Order i n respect of MCS Ltd

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA  

[ADJUDICATION ORDER NO. AP/AO-19/2005-06]

 

In the matter of Inspection of

 

Offer for sale/public issue of shares of

Oil and Natural Gas Corp. Ltd, Power Trading Corp. of India Ltd.

& Bank of Maharastra Ltd

 

AND

 

In respect of

MCS Ltd.

____ 

 

01.          Securities and Exchange Board of India (hereinafter, SEBI) conducted an inspection of the activities of MCS Ltd. in May and June 2004 to ascertain the role played by MCS as the Registrar to the Public issues of shares of Oil and Natural Gas Corp. Ltd, Power Trading Corp. of India Ltd. and Bank of Maharastra Ltd. The inspection report (IR) alleged many irregularities and in pursuance, SEBI appointed the undersigned as the Adjudicating Officer under Section 15 I of SEBI Act, 1992, vide order dated July 26, 2005 to inquire into and adjudge under Sections 15HB and 15C of SEBI Act, 1992, the alleged violation of SEBI (Registrars to an Issue and Share Transfer Agents) Rules & Regulations, 1993 the alleged lapses in MCS’ operations and also the alleged failure to redress investor grievances, respectively. The said order was communicated vide proceedings dated August 04, 2005.

 

02.          The undersigned issued a show cause notice (SCN) dated October 25, 2005 under Rule 4(1) of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter, Adjudication Rules) to MCS, communicating the allegations levelled against it and calling up on it as to why an inquiry in terms of the said Rules should not be conducted against it. Copies of the inspection report (97 pages + annexures), the details of investor complaints and sample copies of correspondences with MCS were enclosed along with the SCN as annexure II, III & IV respectively.

 

03.          MCS responded to the SCN vide letter dated November 15, 2005. It submitted that MCS’ letter dated October 24, 2005 (MCS’ reply to the Enquiry proceedings against it) may be treated as its reply to the Adjudication proceedings as well. In the reply dated October 24, 2005 MCS submitted that all the errors happened because of factors beyond its control and it has taken adequate remedial measures to minimize inconvenience caused to the investors. After considering the reply of MCS, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry dated November 17, 2005 was issued to MCS fixing December 07, 2005 as the date for inquiry. Mr. P.N. Rao, Director of MCS along with Mr. Ramesh Agarwal, Director and Ashok Kambli, Asst. Vice President, appeared before me for the inquiry and reiterated the submissions made vide the letter dated October 24, 2005. During the course of personal hearing MCS was granted time till December 19, 2005 to file additional reply in support of its contention. MCS filed the same vide its letter dated December 19, 2005 in the form of a bound volume with 11 exhibits.

 

04.          I have carefully perused the material on record and proceed to record my findings as under. But before that the relevant provisions pertaining to this case, are listed below:

 

15HB: Penalty for contravention where no separate penalty has been provided.

Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

 

15C: Penalty for failure to redress investors’ grievances.

If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

 

Rule 4 (1) (e) of SEBI (Registrars to an Issue and Share Transfer Agents) Rules, 1993: Condition for grant or renewal of certificate.

he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaints and he shall keep the Board informed about the number, nature and other particulars of the complaints received and the manner in which such complaints have been redressed.

 

Regulation 13 of SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993: Schedule III- Code of Conduct

Clause 2: A Registrar to an Issue and share transfer agent shall fulfill its obligations in a prompt, ethical and professional manner

Clause 3: A Registrar to an Issue and share transfer agent shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

 

Clause 5: A Registrar to an Issue and Share transfer agent shall always endeavour to ensure that

(a)……

(b) grievances of investors are redressed without any delay;

 

Clause 21: A Registrar to an Issue and Share transfer agent shall endeavour to resolve all the complaints against it or in respect of the activities carried out by it as quickly as possible.

 

Clause 30: A Registrar to an Issue and Share transfer agent shall be responsible for the acts of omissions of its employees and agents in respect of the conduct of its business.

 

Other directions to RTIs/STAs [as per RRTI Circular no. 1 (94-95), dated 11/10/94]

5. (i) Keeping the investors interest in mind, RTI/STA shall not accept work disproportionate to its capacity. RTI/STA shall not unload the entire/substantial proportion of its activities to outside agencies except in case of exigencies beyond its control.

