In the matter of

The Dhanalakshmi Bank Ltd                             Appellant

Vs

Securities & Exchange Board of India              Respondent
 

Present:

Shri P.K. Ganapathy
Chief Manager                                                      for the Appellant
 

Ms. Poonam Bamba
Division Chief, SEBI                                            for the Respondent
 
 

This appeal by The Dhanalakshmi Bank Limited, the Appellant herein, is against the order dated November 9, 1998 made by the Adjudicating Officer appointed by the Securities & Exchange Board of India (SEBI), imposing a penalty of Rs. 50,000/- for non-compliance of certain requirements under the Securities and Exchange Board of India (Bankers to an Issue) Regulations, 1994.
 

The Appellant, a scheduled Bank engaged in the banking business was registered as "Banker to an Issue" under section 12 of the Securities and Exchange Board of India Act, in 1994. Registration has been renewed in 1997 for a further period of 3 years.
 

SEBI vide its order dated June 15, 1998 had appointed an Adjudicating Officer " to adjudicate and hold an enquiry under section 15B of the Act, in the prescribed manner for contravention of Rule 4 (a) and Regulation 14 (1) and 14 (2) of the SEBI (Banker to an Issue) Rules and Regulations, 1994" by 9 banks including the Appellant. The Adjudicating Officer issued a show cause notice on September 8, 1998 asking the Appellant to show cause as to why action should not be taken against it by way of levy of penalty in accordance with section 15B and section 15I of the SEBI Act for the contravention referred to in the SEBI's said order. The Appellant filed written reply and also made oral representation before the Adjudicating Officer in response to the said show cause notice. The Adjudicating Officer after inquiry found the Appellant guilty of non-compliance of the requirements under regulation 14 (1) and imposed a monetary penalty of Rs. 50,000/- vide his order dated November 9, 1998. The said order is under challenge in the present appeal.
 

Application No. 4 of 1998

Rule 9 of the Securities Appellate Tribunal (Procedure) Rules, 1995 provides for deposit of amount of penalty as a precondition for entertaining the appeal. However, the Tribunal is empowered to waive the said requirement for sufficient reasons. The Appellant in the application filed alongwith the appeal has prayed for waiver of the requirement of depositing the penalty amount. When the application was taken up, both the parties consented to take up the appeal itself for disposal in one go. Since the parties are willing and ready to argue the main appeal itself at this stage, I do not consider it necessary to go into the merits of the application as the waiver now remains only a technical requirement. Application allowed.
 

Application No. 1 of 99

Respondent vide this application has sought condonation of about 3 weeks delay involved in filing the reply, on the ground that it was due to reasons beyond its control and neither willful nor intentional. Appellant has no objection. Application allowed.
 

Appeal 3 of 1998

Shri P.K. Ganapathy, authorised representative of the Appellant, reiterated the submissions made in the appeal. He submitted that the Appellant had acted as Banker to few public issues and discharged the attendant duties to the satisfaction of all concerned and there was not even a single complaint against the Bank. He submitted that the Appellant's registration was renewed in July, 1997 by the Respondent. Shri Ganapathy broadly explained the procedure followed by the Appellant as Banker to public issues. He stated that on getting an offer from the issuer company to act as a Banker to the public issue for collection of application money, the offer is accepted and the acceptance is communicated by sending a consent letter to the issuer company. He stated that alongwith the said consent letter a list of collection centres is also sent. The said offer and acceptance by itself bring into existence a legally binding agreement between the parties as required under regulation 14 (1). He further stated that, thereafter detailed discussions are made with the issuer company, concerned Registrar and others and letters are exchanged between the Bank and issuer company/ or its agents detailing various matters including the requirements of regulation 14 (2). This takes care of the requirements of regulation 14 (2) as well. He also submitted that during the last 2 years the Bank had not handled any public issue. According to him, there was no violation of any of the provisions of the Act, rules or regulations by the Appellant. Even if it is assumed that no formal agreement as such has been executed as alleged, at best it is only a technical lapse without any material consequence or adverse impact on anybody. He submitted that all the requirements of regulation 14 have been effectively complied with, though formal agreement as such was not drawn out, that since the Respondent is insisting for formal agreement, the Bank is ready to draw formal agreement in all cases, in future. He further submitted that the penalty of Rs. 50,000/- imposed is not only severe and harsh but also unjustified.
 

