MUMBAI APPEAL NO. 27/2000 In the matter of: S.K.D.C. Consultants Limited Appellant Vs. Shri
P.Sri Sai Ram
APPEARANCE: Mr.
K.Raghu
Mr.
J.Ranganayakulu
Mr.
R.Sridhar Reddy
(Appeal arising from the order dated 31.8.2000 made by the Adjudicating Officer, Securities & Exchange Board of India) ORDER SKDC Consultants
Ltd., the Appellant herein, is a public limited company registered on 18.2.1998.
It is a category 1 Registrar to an Issue and Share Transfer Agent. As per
the Memorandum of Association submitted by the Appellant for the purpose
of registration before the Registrar of Companies, Coimbatore, one of the
main objects to be pursued by it on incorporation was to take over as a
going concern, �Shreekrishna Data Centre, Coimbatore�, engaged in the business
of Registrars to Issue/Share Transfer Agents. The said Shree Krishna Data
Centre, (SKDC) was a sole proprietary concern of one Mrs. Padma Sreedharan.
SKDC was holding a certificate of registration from SEBI to act as a category
I Registrar to an Issue and Share Transfer Agent. Though the original registration
was valid for a period of 3 years from 16.12.1994 to 15.12.2997 the same
was renewed for a further period of 3 years i.e. from 16.12.1997 to 15.12.2000.
Consequential to the acquisition of SKDC by the Appellant, SEBI transferred
the certificate of registration granted to the said sole proprietary concern
to the Appellant.
SEBI,
which is entrusted with the duty of regulating the activities of the market
intermediaries including Registrars to an Issue and Share Transfer Agents,
inspected the records of the Appellant sometime in December, 1998. Said
inspection reportedly revealed certain irregularities on the part of the
Appellant. Subsequently, Chairman, SEBI vide order dated 17.4.2000 appointed
the Respondent as Adjudicating Officer to enquire into the alleged contravention
of rule 4 (1) (b) of SEBI (Registrars to an Issue and Share Transfer Agents)
Rules, 1993 (the Rules), read with section 15B of the Securities and Exchange
Board of India Act, 1992 (the Act), by the Appellant. The Adjudicating
Officer, after enquiry concluded that the Appellant had not entered into
agreements as per the format prescribed by SEBI before acting as Registrar
to an Issue in the cases of M/s. Single Window Securities Ltd., (issue
opened on 27.11.1995 and closed on 1.12.1995) and M/s. Lambodhara Textiles
Ltd., (issue opened on 8.12.1995 and closed on 12.12.1995�..). The Adjudicating
Officer had also concluded that the Appellant did not enter into proper
agreements with 10 companies (listed in the impugned order) before acting
as their Share Transfer Agents, but entered into valid MOU only on 02.02.1998,
i.e. after commencing the activities as �Share Transfer Agents�. In his
view the aforesaid omissions amounted to violation of rule 4 (1) (b), and
based on the said conclusion imposed a sum of Rs.25, 000/- as monetary
penalty on the Appellant. Aggrieved by the said order (dated 31.08.2000),
the Appellant has filed the present appeal.
Shri K.Raghu,
one of the Directors of the Appellant, who appeared before the Tribunal,
submitted that the Appellant did not commit any default knowingly and willingly
to attract the penal provisions of the Act. Learned Representative submitted
that the Appellant took over the business of SKDC, as a going concern with
effect from 01.04.1998. SKDC acted as Registrar to the public issue of
equity shares made by M/s. Single Window Securities Ltd and M/s. Lambodhara
Textiles Ltd, based on the offer letter from it as agreed to by the said
two companies. These offer letters covered all the requirements enumerated
in Schedule I of the RRT circular No.1 dated 11.10.1994 issued by SEBI.
He submitted that the offer letter from the said SKDC as accepted by the
issuer companies was taken as the Memorandum of Understanding and the same,
though not in the rigid format prescribed by SEBI, served the purpose;
as it was substantially identical and near to the model agreement drawn
up by SEBI and there was no complaint from anybody in this regard.
Referring
to the ongoing share transfer agency work of the 10 companies referred
to in the impugned order, Shri Raghu submitted that SKDC had been associated
with these companies for quite some time providing services in the area
of data processing, software development, etc. IPOs and Rights/Bonus issues
of these companies were handled by it and continued to be their share transfer
agents. An offer letter defining the �scope of the services� as near as
suggested to by SEBI was in force. He submitted that the omission to execute
proper agreement, as per the model form suggested by SEBI was not at all
intentional, but only by over sight. He submitted that, agreement in the
requisite format has already been signed with all these companies on 02.02.1998.
He further submitted that it was not the intention of the Appellant to
violate any of the statutory requirements, and that by not executing the
agreement in the proper format, nobody has been put to any loss. Since
the omission being unintentional, imposition of penalty in this case was
not warranted, said the learned Representative. He also referred to section
15J of the Act and submitted that none of those parameters has been taken
into consideration by the Respondent. He also cited the Supreme Court decision
in Hindustan Steel Ltd., Vs. State of Orissa (AIR1970 SC 253) to strengthen
his view point that the unintentional default involved was not a case warranting
penalty. He further submitted that Rs.25, 000/- imposed as penalty was
too much for the Appellant to bear.