 

 

05.          Before discussing the findings, it is necessary to understand the work flow of allotment of shares in public issues. In a book building offer, the investors submit their applications to the syndicate member (member of a stock exchange) who enters the bids in the exchange terminals (the electronic book). Upon closing of the issue, the application forms along with the cheques are forwarded to the Banker to the Issue (BTI) for realization of cheques and processing & categorization of applications. The BTI then forwards the applications to the Registrars to an Issue (RTI) along with a statement known as bank schedule. The bank schedule contains details like name of applicant, number of shares applied, cheque no., cheque amount etc. BTI also forwards details of application where cheques are dishonored, to the RTI, so as to prevent allotment. The RTI verifies the physical applications with the data in the bank schedule and does the data entry and also categorizes the applications. This data so entered is once again verified to weeds out invalid applications {like Beneficial Owner (BO) and DP ID (Depository Participant Identity) not provided, multiple BO and DP ID, multiple applications, PAN not given, bank details not provided, incomplete application etc.). The list thus prepared is then uploaded to the Depositories to verify the BO and DPID with that of the name list of the depositories, in order to eliminate applications with name mismatch, invalid BO and DP ID etc. The basis of allotment is finalized after this verification and the final list is uploaded for corporate action (credit of shares to the investor demat accounts).

 

06.          SEBI conducted inspection into the affairs of MCS upon receipt of numerous investor complaints pertaining to the following public issues.

 

Table –I

 

 

	Bank of Maharastra Ltd. (BoM)	Power Trading Corp. of India Ltd. (PTC)	Oil and Natural Gas Corp. Ltd. (ONGC)
Nature of issue	Public issue of shares	Public issue of shares	Offer for sale
Mode of issue	Fixed price issue	100% Book building	100% Book building
Issue/Offer size (no. of shares)	100,000,000	58,499,990	142,593,300
Date of opening	25.02.2004	01.03.2004	05.03.2004
Date of Closing	04.03.2004	08.03.2004	13.03.2004
No of applications expected	400,000	250,000	550,000
No of applications received	1,033,764	616,213	751,942
No of allotted applications	420,531	150,693	742,794
Lead Manager to the Issue	SBI Capital Markets, Kotak Mahindra Capital Company, Enam Financial Consultants, A.K. Capital Services & Allianz Securities	SBI Capital Markets, Enam Financial Consultants	J.M. Morgan Stanley (P) Ltd., DSP Merrill Lynch Ltd. & Kotak Mahindra Capital Co. Ltd.
Banker to the Issue	HDFC, Kotak Mahindra, ICICI & IDBI	HDFC, Kotak Mahindra, ICICI & IDBI	HDFC, Kotak Mahindra, ICICI & IDBI

 

 

07.          I find that the Public issue shares of BoM opened for subscription on February 25, 2004. Even before it closed on March 04, 2004, the public issue of shares of PTC opened on March 01, 2004. And even before the PTC issue closed on March 08, 2004, the offer for sale of shares of ONGC commenced on March 05, 2004 and closed on March 13, 2004. It is clear that there was overlapping of these three mega issues and MCS was the sole Registrar. The number of applications for these three issues exceeded the number of expected applications (given in table above).

 

08.          MCS stated in its reply (page 2 of letter dated December 19, 2005) that the expected number of applications for the aforesaid Public issue of shares/offer for sale was 400,000, 250,000 & 550,000 for BoM, PTC and ONGC issue respectively. Against this, the estimated processing capacity of MCS, as per the IR at page 73, is 30,000 applications per day (@ 250 applications per hour in 3 shifts in 40 terminals); with this capacity it would take 13 days to process 4 lakh applications. Clearly there is a huge mismatch between the processing capacity of MCS and the number of applications expected, in the three overlapping issues. MCS refuted the aforesaid by furnishing the list of 54 agencies appointed by it, for processing application under the supervision of MCS’ 7 branch offices, in Exhibit 9 to the reply dated December 19, 2004. This aspect is examined. While there is no bar on RTI outsourcing its work, it is unambiguous that outsourcing can be done only in exceptional cases in terms of Clause 5(i) of Instructions to RTI/STA vide RRTI Circular no. 1 (94-95) dated 11/10/94. Further, in terms of Clause 30 to the Code of Conduct of the RTI Regulation, the responsibility of the acts of employees and agents of RTI, lie solely with the Registrar. In the instant case there were three overlapping issues and therefore may be considered exceptional, hence outsourcing of work is not objectionable. However, MCS has stated in its statement dated June 26, 2004 that all data entry work for IPO is outsourced, albeit with appropriate checks! Outsourcing by default is not permitted in terms of the cited instructions to RTI. Hypothetically, even if it is allowed, merely having capacity is alone not enough; the capacity to process application in an error free manner is vital. The subsequent events, as discussed later, clearly points out that quality of outsourced work was very poor and to compound the problem, the RTI did not verify the work of the agents due to deadline pressure. Prudence demanded that MCS ought to have opted out of at-least one or two of the mandates, as it did not have the capacity to handle even the expected number of applications of the three issues. But it did not do so and the consequences were borne by the investors.

