ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995)
AGAINST
M/s ITL INDUSTRIES LIMITED
BACKGROUND:
1. These proceedings arise consequent to the order dated November 2, 2005 to enquire into and adjudge the 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 Regulations and the Act respectively) by M/s ITL Industries Limited (hereinafter referred to as ITL) in the matter of their alleged failure to appoint a common share agency for handling the share registry work both for their dematerialised and physical securities.
NOTICE/ REPLY/ PERSONAL HEARING:
2. Accordingly, a notice dated February 20, 2006 was issued to ITL in terms of Rule 4(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) advising them to show cause as to why enquiry proceedings should not be held against them for the alleged violation of the provisions of Regulation 53A of the Regulations and why penalty should not be imposed upon them under section 15HB of the Act. ITL 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.
3. In response to the said notice, ITL vide their letter dated March 6, 2006, inter-alia made the following submissions:-
a) They had already appointed M/s. Ankit Consultancy Private Limited (Ankit) as their transfer agent for handing the physical share work and an outside agency for handling the work of electronic connectivity w.e.f. November 01,2003 (A copy of the agreement entered into with Ankit was enclosed for perusal)
b) They had already intimated the Stock Exchange, Mumbai vide their letter dated November 17, 2003 as also SEBI vide their letter dated June 10, 2005 about the said appointment. (copies of the letters were enclosed for due perusal)
4. As ITL did not submit all the documents evidencing the total compliance with Regulation 53A of the Regulations, a notice of hearing dated March 8, 2006 in terms of Rule 4(3) of the Rules was issued to ITL advising them to attend the proceedings to be held on March 24, 2006 along with the necessary documents to support their contentions.
5. In response thereto submitted the following documents under cover of letter dated March 15, 2006.
a) Copy of the tripartite agreement dated November 12, 2002 entered into by ITL with NSDL and Ankit.
b) Copy of the undated tripartite agreement entered into by ITL with CDSL and Ankit, and
c) Copy of the bipartite agreement dated October 22, 2003 entered into between ITL and Ankit that was valid from November 01, 2003 to October 31, 2004.
Thereafter ITL vide their letter dated March 20, 2006, requested for being exempted from the hearing scheduled on March 24, 2006 on the ground that they had submitted all the relevant documents.
6. Due to the inadequacy of the documents submitted by ITL, they were advised vide letter dated May 16, 2006, to submit the following details to substantiate their claim of compliance with Regulation 53A of the Regulations:-
i. Date of entering into the tripartite agreement with Ankit and CDSL.
ii. Percentage of shareholding in physical and demat shares.
iii. Proof of Continuation of service rendered by the RTA pursuant to the bipartite agreement entered into with the RTA that appeared to be valid only upto October 31, 2004.
iv. Documentary proof from the registrar validating the above.
7. Thereafter ITL under cover of their letter dated May 26, 2006, submitted that November 12, 2002 was the date when the tripartite agreement was entered into with CDSL and Ankit and that the percentage of shareholding of ITL in physical and demat shares as on March 31, 2006 was 38.96% and 61.04% respectively. ITL also stated that Ankit was appointed as their RTA since November 1, 2003 and continued to be their RTA and to that effect submitted a letter from Ankit confirming the same. Subsequently vide their letter dated May 31, 2006, ITL clarified that that they had appointed Ankit as a common agency for handling share registry work for both the demat and physical securities of their company since November 1, 2003. This submission of ITL was at variance with the submissions earlier made by them in their letter dated June 06, 2005, wherein they had submitted that they had appointed Ankit as their transfer agent for handing the physical share work and an outside agency for handling the work of electronic connectivity w.e.f. November 01, 2003. Hence written confirmation vide letter dated June 1, 2006 was sought from Ankit as regards their appointment as a common share agency for the share registry work relating to both the physical and demat shares of ITL and the exact date of such an appointment. In response to the same, Ankit vide two separate letters, both dated June 1, 2006 confirmed that they had been appointed as a common share agency for the share registry work relating to both the physical and demat shares of ITL in terms of Regulation 53A of the Regulations since November 01, 2003 and forwarded a copy of the agreement entered into with ITL in this behalf.
CONSIDERATION OF ISSUES:
8. I have taken into consideration the facts and circumstances of the case, the material available on record including the extensive correspondence entered into with all the concerned parties as also the relevant regulatory provisions.
9. 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.”
10. Thus these Regulations mandate 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 Registrar and Transfer Agent (RTA).
11. 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.
12. Prior to these regulations, SEBI vide its Circular No. FITTC/DC/ Policy-Cir-01/2001 dated August 03, 2001 had advised 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 had been advised to submit a compliance report to SEBI by October 15, 2001.
13. Subsequently SEBI Circular No. D&CC/FITTC/ Cir-05/2001 dated December 26, 2001 had brought out the list of all the scrips that had established connectivity with the depositories. In terms of the said circular, the shares of the companies which 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.
14. 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.
15. The provisions of Regulation 53A of the Regulations are however applicable only to that company whose shares have been dematerialized or to those companies whose shares are both in the physical and demat 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.
16. In the instant case, from the facts earlier mentioned, it appears that the shares of ITL are both in the physical and demat mode and as such ITL would be required to appoint a common share agency in terms of Regulation 53A of the Regulations.
17. I have noted from the records that ITL had appointed Ankit as their RTA, under an agreement dated October 22, 2001 to handle the share registry work relating to both their physical and demat shares effective from November 01, 2003. These facts also stand corroborated by the submissions made by Ankit and the documents forwarded by them evidencing the same. However, it is also apparent that although the said appointment was done before the initiation of the present proceedings, there has been an admitted delay of around 38 days in complying with the mandate specified in Regulation 53A of the Regulations. No reasons have been assigned for the delay. I have however noted that ITL had established connectivity with both the depositories in the year 2001 itself to enable their shareholders to dematerialize their shares and for this purpose had also entered into tri-partite agreements with both NSDL and CDSL respectively. I have perused the copies of the tripartite agreements dated June 20, 2001 entered into with NSDL and Ankit and the tripartite agreement dated May 23, 2001 entered into with CDSL and Ankit submitted during the course of the present proceedings and find them to be in order.
18. Since ITL have established connectivity with both the depositories and have also appointed a common share agency, albeit belatedly i.e. amounting a delay of around 38 days after the due date of compliance but before the initiation of the present proceedings and there is no evidence on record evidencing any loss caused to the investors due to the said delay, viz. complaints against ITL etc. I am of the considered opinion that no cognizance is required to be taken for the belated compliance of Regulation 53A of the Regulations.
19. Hence on a judicious exercise of the discretion conferred upon me, and after analysing all the material available on record as well as factors laid down in Section 15J of the SEBI Act, 1992, i.e. the amount of disproportionate and unfair advantage wherever quantifiable as a result of the default, the amount of loss to an investor or a group of investors as a result of the default, the repetitive nature of the default, all of which are in the negative, I 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 am inclined to hold that the imposition of any penalty in the present matter is not warranted and accordingly the proceedings initiated against M/s. ITL Industries Ltd. are hereby dropped.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: JUNE 05, 2006 |
ADJUDICATING OFFICER |