BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. PB/AO-122/2010]
In respect of
GOOD VALUE MARKETING COMPANY LIMITED
(PAN. AAACG4925D)
UNDER SECTION 19 H (1) OF THE DEPOSITORIES ACT, 1996, READ WITH RULE 5 OF DEPOSITORIES (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 2005
FACTS OF THE CASE IN BRIEF
1. On perusal of the monthly status report submitted by NSDL and CDSL vide their e-mail dated January 15, 2008, SEBI observed that M/s Good Value Marketing Company Limited (hereinafter referred to as “GVMCL/Noticee/Company”) had delayed dematerialization of securities. The details of the delay as on January 15, 2008 are as under:-
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Name of the depository
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No. of Requests pending for more than thirty days
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No. of Shares involved
|
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NSDL
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518
|
83,586
|
|
CDSL
|
305
|
41,372
|
The aforesaid delay is alleged to be in violation of regulation 54 (5) of SEBI (Depositories and Participants) Regulations 1996, (hereinafter referred as "DP Regulations") and liable for penalty under section 19D of the Depositories Act, 1996 (hereinafter referred to as the “Depositories Act”).
APPOINTMENT OF ADJUDICATING OFFICER
2. Mr. V. S. Sundaresan was appointed as Adjudicating Officer under section 19H of Depositories Act read with rule 3 of Depositories (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 2005 (hereinafter referred to as “Rules”) vide order dated March 11, 2008 to inquire into and adjudge the alleged violation of regulation 54 (5) of DP Regulations. Consequent to the transfer of Mr. V.S Sundaresan, I have been appointed as the Adjudicating Officer vide order dated December 24, 2009.
SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING
3. Show Cause Notice No.EAD-5/VSS/SS/121249/2008 dated March 25, 2008 (hereinafter referred to as “SCN”) was issued to the Noticee under rule 4(1) of the Rules to show cause as to why an inquiry should not be held against the Noticee and penalty be not imposed on the Noticee under section 19D of the Depositories Act for the alleged violation specified in the said SCN.
4. I find from the records that the SCN was issued through Registered A.D. at the last known address of the Noticee, at, “3rd Floor, Industrial Assurance BLDG, Churchgate, Mumbai – 400 020” but the same was returned undelivered with remark ”Refused”.
5. Subsequent to my appointment, a press notification was issued in the English national daily “Hindustan Times” on April 10, 2010 as well as in the local newspaper “Sakal” published in Marathi on April 10, 2010 about the SCN requiring the Noticee or its authorized representative to collect the SCN from the office of Adjudicating Officer. It was also mentioned in the said notification that if the Noticee failed to reply to the SCN within 14 days from the date of publication, it shall be presumed that the Noticee does not have any reply to submit and the matter would be further proceeded ex-parte. The press notification was issued as a substitute service, for the Noticee. The copy of SCN was also uploaded on SEBI website i.e. www.sebi.gov.in. I find that Noticee vide letter dated June 04, 2010, had requested to handover the SCN to Shri Hemant Vichare, its authorized representative. Shri Hemant Vichare personally collected the SCN on June 07, 2010 from the office of the undersigned as per the signed acknowledgement received. However, I find from the records that the Noticee has not replied to the SCN.
6. In the interest of natural justice and in order to conduct an inquiry as per rule 4 (3) of the Rules, the Noticee was granted an opportunity of personal hearing on June 15, 2010 at SEBI, Head Office, Mumbai vide notice dated May 11, 2010. The said notice was sent by hand delivery to the abovementioned last known address of the Noticee. The notice was delivered as per the signed acknowledgement card received. The Noticee vide letter dated June 10, 2010 and June 21, 2010 had requested for postponement of the hearing. Acceding to the request of the Noticee, a last opportunity of hearing was given to the Noticee vide letter dated August 30, 2010 to appear on October 08, 2010 at SEBI, Head Office, Mumbai. Shri Dilip S Dahanukar, Director of the Noticee, appeared for hearing on behalf of the Noticee on October 08, 2010. During the course of hearing, he requested 15 days time to submit the written reply in the matter and also requested the undersigned to take a lenient view in the matter. Pursuant to the aforesaid hearing, the Noticee vide its letter dated October 20, 2010 submitted written submissions, which inter alia stated as under:
1. “Our Company ran into severe financial difficulties since year 2000 and we were required to register a reference to BIFR under the SICA Act. The first of such referecnce was made in 14.01.2000 and registered as No. 122/2000 of 31.01.2000.
