ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S MAFATLAL FINANCE COMPANY 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 MAFATLAL FINANCE COMPANY LTD. (hereinafter referred to as the company), in the matter of non redressal of the grievances of the investors.
SHOW CAUSE 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, 412 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 letters dated 19/5/2003, 28/5/2003 & 27/6/2003. However, the reply was not found satisfactory and the matter was referred to adjudication.
Vide show cause notice cited, details of these 412 complaints which have not been 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. The company submitted its reply vide letter dated 27/8/2003, 7/10/2003 & 18/11/2003. Shri K Chandramouli, Company Secretary appeared on 22/9/2003, 21/10/2003 & 18/11/2003 and made the following submissions:
- That the list of complaints, which was forwarded for redressal was inflated on account of the same complaints having been repeated.
- Status of complaints was submitted as follows:
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Number of complaints received
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412
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Number of Complaints duplicated/triplicated etc
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33
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Number of complaints to be redressed
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379
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Number of Complaints redressed
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365
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Complaints for which details were insufficient
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12
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Complaints under litigation and hence sub-judice
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2
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- That the company exhibited serious ernest and intent to abide by the directions and notwithstanding various constraints, met the deadlines. Immediately on receipt of the first communication the company requested SEBI vide letter dated 19.5.2003 to furnish a copy of the 38 complaints for which adequate details were not available. Thereafter, the company has once again written to SEBI vide letter dated 28.5.2003 to furnish copy of the complaints for which details were not available. Vide letter dated 27.6.2003 the company remitted Rs.200/- to get a copy of the complaint.
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4. That Bank of India in their capacity as Debenture Trustees filed suit No.572/2002 in the Hon’ble High Court of Mumbai. In the said suit, a notice of motion was taken out by Mafatlal Finance Co Ltd being notice of motion, No.3459 of 2002. Vide order dated 8/1/2003, the Hon’ble High Court directed the company to convene a meeting of the Debenture Holders as prayed for in accordance with the 4th and 7th schedule of the respective trust deed dated 25/5/1996 and 29/5/1997. The said meeting was to be presided over by the Debenture Trustees, Bank of India.
It was submitted that in terms of the said order, a meeting of the Debenture Holders was convened on 14/3/2003 vide notice dated 31/1/2003 to consider and pass a resolution for Secured Deep Discount Bonds (F3 series) issued for Rs.1000/- each with a maturity value of Rs.2,400/- for reduction in the maturity value of the debentures on account of liquidity problems due to past losses and continued defaults by lessees and hirers. The consent of the debenture holders was obtained to pay 50% of the maturity value of debentures i.e. Rs.1,200/- per debenture as the redemption maturity value payable within 6 months after passing the resolution or 31st December 2003 whichever is later for debentures of the reduced maturity value upto to Rs.15,000/- and below and in 4 half-yearly instalments commencing from 6 months after passing the resolution or 31st December 2003 whichever is later for the rest of the debenture holders. Default in redemption of debentures since 1/10/99 was also resolved to be condoned.
A similar resolution was also proposed vide notice dated 31/1/2003 in respect of F2 series of debentures whereby it was proposed that the debenture holders accept 60% of the principal amount of debentures i.e. Rs.600/- as redemption value in full payable within 6 months after passing the resolution or 31/12/2003 whichever is later.
It was submitted that both the aforesaid resolutions were put to vote in the debenture holders’ meeting held on 14/3/2003 and they were carried in the said meeting presided over by Debenture Trustees. It was submitted that the process of payment to retail debenture holders under series F2 & F3 (which are relatable to 388 complaints referred to by SEBI) based on the resolution was nearing completion as 365 complaints have already been resolved. Details of payments made containing cheque No/DD No., date, etc. were filed vide letter dated 18.11.03.
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 412 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 details is as follows:
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Category of complaint
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Number
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I
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10
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II
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5
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III
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7
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IV
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388
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V
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2
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VI
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0
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Total
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412
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Year of complaint
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Number
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1999
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7
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2000
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96
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2001
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142
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2002
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147
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2003
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20
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Total
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412
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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
Type V
B Non receipt of letter of offer for Rights
D Non receipt of Interest on delayed payment of refund orders.
Following facts are observed from the analysis of the various submissions made by the company and facts of the case:
1. As can be seen from the analysis of pending complaints, that 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. The complaints are pending since 1999. However, the number of complaints increased substantially since 2000.
3. The company got the details of the 412 complaints as per SEBI letter IGG/SR/8285/2003 dated April 29, 2003. As per the requirements of the letter IGG/SR/8285/2003 dated April 29, 2003, all the complaints should have been resolved within 30 days from the date of the letter. As on November 18, 2003 status of the complaints were as follows:
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Number of complaints received
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412
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Number of Complaints duplicated/triplicated etc
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33
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Number of complaints to be redressed
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379
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Number of Complaints redressed
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365
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Complaints for which details were insufficient
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12
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Complaints under litigation and hence sub-judice
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2
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4. The Debenture Trustees had received the following complaints from the members of the public:
I. Correspondences addressed to the Registered Office of the company were returned undelivered to the members of the public.
II. Although debentures were surrendered to the company, neither any acknowledgement of the same nor any payments were received by the members of the public.
III. The members of the public filed various consumer complaints in various consumer forums all over the country and the company was required to defend the same.
In the above circumstances, Bank of India, debenture trustees, filed a suit number 572 of 2002 in their capacity as Debenture Trustees, to protect the interest of holders of Secured Redeemable Non Convertible Debentures.
