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 SUNSTAR LUBRICANTS 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 Sunstar Lubricants Ltd (hereinafter referred to as SLL) 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 SLL by the issuance of a show cause notice dated January 12, 2004 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under SLL 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. SLL 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 notice was acknowledged by SLL, they did not respond to the said notice nor provide any explanation for their failure to do so.
4. Therefore, a notice of hearing dated November 3, 2004 was sent to SLL in terms of Rule 5(1) of the Rules, and vide the said notice, SLL was advised to attend the hearing proceedings to be held on November 29, 2004. A copy of the said notice of hearing was also faxed to SLL. Although the notice of hearing was acknowledged by SLL, they did not respond to the said notice. However upon receipt of the fax, a representative of SLL contacted the undersigned and stated that as they had not received the copy of the notice sent to them, a copy of the same be faxed to them. He also requested to be given an opportunity of being heard in person.
5. Keeping in mind the principles of natural justice, another opportunity was offered to SLL vide notice of hearing dated November 22, 2004 not only to be heard in person on December 6, 2004 but also to submit the documentary proof if any, in support of their contentions. It was also made clear to SLL 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. A copy of the show cause notice was also faxed to SLL on November 17, 2004, as requested.
6. On the said date, Shri S K Mishra, Ex-Company Secretary of SLL, authorized to represent SLL in the matter appeared before me and made the following submissions:
a. SLL, which was listed on the BSE and the NSE was incorporated in 1989. The shareholding pattern was such that the promoters at that time held more than 50% while the public held 36% of its equity capital.
b. The trading of the shares of SLL got suspended in the year 1999 due to their inability to pay the listing fees.
c. As SLL had started suffering huge losses, they had been referred to the BIFR in January 1999 and were registered as a sick company by the BIFR, vide its order dated May 11, 1999. Thereafter IFCI had been appointed as the operating agency. However as the rehabilitation package offered by SLL, was not found to be viable, BIFR vide its order dated March 05, 2003 recommended the ‘winding up of SLL’
d. The Hon’ble High Court of Delhi vide its order dated December 3, 2003 ordered the winding up of the company, whereupon the Official Liquidator of the Delhi High Court was appointed to take over the assets and records of the company. Documentary evidence in support of the said contentions was submitted.
e. At the time of liquidation, 72% of the shares of SLL were held by the promoters while3% of its equity capital was held by the FIIs and banks.
f. Earlier to that, SLL had appointed M/s Alankit Assignments, Delhi as its depository participant and got 25% of the shares of SLL dematerialized. However proof of the same was not submitted.
g. The share transfer requests upto November 30, 2003 had been processed and requests for the same made after December 3, 2003 were yet to be attended to, as the Register of Members was with the official liquidator.
h. SLL would undertake to provide details of the pending share transfers to the Official Liquidator for making necessary corrections in the list of members, they are possessed of, to look into this aspect.
i. SLL was facing winding up proceedings at the Delhi High court, by the time Regulation 53A of the Regulations were made applicable to it and consequently SLL was in no position to comply with the requirement of the said regulation.
On the basis of the same, it was requested that the proceedings initiated against SLL be dropped.
7. In view of the said development, a notice of hearing dated December 20, 2004 was sent to the Official Liquidator appointed by the Delhi High Court in the matter to hear his views on the matter. Furthermore, the Official Liquidator was advised not only to be heard in person on January 27, 2005, 2005 to present the case of SLL along with the documentary proof if any, in support of their contentions. It was also made clear to the Official Liquidator that in case they failed to appear for the said proceedings, the matter would be decided solely on the basis of the merits of the case and the material available on record. However there was no representation by the OL on the scheduled date of hearing.
CONSIDERATION OF ISSUES:
8. I have taken into consideration, the facts and circumstances of the case, the material available on record, and the submissions made in support of SLL 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. 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.
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. Thus the provisions of Regulation 53A of the Regulations would be applicable only to that company whose shares have been dematerialized or to those companies whose shares are both in the physical and demat mode.
13. In such a case, 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 Registrar and Transfer Agent (RTA).
14. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI effective from September 02, 2003.
15. I have also perused the circular issued by SEBI bearing no.FITTC/DC/Policy-Cir-01/2001 dated August 03, 2001 which advises all companies to establish connectivity with both the depositories on or before September 30, 2001 so as to facilitate compulsory trading in the rolling settlement effective from January 2, 2002. In terms therein all stock exchanges have been advised to submit a compliance report to SEBI by October 15, 2001.
16. Subsequently SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001 has brought out the list of all the scrips that have established connectivity with the depositories. In terms of the said circular, the shares of the companies which have not established connectivity with the both depositories as on October 31, 2001 are to be traded on the ‘Trade for Trade’ settlement mode and not on the normal rolling settlement.
17. 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.
18. In the instant case, upon perusal of the information available on record, it is seen that SLL is registered with both the depositories namely, Central Depository Services Ltd (CDSL) and National Securities Depositories Ltd (NSDL) which aspect has been verified from the respective websites of the depositories. However, it is also noted that SLL has not appointed a common agency to handle the share registry work relating to both the physical and demat shares. Moreover SLL has not provided any documentary evidence to substantiate their contention of having appointed M/s. Alankit Assignments as the RTA for handling the demat requests of their company. What has however been drawn to my attention is the fact that by the time Regulation 53A of the Regulations was made effective, ie.., on September 02, 2003, SLL was already facing winding up proceedings at the Delhi High Court, in that vide an order dated March 05, 2003, the BIFR recommended the winding up of SLL to the Delhi High Court. I have perused the order of the Delhi High Court dated December 03, 2003 which consequent to receiving the recommendation of the BIFR, ordered the winding up of SLL and appointment of the Official Liquidator attached to the Delhi High Court, as the Liquidator of SLL, who was then directed forthwith, to take over the assets and records of SLL.
19. In view of the facts above stated, this appears to be a case wherein the retrospective application of the provisions of Section 53A of Regulations cannot be made. Moreover, Article 20(1) of Constitution of India, in this regard, would also apply which inter-alia prohibits the conviction of any person of any offence, except for the violation of a law in force, at the time of the commission of the act, charged as an offence. There being no definition of ‘offence’ in the Constitution, the definition in Section 3(37) of the General Clauses Act is to be applied which defines ‘offence’ to mean an act or omission punishable by any law by way of fine, imprisonment or death.
20. In the facts of the present circumstance, SLL was not in existence as on the date Regulation 53A of the Regulations was made effective, i.e., on September 02, 2003, in that by March 05, 2003, the BIFR had already recommended the winding up of SLL, whereafter the Delhi High Court had ordered the SLL to be wound up vide its order dated December 03, 2003. Consequently, the imposition of any penalty upon SLL for non compliance of Regulation 53A of the Regulations besides being impracticable, given the present facts of the case, in that, SLL was clearly incapable of complying with the requirement of the Regulation specified above, would also not be in accordance with law.
ORDER:
21. Taking into consideration, the fact that Regulation 53A of the Regulations which requires all listed companies to engage a common share agency for the purposes envisaged therein cannot be made applicable to the facts of the case on record, 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, I think it appropriate to dispose of the present case initiated against M/s Sunstar Lubricants Ltd without imposing any penalty upon the said entity.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: MARCH 18, 2005 ADJUDICATING OFFICER