ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES)
AGAINST
M/s KAY PULP AND PAPER MILLS LIMITED
1. These proceedings arise consequent to the order of the Securities and Exchange Board of India (SEBI) dated November 2, 2005 to enquire into and adjudge the alleged contravention of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 read with Section 15HB of the SEBI Act, 1992 (for brevity’s sake, hereinafter referred to as the Regulations and the Act respectively) by M/s. Kay Pulp and Paper Mills Ltd. (hereinafter referred to as KPPM) in the matter of their failure to appoint a common share agency for handling their share registry work both for the dematerialised and physical securities.
NOTICE/ REPLY/ PERSONAL HEARING:
2. Accordingly, a notice dated February 20, 2006 was issued to KPPM under Rule 4(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) in terms of which, KPPM were advised to show cause as to why the inquiry proceedings should not be initiated against them for the alleged violation of the provisions of Regulation 53A of the Regulations and why the penalty as prescribed under section 15HB of the Act should not be imposed upon them. KPPM were 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 response to the said notice, KPPM vide their letter dated March 6, 2006, while stating that they had already corresponded earlier with SEBI vide letter dated June 18, 2005 to seek extension of time for the appointment of common agency, now submitted that they had finalized the appointment of the connectivity provider - Sharepro Services Mumbai, for functioning as a common agency from April 01. 2006 in compliance with Regulation 53A of the Regulations.
4. Thereafter, a notice of hearing dated May 12, 2006 was sent by registered post to KPPM under Rule 4(3) of the Rules advising them to attend the proceedings scheduled on June 6, 2006 and also to submit the documentary proof if any, in support of their contentions at the time of the hearing. On the said date, Shri Sham A. Melye, Company Secretary of KPPM appeared on behalf of KPPM and advanced submissions on behalf of the company inter alia to the effect that the delay in compliance was on account of the company being referred to BIFR as a sick company. As Shri Melye was advised to submit the necessary documents to substantiate his contentions, he requested for additional time to submit the requisite documents i.e. tripartite agreements entered into by the company and the RTA with CDSL and NSDL respectively and the copy of the bipartite agreement entered into with Sharepro Services (I) Pvt. Ltd; (Sharepro) the common share agency as also the documents evidencing reference to BIFR and declaration as a sick company and any other relevant documents.
5. Thereafter under cover of their letter dated June 24, 2006, KPKM forwarded the following documents :-
(i) Photocopies of the tripartite agreements signed between the company, Sharepro and NSDL and CDSL respectively.
(ii) Brief note on the financial condition of the company stating reasons for not appointing a common agency earlier.
(iii) Copy of BIFR letter No.F.3 (K-6) BC/2003 dated April 22, 2003 advising the company that their reference received for registering the company as sick was registered as Case No.183/2003
(iv) Copy of the order of the BIFR dated June 9, 2005 ordering that the case was fixed for commencement of hearing on July 6, 2005.
6. Under cover of the said letter, it was further stated that since the company had developed certain differences with Sharepro, they were unable to submit the copy of the bipartite agreement entered into with the RTA by June 30, 2006 and hence requested for additional time to switchover/appoint Satellite Services as their new RTA from July 01, 2006.
7. Thereafter under cover of their letter dated July 24, 2006, KPPM forwarded a letter dated July 22, 2006 received from Sharepro in which they had inter- alia accepted acting as the common agency of KPPM effective from July 01, 2006. Pursuant to receiving an email dated August 08, 2006 from my office seeking the copy of the bipartite agreement entered into with Sharepro, under cover of their letter August 23, 2006, KPPML forwarded the copy of the said agreement and on the basis of the same requested that the proceedings be dropped.
CONSIDERATION OF ISSUES
8. The provision of law alleged to have been contravened is Regulation 53A of the Regulations which came into force on September 02, 2003 and 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.”
9. Thus a mandate has been stipulated via the said law that all issuer companies should appoint a common agency to handle the share registry work relating to both the physical and demat shares of the company, which can be done either in house or through a SEBI registered Registrar and Transfer Agent (RTA).
10. The object behind the said mandate as brought out in SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, and is applicable to all issuer companies to appoint a common agency for handling all share registry work, is to avoid:
a) any delay in dematerialization, and
b) 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.
11. This stipulation would however be applicable only to that company, all of whose shares have been dematerialized or to those companies whose shares are both in the physical and demat mode but not to those companies all of whose shares continue to remain in the physical mode. As regards the shares in the demat mode, before the admission of any security into the depository system, the issuer company would have to establish electronic connectivity with both the depositories either directly or through a RTA.
12. I have noted that SEBI had earlier brought out a circular bearing no.FITTC/DC/ Policy-Cir-01/2001 dated August 03, 2001 in terms of which, all companies were advised to establish connectivity with both the depositories on or before September 30, 2001 so as to facilitate compulsory trading in rolling settlement effective from January 2, 2002. In terms therein, all stock exchanges were advised to submit a compliance report to SEBI by October 15, 2001.
