ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S LLOYDS FINANCE LTD. READ WITH SECTION 15C OF SEBI ACT, 1992.
I was appointed as Adjudicating Officer by SEBI vide order dated July 7, 2003, to inquire into and adjudge the alleged contravention of Section 15C of SEBI Act, 1992 by M/S LLOYDS FINANCE LTD (hereinafter referred to as the company), in the matter of non redressal of the grievances of the investors.
NOTICE AND REPLY
Accordingly, a Show Cause Notice dated August 19, 2003, was issued to the company. The said show cause notice alleges that the company did not redress the grievances of investors when called upon to do so by SEBI vide its letter IGG/SR/8285/2003 dated April 29, 2003. Vide the said letter, SEBI informed the company that as on April 22, 2003, 265 complaints of the investors were still pending for redressal and called upon the company to redress these grievances within 30 days thereof.
The company responded vide letter dated 17/5/2003 and informed that they will initiate steps to redress investor complaints upon receiving permission of RBI to do so, as RBI had appointed an officer to oversee the activities of the company. Similar reply was filed vide letter dated 26/5/2003. As the reply was not found, the matter was referred to adjudication.
Vide show cause notice cited, the details of 265 complaints which were not redressed by the company were forwarded with an advice to show cause as to why an inquiry should not be held against the company in terms of Rule 4 of SEBI(Procedure for Holding Inquiry and Imposing Penalty by Adjudicating Officer)Rules, 1995 and why penalty should not be imposed under Section 15C of SEBI Act, 1992 for the alleged failure to redress the grievances of the investors. The company submitted its reply vide letter dated 3/9/2003. Shri D D Madan and Shri N V Kulkurni, Advocates appeared on behalf of the company on 12/11/2003 and made the following submissions.
1. That in view of the RBI’s directive dt 27.2.99 to the company, which is an NBFC, not to make any payment except with the prior permission of the Special Officer, Debenture Holder’s grievances could not be resolved earlier. It was submitted that the RBI had finally agreed to permit the company to make payments to the secured debenture holders vide letter dated 31/7/2003.
2. That out of 265 complaints, the company has settled and resolved 228 complaints. A statement detailing the break-up of these complaints is filed. Earlier, vide letter dated September 3, 2003 the company has submitted that 187 complaints were by NCD holders and cheques for Rs.7,26,000/- were already sent. The company has entered into negotiations with 2 NCD holders who hold NCDs of the value of Rs.68,40,000/-.
3. That the company contacted each of the Debenture Holders separately and by way of settlement, the Debenture Holders agreed to receive less than the amount due on redemption in full and final settlement. The Debenture Holders accepted payment and also surrendered the debenture certificates duly discharged.
4. A statement containing details of payments made to each Debenture Holder and the method and manner of resolving the grievances were filed vide letter dated November 27, 2003.
5. About 12 Debenture Holders did not settle for less than the maturity amount. They were paid the first installment of the redemption proceeds. Written confirmation from these debenture holders are filed vide letter dated November 27, 2003.
6. That 41 complaints were repeated.
7. In respect of 11 complaints, the excess money after conversion into equity shares was not repaid. 9 out of these 11 cases were resolved and in respect of 2 cases, the parties were being contacted for a settlement.
8. In respect of 6 complaints, the latest addresses of the complainants were not available and efforts were being made to contact them to arrive at a settlement.