 

09.          As per MCS’s own admission in the IR it did not follow the normal procedure for processing the applications in ONGC and PTC issues. MCS used the data in the soft copy of the bank schedule, instead of making its own data entry. As per its own admission vide its statement dated June 26, 2004, MCS used the data from the BTI for the ONGC and PTC issue, without any, independent verification and reconciliation with the physical applications, because of the time constraint. MCS also admitted that the normal procedure for allotment was followed in the BoM issue. The basis of allotment was done partly using bank schedule and electronic book data. This resulted in instances where in invalid applications, where cheques were dishonored, etc were allotted shares. As demographic details (like address, bank account details) of the investors were obtained from the Depositories, instead of data entry, it resulted in wrong credits/refund to accounts. This was conceded by MCS in its statement dated June 26, 2004 with regard to ONGC and PTC issues. The aforesaid could have been avoided if the normal procedure of verification was carried out. The issue wise details in this regard are discussed later.

 

10.          MCS stated in its reply that, including the aforesaid three issues, it was also the Registrar to 7 mega issues for which the basis of allotment was finalized in the month of March 2004. It was submitted that the total number of application expected in the 7 issues (including the aforesaid 3 issues) was about 19 lakhs against which more than 30 lakh application were received. This statement only strengthens my finding that MCS showed lack of diligence and professionalism in accepting these mandates; the prestige and the gains in the form of fee from these large issues seems to have clouded MCS’ judgment in accepting these mandates without augmenting its capacity to handle it.

 

11.          The number of applications received in the aforesaid three issues turned out to be much higher than anticipated, as given in table above. The problem which thus began, led to chain of events, resulting in following:

 

a)      MCS did not exercise due skill, care and caution while processing the application forms, allotment procedures, credit of shares to various investor accounts with the depositories. Besides, there were delay in upload of shares and dispatch of refunds to the investors, resulting in several investor complaints

b)     MCS uploaded wrong file in the ONGC issue, leading to excess allotment of shares

c)      MCS did not follow normal standard procedure for processing of application also for finalization of basis of allotment. As the aforesaid were done without verification of data entered, it resulted in several errors and consequent investor complaints

d)     MCS did not verify, validate the applicant’s beneficiary details on account of which the credits had gone to wrong beneficiary account (to applicants who had not applied in the public issue) and the refunds were dispatched to the wrong address, resulting in large number of investor complaints.

e)      MCS allotted shares to applicants whose cheques have not been honoured. Further, even refund orders have been dispatched to such persons

f)       MCS allotted ONGC shares to applicants who applied to PTC issue

g)     MCS allotted shares in excess/shortfall and also issued refund orders in excess/shortfall

h)     MCS did not consider valid applications for allotment of shares

i)       MCS allotted BoM shares in physical form to investors, who indicated their preference to receive it in demat form, resulting in opportunity loss for them

j)        MCS outsourced its work and did not verify the details submitted by the agents. As the result, the quality of the work was poor.

The details in this regards are discussed subsequently.

 

 

12.          In the aforesaid context, the issue wise charge and rebuttal of MCS are examined below:

 

(a) ONGC:

 

i)       MCS contented that it suggested to the Book Running Lead Manager (BRLM) to consider having one more registrar for the issue. In support of this contention MCS furnished copy of the proposal for joint registry as Exhibit No 5 to letter dated December 19, 2005. I examine this evidence. Even though there is nothing to suggest that MCS has indeed forwarded this proposal to the BRLM, I am inclined to give MCS the benefit of doubt in this regard on the basis of the facsimile date stamp (January 13, 2004) on the proposal. The aforesaid contention of MCS for the proposal of joint registrar is corroborated by the IR in paragraph viii at page 33. It implies that MCS apprehended the nature and huge volumes of the work and it can not be made solely responsible, but the only problem existed is that, it continued with the work despite non-appointment of joint registrar to the issue.