2. In spite of the difficulties, the Company continued to work diligently to process the demat requests normally.
3. Due to defaults with IDBL and SBBJ banks, the disputes came to a head with cases filed against the company in DRT.
4. The financial difficulties increased in 2005-2006 onwards, resulting in a large number of our staff leaving the company for more secure jobs. This left the share department in our company unattented.
5. None of the existing Directors were aware of the delay in processing demat requests until your above said SCN was brought to their attention in April 2010.
6. In the meantime, some differences arose with our Agents for Electronic Connectivity on accounts and other matters.
7. We settled off the loans of IDBI and SBBJ under OTS scheme and resolved our differences with our Agents for Electronic Connectivity.
8. Once the relations were normalized, our company began to receive the lists for demat from 20/07/2010 which were promptly attended by the Company.
9. It may be noted that the matter of pending request in your SCN was brought to our notice only in April 2010. Due to unavailability of lists the company was unable to take any steps in the matter. We once again began to receive the lists from 20/07/2010 and have expeditiously and without wasting any time, cleared the said requests diligently within a few days.
10. We have cleared off not only the entire backlog of demat requests referred by you in the said SCN, but also brought the record up to date. There is now not a single case outstanding. A certificate to this effect has been furnished by us to you on 8/10/2010.
11. We submit that there is no disproportionate gain or unfair advantage as a result of the aforesaid delay either to the Company or to any of its officers or directors.
12. We submit that there is no loss caused to any investor or group of investors as a result of the above said delay.
13. We submit that this is not a repetitive default but delay due to circumstance explained earlier and we have undertaken not to have any further defaults of this nature in the future.
14. We submit that the delay in the processing of requests was not intentional. The delay was largely caused to the circumstance which the company found itself.
15. Under the circumstances of our case, we request you to take a lenient view and condone the delay.”
CONSIDERATION OF ISSUES AND FINDINGS
7. I have carefully perused the written submissions of the Noticee and the documents available on record. The issues that arise for consideration in the present case are :
a) Whether the Noticee had violated regulation 54 (5) of DP Regulations?
b) Does the violation, if any, on the part of the Noticee attract monetary penalty under section 19D of the Depositories Act?
c) If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in section 19 I of the Depositories Act?
8. Before moving forward, it will be appropriate to refer to the relevant provisions of the DP Regulations, which reads as under:
“Manner of surrender of certificate of securities
54(1) ……………………..
(2) …………………….
(3) ……………………
(4) ……………………
(5) Within 15 days of receipt of the certificate of security from the participant the issuer shall confirm to the depository that securities comprised in the said certificate have been listed on the stock exchange or exchanges where the earlier issued securities are listed and shall also after due verification immediately mutilate and cancel the certificate of security and substitute in its record the name of the depository as the registered owner and shall send a certificate to this effect to the depository and to every stock exchange where the security is listed.
(6) …………………….
(7) ……………………”
9. It is observed from the provisions of regulation 54(5) of DP Regulations that, the issuer company shall, within 15 days of the receipt of certificate of security from the participant, confirm to the depository that securities comprised in the said certificate have been listed on the stock exchange/s where the earlier issued securities are listed and shall also after due verification, immediately mutilate and cancel the certificate and substitute in its records the name of the depository as its registered owner and shall send a certificate to this effect to the depository and to every stock exchange where the security is listed.
10. In the instant case, it is alleged that the Noticee had not complied with regulation 54(5) of DP Regulations. The details of delay in dematerialization of securities as on January 15, 2008 are given below:
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Name of the depository
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No. of Requests pending for more than thirty days
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No. of Shares involved
|
|
NSDL
|
518
|
83,586
|
|
CDSL
|
305
|
41,372
|
11. The Noticee vide its letter dated October 08, 2010 enclosed the letter of Computech Sharecap Limited, their Registrars and Share Transfer Agents in which the following was mentioned:
“With reference to your letter dated 4th October 2010 we have to state that there are no pending demat requests in NSDL & CDSL beyond the stipulated time period as specified in the Depository Act.”
