SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION 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
INDIAN ALUMINIUM COMPANY LIMITED
1.0 BACKGROUND:
1.1 I was appointed as the Adjudicating Officer by Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) to enquire into and adjudge the alleged contravention of Regulation 53A of SEBI (Depositories and Participants) Regulations, 1996 (hereinafter referred as the “DP Regulations’) read with section 15 HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred as the ‘Act’) by Indian Aluminium Company Limited (hereinafter referred to as ‘Indal’ or ‘company’) having its Registered Office at 1, Middleton Street, Kolkata 700 071 for the alleged failure to appoint a common share agency for handling share registry work for both the demat and physical shares.
2.0 SHOW CAUSE NOTICE
2.1 A Show Cause Notice dated 12.01.2004 under Rule 4(1) of the SEBI (Procedure for holding Enquiry and imposing Penalty by the Adjudicating Officer) Rules, 1995 was issued to Indal alleging that the company failed to appoint a common agency for handling all share registry work for both demat and physical securities in terms of Regulation 53A of the DP Regulations. Indal submitted reply vide letter dated 16.01.2004. The company appeared for personal hearing through Company Secretary Shri Aniruddha Roy on 05.04.2004 and made submissions.
3.0 REPLY TO THE SHOW CAUSE NOTICE & PERSONAL HEARING
3.1 Indal vide its reply dated 16.01.2004 submitted that as on date of reply HINDALCO was holding around 97 % of the paid up share capital of the company and the number of share holders had been reduced drastically. The company had then applied for delisting its equity shares from the stock exchanges on which they were listed, viz, Kolkata, Mumbai and National Stock Exchange. It was claimed therein that approvals in principle had been received from the BSE and NSE and trading had been suspended. Company was then awaiting approval from the Calcutta Stock Exchange for delisting. Upon the receipt of the approval, as per the undertaking given to the said Stock Exchanges an exit/ final option would be given to the remaining share holders and the company would become a wholly owned subsidiary of HINDALCO and there will not be any share processing work to be done.
3.2 The company enclosed two letters addressed to SEBI dated 03.01.2003 and 24.03.2003 with its reply. The letter was sent to SEBI in the light of Depository and Custodian Division Circular Number 15 dated 27.12.2002 regarding common agency for share registry work whereby the said Circular demanded compliance on 1st February 2003. In the said letter addressed to SEBI, the company stated that Indal was taken over by Hindalco and the public shareholding in Indal is below 10%. The company is heading for the final offer within 7-8 months with an exit option for the remaining shareholders as per the Takeover Regulations of SEBI. The share registry work relating to the physical mode is handled in-house and that of the electronic mode is handled by MCS Ltd, the SEBI registered R & T Agent. The company submitted that the in the above context, compliance of the circular will be a futile effort where the entire share capital will be held by single entity, hence prayed for exemption from the same. In the subsequent letter dated 24.03.2003, company reiterated that it was more than 95% subsidiary of Hindalco and the final offer for acquiring the remaining shares will be closed in August 2003. The company prayed again for exemption from compliance of the said circular in the above circumstances.
3.3 Indal furnished copies of the letters of permissions for delisting granted by CSE, BSE and NSE dated 16th January 2004, 27th October 2003 and 19th November 2003 respectively along with their request letter for extension of time of personal hearing dated 08.03.2004. The company also submitted that the final exit option for the remaining share holders will close on 15th February 2005. The application to stock exchanges for final delisting of shares was also annexed with the said letter.
It was submitted that Hindalco together with its subsidiary RIFL were holding 96.47 % of the paid up capital of the company. All the exchanges in principle had approved the company’s request to delist the shares upon fulfilling certain conditions. Pursuant to the same Indalco had given an exit option to the remaining share holders which is open from 15th February 2004 to 15th February 2005. The number of other shareholders and the shares floating in the market were negligible. Once the ongoing exit option is over on 15th February Hindalco is expected to hold 100% of the shares of the company, the acquirer may then hold them in physical or demat form. Hence, the problems mentioned in the Circular No.15 regarding non appointment of common share registry do not arise.
CSE had already delisted the stocks of the company on 31st March 2004 and it is expected that BSE and NSE will follow suit, though trading in the shares had been suspended.
The company handles share registry work in the physical mode in-house. The company had dealt only 44,574 shares since the circular had came up. There were no investor complaints in this regard. The company was established in 1913 and there was large number of records pertaining to the past years. Due to the large share holding of Hindalco the work and queries relating to the past period was continuing unabated. Transfer of records and documents in such a circumstance will result in duplication of work, wastage of time and delay in responding to the investors. In short, it will be contrary to the letter and spirit of SEBI Act. The inconvenience caused by the default is for a limited period and the investors and company would have suffered major inconvenience and grave injury if the company had attempted to shift the records at a point of time when the exit option was open.
The purpose of the 27.12.2002 circular was to ensure smooth and speedy transfer of shares without delay. There was no investor complaint till the date of reply.
In the above mentioned special situation where Hindalco had been acquiring the company, Indal’s actions were bonafide after disclosing the same to SEBI.
The company had not made any disproportionate gain or unfair advantage. There had been no loss to the investors. The company had also fulfilled the terms of representation to SEBI by applying for delisting soon after the Circular came into force.