Ms. Poonam Bamba, representing the Respondent, submitted that non-compliance of the requirements of the regulation by the Appellant came to SEBI's notice in 1997, when the Appellant approached the Board for renewal of registration under section 12 of the Act. She submitted that the Appellant had admitted non-compliance of the requirements of regulation 14 (1), which stipulates that every banker to an issue shall enter into a legally binding agreement with the body corporate for whom it is acting as a banker to an issue. According to Ms. Bamba the correspondence exchanged between the parties cannot be considered as an agreement for the purpose of regulation 14 (1), as the regulation itself provides for the form of the agreement. In support of this contention she cited Calcutta High Court's decision in Damodar Shah, Arbitrator Vs. Union of India (AIR 1959 Calcutta 526). She submitted that a binding agreement between the parties, on the lines provides in the regulation is a statutory requirement and there is no substitute for this. She further submitted that under section 15B of the Act, if any person who is registered as an intermediary and is required under the Act or any rules or regulations made thereunder, to enter into an agreement with its clients, fails to enter into such agreement, it shall be liable to a penalty not exceeding Rs. 5 lakhs for every such failure. Since the Appellant, who was required to enter into an agreement with the issuer company, having failed to do so has contravened the provisions of regulation 14 (1), penal provision of section 15 is attracted. Even though, the law provides for a monetary penalty upto Rs. 5 lakhs, the Adjudicating Officer imposed only a nominal penalty of Rs. 50,000/- which cannot by any standard, be considered severe or harsh.
 

It is seen from the Respondent's order of June 15, 1998 that the mandate to the Adjudicating Officer was "to adjudicate and hold an enquiry under section 15B of the said Act (SEBI Act) in the prescribed manner for contravention of Rule 4 (a) and Regulation 14 (1) and 14 (2) of the SEBI (Bankers to an Issue) Rules and Regulations, 1994 by Bankers to an issue registered with SEBI mentioned in Annexure I". The Appellant was one among the nine Banks stated in the said Annexure. The Adjudicating Officer on September 8, 1998 issued a Show Cause notice to the Appellant asking to show cause as to why penal action should not be taken against the Bank for non-compliance of the rule and regulations referred to in the said order, a copy of which was annexed to the notice.
 

Relevant provisions of the Act/rule/regulations cited in the adjudication order are extracted below :

Section 15B of the SEBI Act

"If any person who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder to enter into an agreement with his client fails to enter into such agreement, he shall be liable to a penalty not exceeding five lakhs rupees for every such failure ".

Rule 4 (a) of the Securities and Exchange Board of India (Bankers to an Issue) Rules, 1994

(a) he shall enter into a legally binding agreement with the body corporate for or on whose behalf he is acting as banker to an issue, stating therein the duties and responsibilities between himself and the body corporate for the issue for which he is acting as a banker to an issue.
(b) ������.
(c) ������.
(d) ������

"(1) Every banker to an issue shall enter into an agreement with the body corporate for whom it is acting as a banker to an issue.6 :

(2) The agreement referred to in sub section (1) shall contain the following clauses, namely :-

 
(a) the number of centres at which the application and application monies of an issue of a body corporate will be collected from the investors ;

(b) the time within which the statement regarding the applications and application monies received from the investors investing in an issue of a body corporate will be forwarded to the registrar to an issue or the body corporate, as the case may be;

(c) that a daily statement will be sent by the designated controlling branch of the banker to the issue to the registrar to an issue indicating the number of applications received on that date from the investors investing in the issue of a body corporate, and the amount of application money received.
It is seen from the Certificate of Registration issued to the Appellant that the

On a perusal of the legal provisions cited above it is clear that the Banker to an issue is required to enter into a legally binding agreement with every issuer company for or on whose behalf it is acting as a Banker. It is beyond any doubt that the agreement envisaged under regulation 14 is required to be entered into with the issuer company for each public issue with specifics as required under regulation 14 (2) alongwith other mutually agreed matters. One may call it formal or informal agreement. Description does not matter. Substance is relevant. Also it should be a legally binding one. To ascertain whether in terms of regulation 14, there is compliance or not or the compliance is adequate or not, one has to examine the particular public issue to which the Appellant had acted as a Banker. This is very clear from the wording of regulation 14 (1) requiring the Banker to enter into an agreement with the issuer company and section 15B providing for penalty for failure specific.
 