According
to the learned Representative since SEBI vide its letter dated 10.04.2000
had already punished the Appellant by issuing a warning, imposition of
monetary penalty based on the same set of facts was not legally sustainable.
Shri Raghu
further submitted that since the alleged offences were committed by SKDC,
the Appellant can not be penalised.
Shri J.Ranganayakulu,
learned Representative of the Respondent submitted that the Appellant had
failed to comply with the requirements of rule 4 (1) (b) and the failure
has been admitted by the Appellant before the Respondent and also in its
pleadings before the Tribunal. He pointed out that in the case of the public
issue of equity shares made by M/s. Single Window Securities Ltd., and
M/s. Lambodhara Textiles Ltd, the Appellant acted as Registrar to Issue
without executing any agreement with the Issuer Company. The Appellant
should have acted as Registrar to Issue only after executing the agreement
as provided in the rule. There was nothing on record to establish the Appellant�s
contention that its offer letter accepted by the issuer companies contained
the requirements specified in rule 4 (1) (b) and same was the case regarding
its role as Share Transfer Agents in the case of 10 companies stated in
the order. He submitted that proper agreement was entered into with the
companies only in February 1998. According to him since the scope of the
agreement having been set out in SEBI�s circular, it was necessary to execute
the agreements in the said format. Therefore, the offer letter along with
the "scope of the work" stated to have been used, cannot be considered
as an agreement in terms of rule 4 (1) (b). Shri Ranganayakulu submitted
that the Appellant had accepted the fact that it had failed to enter into
requisite agreement with issuer companies and thereby violated rule 4 (1)
(b), attracting the penal provisions of section 15B of the Act.
Shri Ranganayakulu
submitted that having admitted the failure to comply with the requirements
of rule 4 (1) (b) in the case of 2 public issues as Registrars to an Issue
and in 10 cases as Share Transfer Agents, the Appellant cannot absolve
itself from the legal consequences attached to the default. Though, there
was no visible gain or unfair advantage to the Appellant as a result of
the non-compliance and no loss was caused to the investors, imposition
of monetary penalty was fully justified, in view of the proven failure
on the part of the Appellant to comply with the statutory requirements.
He further submitted that 15B provided for a maximum penalty of Rs. 5 lakhs
for every such failure, and that such failures were 12 in number (2 as
Registrars to an Issue and 10 as Share Transfer Agents), invited a maximum
penalty of Rs.60 lakhs. But the Adjudicating Officer imposed only a token
penalty of Rs.25, 000/-, which by any standard is not unreasonable or unjustified.
Referring
to the letter of SEBI dated 10.04.2000 warning the Appellant to ensure
compliance of the statutory requirements, learned Representative submitted
that the same cannot be considered as a penalty for the default already
committed by the Appellant. It was in the nature of caution. Shri Ranganayakulu
submitted that the decision of the Supreme Court in Hindustan Steel�s case
relied on by the Appellant had no application to the case, as mens rea
is not an ingredient of the offence prescribed in section 15B of the Act.
He further stated that since the Appellant had taken over the business
of SKDC with assets and liabilities, it was responsible for the consequences
of non-compliance of the statutory requirements by the said SKDC and liable
to pay the monetary penalty provided for the same. Penalty is linked to
the failure to comply with the statutory requirements, not to the financial
position of the concerned defaulter, he submitted.
Since
the Appellant had not filed copies of certain documents which were relied
on by the learned Representative at the time of oral submission, Shri Raghu
was directed to file copies of the same within 7 days. Accordingly the
Appellant filed certain documents with copies to the Respondent.
It is
an admitted fact that the Appellant is a public limited company incorporated
under the Companies Act, 1956. The date of incorporation as could be seen
from the certificate of incorporation issued by the Registrar of Companies,
Coimbatore is 18.02.1998. Thus it is clear that the Appellant became a
legal entity only from 18.02.1998, being its date of birth.
It is
also on record that SKDC was a sole proprietary concern of Mrs. Padma Sreedharan
and the said sole proprietary business set up was to be transferred to
the Appellant on 1.4.1998 or the date on which permission of SEBI was received
in this regard. This is born out of the Memorandum of Understanding entered
into between the Appellant and the said Mrs. Padma Sreedharan on 25.02.1998.
Adjudicating Officer in para 6.0 of his order quoting the Appellant has
stated that the business of SKDC as a going concern was taken over by the
Appellant with effect from 01.04.1998, and till 31.03.1998 the said SKDC
continued to be a sole proprietary concern carrying on with its activities.
