ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES)
AGAINST
M/s. INDIA POLYSPIN LIMITED
1. The limited issue that arises for my consideration in these proceedings initiated vide Securities and Exchange of India order dated November 2, 2005 is to determine whether there has been, as alleged, a non compliance on the part of M/s. India Polyspin Limited (for brevity’s sake hereinafter referred to as IPL) with the provisions 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) 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. In this context, a notice dated February 20, 2006 was issued to IPL in terms of Rule 4(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) in terms of which IPL was advised to show cause as to why enquiry proceedings should not be held against them for the alleged violation of the provisions of Regulation 53A of the Regulations and as to why penalty should not be imposed upon them under section 15HB of the Act. IPL 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 response to the said notice, IPL vide their letter dated March 13, 2006, inter-alia made the following submissions: -
(i) They had appointed M/s. Intime Spectrum Registry Limited as their common agency to handle the share registry work for both the physical and demat shares of their company. (Copy of the agreement dated March 7, 2006 entered into by them and the RTA was enclosed)
(ii) Prior to March 7, 2006; being a small company and due to non profitability issues, they were not able to afford the additional expenditure of paying the fees of the RTA and hence had been doing the physical transfer of shares in-house.
4. Thereafter, a notice of hearing dated May 12, 2006 was sent by registered post to PIL in terms of Rule 4(3) of the Rules where under, PIL was advised to attend the proceedings to be held on June 6, 2006 along with the necessary documentary evidence to support the contentions advanced by them.
5. In response to the same, PIL vide letter dated May 30, 2006 while reaffirming their compliance as regards the appointment of a common share agency, further submitted that although the share registry work relating to the physical shares of he company had been done in-house, the work was never delayed. They once again submitted a copy of the bi-partite agreement between them and the registrar.
6. Thereafter, another notice of hearing dated June 16, 2006 was sent by registered post to PIL advising them to attend the hearing scheduled on June 30, 2006. PIL were further advised to submit the documentary proof if any, in support of their contentions at the time of the hearing especially the following documents :-
(i) Tripartite agreements entered into with the registrar and NSDL and CDSL respectively; and
(ii) the percentage of shareholding in physical and demat shares.
7. Although the acknowledgment of IPL was received evidencing their receipt of the said notice, nobody appeared on behalf of IPL on the said date nor did they furnish the required documents sought for. Despite the same, vide notice of hearing dated August 3, 2006, another opportunity was given to IPL to appear for the hearing scheduled on August 25, 2006. IPL were further advised to note that in case they failed to appear on the said date, the matter would be proceeded on the basis of the material available on record. Once again although IPL received the said notice, they did not appear on the said date nor did they forward the required documents.
8. As there has been adequate service of notice on IPL and as they have despite the same failed to participate in the present proceedings, the case is proceeded with based on the material available on record.
CONSIDERATION OF ISSUES
3. 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.”
4. 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).
5. The object behind the said mandate as brought out in SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, which 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. On the basis of the documentary evidence placed before me, it is clear that the shares of IPL are both in the physical and demat mode and hence the same would necessitate IPL appointing a common share agency in term of the mandate prescribed in the Regulations. It appears that IPL have appointed M/s. Intime Spectrum Registry Limited as the common agency for the share registry work relating to both the physical and demat shares of their company only on March 07, 2006 i.e. after almost 21/2 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. No reasons have been assigned for the said delay other than stating that due to their company being small and non profitable, the processing of share transfers was done in house to save costs and that despite not having a common agency, they had cleared all demat requests expeditiously.
11. IPL have however not placed any documentary evidence before me to enable me to verify the authenticity of this contention. That apart, a desire to avoid additional financial burden on the company can by no stretch of imagination be termed as sufficient justification to avoid any mandate prescribed by SEBI, that too, in the interest of the investors.
12. As brought out earlier, every issuer company would have to establish electronic connectivity with both the depositories either directly or through a RTA before the admission of any security into the depository system. On that basis, in the instant case, although IPL would have established connectivity with both the depositories to facilitate the dematerialization of the shares of the various shareholders, they have, despite receiving several reminders from me to submit the required information, once again failed to submit the necessary information in this regard viz details as to the date of entering into the said agreements etc.
13. Be that as it may, the fact remains that IPL did not have a common share agency till recently and hence did not comply on time with 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
14. The object behind the timely appointment of a common agency has been discussed in detail earlier which thus appears to have been defeated by IPL 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.
15. 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.
16. 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 IPL, 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 more than two 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.
17. Accordingly in order to levy the appropriate penalty on IPL, 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.
18. 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 IPL 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 as mentioned earlier, IPL have not appointed a common share agency to handle their share registry work relating to both physical and demat shares of the company within the period stipulated in the Regulations which default would have undoubtedly adversely affected the interests of their shareholders. Moreover IPL have also failed to provide the other related information sought for from them despite receiving several reminder to that effect.
19. 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 IPL did not have a common share agency for a considerable period of time and have only recently appointed a common share agency, i.e. under an agreement dated March 07, 2006, although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a token penalty is very much necessitated.
20. 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. India Polyspin 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.
21. 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 14, 2006 |
ADJUDICATING OFFICER |