ORDER
(UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
M/s JOG ENGINEERING LTD.
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 the 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 Jog Engineering Ltd. (hereinafter referred to as JEL) 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 JEL 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 JEL 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. JEL 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, JEL vide their letter dated March 8, 2006, while enclosing a copy of the 26th Annual Report for the year 2004-2005 inter-alia made the following submissions: -
a) The share registry work relating to the physical shares of the company was being looked after in house at their registered office, while the services of an outside agency i.e. Sharepro Services (I) Pvt. Ltd was availed for the purpose of dematarialisation of shares.
b) For the last 4 years, the company had passed through a financial crunch and the liquidity problem had remained acute. Their financial commitments to banks, suppliers, depositors, employees etc., could not be met on time. As the staff salaries used to remain unpaid for 4 to 5 months, many of the staff members left the company. Their bank accounts were labeled as NPAs.
c) The last financial year ending on 30th June 2005 had a loss of Rs.16.26 crores.
d) The litigation against the company and its executives had also increased. Hence the company could not shoulder any financial burden required for the purpose of appointing a common agency especially since the volume of their physical share transfers was very low.
e) The company had received only 73 share transfer applications during the first 8 months of the current financial year of the company (July 2005 to February 2006). The increasing dematerialization of the shares had reduced the number of physical shares and hence the reduced volume of share registry work did not justify the appointment of an outside agency.
f) As the company had not paid dividend in the last 3 financial years, there had not been any dividend related work.
g) Their inadequate facilities and financial resources did not permit them establishing their own electronic connectivity with the depositories.
h) The company had a qualified company secretary to take care of secretarial functions including share transfer matters.
4. Thereafter, a notice of hearing dated May 12, 2006 was sent to JEL by registered post under Rule 4(3) of the Rules with an advice to them to attend the proceedings scheduled to be held on June 7, 2006 and also to submit documentary proof, if any, in support of their contentions at the time of the hearing.
5. On the said date, Shri A.V. Vasantgadkar, authorized representative of JEL appeared before me and while undertaking to submit the copies of the tripartite agreements entered into with CDSL and NSDL, reiterated the submissions made earlier, and made the following additional submissions in their letter dated June 6, 2006 and also during the course of the hearing:-
a. They had established electronic connectivity with both the depositories.
b. They had made a request to SEBI to exempt them from the applicability of Regulation 53A of the Regulations on the ground of erosion of their networth but their request was not considered.
c. 66% of the shares of JEL have been dematted and 34% were in the physical form. The promoters were holding about 60% of the total shareholding which is listed on the BSE.
d. Only 195 share transfer applications were received during the previous year while around 84 share transfer applications were received in the current year.
e. The company was facing severe liquidity problems and in fact was unable to pay the deposits received from the public on the maturity date and in this regard the Company Law Board (CLB) had passed 6 orders, time and again directing the company to repay the matured deposits which the company was unable to comply with. They were trying to repay the amounts from time to time.
f. An amount of approximately Rs.30,000 per month would have to be paid to an outside agency for the work which could be done in-house.
g. The company had suffered a net loss of Rs 1626.71 lacs in the last financial year ended on June 30, 2005 (18 months) and Rs 1872.26 lacs in the financial year ended on December 31, 2003 (18 months)
h. The company would consider the appointment of a common agency as and when they got themselves out of the current financial condition. Hence a sympathetic view be taken in the case.
6. Thereafter under cover of their letter dated June 8, 2006, the representatives of JEL forwarded the certified true copies of the tripartite agreements entered into with NSDL and CDSL respectively as proof of the contentions earlier advanced by them.
CONSIDERATION OF ISSUES
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. Thus the provisions of the said Regulation mandates all issuer companies to 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).
9. The object of the appointment of the common share agency which was 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.
10. Thus the provisions of Regulation 53A of the Regulations would 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, it would be necessary for the issuer company to establish electronic connectivity with both the depositories either directly or through a RTA.
11. Accordingly, 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.
12. 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 both the depositories as on October 31, 2001 were to be traded on the ‘Trade for Trade’ settlement mode and not on the normal rolling settlement.
13. 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. 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.
14. In the present case, JEL have admittedly not complied with the provisions of Regulation 53A of the Regulations in that the share registry work relating to the physical shares of JEL are being looked after in house at their registered office, while Sharepro Services (I) Pvt. Ltd are handing the share registry work related only to the demat shares of the company. However it is seen that JEL have established connectivity with both the depositories in the year 2000 itself to facilitate dematerialization of their shares as is evident from a perusal of the copies of the tripartite agreements entered into by JEL and Sharepro with NSDL and CDSL respectively, It is noted that about 66% of the shares of JEL are in the demat form while the remaining 34% continue to remain in the physical mode, of which around 60% of the shares are stated to be held by the promoters of the company. In this regard, JEL have contended that incurring an expenditure of Rs.30,000 for the appointment of a common agency would not be financially viable considering that only around 195 share transfer applications were received during the previous year while around 84 share transfer applications were received in the current year of which 73 share transfer applications were received during the first 8 months of the current financial year of the company (July 2005 to February 2006) and also since there was no dividend related work as the company had not paid dividend in the last 3 financial years. However the main reason for the failure to appoint a common agency has been attributed to the liquidity problems being faced by JEL to the extent that they were apparently unable to even comply with the 6 orders passed from time to time by the Company Law Board (CLB) in the matter of the repayment of deposits (on the maturity date) received from the public. JEL have also made out a case of the company suffering a net loss of Rs 1626.71 lacs in the last financial year ended on June 30, 2005 (18 months) and Rs 1872.26 lacs in the financial year ended on December 31, 2003 (18 months).
15. Although a very strong case is made out by JEL as regards their financial status, I am surprised to note that a reference was never made to the BIFR for being declared as a sick company. Be that as it may, the fact remains that the Regulations do not envisage the grant of any exemption from the applicability of the Regulations.
16. The object behind the appointment of a common agency has been discussed in detail earlier which thus appears to have been defeated by JEL. Hence their violation of Regulation 53A of the Regulations stands established.
17. 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 and that being the case, such a loss cannot be specifically computed in monetary terms. 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.
18. In order to levy the appropriate penalty on JEL, I have referred to Section 15HB of the Act 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.
19. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the company. There are also no 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 said default is bound to have caused an unquantifiable loss to the investor class as a whole and is continuing till date.
20. However, on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated above as well as after taking into consideration the facts and circumstances of the present case, the rationale behind the requirement of the appointment of a common share agency, the mitigating factors, i.e., the financial status of the company, I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of a penalty is very much necessitated.
PENALTY
21. In view of the same, I 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, in the interest of justice, equity and good conscience, think it appropriate to levy a penalty of Rs. One lakh only (Rupees 1,00,000 only) on M/s. Jog Engineering Limited for their failure to comply with the provisions of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 by not appointing a common share agency for the demat and physical shares of their company.
22. 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, 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 18, 2006 |
ADJUDICATING OFFICER |