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. BHARAT ELECTRONICS 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. Bharat Electronics Ltd (hereinafter referred to as BEL) whose shares are listed on the Bangalore, National Stock Exchange and the Stock Exchange, Mumbai (for brevity sake hereinafter referred to as BgSE, NSE and BSE respectively) in the matter of their failure to appoint a common share registrar 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 by the issuance of a show cause notice dated December 30, 2003 to BEL in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under BEL was asked to show cause as to why enquiry proceedings should not 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. BRL 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.
3. In reply to the same, BEL vide their letter dated January 19, 2004 inter alia, made the following submissions:
a) BEL is a Government of India enterprise, under the administrative control of the Ministry of Defense, Department of Defense, Production and Supplies.
b) Of the total paid up capital of its 80,000,000 equity shares, the Government of India held 75.86% amounting to 60,689,600 shares while 24.14% amounting to 19,310,400 shares of BEL was held by others.
c) Out of 24.14% of BEL shares held by others, as on December 31, 2003, 99.73% of BEL shares were in the demat form (i.e. of the 19,310,400 shares divested by the Government and held by others).
d) Thus, as on December 31, 2003, BEL had only 50,936 shares (about 500 certificates) held by persons other than the Government, in physical form in 262 folios. During the last one year, BEL had received and processed a total of 63 transfer requests (covering 8500 shares) i.e., about 1-2 transfer requests per week. Similarly, the weekly average dematerialization attended during the last one year has been three demat requests per week (a total of 171 demat requests covering 30,100 shares in both the depository systems).
e) With the present public holding of physical shares of just 50,936 shares in 262 folios, the above stated volume was declining to a negligible position.
f) BEL was attending to all share transfer requests and related works, in house very promptly and there was no complaint of delay from any shareholder on this account.
g) BEL had till December 31, 2003 handled in house, a total of 2710 demat realization requests (dematerializing 19,26,100 shares) and 15 rematerialisation requests (rematerializing 1636 shares) in both NSDL and CDSL very promptly.
h) In this connection, BEL had entered into tripartite agreements with NSDL/CDSL and M/s Alfa Systems Pvt. Ltd., Bangalore (RTA). The services of the RTA were availed for maintaining electronic connectivity with the depositories.
i) BEL had a well established secretariat department with adequate number of qualified professionals, infrastructure and well laid systems and procedures to attend to all share registry work in house very promptly.
j) BEL had a Company Secretary (who is also the Compliance Officer) and one Deputy Company Secretary and one Assistant Company Secretary, all of who are members of the Institute of Company Secretaries of India.
k) The transfer / transmission requests, requests for issue of duplicate certificate, etc. were examined and approved by a committee consisting of the Chairman and Managing Director, Director (Finance) and Director (Personnel). Share certificates wherever required were issued under the signature of Chairman and Managing Director, one part time Director and the Company Secretary.
l) BEL was prompt in maintaining all records and filing all returns / reports with the ROCs and the Stock Exchanges. BEL had a system of weekly reconciliation of its share capital held in both physical and electronic form with CDSL and NSDL and never faced any problem in this regard.
m) BEL has constituted an Investors/Shareholders Committee consisting of three Directors and the grievances together with information on transfer/demat/remat requests, etc. received and serviced by the company are examined by the said committee and queries / complaints attended to promptly.
n) Keeping in mind, its strong and well established in house arrangements to handle the share registry work and viewing its track record of promptly complying with all the requirements and the listing agreement, no additional purpose would be served by handling over the share registry work to any RTA especially at the stage when 99.73% of its traded shares were already in the demat form and the number of shares held by the institutions/ public was very small and BEL was capable of handling, in house the couple of transfer requests and few dematerialization requests.
o) In case the complete share registry works and associated responsibility for maintenance of records was handed over to the R & T agents, BEL would have to refer every query and complaint to the R &T agent which would involve delays and not be in the interest of investors.
p) Getting direct electronic connectivity by BEL from both the depositories and handling all the share registry work in house (including maintaining electronic connectivity) would call for considerable capital investment (connectivity with NSDL alone would involve initial investment of about Rs.13 lacs as hardware/software costs) and employing further trained technical persons to maintain the connectivity.
q) Considering the negligible volume of remat/demat related jobs, such an investment was not justified.
r) BEL had represented to SEBI through the BgSE, vide their letter dated January 06, 2003 for exemption from the requirement of appointing a common R & T agent, but had not received any reply till date from SEBI in this regard.
4. On the basis of the above, it was requested that they may be exempted from appointing a common agency for handling all the share transfer work relating to both the physical and demat shares of their company and be permitted to continue with the present arrangement of handling the share registry work in house while maintaining the electronic connectivity with the depositories through the registrars.
5. Thereafter in terms of rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, (Rules) a notice of hearing bearing no. A&E/SVK/540/04 dated July 07, 2004 was sent to BEL advising them to attend the hearing proceedings to be held on July 16, 2004.
6. In reply to the same, BEL vide their letter dated July 16, 2004 stated that since they had received the said notice only on July 16, 2004, due to a change in their office address, a subsequent date of hearing be granted to them. Enclosed therein was the new address of the company.