 

ii)     MCS's contention about the delay by the Bankers to the Issue (BTI), was also a crucial factor. According to MCS, because of the common BTI for all the seven issues in March 2004 and because of the large number of applications received, there were many irregularities by the BTI. Referring to ONGC issue, MCS furnished the details of branch wise delay by BTI in forwarding the applications to it, in Exhibit 6 to the letter dated December 19, 2005. This evidence is examined. It is seen that out of the 1,24,712 applications received from ICICI Bank, 28,579 (23%) were received after the cut off date. Similarly it is seen that out of the 1,77,383 applications received from Kotak Mahindra Bank, 35,304 (20%) were received after the cut off date. These applications were received between 20^th and 25^th of March, 2004 instead of being received before March 20, 2004. Thus 23% and 20% of applications received from BTIs ICICI Bank and Kotak Mahindra Bank were received late. It may be emphasized that the finalization of the basis of allotment can be done only after all the applications are received. Therefore, the delay by the BTIs has contributed to the mess in the allotment procedure and MCS cannot be held responsible alone due to the delay by the BTIs in forwarding the aforesaid applications.

 

iii)  The BTI delayed sending the list of cheques dishonour cases to the RTI and MCS uploaded the file for corporate action without waiting for this information, because of the time constraint. This resulted in allotment of 37,700 shares to 808 applications, whose cheques were dishonored and they also got refunds! I also note that these errors were subsequently rectified. In this instance both the RTI and BTI contributed for the mess up; the former for the hurry and the later for the delay!

 

iv)   MCS contented that the three categories of investors (shareholder, employees and public) were clubbed together in the bank schedule by some of the branches of BTI, which resulted in wrong allotments. Though details in this regard are not provided, I am willing to accept the aforesaid contention of MCS as the explanation seems plausible.

 

v)     MCS also contented that PTC applications were inadvertently mixed with the ONGC application by the BTI. Though details in this regard are not provided, the IR concurs with the contentions of MCS and is hence acceptable.

 

vi)   In Exhibit 7 to reply dated December 19, 2005, MCS furnished evidence for the following

1.      15 instances where no bank serial number is mentioned in bank schedule but the same is mentioned in cheque return list.

2.      1597 instances (BTI & branch wise) where bank serial number is not mentioned in the bank schedule

3.      779 instances where serial numbers are repeated, no separate schedule for each category are mentioned

4.      109 instances where application number and applicant name is not mentioned

5.      41 instances where there is duplication in bank serial number.

6.      476 instances where serial number in the application differs with that on the bank schedule

 

Having examined the aforesaid evidence, I am of the view that in so far as the above instances are concerned, MCS cannot be held responsible as the investors/BTI have contributed to the problem.

 

vii)      MCS also contented that the compression of time frame also contributed to the problem. As per the schedule, the time frame for completion of ONGC issue was upto April 05, 2004. I observe in paragraph iii at page 33 of the IR that “there was an unofficial mandate from the issuer companies/sellers to the RTI to credit the public issue amount received in ONGC and BOM, before March 31, 2004.” Further also as per Exhibit 8 of reply dated December 19, 2005, it is observed that the time frame was compressed to complete the allotment process. As per the said exhibit, March 30, 2004 was the last date to complete the said process. It is quiet understandable that when such compression of time frame is done post facto i.e. subsequent to MCS appointed as RTI, it leads to all kinds of problem, as happened in the instant case. It is also noted that if MCS was not comfortable with the compressed time frame, it should have opposed the revised settlement timeline.

 

viii)    Basis of allotment was finalized on March 28, 2004 as per DIP guidelines, however, the dispatch of refund orders and credit of shares to the beneficiary account, which should have been completed by April 05, 2004, was not complete even as on the date of inspection report which was submitted on July 20, 2004. Therefore, I am not in agreement with the contention of MCS that all the allotment formalities were completed within the stipulated time.

