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 MOTOROL ENTERPRISES LIMITED
BACKGROUND:
- 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 Motorol Enterprises Ltd (hereinafter referred to as MEL) in the matter of their failure to appoint a common share registrar 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 against MEL by the issuance of a show cause notice dated December 30, 2003 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 where under MEL was asked to show cause as to why enquiry proceedings should not held against them for the alleged violation of the provisions of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 and as to why penalty should not be imposed upon them under section 15HB of the SEBI Act, 1992. MEL 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. In reply to the same, MEL vide their letter dated January 30, 2004, inter alia submitted that they were passing through a rough financial patch and were in the process of restructuring their operation. It was contended that they were in the process of settling the outstanding payments payable to their R & T Agent and expected that the same would be completed in the next couple of weeks. On the basis of the above, they requested for time till March 2004 to adhere to the provisions of Regulation 53A of the Regulations and report compliance thereof.
4. Upon their failure to do so, a notice of hearing dated February 16, 2004 was issued by the then adjudicating officer to MEL in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, advising them to attend the hearing proceedings to be held on March 10, 2004. However, MEL sent a letter dated March 4, 2004 seeking extension of time of two months for reporting compliance. Accordingly, the case was adjourned for hearing to April 6, 2004. However, no body appeared on behalf of MEL on the said date to present their case. Keeping in mind the principles of natural justice, I offered another opportunity to MEL vide notice dated October 14, 2004 not only to be heard in person on October 28, 2004 but also to submit the documentary proof if any in support of their contentions. It was also made clear to MEL 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.
5. In reply to the same, MEL vide their letter dated October 26, 2004 merely reiterated the submissions made earlier and assured that they would appoint a common agency for handling all share registry work for both demat and physical securities and that the said facts be placed on record during the adjudicating proceedings to be held on the scheduled date. However no one appeared on behalf of MEL on the said date.
CONSIDERATION OF ISSUES:
6. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of MEL, the material available on record as also the relevant regulatory provisions.
7. 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.”
8. In view of the above, it is imperative to appoint a common agency either in house or through a SEBI registered RTA for the share registry work relating to physical and demat shares of the company.
9. 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, was to avoid:
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any delay in dematerialization, and
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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.
10. 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).
11. Thus acting as an in-house share registrar and installation of VSAT at the company premises is the prime step to comply with Regulation 53A of the Regulations which are important measure brought about by SEBI for the benefit of the investors.
12. From the facts earlier mentioned, MEL submitted that they were going through a financial crunch and that it would take some time to comply with the provisions of Regulation 53A of the Regulations. However despite granting them sufficient time for the said purpose, they never provided any evidence to support their claim. Till date no document has been furnished by them to this effect and it is not known whether they have actually started functioning as a common share registrar for both physical and demat securities in terms of the provisions of the Regulations. It is clear that MEL were unable to provide any evidence to support their claim since they were all along aware of not having any such documentary proof in their possession. Furthermore, despite being offered several opportunities to present their case, they kept themselves away from the hearing proceedings simply stating that they would comply with the provisions of the Regulations.
13. Mere contentions assuring compliance without making any attempt in that direction or furnishing any documentary proof of the same to substantiate the claim, does not absolve MEL from the charge of non-compliance of the said Regulations.
14. In view of the above, the violation of regulation 53A of SEBI (DP) Regulations, 1996 by MEL is established and in fact the default by MEL is continuing till date.
15. 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.”
16. In the present case, MEL 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 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.
17. 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
18. 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.
19. Some of these pre-requisites are in the negative and are in favour of MEL. However, on a judicious exercise of the discretion conferred upon me, bearing in mind the facts and circumstances of this 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, the nature of the violation, the extent to which the violation has affected the interest of the investors in securities as well as the mitigating factors, if any, I am inclined to hold that although the penalty need not be imposed in terms of the provision provided in Section 15HB of the Act, the imposition of penalty is very much necessitated.
ORDER:
20. 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, and in the interest of justice, equity and good conscience I think it appropriate to levy a penalty of Rs. 50,000/-(Fifty thousand only) on M/s Motorol Enterprises Ltd for their failure to appoint a common share agency for demat and physical shares under Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996.
21. The penalty amount shall be paid 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.
G. BABITA RAYUDU
ADJUDICATING & ENQUIRY OFFICER