7. In view of the above, another notice of hearing dated October 14, 2004, in terms of Rule 5(1) of the Rules, was sent to BEL and vide the said notice, BEL was advised to attend the hearing proceedings to be held on November 19, 2004 and submit the documentary proof if any, in support of their contentions.
8. On the said date, Mr V. Venugopalan, Deputy Company Secretary of BEL appeared before me and reiterated the submissions made earlier, especially regards as having sought from SEBI, exemption from the applicability of Regulation 53A of the Regulations and their failure to receive any response from SEBI. Thereafter, the attention of Mr. Venugopalan was drawn to the letter no. D&CC/BEL/1019/2003 dated January 14, 2003 issued by SEBI to the M.D, BEL, wherein SEBI had advised that no relaxation or waiver would be considered in the matter of appointing a common agency for maintaining share registry work and electronic connectivity at a single point. Mr. Venugopalan, stated that as BEL had not received the said letter and that the same would have to be brought to the notice of the management, additional time of about 3 months be granted to him to report compliance.
9. In view of the above, the case was adjourned to February 02, 2005.
On the said date, Mr. Venugopalan appeared before me and stated that BEL had complied with all the formalities relating to the appointment of a common share agency in terms of Regulations 53A of the DP Regulations. In this regard he submitted the copies of the following documents as proof of compliance:
i) Tripartite agreement dated October 12, 1998 between NSDL, BEL and Alfa Systems Pvt. Ltd. (RTA).
ii) Tripartite agreement dated April 28, 2000 between CDSL, BEL and the RTA.
iii) Bipartite agreement dated January 18, 2005 between BEL and the RTA.
iv) Letter no.ASPL/BEL/2005 dated January 25, 2005 from the RTA acknowledging receipt of all required documents and the data and confirming that they are in a position to render all services as per the bipartite agreement dated January 18, 2005.
v) Letter No.17507/NSE/SEC/HO dated January 25, 2005 addressed to the NSE informing them of the appointment of M/s Alfa Systems Pvt. Ltd. as the RTA.
vi) Letter No.17507/14/SEC/HO dated January 25, 2005 addressed to the BSE informing them of the appointment of M/s Alfa Systems Pvt. Ltd. as the RTA.
vii) Letter No.17507/10/SEC/HO dated January 25, 2005 addressed to the BgSE informing them of the appointment of M/s Alfa Systems Pvt. Ltd. as the RTA.
viii) Letter dated January 27, 2005 addressed to the shareholders informing them of the appointment of M/s Alfa Systems Pvt. Ltd. as the RTA.
ix) Information put on the companies website www.bel-india.com.
On the basis of the above, he requested that the present proceedings be dropped without imposing any penalty.
CONSIDERATION OF ISSUES:
10. I have taken into consideration, the facts and circumstances of the case, the material available on record, the submissions advanced on behalf of BEL and as also the documents submitted by them including the originals produced for verification at the time of the hearing proceedings held on February 02, 2005 and the relevant regulatory provisions.
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. 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.
13. 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.
14. 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.
15. 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).
16. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI.
17. 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.
18. 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.
19. 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 a share transfer agent.
20. From the facts earlier mentioned, it is noted that BEL had requested for exemption from the necessity of appointing a common share agency in terms of Regulation 53A of the Regulations for the reasons elaborated above primarily on the ground that more than 99% of the shares of BEL out of 24.14% held by the public, were in the demat form (which was already entrusted to a SEBI registered RTA) and the physical shares constituting less than 1% of its total paid up capital was being handled in house by them, apparently efficiently without any investor complaint till date. However, the requirement of appointing a common share agency in terms of Regulation 53A of the Regulations is mandatory and required to be complied with every listed company. Accordingly SEBI had refused to grant any exemption to it and communicated the same to BEL vide their letter dated January 14, 2003. However, on the basis of the submissions made on behalf of BEL, it appears that they did not receive the said letter and hence had not initiated any action in this regard.
21. I would like to give the benefit of doubt to BEL as regards their not receiving the letter dated January 14, 2004 issued by SEBI. In fact taking into consideration the merits of the case as well as the historical significance of the organization, BEL was granted time and I have noted that they have duly fulfilled the requirements as specified under Regulation 53A of the Regulations and reported compliance by the first week of February, 2005. i.e. BEL have entered into an agreement with a SEBI registered RTA to handle the share registry work relating to both the demat and physical shares of the company in due compliance with the provisions of Regulation 53A of the Regulations.
22. Since BEL had already established connectivity with both the depositories by the year 2000 itself to enable the shareholders to dematerialize their shares and in this regard had also entered into tri-partite agreements with both NSDL and CDSL and have also appointed a common share agency, there has been compliance by them of the provisions of Regulation 53A of the Regulations.
ORDER:
23. Having regard to the factors contained in Section 15J of the SEBI Act as also bearing in mind the facts detailed above on a judicious exercise of the discretion conferred upon me, I am of the considered opinion that the imposition of any penalty in the present matter is not necessitated.
24. 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. Bharat Electronics Limited are hereby dropped.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: FEBRUARY 16, 2005 ADJUDICATING OFFICER