 

ix)         I find that Instead of uploading the file with details of retail investors, MCS erroneously uploaded file with details of both retail and HNI investors on March 27, 2004 (first basis of allotment), resulting in all the HNI getting on full allotment, instead of proportional allotment. This resulted in 46,434,810 shares being wrongly and additionally credited to HNI. I note that this error by the RTI is fairly conceded in its statement dated June 26, 2004 and the error was subsequently sorted out by RTI except for 440,765 shares, which had been sold off by the HNIs. To that extent, it is an opportunity loss for the investors in other categories and as well a reflection of the quality of work of the RTI, under pressure. That the error was largely rectified does not take away the fact that the RTI had failed to discharge its duty diligently in the first place.

 

x)            I find that there were 5,175 applications, which were not classified properly by the BTI, which resulted in excess/short allotment in different categories. Since the mistake was by the BTI, MCS cannot be held responsible. This error was subsequently rectified.

 

xi)         I find that MCS uploaded the file for corporate action even before finalization of basis of allotment. As second verification of the application form with the names of investors from the Depositories, was not done, even those who did not apply, got allotment.

 

xii)       I find that there were 11,593 cases of multiple applications and had received allotment, instead of being rejected.

 

xiii)    I find that in 5,700 instances, allotment was made to applicants who had not mentioned their BO and DPID, instead of rejecting the applications.

 

xiv)     I find that in 22,320 instances, allotment was made to applicants who had not mentioned their PAN, instead of rejecting the applications.

 

xv)       I find that there were 2,000 cases of undelivered refund orders, as the address obtained by the RTI from the Depositories was outdated. The RTI cannot be held accountable for this problem as the application form had the necessary mandate for the RTI to obtain this data from the Depositories.

 

xvi)     Similarly, 8,811 refund orders were not dispatched in May 2004, because of details like name, address, bank details etc were not available and hence the RTI cannot be held responsible for the delay in refund.

 

xvii)  In the case of 18 applications of PTC who (16) were allotted ONGC shares, I note that the mistake occurred due to mixing up of the forms by the BTI. Though the RTI cannot be held solely responsible for the error, it could have averted, if the normal procedure for processing application had been followed.

 

xviii)      I find that for 11,943 applicants, 447,398 shares were not credited to the investors as on June 03, 2004.

 

xix)     There were 5,743 instances where the BO and DPID was not captured in data entry, 5,847 instances where application number were entered twice, 75 instances of name field left blank but not rejected, and 345 cases of wrong application number mentioned.

 

(b)        PTC:

i.              As per DIP guidelines, the dispatch of refund orders and credit of shares to BO should have been completed by March 24, 2004, but were incomplete as on the date of inspection report. Therefore, I am not in agreement with the contention of MCS that all the allotment formalities were completed within the stipulated time.

 

ii.           Demographic details like address of the investor, bank account details, etc were taken from the Depositories, rather than being captured by manual data entry from the application forms. It may be highlighted that the application did not have any specific mandate for using the data of depositories. This resulted in wrong credits, dispatch of refund to wrong address (as data in the application form was ignored) and consideration of invalid applications, thereby causing opportunity loss for the genuine investors.

 

iii.         I find that there were 1,800 cases of multiple applications and who had received allotment, instead of being rejected.

 

iv.         I find that in 743 instances, allotment was made to applicants who had not mentioned their BO and DPID, instead of rejecting the applications.

 

v.            I find that in 2,200 instances, allotment was made to applicants who had not mentioned their PAN, instead of rejecting these applications.

 

vi.         I find that there were 4,685 cases of undelivered refund orders, as the address obtained by the RTI from the Depositories was outdated. The RTI is responsible for this problem as the application forms did not have the necessary mandate for the RTI to obtain from the Depositories. In this case MCS should have referred to the application forms of the investors to minimize the instances of undelivered refund orders. In other words MCS should have made data entry of demographic details from the application form, rather than downloading the data from the Depositories.

 

vii.       I find that 3,000 refund orders were not dispatched in May 2004, because of details like name, address, bank details etc were not available. The RTI cannot be held responsible for the delay in refund as far as these 3000 cases are concerned.

 

viii.    I find that 423,900 shares, in respect of 3471 applicants, were not credited to the investors as on May 26, 2004, whereas MCS was supposed to complete it by March 24, 2004.

 

ix.          I find that in 285 cases, allotment was done to investors who have not even applied for PTC issue.

 

x.            I also find that there were 3,804 instances where application numbers were entered twice, 750 instances of bank field left empty, and 96 instances of application number field left blank.

