ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15C OF THE SEBI ACT, 1992.
AGAINST
M/S. INFORMATION TECHNOLOGIES (INDIA) LTD.
1. M/s. Information Technologies (India) Ltd. (for brevity’s sake, hereinafter referred to as ITIL) is a company listed on the National Stock Exchange, the Delhi Stock Exchange and the Stock Exchange, Mumbai (BSE). BSE suspended dealings in the said scrip w.e.f February 14, 2003 and NSE suspended the same on June 27, 2002. ITIL was also registered with the Securities and Exchange Board of India (for brevity’s sake, hereinafter referred to as "SEBI") as a Share Transfer Agent (STA) holding registration no. INR000001864 which expired on December 31, 2003 and stands cancelled.
2. M/s Industrial Finance Corporation of India Ltd. (for brevity’s sake, hereinafter referred to as "IFCI") made a complaint to SEBI vide letter dated 23 December, 2002 against ITIL alleging non-credit of 2.265 million shares of ITIL, face value of each being Rs.5/- into their demat account.
3. The complaint inter-alia alleged as follows:-
a. IFCI had sanctioned rupee term loans and guarantee facility to Koshika Telecom Ltd. ("KTL"), one of the group companies of the Usha group, for which facility KTL had pledged 2.265 million shares of ITIL held by M/s. Ramkrishnan Kulwant Rai Agencies Pvt. Ltd. ("Rai Agencies") as security in favour of IFCI. The shares of ITIL were split into shares of face value of Rs 5/- in May 2000.
b. Pursuant to the split of shares, IFCI lodged the same with ITIL in November 2000 for dematerialization. The split of shares to face value of Rs. 5/- entitled IFCI a credit of 4.53 million shares into their demat account (i.e. 2.265 million shares of Rs. 10/- each doubled with face value of Rs. 5/- each after splitting). It was alleged by IFCI in their complaint that ITIL, instead of crediting 4.53 million shares of Rs. 5/- each into the IFCI demat account, credited only 2.265 million shares of Rs. 5/- each into the IFCI account and deposited the remaining 2.265 million shares of Rs. 5/- each to the credit of Rai Agencies, which incidentally is owned by the promoter group of ITIL.
4. SEBI forwarded the said complaint of IFCI to ITIL and the National Securities Depositories Limited (NSDL) vide letter dated 22 January 2003. NSDL vide its letter dated 30th April 2003 informed SEBI that on 17th November 2000, the demat request was received only for 2.265 million shares of ITIL in respect of the account of Rai Agencies and the same was demated on 22nd November 2000.
5. In view of the same, SEBI vide its letter dated 10th February 2003 advised ITIL to redress the grievance of IFCI. No comments were received from ITIL in response to the letter or the subsequent reminder dated February 10, 2003. In fact the grievance has not been redressed till date i.e. even after more than 2 years from the dates of being called upon by SEBI.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
6. Accordingly adjudication proceedings were initiated in the first instance by the issuance of a notice dated January 11, 2005 under Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, (Rules) where under ITIL was asked to show cause as to why proceedings should not be initiated against them and why penalty should not be imposed upon them under Section 15C of the Act. ITIL 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, and were also advised that in case they failed to reply within the stipulated period, it would be presumed that they had no adequate explanations to offer.
7. Copies of the said notice were also forwarded to all the available addresses of ITIL on record as well as to the directors of ITIL through the Northern Regional Office (NRO) SEBI. The notice sent to Microwave Towers, Adekhi Colony, Shankar Vihar Colony, Hardoi Road, Lucknow, (the latest known address of ITIL) was acknowledged on January 20, 2005, but no reply was offered. Further, the notice sent to the address of ITIL at E/127, Sarita Vihar, New Delhi, was received and acknowledged. The remaining notices were affixed at the main door of the address in the presence of two witnesses in terms of Rule 7(c )of the Rules. Thereafter a notice of hearing dated February 9, 2005 was sent to ITIL advising them to appear for a personal hearing scheduled on March 2, 2005. As nobody appeared on behalf of ITIL on the said date, another notice of hearing dated March 16, 2005 was sent to ITIL advising ITIL or their representatives to appear for the said hearing on April 12, 2005. No body appeared for the said proceedings on the said date as well.
CONSIDERATION OF ISSUES:
8. In the absence to any representation from ITIL, the matter is proceeded with on the basis of the facts and circumstances of the case and the material available on record.
9. Before dealing with the issue on hand, I consider it necessary to place on record a few related events for a proper appreciation of the facts of the case and for adjudicating the issue under consideration.
10. SEBI vide its order dated 21 April 2003, ordered an inspection of ITIL’s books of account, records, documents and infrastructure, systems and procedures inter-alia, to look into IFCI’s complaint. On 14 May 2003, an inspection team of SEBI also visited the ITIL office at A-41, Mohan Cooperative Estate, Mathura Road, Badarpur, New Delhi – 110 044 (hereinafter referred to as "Badarpur premises") for inspection but ITIL could not be traced. It was reported that an educational institution was being run by Shri Vinay Rai and others in the name of ‘Rai Foundation’ at Badarpur premises and persons at the Rai Foundation claimed no knowledge about ITIL. Subsequently, an inspection team of SEBI visited Lesag House, 11/2, Delhi Mathura Road where security guards informed that ITIL office had been shifted to Badarpur premises. On a visit to Badarpur premises again, the team was told that ITIL had shifted to Microwave Towers, Adekhi Colony, Shankar Vihar Colony, Hardoi Road, Lucknow. The Uttar Pradesh Stock Exchange (UPSE) when advised to check up at the said premises at Lucknow, informed that there was no trace of ITIL at the given address.