Further clarifications/ particulars were submitted vide letter dated November 27, 2003
APPRECIATION OF EVIDENCE AND FINDINGS
Vide letter IGG/SR/8285/2003 dated April 29, 2003, SEBI has informed the company that it was yet to resolve 265 complaints of its investors pending as on April 22, 2003 and called upon it to resolve these grievances within 30 days thereof. Details of the said complaints were also forwarded vide the aforesaid letter. Analysis of these complaints is as follows:
|
Category of complaint
|
Number
|
|
I
|
8
|
|
II
|
4
|
|
III
|
6
|
|
IV
|
247
|
|
V
|
0
|
|
VI
|
0
|
|
Total
|
265
|
|
Year of complaint
|
Number
|
|
1998
|
1
|
|
1999
|
6
|
|
2000
|
102
|
|
2001
|
52
|
|
2002
|
78
|
|
2003
|
26
|
|
Total
|
265
|
The nomenclature of Type I to Type V includes the following types of complaints:-
Type I: non receipt of
A. Refund order/ Allotment Advice
B. Cancelled stock invest
C. Allotment advice against encashed stock invest
D. Refund order sent for revalidation
E. Refund order after furnishing the required details like application number, bank serial number etc
F. Duplicate refund order in lieu of original refund order printed in wrong name/ beneficiary and returned to the company for correction
G. Duplicate refund order in lieu of original refund order printed for wrong amount and returned to the company for correction
H. Duplicate refund order in lieu of original refund order printed with wrong bank details and returned to the company for correction
I. Copy of encashed instruments in misappropriated cases
J. Balance amount against short refund made by the company due to some error
K. Duplicate refund order against an undertaking/ duly executed indemnity bond sent to the company
Type II : Non receipt of
A Dividend on shares
Type III : Non receipt of
A Share certificate in exchange of allotment letter
B Share certificate after transfer
C Share transfer after transmission
D Share certificates after conversion
E Share certificates after endorsement
F Share certificates after consolidation
G Share certificates after splitting
H Bonus shares
I Share certificate against duly executed indemnity bond sent to the company
Type IV : Non receipt of
A. Interest on Debentures
B. Redemption amount of debentures
C. Debenture certificate in exchange of allotment letters
D. Debenture certificate after transfer
E. Debenture certificates after transmission
F. Debenture certificate after endorsement
G. Debenture certificate after consolidation
H. Debenture certificate after splitting
I. Debenture certificates against duly executed indemnity bond sent to co.
J. Interest on delayed payment of interest on debentures
K. Interest on delayed payment of redemption amount of debentures
From the various submissions made by the company, the following position emerges:
1. Majority of the complaints relate to non receipt of interest on debentures and non receipt of redemption amount of debentures (Category IV A & IV B complaints).
2. Few complaints are pending since 1999. However, the number of complaints increased to 102 in the year 2000.
3. Vide letter dated February 27, 1999, the Reserve Bank of India informed the company that a Special Officer was appointed with effect from March 1, 1999. Clause 5(b) and 5(g) of the letter read as under:
(b) Your company shall obtain a prior written permission from the said Special Officer for making any payment to anyone except the payment of salaries and other establishment expenses, which will have to be reported to the Special Officer immediately.
(g) the funds received by the company out of realization of its dues or sale of its assets shall be utilized only for repayment of matured public deposit and interest thereon.”
In view of the above, the company was restrained from making any payments without the prior written permission of the Special Officer and funds received shall have to be used for repayment of matured public deposit and interest thereon. RBI vide its letter dated August 25, 2001 denied permission to repay some of the Debenture Holders who are pressing for payment as against others since that would be discriminatory.
4. There was a general run by depositors on deposits held by NBFCs including the company and the company in the year 1997-1998 had to repay more than 450 Crores. Consequently this resulted in liquidity mismatch (short and long term) and poor financial conditions. Compounded with these facts, the company could not access funds from Banks and Institutions. Furthermore, recovery of dues from borrowers was not forthcoming and investments made by the company were not fetching due returns and the company was incurring operating losses.
5. It was submitted that the company has reduced its liability to depositors and creditors by more than Rs.750 Crores by legally prosecuting claims against its creditors and sale of its assets and investments.
6. In view of express prohibition imposed upon the company by the RBI in making repayments without the leave of the special officer, it could not, till August 2003, make repayment to its secured creditors and was also unable to make payment to the 265 complainants.
7. The Reserve Bank of India vide its letter dated July 31, 2003 informed that it has no objection to the company’s proposal to make payment to the secured creditors.