13. It appears that vide SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001, a list of all the scrips that had established connectivity with the depositories was brought out. In terms of the said circular, the shares of the companies that had not established connectivity with the both depositories as on October 31, 2001 were to be traded on the ‘Trade for Trade’ settlement mode and not on the normal rolling settlement.
14. Thus on date, there continue to be companies that have not yet dematerialized their shares and instead have continued to retain their shares in a physical mode and the transfers, maintenance of record of the holders of securities and handling of the said physical securities in such cases is continued to be done in-house or through a registered share transfer agent.
15. On the basis of the oral and documentary evidence placed before me, it is clear that the shares of KPPM are both in the physical and demat mode and hence the same would necessitate KPPM appointing a common share agency in term of the mandate prescribed in the Regulations. There is no dispute of the fact of appointment of Sharepro as the common agency of KPPM to handle the share registry work of both the physical and demat shares of the company under an agreement entered into on August 12, 2006 effective from July 01, 2006. This is apparent upon a perusal of the bi-partite agreement entered into with them that forms part of the record. However this agreement was entered into almost 3 years after the due date of compliance i.e. September 23, 2003 and much after the date of initiation of the present proceedings i.e. November 2, 2005.
16. No reasons have been assigned for the said delay other than stating that as the entire networth of the company had almost been wiped out and the operations thereof had been closed since December 2003, KPPM had done the processing of share transfers in house to save costs especially considering that the number of transfers received by them were minimal and well taken care of by them within the specified time. KPPM have also attributed their belated compliance to being a sick company in June 2002. To verify the authenticity of this contention, I have perused the brief note submitted by KPPM detailing their financial status. From the same it appears that KPPM had been referred to BIFR as a sick company and that their case of reference had been registered as Case No.183/2003. This is apparent from the copy of the BIFR letter dated April 22, 2003. However KPPM was never declared as a sick company and no operating agency was appointed to fix a financial plan for restructuring the company. In fact a perusal of the copy of the order of the BIFR dated June 9, 2005 only indicates that the case was fixed for commencement of hearing on July 6, 2005. No information has been submitted by KPPM as regards the facts of the proceedings pending before the BIFR or any other subsequent development. A mere reference to the BIFR does not make a company eligible to be declared as a sick company. In view of the above, the contention of KPPM that they were a sick company in June 2002 is incorrect. As regards the contention of their networth being eroded, once again no evidence has been placed on record to substantiate such a contention.
17. I have however noted that KPPM had established connectivity with both the depositories in the year 2000 itself i.e. prior to the date when the Regulations came into effect, to facilitate the dematerialization of the shares of the various shareholders and have in thus regard entered into the tri-partite agreements with both NSDL and CDSL respectively. This is apparent from a perusal of the tripartite agreement dated September 7, 2000 entered into with NSDL and Sharepro Service (I) Pvt. Ltd. and the tripartite agreement dated August 30, 2000 entered into with CDSL and Sharepro Services (I) Pvt. Ltd.
18. It is thus a matter of record that KPPM did not appoint a common share agency in terms of the provisions of Regulation 53A of the said Regulations which clearly mandates the appointment of a common share agency, effective from September 02, 2003 for both the physical and the demat shares of the company for the purposes envisaged in the Regulations
19. The object behind the timely appointment of a common agency has been discussed in detail earlier which thus appears to have been defeated by KPPM due to their admittedly failing to appoint a common agency on their records as on the stipulated date, in terms of the provisions of Regulation 53A of the Regulations. Hence their belated compliance of the said Regulation stands established.
20. Any non adherence to the regulatory provisions issued by the regulator in the interests of the investors 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 said Regulation would become redundant.
21. It would be relevant to note that had even a nominal delay been involved in complying with the mandate laid down in the Regulations or sufficient justification for the same been given by KPPM, no cognizance would have been taken for the belated compliance of Regulation 53A of the Regulations. However as this is a case involving a delay of almost three years in complying with the provisions of the said Regulation 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.
22. Accordingly in order to levy the appropriate penalty on KPPM, Section 15HB of the Act is to be considered which prescribes the penalty upto Rs.1 crore to be levied in cases of non compliance with any provision of the Act, the rules or the regulations made or directions issued by the Board for which no separate penalty has been provided. I have also considered the following factors as provided in Section 15J of the Act, which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995, i.e., the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.
23 As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the part of KPPM nor any figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. However the fact that the company did not have any common agency on their roles for a considerable period would undoubtedly have affected the interests of the shareholders of the company.
24 Hence, on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated in Section 15J of the Act, as well as after analysing the facts and circumstances of the present case, I am inclined to hold that since KPPM have only recently appointed a common share agency, under an agreement entered into on August 12, 2006 effective from July 01, 2006, the imposition of a token penalty is very much necessitated.
25 Accordingly 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 token penalty of Rs.25,000/-(Rupees Twenty five thousand only) on M/s. Kay Pulp and Paper Mills Limited for their belated compliance of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 in the matter of appointment of a common share agency to handle the share registry work relating to the dematerialized and physical shares as required there under.
26. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order 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.
| PLACE: MUMBAI |
G. BABITA RAYUDU |
| DATE: SEPTEMBER 15, 2006 |
ADJUDICATING OFFICER |