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 CEPHAM MILK SPECIALTIES 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 Cepham Milk Specialties Ltd (hereinafter referred to as CMSL) in the matter of their alleged failure to appoint a common share agency 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 against CMSL by the issuance of a show cause notice dated December 30, 2003 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 where under CMSL was asked 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 as to why penalty should not be imposed upon them under section 15HB of the Act. CMSL 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. However, the said notice was returned undelivered by the postal authorities. Thereafter, a notice of hearing dated November 22, 2002 was sent to CMSL in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, (Rules) and vide the said notice, CMSL was advised to attend the hearing proceedings to be held on December 17, 2004 along with any documentary proof in support of their contention. However, no body appeared on behalf of CMSL on the said date to present their case nor was any explanation offered for their absence. Keeping in mind the principles of natural justice, another opportunity was offered to CMSL vide notice dated February 9, 2005 advising them to attend the hearing proceedings to be held on March 01, 2005. CMSL were also advised to note that no further adjournment would be granted to them and that in case they failed to appear for the said proceedings, the matter would be decided solely on the basis of the material available on record. The notice forwarded to CMSL through the Ludhiana Stock Exchange Association Ltd (LSE), was received by CMSL on February 15, 2005, as is evident from the acknowledgment forwarded by the LSE to SEBI. However, no body appeared on behalf of CMSL on the said date to present their case and once again no explanation was offered for their absence.
5. As observed above, CMSL were granted sufficient opportunities to appear before me and present their case. Despite the same, they failed to avail the said opportunities.
CONSIDERATION OF ISSUES:
7. In the absence to any representation from CMSL, the matter is proceeded with on the basis of the facts and circumstances of the case, the material available on record as also the relevant regulatory provisions.
8. 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.”
9. In view of the above, it is imperative for all issuer companies to appoint a common share agency either in house or through a SEBI registered RTA for the share registry work relating to physical and demat shares of the company.
10. 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 was to avoid:
a) any delay in dematerialization, and
b) Non-reconciliation of the share holding due to a lack of proper co-ordination among the concerned agencies or departments, which was adversely affecting the interest of the investors.
11. Hence before the admission of any security into the depository system, it is necessary for the issuer company to establish electronic connectivity with both the depositories either directly or through a Registrar and Transfer Agent (RTA).
12. Thus Regulation 53A of the Regulations is an important measure brought about by SEBI for the benefit of the investors.
13. From the facts earlier mentioned, it is clear that despite granting CMSL sufficient opportunities to appear in person and present their case, they did not submit any proof of their compliance of Regulation 53A of the Regulations. Not even on a single occasion did CMSL address the notices issued by SEBI or express their inability to attend the hearing proceedings. Despite receiving the notice forwarded through the LSE, they kept themselves away from the hearing proceedings. Moreover till date, no document has been furnished by them evidencing compliance of the Regulations and it is not even known as to whether they have actually started functioning as a common share registrar for both physical and demat securities in terms of the provisions of the Regulations.
11. In any case, to obtain the relevant information in this regard, both the CDSL and NSDL were contacted. From the information received from them, it is noted that CMSL have till date not established any connectivity with either of the two depositories to enable their shareholders to dematerialize their shares. Further no tripartite agreements either with NSDL or CDSL has been entered into for the said purpose. The same is also evident from the information available in the websites of both the depositories (NSDL & CDSL).
12. It is thus clear that since CMSL have failed to establish connectivity with both the depositories to facilitate dematerialization of their shares and had also not entered into tri-partite agreements with NSDL and CDSL or appointed a common share agency, they were unable to provide any evidence in this regard since they had not complied with Regulation 53A of the Regulations.
14. Any evasion of the regulatory provisions issued by the regulator in the interests of the investors or non adherence to the same 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 provisions in the said enactments would become redundant.
15. In view of the absence of CMSL submitting any information evidencing their compliance of Regulation 53A of the Regulations, the said violation by them is established, and they will be held liable for the non compliance of Regulation 53A of the Regulations under 15HB of the SEBI Act, 1992 in this regard which reads as under:
16. Section 15HB reads as under:
“Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”
17. While adjudging the quantum of penalty, the adjudicating officer is required to have due regard to the factors laid down in Section 15 J of the Act which are as under:-
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
18. These provisions also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995.
19. It is not clear as to whether CMSL enjoyed any gain or unfair advantage as a result of the default. However it cannot be denied that the said default would have certainly caused a certain amount of disadvantage to their shareholders and the investor class as a whole. Moreover, the default is continuing till date. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated above as well as after taking into consideration the facts and circumstances of the present case as well as after analysing all the material available on record, the rationale behind the requirement of the appointment of a common share agency, the absence of any response by CMSL to a regulatory directive, I am inclined to hold that although the penalty need not be imposed in terms of the quantum provided in Section 15HB of the Act, the imposition of a token penalty is very much necessitated..
PENALTY:
20. In view of the failure on the part of CMSL to appoint a common share agency for demat and physical shares under and their consequent non compliance with Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996, 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 penalty of Rs. 75,000/-(Rupees seventy five thousand only) on M/s M/s Cepham Milk Specialties Ltd .
21. The 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, Deputy General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: MARHC 21, 2005 ADJUDICATING OFFICER