11. As per the NSDL records, ITIL had an office at B-303, Ansal Chambers, Bhikaji Cama Place, New Delhi. When the Inspection team visited that place on June 25, 2003, ITIL was not found there too. As per SEBI records, ITIL was located at 12/1, Delhi Mathura Road, Faridabad 121 002. On July 22, 2003, the inspection team visited the said address. It was however found that the premises were occupied by Rai Foundation and there was no name plate of ITIL. ITIL company officials were found operating from the same premises, with poor infrastructure. There was not even a direct phone line or fax available. Further, ITIL was found to be negligent in operations. Share certificates lodged with them were found to have been not transferred for almost 3 years. Upon enquiry, it transpired that ITIL was in the process of winding up and transferring its operations to RCMC Share Registry. Even upon visiting the Badarpur premises, ITIL was not found there too.
12. It is apparent from the facts stated above, that ITIL which was registered with SEBI for carrying on share transfer activities and was in fact, carrying out the said activities in-house as a category II Share Transfer Agent, was not functioning satisfactorily and had no definite address or adequate infrastructure, systems and procedures.
13. The difficulties encountered by the inspection team of SEBI, even to trace the location of office of ITIL and the futility of its efforts to carry out the inspection of the activities of Share Transfer Agent as well as the manner in which they have in the present case failed to respond to any of the notices sent to them or participate in the adjudicating proceedings speak volumes about the manner in which the business is being conducted by them. These are nothing but ploys used by them to delay and deviate any proceedings initiated against them.
14. While non-transfer of shares, and non-despatch of share certificates lodged for as long as 3 years point to their inefficiency, deliberate non credit of the shares lodged by IFCI for dematerialisation fully into the demat account of the IFCI and on the contrary crediting a part of the shares so lodged, to the account of a promoter entity of ITIL, points to impropriety.
15. It is also observed that the shares of ITIL itself stand suspended for trading. More importantly, based on the investigation into the allegation of price manipulation of its shares, I have noted that SEBI vide its orders dated 31 March 2004 directed ITIL and its promoter directors not to access the capital market and not to deal in securities in any manner whatsoever for a period of one year which order is valid upto 31 May 2005. It is also seen that the registration of the Share Transfer Agent with SEBI that expired on December 2003 stands cancelled.
16. Subsequently, SEBI vide its order dated June 14, 2004 had also directed ITIL to transfer the records of its existing clients, if any, to another Share Transfer Agent registered with SEBI, or to the companies concerned within a period of 21 days from the date of this order, without prejudice to the initiation of any further action, in respect of other violations, found to have been committed by ITIL.
17. Taking into consideration these facts, when ITIL was advised by SEBI vide its letters dated January 22, 2003 and February 10, 2003 redress the grievance of IFCI, their action of wrongly crediting the said shares to Rai Agencies, which is an entity owned by the promoter group of ITIL is glaring and obviously done to facilitate ITIL and its promoters which was easily executed since the share transfer activities of ITIL were managed in house.
18. However besides failing to redress the grievance of IFCI, ITIL has also failed to respond to the letters issued by SEBI in this regard. Furthermore, all the notices issued by this forum were not responded to and no efforts were made to participate in the adjudication proceedings despite affording them a fair and reasonable opportunity to present their case. Despite more than two years elapsing from the dates of being called upon by SEBI, the compliant remains unresolved till date which action amounts to a violation of Section 15C of the SEBI Act, 1992.
19. 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.
20. Section 15C of SEBI Act, 1992 in this regard reads as under:-
“If any listed company or any person who is registered as an intermediary, after having been called by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
21. In view of the fact that it is clearly established that ITIL has failed to comply with the provisions of Section 15C of the Act, they would be liable for such penalty as I think fit to impose in accordance with the provisions quoted above read in tandem with the facts and circumstances of the case as also the 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.
22. The fact that IFCI was entitled to a credit of 4.53 million shares of Rs 5/- each into its demat account is undisputed as is also the fact that ITIL wrongfully and deliberately credited 2.265 million shares of Rs 5/- each into the demat account of M/s Ramkrishanan Kulwant Rai Agencies Pvt Limited, which is an entity owned by the promotor group of ITIL instead of crediting the said amount of shares into the demat count of IFCI. The said action clearly indicates the amount of disproportionate gain or unfair advantage made by ITIL, and the equal if not more, loss and disadvantage suffered by IFCI, which undoubtedly would have caused an equal amount of loss to the investor class as a whole what with IFCI being a financial institution with a presence all over India. Most apparent is the failure on the part of ITIL to heed to the advice of SEBI to resolve the complaint of IFCI which is to a large extent, indicative of the manner in which ITIL is functioning. Moreover the complaint of IFCI remains unresolved till date and the default of ITIL is continuing till date.
23. Moreover, I am cognizant of the various orders passed by SEBI against ITIL and its directors. My attention is also drawn to the fact that Complaint case no 60/2004 has been filed in the Court of the Additional Chief Metropolitan Magistrate, Delhi and charges have been framed against ITIL and its directors for violation of Section 113 of the Companies Act, 1956 punishable under section 621 of the said Act.
24. Bearing in mind the factors enumerated above in Section 15J of the Act, on a cumulative analysis of the facts and circumstances of the present case, the material available on record including the antecedents of the entity in question, and the gravity of the charges established against ITIL as also the blatant violation of the provisions of Section 15C of the Act, I am of the considered opinion that a very harsh and stringent penalty amount is called for in the present matter. Accordingly 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. 1,00,00,000/-(Rupees One crore only) on M/s. Information Technologies (India) Limited for their failure to redress the grievance of M/s Industrial Finance Corporation India Limited.
25. 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 Suresh Menon, General Manager, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400005.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: MAY 6, 2005 AJUDICATING OFFICER