The show cause notice issued to the Appellant in the case is vague. The notice merely stated violation of certain provisions of the rule/regulations in a general manner without mentioning the particulars on which the charge against the appellant was based. Further, there is nothing in the adjudicating order to show that even at a later stage the Appellant was informed of the specific instances of default. Principles of natural justice demand that before adjudication starts, the authority concerned should give the affected party the basis of the charge against him so that he gets an opportunity to defend himself. A show cause notice should serve the purpose for which it is required. An abstract notice like the one in the instant case will not serve the purpose.

It has been stated in the adjudication order that " from the evidence given by the Bank it is seen that they have not entered into agreement with the issuer company, letters were exchanged with the Registrar. Therefore, there was no compliance of the Regulation by the Bank".

It is on record that the Appellant accepts the offer from the issuer company to act as banker to the public issue, and that acceptance is communicated to the company and thereafter the requirements of regulation 14 (2) are complied with by writing to the Issue Registrar, who is stated to be an agent of the issuer company. The Representative of the Appellant claimed in no uncertain terms that the Bank had complied with all requisite statutory requirements. But at the same time he admitted that no formal agreement in the manner required by SEBI was executed !. The Appellant had acted as banker to public issue in a few cases. The adjudication order is silent about the specific instances in which the Appellant had failed to comply with the requirements of regulation 14 warranting penalty under section 15B. It seems that the Adjudicating Officer has gone by the admission part of the Appellant's statement, ignoring that part of the statement on compliance and denial of the charge. In one breath the Appellant claims the existence of a legally binding agreement between the parties and then meekly admits that a formal agreement of the type the Respondent wanted was not entered into!
 

During the course of the argument, Ms. Bamba was asked to state the public issues to which the Appellant had acted as banker and the extent of non-compliance of the statutory requirement in each such case. She admitted that there is no such information with the Respondent that the proceeding was on the basis of the Appellant's own admission that no formal agreement as such, was entered into.
 

An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding and the penalty will not be ordinarily imposed unless there is reasonable evidence to prove commission of the offence. The adjudication proceeding is by its very nature, is not a criminal trial. The standard of proof required to prove a person guilty of a criminal charge in a trial is not required to hold him liable for contravention of the provisions of the Act in an adjudication. But at the same, time, commission of an offence cannot be presumed to award penalty. Guilt has to be proved, though not upto the hilt, to some reasonable extent. An abstract charge that Appellant has contravened the provisions of the law and a guarded admission of the same coupled with denial by the Appellant, by itself is not sufficient to prove the guilt. Further, the Adjudication Officer states that his finding is based on the evidence given by the Bank. I do not find any such evidence discussed in the order. In fact the order has not brought out any specific offence. The Madras High Court in the case of an adjudication under Foreign Exchange Regulation Act had observed that " �������. even if a person admits the charges alleged against him, the Adjudicating Officer must corroborate the charges with evidence" (M.S.M. Syed Mohammed Bhukeri Vs. Directorate of Enforcement, (AIR 1977 Madras 23).
 

This principle is applicable to the present adjudication also. Penal action has to be praticularised with reference to non-compliance of the regulation in specific cases, i.e. those public issues to which the Appellant acted as banker. Not even a single specific case of default by the Appellant has been brought out in the order. A vague and abstract charge cannot sustain. An offence not proved should not end up in penalty. For these reasons the order falls.
 

For the above reasons, I set aside the impugned order. However, it is made clear that this order does not in any prevent the Adjudicating officer holding any inquiry under chapter VI A of the Act for ascertaining the extent of compliance of the statutory requirements by the Appellant in any particular public issue (s) to which it had acted as Banker.
 

The appeal is allowed.