12. However, upon perusing the written submissions of the Noticee dated October 20, 2010, I find that detailed status of the pending demat requests were not submitted by the Noticee. The Noticee had submitted only the reasons for delay in dematerialization of shares.
13. As the detailed information about resolving of pending demat requests was not forthcoming from the Noticee, there was no choice but to seek the information from other sources. Therefore, information was sought directly from NSDL and CDSL. NSDL provided the following information with regard to the Noticee:
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Column No.1
|
Column No.2
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Column No.3
|
|
|
Pending as on 15-Jan-2008
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No of Pending cases in column no. 1 processed
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Pending as on 04-Oct-2010
|
|
|
No. of
Requests
Pending for more than thirty days
|
No. of Shares
involved
|
No. of
Requests
|
No. of Shares involved
|
No. of
Requests
Pending for more than thirty days
|
No. of Shares involved
|
|
|
|
|
|
|
|
518
|
83,586
|
518
|
83,586
|
0
|
0
|
|
| |
From the above table, I find the following:
· As on January 15, 2008, 518 demat requests were pending in the NSDL system for more than thirty days and a total of 83,586 shares of the said ISIN were requested for dematerialization through these requests.
· Out of the total of pending 518 demat requests, all requests for 83,586 shares were processed. A perusal of the details of 518 demat requests (Annexure–1) indicates that there was delay in dematerialization requests by the Noticee within the range of 789 days to 2303 days. For example: On May 17, 2004, the Noticee has received the request for dematerialization for 300 shares. However, the Noticee has confirmed the same request on September 27, 2010, with a delay of 2303 days.
· As on October 04, 2010, no demat request is pending in the NSDL system for dematerialization.
14. CDSL provided the following information with regard to the Noticee:
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Column No.1
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Column No.2
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Column No.3
|
|
|
Pending as on 15-Jan-2008
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No of Pending cases in column no. 1 processed
|
Pending as on 04-Oct-2010
|
|
|
No. of
Requests
Pending for more than thirty days
|
No. of Shares
involved
|
No. of
Requests
|
No. of Shares involved
|
No. of
Requests
Pending for than thirty days
|
No. of Shares involved
|
|
|
|
|
|
|
|
305
|
41,372
|
305
|
41,372
|
0
|
0
|
|
| |
From the above table, I find the following:
· As on January 15, 2008, 305 demat requests were pending in the NSDL system for more than thirty days and a total of 41,372 shares of the said ISIN were requested for dematerialization through these requests.
· Out of the total of pending 305 demat requests, all requests for 41,372 shares were processed. A perusal of the details of 305 demat requests (Annexure–2) indicates that there was delay in dematerialization requests by the Noticee within the range of 982 days to 2112 days. For example: On December 18, 2004, the Noticee has received the request for dematerialization for 100 shares. However, the Noticee has confirmed the same request on September 30, 2010, with a delay of 2112 days.
· As on October 04, 2010, no demat request is pending in the CDSL system for dematerialization.
15. Upon perusal of the submissions of the Noticee, both oral and written, I find that the Noticee has admitted the delay in dematerialization of securities but defended the same by stating that the delay was caused due to circumstances beyond the control of the Noticee.
16. I have noted the reasons submitted by the Noticee in delaying the dematerialization requests which are as follows:
· The Company was facing financial difficulties since year 2000. A reference was also made to the Board for Industrial and Financial Reconstruction (BIFR) on January 14, 2000 to declare the company as sick company.
· Company had default with certain banks for the outstanding loan; the cases were filed against the company in Debt Recovery Tribunal (DRT).
· Directors of the company were not aware about the delay in processing of demat requests.
· The financial difficulties of the company were increased in 2005-2006 onward, resulting in a large number of staff leaving the company for more secure jobs. This left the share department in the company unattended.
· Company had certain differences with Registrar and Share Transfer Agents relating to the electronic connectivity on accounts and other matters.
· Delay in the processing of demat requests was not intentional.
17. From the above, I am of the view that Noticee had only made a reference to BIFR to declare the company as sick company. However, I find that BIFR has not declared the company as sick company and no such order has been passed by the BIFR.