 

(c)          BoM:

 

i.              As per DIP guidelines, the dispatch of refund orders and credit of shares to BO should have been completed by April 03, 2004, but were incomplete as on the date of inspection report. Therefore, I am not in agreement with the contention of MCS that all the allotment formalities were completed within the stipulated time.

 

ii.           I find that 82,400 applicants received allotment in physical shares though they had indicated their preference to receive it in demat mode. Besides being an irritant, such irregularity results in opportunity loss for the investors. MCS conceded vide its statement dated June 26, 2004 that this error was on account of its agents not keying in data properly and also the time constraint. For agents failure, liability will rest with MCS, being a principal.

 

iii.         I find that there were 8,500 applications in a sample of 10,000 applications that did not have bank details, but were still allotted shares.

 

iv.         I find that in 21 instances, allotment was made to applicants who had not mentioned their PAN, instead of rejecting the applications.

 

v.            I find that there were 5,800 cases of multiple applications and had received allotment, instead of being rejected.

 

13.          Thus, from the aforesaid, it is seen that MCS showed lack of diligence in accepting overlapping mandates for large issues, which it was not equipped to handle. The conduct of the BRLM, BTI and syndicate members also caused and added to the problem and also set up breeding ground for the inevitable disaster that followed. I find that the number of applications entered in the electronic book was 30,000, and 20,000 more than the number of physical application received for ONGC and PTC respectively. As pointed out in the IR, this indicates irregularity at the end of the syndicate member. Multiple bankers to the issue in the book building issue also caused delay as the refund procedure is required to be done separately for each BTI.

 

14.          MCS conceded the errors and their causes and pleaded that it was not intentional but at the same time denied the charges! It is difficult to accept the contention of MCS that what ever happened was unavoidable. It is on record that as on the date of inspection, some of the allotment procedures of these issues were still incomplete, as already discussed. Therefore, I am not in agreement with the contention of MCS that all the allotment formalities were completed within the stipulated time. It is now obvious that spillover effect of ONGC led to problems in PTC and BoM allotments.

 

15.          Thus, while MCS alone cannot be held responsible for the irregularities in the aforesaid public issues, MCS precipitated the problem by accepting mandates of these overlapping large issues. I don’t find any merit in the contention of MCS that no specific instances are cited for the allegations. The IR and its annexures were enclosed with the SCN, containing details of the allegations.

 

16.          From the aforesaid discussion, it is seen that MCS violated clauses 2, 3, and 30 of the Code of Conduct as specified in Schedule III of Regulation 13 of SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993 as it failed to exercise due diligence and did not act in a professional manner.

17.          The other charge against MCS is that it did not redress grievances of investors within the stipulated period of 30 days. I find from the material on record that in respect of 50, 300 and 344 instances pertaining to PTC, BOM and ONGC issues respectively, MCS has not redressed the grievances of the investors, within the specified time of 30 days. I find that all these instances pertain to non-receipt of allotment/refund order. It is clear that these instances arose as the normal procedure was not followed during allotment; given the huge number of applications the problem acquired dimension of its own resulting in these investor complaints. I find that in PTC issue about one fourth of the investor complaints have been redressed in 30 to 90 days time and about half of the cases are pending. In the case of BoM, about five sixth of the grievances have been redressed in 30 to 90 days, while in the case of ONGC, more than 50% of the complaint have been redressed in more than 90 days time frame. MCS has not offered any specific rebuttal of this charge; it only stated that the delay was on account of other agencies and which to some extent has been found to be true. The redressal table is given as under:

Table -II

 

18.          MCS submitted that it was the bunching up of large issues that led to the problem in the first place, however the ensuing grievances were addressed expeditiously, which demonstrated its sincerity. But from the above list of investor grievances, where the Board called upon MCS for action, the resolutions have taken place mostly over and above 30 day period as given in table above. It may be emphasized here that the period mentioned in the table is excluding the 30 days period given for resolution.

 

19.          I therefore find that MCS has indeed not redressed investor grievances within the period of 30 days which is in violation of Rule 4(1)(e) of SEBI (Registrar to an Issue and Share Transfer Agents) Rules, 1993 and clauses 5(b) and 21 of the Code of Conduct as specified in Schedule III of Regulation 13 of SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993.

