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 ENKAY TEXOFOOD INDUSTRIES 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 Enkay Texofood Industries Ltd (hereinafter referred to as ETIL) in the matter of their 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 ETIL by the issuance of a show cause notice dated December 31, 2003 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under ETIL 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. ETIL 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. Although the show cause notice was acknowledged by ETIL, they neither responded to the said notice nor provided any explanation for their failure to reply to the same.
4. Thereafter, a notice of hearing dated June 11, 2004 was sent by registered post to ETIL in terms of Rule 5(1) of the Rules whereunder, ETIL was advised to attend the hearing proceedings to be held on July 20, 2004. ETIL acknowledged the receipt of the same vide their reply dated July 20, 2004 in which they inter alia, made the following submissions:
i) There was no violation of the provisions of Regulation 53 of the Regulations in as much as they had already appointed a physical share transfer agent as well as demat registrar for transfer of securities, maintenance of records of holders of securities handling.
ii) In the year 1993, Intime Shares and Services Ltd. was appointed by them for the physical transfer of shares and in the year 2001; Sharex (India) Pvt. Ltd. was appointed for the purpose of dematerialization of the said shares. As such there was substantial compliance of Regulation 53A of the Regulations and hence no penalty under Section 15 HB of the Act should be imposed upon them.
iii) Notwithstanding the above, since May 2001, the company was registered with BIFR and since then, all the factory and office operations were stopped.
iv) Consequently, the company could not make the payment to its Share Transfer Agent and Demat Registrar resulting in the discontinuance of the services of the said STA.
v) Despite making a request to the STA to either provide the entire data of the shares and securities to enable the company to get the transfer of shares done themselves and / or to continue the work of the transfer with the promise that they would be paid as and when the company resumed its operations, neither did the STA hand over the data nor did it continue to transfer the shares of the company. Consequently, the company could not transfer the shares of the investors.
vi) The above dispute was referred to SEBI and a meeting between the representative of the SEBI, CDSL, NSDL, STA and the RTA and the company was held wherein the company explained its inability to comply with the work of the share transfer due to the non availability of records from the STA. As such, all the above mentioned authorities are aware of the inability of the company to redress the grievances of investors relating to share transfer in respect of which, there were several complaints pending redressal.
vii) Despite the facts above stated, their inability to address the issue of non redressal of the grievances resulted in Adjudication proceedings being initiated against the company under Section 15C of the Act and levy of a penalty of Rs.10 lacs upon them for non transfer of the shares of the company.
viii) Consequently, the company should not be penalized twice for the same non compliance in as much as the allegations and charges framed in the present matter arise from the grievances of the investors for non transfer of shares.
On the basis of the above, ETIL sought for the present proceedings to be dropped and also enclosed copies of the documents relied upon by them to substantiate their contentions.
5. Thereafter a notice of hearing dated November 22, 2004 was issued ETIL advising them to attend the hearing proceedings to be held on December 07, 2004. ETIL was also advised to submit the documentary proof if any, in support of their contentions at the time of the hearing and it was also made clear to ETIL 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. These proceedings, on the request of ETIL, were adjourned to December 17, 2004. On the said date, Mr. Deepak Poonamiya, Associate, RMG Law Associates, appeared on behalf of ETIL and requested that the matter be taken up for hearing on December 20, 2004. On the scheduled date of hearing, Mr. Poonamiya, submitted that ETIL had been referred to the BIFR and registered as case no.188/2001. It was stated that questioning the rejection of the said reference by the BIFR on January 16, 2003, an appeal had been filed before the AAIFR which was still pending as on date. It was further submitted that although the company had entered into tri-partite agreements with both the CDSL and NSDL respectively, they were unable to trace the copies of the said agreements since the company was practically defunct as on date. It was further added that Section 53A of the Regulations came into effect on September 2, 2003 whereas the company was referred to the BIFR prior to the said date and hence was incapable of complying with the said regulation.
CONSIDERATION OF ISSUES:
6. I have taken into consideration, the facts and circumstances of the case, the material available on record, the submissions advanced on behalf of ETIL as also the relevant regulatory provisions.
7. 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.”
8. 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 physical and demat shares of the company either in house or through a SEBI registered RTA.
9. 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.
10. 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).
11. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI.
12. From the facts earlier mentioned, it appears that ETIL had appointed a share transfer agent M/s Intime Shares & Services Pvt. Ltd. for the transfer of the physical shares of the company in the year 1993 and a demat registrar, i.e., M/s Sharex (I) Pvt. Ltd. in the year 2001 for the purpose of dematerialization of the said shares. As such, two separate agencies, instead of a common agency appeared to have been appointed by ETIL for the purpose of transfer of both physical and demat shares of the company, which is not in terms of the objective of Section 53A of the Regulations as brought out earlier. However, due to disputes with the STA, the share transfer work relating to the physical share has apparently stopped. Moreover, as per their own admission, made in their reply dated July 20, 2004, no demat request for the past two years have been entertained. As such, the share registry work of the company has admittedly come to a halt. ETIL on their part have highlighted the initiation of adjudication proceedings u/s 15C of the Act against them for the non redressal of grievances related to share transfer, and the amount of Rs.10 lacs imposed as penalty upon them. This issue has been highlighted by ETIL to espouse their cause that since they had already been penalized by SEBI for the non redressal of the grievances of their investors, they should once again, not be penalized for their failure to appoint a common share agency.
13. Though the rationale behind the appointment of a common share agency has a bearing on the share transfer work of the company, the same cannot be equated. As brought out earlier, the object behind the appointment of a common agency is the efficient handling of all share registry work of the company relating to both the physical and demat shares of the company at a single point to avoid any delay either in dematerialization or in reconciling the shareholdings of the investors which would in turn adversely affect the interest of the investors. As such, the object of the appointment of common share agency appears to have been defeated by ETIL due to their admittedly not having any RTA on their records as on date to handle the share registry work, at a common point. Moreover, notwithstanding their contentions of having established electronic connectivity with both the depositories i.e., NSDL and CDSL and entering into tripartite agreements with them, no documents have been submitted any point during the proceedings to evidence the same.
14. As there is no common agency dealing with both the physical and demat securities of ETIL as required to be done in terms of the provisions of Regulation 53A of the Regulations, their violation of Regulation 53A of the Regulations stands established. Even their contention of them being referred to the BIFR prior to Section 53A of the Regulations coming into effect on September 2, 2003 has no force in that the said reference was clearly rejected by the BIFR. The fact that an appeal has been preferred against the same has no bearing when the company is as on date, incapable of complying with the said regulation.
15. 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.
16. To levy the appropriate penalty on ETIL in this regard, Section 15HB of the Act is to be invoked which prescribes the penalty upto Rs.1 crore to be levied in cases of non compliance with any provision of the Act, the rules or the regulations made or directions issued by the Board for which no separate penalty has been provided.
17. To determine the quantum of penalty, I have considered the following factors as provided in the section 15J of the Act, which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995, i.e., the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.
18. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the company. There are also no figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. However, the said default which is bound to have caused an unquantifiable loss to the investor class as a whole is continuing till date. However, 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 mitigating factors, i.e., the financial status of the company, I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of penalty is very much necessitated.
ORDER:
- In view of the clear non compliance of 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. 50,000/-(Rupees fifty thousand only) on M/s Enkay Texofood Industries Ltd for their failure to appoint a common share agency for demat and physical shares as envisaged under Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996.
- 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: MARCH 07, 2005 ADJUDICATING OFFICER