ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/s ZANDU PHARMACEUTICALS LTD FOR THE VIOLATION OF REGULATION 53A of SEBI(DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 1996 READ WITH SECTON 15HB OF SEBI ACT, 1992.
I was appointed as Adjudicating Officer by SEBI vide order dated 8th December, 2003, to inquire into and adjudge the alleged contravention of Regulation 53A of SEBI (DP) Regulations, 1996, by M/s Zandu Pharmaceuticals Ltd (hereinafter referred to as the company), in the matter of appointment of common share registrar for handling share registry work both for demat and physical securities.
Accordingly, a show cause notice dated January 12, 2004, was issued to the company. After receiving the reply dated 08.04.2004, an opportunity of personal hearing was granted.
Dr. S. D. Irani, Practicing Company Secretary, appeared on behalf of the company on 08.04.2004 and made the following submissions in support of their reply dated 10.02.04
1) That Zandu is more than 8 decades old company, registered under the Companies Act, 1913 with a paid up capital of Rs.4,03,20,000/-
2) The shareholder base is very small as reproduced in the table below :
|
Year
|
Number of shareholder
|
|
1997-98
|
6735
|
|
1998-99
|
6874
|
|
1999-00
|
6861
|
|
2000-01
|
7155
|
|
2001-02
|
7295
|
|
2002-03
|
7108
|
|
As on Date
|
6866
|
3) Most are the loyal shareholders and are those who have held on to the shares of the company for a long time
4) Only 40% of the total number of shares i.e. 166635 equity shares have been dematerialized. Rest 60% are held in physical form.
5) The shares are listed on NSE and BSE and are thinly traded as is evident from the table below:
|
YEAR
|
BSE
|
NSE
|
|
|
No. of Trades
|
No. of Shares
|
No. of Trades
|
No. of Trades
|
|
2000-2001
|
1473
|
19729
|
2999
|
18689
|
|
2001-2002
|
1611
|
5091
|
1387
|
7605
|
|
2002-2003
|
2197
|
7885
|
1873
|
15784
|
6) Approximately 400 folios account for more than 80% of the total paid up capital while 6500 folios account for the balance 20% of the paid up capital.
7) Zandu was handling all the matters relating to transfer of securities, maintenance of records of holders of securities with respect to the shares held in the physical form In-house only. The shares held in demat form were handled by Intime Spectrum Registry Ltd., SEBI registered RTA.
8) It has received only 11 complaints during the period from April 2003 to December, 2003 and all the complaints have been resolved to the investors’ satisfaction. There is no single investor complaint pending.
9) Zandu contacted NSDL and obtained the rates for in house connectivity. Also various RTAs were contacted. Copies of the rates received from RTAs were enclosed with the reply dated 10.02.2004
10) However, due to exorbitant cost the matter could not be proceeded further.
11) The company is in the process of finalizing and appointing a common agency to handle all the matters relating to physical and demat shares.
The following documents were furnished in connection with the submissions made:
1. A letter dated 08.04.2004 which stated that the company held several discussions with several RTAs and after examination and evaluation of the cost, the company had arrived at a conclusion that it would itself act as a common agency and handle all the transfer work in house for both physical and electronic shares.
2. Also enclosed was an unsigned letter dated 07.01.2003 from Shri Kishore Thakkar of Intime Spectrum forwarding the quotations for the same.
3. Secretarial Audit Report for quarters ended 31.09.2003 and 31.12.2003 was also enclosed with the said reply. It was mentioned in the said report that Intime Spectrum Registry Pvt Ltd. was the share registrar for demat securities only.
4. Letter dated 22.05.03 from UTI Investors Services Ltd addressed to the company for offering RTAs service.
A letter from NSDL dated 07.04.2004 was also filed during the proceedings which spoke about forwarding of 2 CDs for installation of NSDL Share Registrar Application and common software. It was submitted during the proceedings that necessary software has already been obtained from NSDL and the same is under installation and the connectivity would be operational within 2 months. The hardware was also procured. It was requested to take a lenient view as number of shareholders was less than 7000 and not many transfers were affected and the delay being unintentional as the company was weighing alternative proposals.
Enclosed with the reply was an email dated 16.04.2003 from Shri Prakash Talekar of NSDL to Zandu forwarding the details for establishing direct connectivity and the charge structure.
APPRECIATION OF EVIDENCE AND FINDINGS
Regulation 53A of SEBI(DP) Regulations, 1996 came into force with effect from 02.09.2003 and reads as under :
“All matters relating to 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.”
The object of the appointment of common share agency as can be seen from SEBI Circular No. SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, was to avoid :
a) delay in dematerialization
b) non-reconciliation of share holding due to lack of proper co-ordination among the concerned agencies or departments, which is adversely affecting the interest of the investors.
Hence, it was directed to appoint common agency either in-house or through SEBI registered RTA for share registry work relating to physical and demat shares of the company.
Before the admission of any security into the depository system, it is necessary for the issuer to establish electronic connectivity with both the depositories either directly or through a Registrar and Transfer Agent (RTA).
Regulation 53A of SEBI(DP) Regulations, 1996 became notified on 02.09.2003.
Some facts need to be considered in the present case:
1) The intention to comply with the Regulation 53A of SEBI(DP) Regulations, 1996 was clear as is evident from the email dated 16.04.2003 of Shri Prakash Talekar of NSDL which is before the said Regulation came into force.
2) It was submitted that the company evaluated various proposals and decided to go for in-house share registry for securities related work for both physical and demat securities.
3) Letter from NSDL dated 07.04.2004 for installation of the software was furnished.
4) No letter in support of installation of VSAT connectivity etc. was furnished.
5) No data transfer has actually taken place.
To act as in-house share registrar, installation of VSAT at the company premises is the prime step to comply with Regulation 53A of SEBI(DP) Regulations, 1996. The company had installed the VSAT connectivity with NSDL. However, no letter was furnished of the installation of the same. But since a letter from NSDL for forwarding the software has been furnished, it can be said that steps to get the connectivity with NSDL are taken which suggests that the company had started operating as RTA.
It was submitted by the company during the proceedings held on 08.04.2004 that it would take another two months to become operational as in-house registrar. However, till date no document is furnished by the company to this effect and it is not known whether they have actually started functioning as common share registrar for both physical and demat securities in terms of Regulation 53A of SEBI(DP) Regulations, 1996.
Therefore, the violation of regulation 53A of SEBI (DP) Regulations, 1996 which requires “All matters relating to 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” is established.
Section 15HB reads as under:
“Penalty for contravention where no separate penalty has been provided.
15HB. 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.”
The company is under statutory obligation to comply with Regulation 53A by appointing a common share RTA w.e.f. 02.09.03 and as discussed earlier there is no material to suggest that the company had complied with the same even as on date.
ORDER
Having regard to the factors contained in Section 15J of SEBI Act, 1992, facts and circumstances of the case and the submissions made, I hereby impose a penalty of Rs. 50,000/- (Rupees fifty thousands only) under Section 15HB of SEBI Act, 1992 on M/s Zandu Pharmaceuticals Works Ltd for failure to appoint a common share agency for demat and physical shares under Regulation 53A of SEBI(DP) Regulations, 1996.
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 V S Sundaresan, Deputy General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
| Date: NOVEMBER 10, 2004 |
S V Krishna Mohan |
| Place: Mumbai |
Adjudicating Officer |