ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/s IFSL LIMITED
BACKGROUND:
1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated November 2, 2005 to enquire into and adjudge the alleged 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 IFSL Limited, (formerly known as Interlink Financial Services Limited and for brevity’s sake, hereinafter referred to as IFSL) in the matter of their failure to appoint a common share agency for handling their share registry work both for the dematerialised and physical securities.
NOTICE/ REPLY/ PERSONAL HEARING
2. In view of the same, a notice dated February 20, 2006 was issued to IFSL 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. IFSL 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, IFSL vide their letter dated March 01, 2006, inter-alia submitted that the company had already appointed M/s. Ankit Consultancy Private Limited (Ankit) as the common agency for handling the share registry work for both the demat and physical securities in terms of Regulation 53A of the Regulations.
4. As IFSL did not submit the necessary documentary proof to evidence their compliance with Regulation 53A of the Regulations, a notice of hearing dated March 9, 2006 in terms of Rule 4(3) of the Rules was issued to IFSL advising them to attend the hearing on March 24, 2006 along with the documentary proof in support of their contentions at the time of the hearing.
5. Vide their letter dated March 20, 2006, IFSL forwarded the copy of the agreement dated November 25, 2005 entered into with Ankit and further stated that they did not wish to have any personal hearing. Thereafter under cover of their letter dated April 8, 2006, IFSL forwarded the copies of the tripartite agreements entered into between IFSL, the RTA and NSDL and CDSL respectively.
6. As the copy of the tripartite agreement entered into with the RTA and CDSL was undated and as there was no information on record as regards the date of appointment of Ankit as the common share agency or any documentary evidence to validate the same and in the absence of details about the percentage of shareholding of the company in physical and demat shares, a letter dated May 16, 2006 was sent to IFSL to furnish the necessary documents on or before 31, May 2006. IFSL were also advised that in case the documents were not sent within scheduled date, the matter would be proceeded with based on the evidence available on record and keeping in mind their desire expressed in their letter dated March 20, 2006 not to be heard in person.
7. Subsequently IFSL submitted the following information along with the supporting documents under cover of their letter dated May 24, 2006.
a) The tripartite agreement had been entered into with the CDSL and Ankit on October 31, 2002.
b) The position of the holding of the shares in physical and demat form (as per the Secretarial Audit Report and Certificate enclosed for perusal) was as follows:- the total % of issued capital of IFSL was 8,00,00,000 equity shares. Out of the same, 1,75,73,408 shares of Rs 1/ each were held in demat form in the CDSL while 6,11,36,542 shares of Rs 1/ each were held in the demat form in the NSDL. Further 12,90,050 shares of Rs 1 each held were held in the physical form.
c) Ankit had been appointed as the common share agency on November 01, 2005. However copy of the agreement dated November 25, 2005 was enclosed as proof of the said contention.
CONSIDERATION OF ISSUES:
8. Since IFSL have forwarded the necessary documents and have not sought for any hearing, I propose to proceed in the case, on the basis of the said documents and the facts and circumstances of the case, as also the relevant regulatory provisions without hearing IFSL.
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 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. 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. 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 RTA.
13. 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.
14.I have also perused the earlier circular issued by SEBI bearing no.FITTC/DC/ Policy-Cir-01/2001 dated August 03, 2001 in terms of which all companies had been advised 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.
15.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 that 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.
16. Thus on date, there remain some 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.
17.From the facts earlier mentioned, it is clear that the shares of IFSL are both in the physical and demat mode. IFSL have contended that Ankit had been appointed as the common agency for the share registry work relating to both the physical and demat shares of their company on November 01, 2005, under an agreement dated November 25, 2005 i.e. almost 2 years after the due date of compliance i.e. September 23, 2003 and a date prior to the date of initiation of the present proceedings i.e. November 2, 2005. No reasons have been assigned for the said delay. It is however noted that IFSL had established connectivity with both the depositories in the year 2002 itself i.e., prior to the date when the Regulations came into effect, to facilitate the dematerialization of the shares of the various shareholders. I have examined the copies of the tripartite agreements entered into with both NSDL and CDSL dated November 12, 2002 and October 31, 2002 respectively that have been forwarded for my perusal as proof of the contentions made earlier as also the copy of the bipartite agreement entered into with the RTA, which is valid upto October 31, 2006.
18.It is however a matter of record that IFSL did not have a common share agency till recently and hence did not comply with the provisions of Regulation 53A of the said Regulations which clearly mandates the appointment of a common share agency, effective from September 02, 2003 for both the physical and the demat shares of the company for the purposes envisaged in the Regulations
19. Admittedly all the shares of IFSL have not been dematerialized. It is noted that about 98.38% of their shares are in demat form and the remaining 1.62% continue to remain in the physical mode.
20.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. Furthermore, the direction to all issuer companies to appoint a common share agency in terms of the provisions of Regulations 53A of the Regulations was meant to address issues of admission criteria, delays in demat and disputes of issuer companies with the RTAs as well as to overcome problems relating to mismatching of equity figures when they are reconciled. The scenario existing prior to the issuance of the said regulatory requirement was full of delays in dematerialization and non-reconciliation of share holdings due to a lack of proper co-ordination among concerned agencies/ departments resulting in the interest of the investors being adversely affected.
21. Moreover the compulsory dematerialization of the company was introduced by SEBI to maintain the integrity of the market and protect the interest of the investors in the capital market. It was perceived and has proved to be an effective way of curbing/ resolving investor complaints that arise on account of fraudulent transfer of shares / securities.
22. As such, the object of the timely appointment of common share agency appears to have been defeated by IFSL due to their admittedly failing to appoint a common agency on their records as on the stipulated date, to handle the share registry work for both the physical and demat shares of the company as required to be done in terms of the provisions of Regulation 53A of the Regulations. Hence their belated compliance of the said Regulation stands established.
23.Any non adherence to the regulatory provisions issued by the regulator in the interests of the investors 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 said Regulation would become redundant.
24. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the Regulations or sufficient justification for the same been given by IFSL, no cognizance would have been taken for the belated compliance of Regulation 53A of the Regulations. However as this is a case involving a delay of almost two years in complying with the provisions of the said Regulation and no justification has been given for the same, necessary cognizance of the non adherence to the mandate laid down in the Regulations is very much necessitated. .
25.Accordingly in order to levy the appropriate penalty on IFSL, Section 15HB of the Act is to be considered 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. I have also considered the following factors as provided in 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.
26. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the part of IFSL nor any 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 from the facts earlier mentioned, IFSL have not appointed a common share agency to handle their share registry work relating to both physical and demat shares of the company within the period stipulated in the Regulations and have thereby not complied with the said Regulations.
27. Hence, on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated in Section 15J of the Act, as well as after analysing the facts and circumstances of the present case, I am inclined to hold that since IFSL did not have a common share agency for a considerable period of time and have only recently appointed a common share agency, i.e. under an agreement dated November 25, 2005, although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a token penalty is very much necessitated.
28. 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 token penalty of Rs.20,000/-(Rupees Twenty thousand only) on M/s IFSL Limited for their belated compliance of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 in the matter of appointment of a common share agency to handle the share registry work relating to the dematerialized and physical shares as required there under.
29.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: MAY 31, 2006 |
ADJUDICATING OFFICER |