granted.
b. The company was making losses since 1994.
c. About 30% of their shares are in the demat mode and 70% are in the physical form. About 60% to 65% of the shareholding remained with the promoters and hence effectively around 5% -10% of the shares ware with the public.
d. They had entered into the tripartite agreements with NSDL and CDSL.
Shri Rajesh Mittal, submitted the copy of the Annual Report (2004-05) of the company and the copy of the letter issued by the BIFR to UIL which inter alia intimated them about their case registered as Case No 44/2006. He also requested that additional time be granted to them to enable them to make their written submissions along with the documents in support of his contentions.
5. Accordingly another notice of hearing dated August 3, 2006 was sent to UIL advising them to attend the proceedings scheduled on September 1, 2006.
6. Vide letter dated August 28, 2006, Shri Rajesh Mittal communicated his inability to attend the said hearing on the ground that he would be out of town on the said date and requested for a hearing at a later date in September 2006. He however submitted that notwithstanding that the net worth of UIL was fully eroded as on the year ending March 31, 2006 and being a ‘Sick’ company, registered with the BIFR on May 11, 2006 as Case No 44/2006, they had cleared the dues of their old RTA and got NOC from them to change their RTA and accordingly, had now selected Adroit Corporate Services Pvt Ltd.(Adroit) to act as their common agency in compliance with the mandate stipulated by SEBI and had also filed an application with the NSDL for change of RTA. The necessary documents in this regard were enclosed for due perusal.
7. Subsequently as undertaken by UIL, vide letter dated December 11, 2006, the tripartite agreement entered into between UIL, Adroit and CDSL on September 9, 2006, the tripartite agreement entered into between UIL, Adroit and NSDL on September 16, 2006 and the bipartite agreement entered into by UIL with Adroit on June 02, 2006 was forwarded as proof of their contention of having complied with Regulation 53A of the DP Regulations.
CONSIDERATION OF ISSUES:
- The provision of law alleged to have been contravened is Regulation 53A of the Regulations which came into force on September 02, 2003 and 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. Thus a mandate has been stipulated via the said law that all issuer companies should 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).
10. The object behind the said mandate as brought out in SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, which 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.
- This stipulation would however 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, the issuer company would have to establish electronic connectivity with both the depositories either directly or through a RTA.
- I have noted that 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.
- 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.
- 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.
- On the basis of the documentary evidence placed before me, it is clear that the shares of UIL are both in the physical and demat mode and hence the same would necessitate UIL appointing a common share agency in term of the mandate prescribed in the Regulations. It appears that UIL had earlier appointed Intime as the RTA for the share registry work relating to both the demat shares of their company while the company handled in-house the share registry work relating to the physical shares of their company and that only recently they have appointed Adroit as the common share agency vide an agreement entered into on June 02, 2006 i.e. after more than 2 1/2 years after the due date of compliance i.e. September 23, 2003 and much after the date of initiation of the present proceedings i.e. November 2, 2005. It is also noted that UIL have entered into the necessary tripartite agreements with both the depositories and the RTA only in the year 2006 which fact is established from the perusal of the copies of the said agreements submitted by UIL.
- Considering that 30% of the shares of UIL are in the demat form while the remaining 70% are in the physical form and till 2006, there was no common agency to handle the share registry work relating to both the physical and demat shares of the said company., it is evident that the interests of the shareholders was not taken into consideration.
- UIL have however sought exoneration of their liability to the fact that there was a complete erosion of the networth of the company as on the year ending March 31, 2006, and that although they were facing losses since 1994, a reference was made to the BIFR during 2006 and that their reference was registered as Case No. 44/2006 on May 11, 2006. The fact however remains that BIFR has not declared UIL as a SICK company. What I also find intriguing is that although the company claims to have suffered losses from the year 1994, they chose to seek a reference to BIFR only in the year 2006, that too, after the commencement of the present proceedings. Moreover their claim of networth erosion only stands supported by the copy of the copy of the Annual Report for the year 2004-05. In view thereof, the claim of UIL of facing a severe financial crunch does not appear to be ably supported by any documents. A desire to avoid additional financial burden can, by no stretch of imagination be termed as sufficient justification to avoid adhering to any mandate prescribed by SEBI, that too, in the interest of the investors. In any case, the DP Regulations do not envisage the grant of any exemption from the applicability of the Regulations for any reason whatever.
- 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.
19. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the Regulations or sufficient justification for the same been given by UIL, no cognizance would have been taken for the belated compliance of Regulation 53A of the Regulations. However as this is a case involving a delay of more than two and a half years in complying with the provisions of the said Regulation and no adequate justification has been given for the same, necessary cognizance of the non adherence of the mandate laid down in the Regulations is very much necessitated.
20. Accordingly in order to levy the appropriate penalty on UIL, Section 15HB of the Act is to be considered 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.
21. 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 UIL 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 as mentioned earlier, UIL have not appointed a common share agency to handle their share registry work relating to both physical and demat shares of the company within the period stipulated in the Regulations which default would have undoubtedly adversely affected the interests of their shareholders.
22. Hence, 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 since UIL did not have a common share agency for a considerable period of time and have only recently appointed a common share agency, although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a token penalty is very much necessitated.
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, and in the interest of justice, equity and good conscience. I think it appropriate to levy a token penalty of Rs.25,000/-(Rupees Twenty five thousand only) on M/s. Unimin India Limited 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.
24. A 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, Plot C4-A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: DECEMBER 13, 2006 |
ADJUDICATING OFFICER |