It is submitted that penalty cannot be imposed on the company due to the following reasons;
i. Sections 15I and 15 J of the Act dealing with the power of Adjudicating Officer and the factors to be taken into account wile imposing the penalty respectively. 15-I confers discretion on the Adjudicating Officer and hence the imposition of the penalty is not automatic. And in the presence of guidelines provided under 15J there is no cause to impose penalty.
ii. SAT had held in Sriram Mutual fund v SEBI, 2003 (46) SCL, 571 – (SAT-Mum) that if a minimum penalty is prescribed the authority competent to impose the penalty will be justified in refusing to impose penalty. When there is a technical or venial breach of the provisions of the Act or where the breach flows from the bonafide belief that the offender is no liable to act in the manner prescribed by the statute.
Further Submissions
a. Company had applied to all the stock exchanges for delisting where its shares had been listed under 21 (3) of the SEBI (SAST) Regulations, 1997 and had also complied with the requirement under the said Regulations by public announcement.
b. NSE had suspended trading in the scrip from December 2003 and the final delisting would be considered when the Regional Stock Exchange agrees delisting.
c. CSE had delisted the shares of the company from the official list with effect from 31st March 2004.
d. In view of the proposal of the company to delist the shares form all he stock exchanges and the necessary steps taken pursuant to the same, it was submitted that the compliance with Regulation 53A would not be required.
4.0 APPRECIATION OF EVIDENCE AND FINDINGS
4.1 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.”
4.2 Hindalco holds around 97% of the paid up capital of Indian Aluminum Company Ltd (Indal). Indal has applied for delisting its equity shares from all the stock exchanges in which its shares are listed namely Kolkata, Mumbai and NSE. In principle approvals have already been received from the BSE vide its letter dated 27.10.2003 for delisting of shares of the company pursuant to Reg.21 (3)(a) of SEBI(SAST) Regulations, 1997. NSE suspended the trading vide its letter dated 19th Nov 2003 and informed that delisting would be done on receipt of approval of delisting from the Regional Stock Exchange. Kolkata Stock Exchange vide it’s letter dated 31.03.2004 has informed that that the equity shares of the company are delisted with effect from 31.03.2004 and also issued a notice to all the members vide its notice of even date.
4.3 The company vide its letter dated 19 Feb 2004 has informed CSE, BSE and NSE that it had made a public announcement in the Business Standard dated 11th Feb 2004, Aajkal dated 11th Feb 2004 about the delisting of its equity shares and enclosed copies of the public announcement and individual letters sent to the remaining public share holders.
4.4 In the facts of the case following facts assume significance;
a) The public float of the shares is low as Hindalco has acquired 97% of the paid up capital of Indal
b) The company had also made a public announcement to acquire the remaining shares from the public before delisting in terms of Regulation 21(3)(a) of SEBI(SAST) Regulations, 1997.
c) CSE had already delisted the shares vide its letter dated 31st March 2004 and other exchanges granted in principle approval for delisting subject to certain conditions and the trading of the shares is suspended.
d) Absence of any investor complaints
4.5 In view of the above, the alleged non-compliance of the directions of the Board has;
a) Not resulted in any gain or advantage
b) Not caused any loss to any investor or group of investors
c) Not a recurring default
Hence, none of the factors contained in Section 15J of SEBI Act, 1992 which reads as under are attracted so as to levy a penalty.
“15J. Factors to be taken into account by the Adjudicating Officer—While adjudging the quantum of penalty under section15-I, the Adjudicating Officer shall have due regard to the following factors namely:—
(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;
(c) the repetitive nature of the default.”
4.6 In the judgment of Supreme Court in Hindustan Steel Limited v State of Orissa, AIR 1970 SC 253, the Hon’ble court held us under;
“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding and penalty will not be ordinarily be imposed unless the party obliged either acted in defiance of the law or acted in conscious disregard of its obligations. Penalty will not also be imposed merely because it is lawful to do so. Where penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judiciously and on a consideration of all the relevant circumstances.”
4.7 Under the circumstances, it is pertinent to refer to the observations of Hon’ble Bombay High Court in Cabot International Ltd vs SEBI [2004] 51 SCL 307(BOM).
“Though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite, that in the statute, minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to the bonafide belief that he was not liable to act in the manner prescribed by the statute or there was too technical or venial breach etc.“
5.0 ORDER
Having regard to the nature of charges, the facts and circumstances and taking into account that the company’s shares are delisted from BSE and NSE on 8th April 2004 subsequent to a public announcement made to acquire the remaining shares from the public, the factors under Section 15J of SEBI Act, 1992 and following the Judgement Supreme Court in Hindustan Steel Limited v State of Orissa, AIR 1970 SC 253 and judgement of Hon’ble Bombay High Court in Cabot International Ltd vs SEBI [2004] 51 SCL 307(BOM), it would not be just, fair and proper to impose a penalty for the non-compliance of Regulation 53A of SEBI (DP) Regulations, 1996 between 3rd September 2003 when the said Regulation came into force and 31st March 2004 when its shares were delisted by CSE.
Date: 29 July 2005 S.V Krishna Mohan
Place: Mumbai Adjudicating Officer