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 ALLIED RESINS & CHEMICALS 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 Allied Resins & Chemicals Ltd (hereinafter referred to as ARCL) 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 by the issuance of a show cause notice dated December 30, 2003 to ARCL in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 where under ARCL 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 why penalty should not be imposed upon them under section 15HB of the Act. ARCL 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. As no response was received from ARCL, a notice dated July 15, 2004 in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, was issued to ARCL to attend the adjudication proceedings on July 30, 2004. In response to the same, ARCL vide their letter dated July 24, 2004, stated that as they did not receive any notice, they would not be able to attend the adjudication proceedings. In view of the same, while forwarding the copy of the notice earlier issued to ARCL, the said company was once again advised to attend the hearing proceedings in the matter on July 30, 2004. In reply to the same, ARCL vide their letter dated July 31, 2004, inter alia submitted that their company was a sick industrial unit registered with BIFR (copy of the order declaring the company as sick was enclosed for perusal). It was further contended that although the company was facing severe financial crisis, they were somehow running the show and hence would not be able to appoint the depositories for handling share registry work. It was further stated that although the company had requested SEBI to exempt them from the compulsory dematerialsation of the equity shares of the company, they had not received any response to the said request. On that basis it was requested that the violation of the company be condoned.
4. Subsequently, keeping in mind the principles of natural justice, another opportunity was granted to ARCL to attend the hearing proceedings to be held on November 25, 2004 and also to submit the documentary proof if any in support of their contentions. It was also made clear to ARCL 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. Once again, ARCL vide their letter dated October 18, 2004, while reiterating the contentions made earlier, further stated that the company was in no position to spend money even for attending the proceedings at Mumbai and hence requested that the requirement of attending the hearing proceedings be waived or in the absence requested that the proceedings be held in Kolkatta. On the schedule date of hearing, no body appeared on behalf of ARCL.
CONSIDERATION OF ISSUES:
5. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of ARCL, the material available on record, the relevant regulatory provisions as also the rationale behind the said provisions.
6. Regulation 53-A of the Regulations which came into force on September 02, 2003 reads as under:
“All matters relating to the transfer of securities, maintenance of record 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.”
7. In view of the above, it is imperative to appoint a common agency either in house or a SEBI registered RTA for the share registry work relating to physical and demat shares of the company.
8. 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.
9. 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).
10. As such Regulation 53A of the Regulations is an important measure brought about by SEBI for the benefit of the investors.
11. From the facts earlier mentioned as well as the documents on record, it is seen that ARCL is stated to be an assisted unit of financial institutions like IDBI, IFCI, IIBI and ICICI with IIBI in the lead. It is also noted that ARCL has all along sought the benefit of exemption from the applicability of the Regulations as well as the compulsory dematerialization of the equity shares of the company inter alia on the ground that the company was declared as a ‘sick company’ under the Sick industrial Companies (Special Provisions) Act, 1995 (SICA) by the BIFR and that its financial position was so acute that it was in no position to even depute any of their officials to attend the adjudication proceedings at Mumbai.
12. In this regard, I have examined the Award for Industrial and Financial Reconstruction passed by the BIFR in case no. 329/98 in the matter of M/s. Allied Resins and Chemicals Ltd. Upon perusal of the summary record of the proceedings of the hearing held on April 19, 1999 before the Bench consisting of Shri G Narayanan and Shri N R Banerji, Members, BIFR, I have noted that upon a reference filed under Section 15 I of the SICA by ARCL, the BIFR, after being satisfied that ARCL fulfilled the criteria of a sick industrial company in terms of Section 3(1)(o) of the SICA, declared it to be a sick industrial company and appointed IIBI as the operating agency to examine the financial viability of ARCL and formulate a rehabilitation scheme for its revival. It is also noted that the BIFR further directed that in case no comprehensive rehabilitation proposal was received from ARCL/its promoters within a period of six months, then the operating agency would prepare a scheme, whereupon the BIFR would then pass a considered order.
13. The award referred to above, is dated April 19, 1999. More than five years have elapsed from the date of passing of the said award. However, no information has been provided by ARCL as regards measures taken for its revival / further development pursuant to the submission of any rehabilitation proposal by IIBI, the operating agency by BIFR, for the said revival of ARCL. On the contrary, ARCL has only sought exemption from the compulsory dematerialisation of the equity shares of the company.
14. In this regard, it would be relevant to note that the compulsory dematerialsation 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 transfers of shares / securities. Furthermore, the direction to all issuer companies to appoint a common share agency in terms of provisions of Regulation 53 A of the Regulations was meant to address issues of admission criteria, delay in demat and disputes of issuer companies with the RTAs as well as to overcome problems relating to mismatching of equity figures when they were reconciled. The scenario existing prior to the issuance of the said regulatory requirement was full of delays in dematerialisation 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.
15. As regards the grant of exemption from such a regulatory requirement, the Regulations do not contain any provision for grant of relaxation or waiver from the regulatory requirement of appointment of a common share agency or even the compulsory dematerialization of the equity shares of the company. Hence doing so in effect would amount to adversely affecting the rights of the investors. In view of the same, the issue of granting such an exemption to any issuer company does not arise.
16. In view of the foregoing as well as in the absence of ARCL submitting any further information consequent to their being declared as sick and consequent to the appointment of IIBI as the operating agency for the purpose of formulating a rehabilitation package for its revival, the violation of regulation 53A of SEBI (DP) Regulations, 1996 by ARCL is established.
17. 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.”
18. In the present case, ARCL has stated financial difficulties as a reason for their non compliance. However an 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.
19. However, 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
20. 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.
21. It is clear that although ARCL may not have enjoyed any gain or unfair advantage as a result of the default, the said default has certainly caused an unquantifiable loss to the investor class as a whole. Moreover, the default 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, as well as the mitigating factors, if any, I am inclined to hold that it would not be just, fair and proper, to impose a penalty in terms of the provisions provided in Section 15HB of the Act.
ORDER:
22. In view of the foregoing, 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, instead of penalizing ARCL by imposing a monetary penalty which could be used for the purpose of appointing a RTA, in the interest of justice, equity and good conscience as well as the interest of the investors, I think it appropriate to grant a period of three months to M/s Allied Resins & Chemicals Ltd to comply with the directive of appointing a common share agency for demat and physical shares in terms of the Regulation 53A of the (Depositories and Participants) Regulations, 1996. However, in case they fail to do so within the stipulated period, I think it appropriate to levy a penalty of Rs. 25,000/-(Rupees twenty five thousand only) on M/s Allied Resins & Chemicals Ltd.
23. The penalty amount if required to be paid in terms of the order specified above, shall be paid within a period of 45 days from the date of expiry of the stipulated period of three months 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.
| Date: NOVEMBER 25, 2004 |
G. BABITA RAYUDU |
| Place: Mumbai |
Adjudicating Officer |