8. Upon receipt of the consent of the Reserve Bank of India, the company by their letter dated August 4, 2003 informed SEBI of the same and resolved the complaints as submitted in Exhibit R in the Adjudication Proceedings.
|
S/N
|
Item
|
Number of Complaints
|
Complaints: Redressed
|
Complaints: Pending
|
|
1.
|
Relating to NCD non-repayment
|
184
|
149
|
35
|
|
2.
|
Relating to conversion refund non-payment
|
11
|
9
|
2
|
|
3.
|
Duplicate complaints of NCD complaints
|
38
|
38
|
-
|
|
4.
|
Duplicate complaints of conversion complaints
|
3
|
3
|
-
|
|
5.
|
Relating to non payment of Dividend
|
2
|
2
|
-
|
|
6.
|
Relating to Fixed Deposits
|
4
|
4
|
-
|
|
7.
|
Relating to Transfer of Shares
|
3
|
3
|
-
|
|
8.
|
Non pertaining to Lloyeds Finance
|
20
|
20
|
-
|
|
|
Total
|
265
|
228
|
37
|
In as much as the RBI imposed restrictions on the company on 27.2.99 from making any payments without the leave of the special officer and the RBI vide its letter dated 31.7.03 had permitted the company to make payments to the secured creditors, there was delay during the interregnum to resolve the grievances of the investors. Thereafter, the company has resolved 228 out of 265 pending grievances of the investors as per the above table. These are considered as mitigating factors.
Section 15C of SEBI Act, 1992 reads as under :-
“If any listing 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.”
The Hon’ble SAT in Alkan Projects Pvt Ltd Vs SEBI (Appeal No.88/04) dated 9.8.04 had observed that impecuniosity also needs to be taken into account while imposing penalty besides other factors stated in Section 15J of the Act. Although it was stated that there were liquidity mis-match problems and general run by depositors on NBFCs including the company, no financial statements were filed to assess the financial strength of the company or its ability to pay the penalty.
The Hon’ble SAT in the orders referred above had also observed that while imposing penalty the provisions regarding court fees as per Rule 9 of the SAT (Procedure) Rules, 2000 also needs to be taken into account since there is statutory right of appeal.
Although the company had resolved 228 out of 265 complaints, nevertheless, there are still 37 complaints pending for redressal. This undue delay of nearly 15 months is not justified considering that there is no bar to repay the secured creditors from August 2003 onwards and company had deposited Rs.50 lakhs in an escrow account with ICICI, who are the debenture trustees, towards the liability of debenture holders. It is seen from Exhibit 1 to the supplementary written explanation dated 27.11.2003 filed by the company that the total payment made to 158 debenture holders was Rs.18.85 lakhs. Separate payment of Rs.67,000/- was made to another 12 debenture holders. These payments amounting to around Rs.20 lakhs is against the credit of Rs.50 lakhs in the escrow account as aforesaid. Majority of the debenture holders have consented to receive lesser amount in full and final settlement than what was contracted for. It is not known as to whether the debenture trustees were consulted or consented for this type of arrangement whereby the debenture holders were paid less than what was due by way of individual agreements. It may be noted that there is an unconditional/ irrevocable sale/ assignment of the assets in favour of the Debenture Trustees under the debenture trust deed dated April 17, 1996.
ORDER
Having regard to the gravity of charges established, the factors contained under Section 15J of SEBI Act, 1992, that there are still 37 complaints from the investors remained unresolved for nearly 15 months despite the fact that there is no bar on the company in making payments to the secured creditors since 31.7.2003, a penalty of Rs. 3,00,000/- (Rupees Three lakhs Only) is imposed in terms of Section 15C of SEBI Act, 1992 on M/s Lloyds Finance Ltd.
The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” and payable at Mumbai, may be sent to Shri Sujit Prasad, Deputy General Manager, Securities and Exchange Board of India, Exchange Plaza, IVth Floor, Bandra Kurla Complex, Bandra E, Mumbai 400 051.
| Date: NOVEMBER 8, 2004 |
S V Krishna Mohan |
| Place: Mumbai |
Adjudicating Officer |