5. The Hon’ble High Court of Mumbai directed the company to convene a meeting of the debenture holders in accordance with the 4th and 7th schedule of the respective trust deed dated 25/5/1996 and 29/5/1997. Accordingly a meeting of F2 & F3 series of debenture holders was convened on March 14, 2003.
a. To consider and pass a resolution to accept 50% of the maturity value of the debenture i.e. Rs.1200/- per debenture as redemption maturity value payable within 6 months after passing the resolution or 31/12/2003 whichever is later for debentures of the reduced maturity value upto Rs.15,000/- and below and in four half yearly installments commencing from 6 months after passing the resolution or 31/12/2003 whichever is later for rest of the debenture holders.
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- As regards 18% secured quarterly return debentures of Rs.1000/ each (Debenture series F2), waiver of all interest amount accrued and due since 1/9/94 and to accept 60% of the principal amount of debentures i.e. Rs.600/- as redemption value in full payable within 6 months after passing the resolution or 31/12/2003 whichever is later.
6. The aforesaid resolutions were duly passed in the meeting of the debenture holders held on 14.3.2003 as informed by the company vide its letter dated November 18, 2003 and also as appears from the letter of Bank of India bearing Ref No.MMB/EXT/SLK/0127 dt 1.6.2003 filed by the company in the adjudication proceedings. As per the said letter of Bank of India, resolutions as mentioned in the notices of meeting of debenture holders were passed and the company had started making payments as per the said resolutions.
- Minutes of the meeting of the debenture holders (F2 & F3 series) dated 2/6/03 regarding passing of resolutions was filed as Exhibit 6 & 7 of the company’s letter October 7, 2003.
- Investors have suffered due to non payment of redemption amount and non payment of interest by the company. This resulted in piling up of investors complaint in SEBI since 1999 which resulted in issue of notice under Section 15 C by SEBI to the company. It has also forced the Debenture Trustees, i.e. Bank of India to approach Hon’ble High Court, Mumbai.
- It is observed from the explanatory statement to the notice of the company dated January 31, 2003 addressed to the debenture holders that the company’s networth was completely eroded due to accumulated losses which were in excess of the networth of the company. The company’s liquidity was affected adversely due to accumulated losses and, therefore, the company was not generally in a position to effect payment of the redemption amount of debentures from 1/10/1999 onwards nor the company was in a position to meet its commitments for redemption of Debentures as provided under the terms of issue.
- The company could resolve 365 complaints, making payments to debenture holders under F2 & F3 series as submitted in the proceedings dated 18.11.2003.
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.”
Considering that the company has resolved 365 pending grievances of the debenture holders although belatedly, its financial position was not sound which resulted in delay in payment of interest and redemption proceeds. As per the explanatory statement to the notice dt January 31, 2003 addressed to the debenture holders, the company’s networth was completely eroded due to accumulated losses which were in excess of the networth of the company. The company’s liquidity was affected adversely due to accumulated losses and, therefore, the company was not generally in a position to effect payment of the redemption amount of debentures from 1/10/1999 onwards nor the company was in a position to meet its commitments for redemption of Debentures as provided under the terms of issue. The aforesaid resolutions were passed by the debenture holders in the meeting held on March 14, 2003 and the minutes of the proceedings passing the resolution were filed as per Exhibit 6 & 7 of the company’s letter dt 12th October 2003. In view of the above, the delay in making payment to the debenture holders was due to the fact that the company was incurring losses and its entire networth was completely eroded and the debenture holders also passed resolutions to accept redemption proceeds much less than what they have contracted for. Under the circumstances, it would not be fair, just and proper to impose a severe penalty for the delay in making payments to the debenture holders.
It would be appropriate to refer to the order passed by the Hon’ble SAT in Alkan Projects Pvt Ltd Vs SEBI (Appeal No.88/04) dated 9.8.04 wherein it was stated that the capacity to pay the penalty also has to be considered while imposing penalty. The following is extracted from the said order:
“Although Section 15J does not consider impecuniosity as a factor in adjudicating the quantum of penalty, it appears to us it would be an important factor along with the three factors mentioned in 15J viz., (a) amount of disproportionate gain (b) amount of loss caused to the investor and (c) repetitive nature of default.
The Supreme Court in its pronouncement dealing with compensation under the criminal procedure code has held that the means of the accused has also to be considered if a workable order is to be passed (see) (i) (1978) 2 SCC 111, Sarwan Singh Vs Punjab (ii) (1988) 4SCC 51 Hari Singh Vs Sukhbir Singh.
Although the judgements related to trials with respect to criminal trials it would not be out of place to mention that the principle laid down by the Supreme Court with regard to the ability or the means of the appellant to pay a penalty in monetary terms would also apply on principle to the law laid down by the Supreme Court.”
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.
ORDER
Having regard to the gravity of charges established, the factors contained under Section 15J of SEBI Act, 1992, that the company had resolved 365 out of 379 complaints (excluding 33 complaints which are repeated) the details of payments made having been furnished vide letter dated 18/11/2003, the fact that the company’s networth is completely eroded and its liquidity affected adversely due to accumulated losses and following the order of the Hon’ble Securities Appellate Tribunal in Alkan Projects P Ltd Vs SEBI (2004) 55SCL 107(SAT-MUM), a penalty of Rs.15,000/- (Rupees fifteen thousands only) is imposed in terms of Section 15C of SEBI Act, 1992 on M/s Mafatlal Finance Company 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 1, 2004 |
S V Krishna Mohan |
| Place: Mumbai |
Adjudicating Officer |