One of the allegations against the Appellant is that it acted as Registrar to the public issue of shares made in November/December, 1995 by M/s. Single Window Securities Ltd., and M/s. Lambodhara Textiles Ltd, without entering into proper agreement as required under rule 4 (1) (b). Another allegation is that the Appellant acted as Share Transfer Agents of 10 companies without executing agreements as required under rule 4 (1) (b) and that proper agreements were executed only on 02.02.1998. 4 (1) The Board may grant or renew a certificate to a registrar to an issue or a share transfer agent subject to the following conditions namely: (a)����� (b) without prejudice to the obligations under any other law the registrar to an issue or a share transfer agent, shall enter into valid agreement with the body corporate or the person or group of persons or on whose behalf he is buying or selling or dealing in securities as registrar to an issue or as transfer agent and the said agreement amongst other things may define allocation of duties and responsibilities between him and such body corporate or persons or group of persons as the case may be; (c)���� (d)���. (e)����� (emphasis supplied)
(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. It is
clear from the wording of section 15B of the Act that the penalty provided
therein would visit the person who is registered as an intermediary, in
the event of failure of that intermediary to enter into the requisite agreement
with his client. Section 15 J provides guiding principles to the Adjudicating
Officer while adjudging the quantum of penalty.
Thus on
a reading of the provisions of rule 4 (1) (b) along with sections 15B and
15J of the Act it is clear that the responsibility to enter into requisite
agreement is fastened on the concerned intermediary and in the event of
failure to enter into such agreement he is liable to suffer penalty in
such quantum as the Adjudicating Officer may decide taking into consideration
the factors stated in section 15J.
The expression
�penalty� used in section 15B has not been defined in the Act.
It is
an elastic term with many different shades of meaning. As Blacks Law Dictionary
puts, "a penalty is a sum of money which the law exacts payment by way
of punishment for doing some act which is prohibited or for not doing some
act which is required to be done". In this context the following observation
made by Blackburn, J in R Vs. Smith (1862) Le & Ca 131,138 referred
to by Supreme Court in N.K.Jain & Others Vs. C.K Shah & Others
(1991) 2 SCC 945 is a pointer � " I consider that the word penalty falls
to be read in a wide popular sense���. and I select two definitions adequately
conveying that sense. The late Mr. Roberton Christie (The Encyclopaedia,
Vol.II, pg. 204) said " penalty in the broad sense may be defined as any
suffering in person or property by way of forfeiture, deprivation or disability
imposed as a punishment by law or judicial authority in respect of ���
an act prohibited by statute". The Oxford Dictionary echoes the same wide
conception by referring to " a loss, disability or disadvantage of some
kind�� fixed by law for some offence". The monetary penalty provided in
section 15B, thus undoubtedly is by way of punishment for failure to comply
with the requirement of entering into an agreement by an intermediary with
his client, as required under the Act, rules or regulations made thereunder.
It is thus clear that it is in the nature of punishment and relatable to
the defaulter. Incidence of punishment cannot be shifted from the offender
to some one unconnected with the commission of the offence.
As stated
above, the Appellant came into existence on its incorporation on 18.02.1998
and thereafter with effect from 01.04.1998 it took over the business of
SKDC as a going concern with all its assets and liabilities. It is clear
from the adjudication order that the alleged violations relating to public
issue of shares relate to November/December, 1995 and activities of Share
Transfer Agent carried out prior to 02.02.1998, i.e., to a period prior
to the incorporation of the Appellant.
In this
context it is to be noted that the Appellant is a distinct legal personality
from SKDC. The fact that the Appellant had taken over the business of the
said SKDC or that Mrs. Padma Sreedharan, the sole proprietor of the said
SKDC, is one of the 7 subscribers to the Memorandum of Association and
that she is one of the first directors out of the 4 directors of the Appellant
is not sufficient to hold that the said SKDC and the Appellant are one
and the same entity for all purposes. It may not be forgotten that the
Appellant is a public limited company and not even a private company owned
by the said Mrs.Padma Sreedharan. The agreement between the Appellant and
SKDC provides only for transferring the ongoing business with all the assets
and liabilities of SKDC to the Appellant. The Adjudicating Officer had
concluded that SKDC had failed to comply with the requirements of rule
4 (1) (b) well before the Appellant was brought into existence. In terms
of section 15B, the penalty provided therein is to visit the person who
had failed to comply with requirement of entering into agreement with his
client. In this context it is to be remembered that the Supreme Court in
Hindustan Steels Ltd., Vs. State of Orissa (AIR 1970 SC 253) had observed
that " An order imposing penalty for failure to carry out a statutory obligation
is the result of a quasi criminal proceeding". It is not possible to assign
the " failure" in complying with a statutory requirement to some one else
who was not responsible for the same and make him suffer the penalty attendant
to such failure. If there is any liability to pay penalty by way of punishment,
that cannot be transferred to a successor as it remains the liability of
the person who committed the offence. The liability is personal to the
offender. Therefore, the adjudication order holding the Appellant in default
for not complying with provisions of rule 4 (1) (b) and imposing monetary
penalty on it for the said default cannot be sustained. The fact that the
assets and liabilities of SKDC have been taken over by the Appellant does
not mean that it is responsible for the offence committed by SKDC and liable
to suffer the penal consequences.
As the
adjudication order is misdirected to the Appellant, it cannot be sustained.
Since the order cannot be sustained for the reason stated above, I do not
consider it necessary to examine the other arguments advanced by the Appellant.
For the
reasons stated above the appeal is allowed and the impugned order is set
aside.
(C.ACHUTHAN)
PRESIDING OFFICER
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