 

20.          The aforesaid violations, therefore attract penalties U/s 15HB and 15C under Chapter VI A of SEBI Act, 1992. Under this chapter, there is no separate penalty provided for violation of clauses, 2, 3 and 30 of Code of Conduct of Schedule III of SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, hence penalty is imposable U/s 15HB of SEBI Act, 1992. For the violation of Rule 4 (1) (e) of (Registrars to an Issue and Share Transfer Agents) Rules, 1993 and clauses 5 (b) and 21 of Code of Conduct, penalty is imposable U/s 15C of SEBI Act, 1992 as MCS is a registered intermediary and failed to redress the grievances of investors within a period of 30 days after having been called upon by the Board to do so.

 

21.          To determine the quantum of penalty under Section 15HB and 15C, the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default.

 

22.          As mentioned in the findings, the genesis of the problem lay in MCS accepting overlapping large mandates, which it was not equipped to handle. While the IR and its annexures gives large amount of data on problems faced by the investors, there is no mention of one single figure that can be construed as the consolidated loss for the investors arising out of the lapse on the part of MCS. It would be a full-fledged accounting exercise to compute the loss caused to the investors from the data available and the office of AO is not equipped to handle such task. As far as repetitive nature of the default, the balance of convenience is in favour of MCS, as discussed below.

 

23.          There are quiet a few mitigation factors that favour MCS while deciding the quantum of penalty, which inter-alia are:

 

a)      MCS informed the BRLM of the ONGC about its capacity constraint. The BRLM did not consider this warning and moreover, the seller had shortened the time frame completing the process.

b)     In the quarter, which ended on March 2004, out of the 10 PSU issues, MCS was the sole RTI for 7 issues including the three issues under consideration. Therefore, there is considerable force in the contention of MCS about its goodwill and reputation which led the GoI / PSU companies to give mandate to MCS in the first place. This also addresses Section 15J(c) of SEBI Act, 1992; there default is not repetitive in nature, as is also borne out by the track record.

c)      It is quiet possible that if the three issues had come in a sequence rather than in an overlapping manner, due to financial year end considerations, the problems would not have arisen at all. This is borne out by the fact that MCS successfully handled 7 IPOs of around 19 lakh application without any problem in the first quarter of 2004.

d)     The conduct of MCS, after the problems arose, is worth highlighting. An amount of Rs. 1.09 crs was collectively paid by BTIs, BRLMs and MCS as interest to investors of ONGC issue; out of which MCS’s contribution was Rs. 6.43 lakhs, as detailed in Exhibit 11 to reply dated December 19, 2004. Apart from indicating MCS’ sincerity, it also points to the complicity of the BTI and BRLM, which made them to share the bigger portion of the interest liability to the investors. The payment of interest amounting to Rs. 1.03 crores, which works out to 94% of the total interest paid to the investors of ONGC, by the BTI and BRLM proves that these entities also admitted to their lapses in the whole process.

e)      Besides monetary compensation, MCS also set up call center to address investor queries arising out of these issues and also a special dedicated team was set up to reply to investor correspondences received.

f)       I also note from table II above that the number of unresolved investor grievance is just 23 in case of PTC and nil for ONGC and BoM. It can therefore be said that corrective steps have been taken by MCS although with delay, no intention can be attributed to the aforesaid violations. As per the submissions of MCS whatever the cases which are pending for redressal are due to the reasons beyond their control, which includes untraceable applicants, court matters, etc.

 

24.          While deciding on the quantum of penalty, I am also taking into consideration the ruling of the SAT in its order dated June 13, 2005 in the appeal No. 159/2004 in the matter of Karvy Consultants Ltd., wherein the penalty of RS. 10 lacs imposed by the AO, was reduced to Rs. 1.5 lakhs. The contents of this ruling are applicable to MCS in as much as there were several investor complaints arising out of irregularities in allotment of shares, by Karvy and which were similar to this case. However, there was no overlapping of mega issues as in the case of MCS.

25.          After taking into account the violations established and the mitigating factors, as discussed above, I, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of the Securities and Exchange Board of India (procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, hereby impose a penalty of Rs. 2 lacs (Two lacs only) on MCS Ltd. The company shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to Shri Suresh B Menon, General Manager, SEBI, DPS-2, MIRSD, World Trade Centre Cuffe Parade, Mumbai 400 005.

 

26.          This order of adjudication is made and passed on 24^th day of January 2006 at Mumbai.

 

 

(AMIT PRADHAN)

ADJUDICATING OFFICER