18. Further, I find that the reply of the Noticee dated October 20, 2010 is contradictory and tries to misguide. Para 2 of reply states that “In spite of the difficulties, the company continued to work diligently to process the demat requests normally” whereas para 5 of the reply states that “None of the existing directors were aware of the delay in processing demat requests until your above said SCN was brought to their attention in April 2010”. In fact it is really shocking to note the admission of the Noitcee that its directors, who are in charge of the management of the company were not even aware of the fact that there were delays in processing demat requests until the SCN issued by the erstwhile Adjudicating Officer was brought to their notice in April 2010 by the undersigned. The demat requests were pending since year 2004 i.e. for about six years and it is astonishing to note that the directors were not aware of this fact. It reflects very poorly on the functioning of the company.
19. I am of the view that the aforesaid reasons cited by the Noticee, did not, in any way, absolve the Noticee of its failure in complying with the statutory requirements. At best, these are factors which may, to some extent, be relevant while considering the penal consequences that could attract the violation.
20. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the DP Regulations or sufficient justification for the same been given by the Noticee, a lenient view could have been taken for the belated compliance of regulation 54(5) of DP Regulations. However as this is a case involving a delay of more than six years in complying with the provision of the said Regulations and no adequate justification has been given for the same, necessary cognizance of the non adherence of the mandate laid down in the Regulations is very much necessitated.
21. From the aforesaid information received from NSDL and CDSL, I find that the Noticee had delayed considerably in resolving the demat requests which were pending for more than thirty days as on January 15, 2008 and thus, had failed to discharge its obligation to complete the process of dematerialization of securities within the stipulated time period under the DP Regulations. The violation of the provisions of regulation 54(5) of DP Regulations, therefore, stands established.
22. Any 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.
23. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL 216(SC) held that “once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow”.
24. As the violation of the statutory obligations under regulation 54(5) of DP Regulations has been established, I hold that the Noticee is liable for monetary penalty under section 19D of the Depositories Act, which reads as under:-
“Penalty for delay in dematerialization or issue of certificate of securities
If any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) fails to dematerialize or issue the certificate of securities on opting out of a depository by the investors, within the time specified under this Act or regulations or by-laws made thereunder or abets in delaying the process of dematerialization or issue the certificate of securities on opting out of a depository of securities, such issuer or its agent 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.”
25. While determining the quantum of penalty under section 19D of the Depositories Act, it is important to consider the factors stipulated in section 19 I of the Depositories Act, which reads as under:-
“19 –I. Factors to be taken into account by the adjudicating officer
While adjudging quantum of penalty under section 19H, the adjudicating officer shall have due regard to the following factors, namely:-
(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.”
26. From the material available on record, it is not possible to ascertain the disproportionate gain or unfair advantage to the Noticee which may have accrued due to the aforesaid failure. Though it may not be possible to ascertain the monetary loss to the investors on account of failure of the Noticee to discharge its obligation towards the investors to meet the requests for dematerialization, the delay in dematerialization of securities being prejudicial to the interest of investors has to be viewed seriously. Incidences of this nature definitely compromise the securities market regulatory framework to the detriment of investors at large. Delay of each demat request constitutes a separate violation. Therefore, it is noted that the lapse is repetitive in nature and I am of the view that penalty needs to be imposed taking into account each incidence of delay of demat requests. By virtue of the failure on the part of the Noticee to dematerialize the shares of the shareholders on time, the fact remains that it had deprived the shareholders of the liquidity of their investments and loss of opportunity to deal with their dematerialized shares.
ORDER
27. After taking into consideration all the facts and circumstances of the case, I hereby impose a monetary penalty of ` 10,00,000/- (Rupees ten lakh only) on the Noticee which will be commensurate with the violation committed by it.
28. The Noticee shall pay the said amount of penalty by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai, within 45 days of receipt of this order. The said demand draft should be forwarded to Mr. Prasanta Mahapatra , Deputy General Manager, MIRSD-4, Securities and Exchange Board of India, SEBI Bhavan, Plot No.C4-A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai–400 051.
29. In terms of Rule 6 of the Adjudication Rules, copies of this order are sent to the Noticee and also to the Securities and Exchange Board of India.
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Date: November 22, 2010
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PARAG BASU
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Place: Mumbai
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ADJUDICATING OFFICER
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