ORDER UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATION 53A of SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 1996 AND SECTION 15HB OF THE SEBI ACT, 1992. AGAINST M/s TECIL CHEMICALS AND HYDRO POWER LIMITED BACKGROUND: 1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated September 30, 2004 to enquire into and adjudge the alleged contravention of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 (for brevity’s sake referred to as the Regulations) read with Section 15HB of the SEBI Act, 1992 (hereinafter referred to as the Act) by M/s TECIL Chemicals and Hydro Power Ltd (hereinafter referred to as TECIL) in the matter of their failure to appoint a common share agency for handling share registry work both for the dematerialised and physical securities. SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING: 2. In view of the above, adjudicating proceedings were initiated in the first instance against TECIL by the issuance of a show cause notice dated January 12, 2004 in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 where under TECIL was asked 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. TECIL 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. However, although the show cause notice was acknowledged by TECIL, they neither responded to the said notice nor provided any explanation for their failure to reply to the same. 4. Thereafter, a notice of hearing dated November 3, 2004 was sent to TECIL in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 (Rules) and vide the said notice, TECIL was advised to attend the hearing proceedings to be held on November 29, 2004. 5. On the said date, Shri K L Mundra, Authorised Representative of TECIL alongwith Dr. S K Jain, Legal Advisor appeared before me and made the following submissions: a. TECIL was referred to BIFR vide reference dated July 25, 2002 and was registered as case no. 358/2002. However neither was the company declared as ‘Sick’ nor was any operating agency appointed by the BIFR. Moreover their case was not being taken up for hearing despite their repeated efforts. The networth of TECIL was negative to the extent of Rs.44.87 crores. In support of their contention, the annual report for the year ending March 31, 2004 was submitted b. Although a common share agency was not appointed by TECIL in terms of the Regulations, M/s. System Support Services, Mumbai had been appointed as their Registrars for the past ten years. c. TECIL had applied on September 23, 2004 to NSDL through their Registrars, for the compulsory dematerialization of all the shares of the company but were yet to receive any reply from NSDL. They were however given to understand that NSDL was not willing to grant connectivity to any company whose networth had been eroded. 6. Upon the conclusion of the hearing, additional time was sought to submit some more documents to support their contentions. Accordingly the case was posted for further hearing to December 15,2004. On the said date, Shri K L Mundra and Dr. S K Jain once again appeared before me and made the following submissions: a) The shares of TECIL are in the physical form only. Their requests to dematarialise the said shares were turned down by the Registrars on the ground of the negative networth of TECIL. A copy of the letter dated December 14, 2004 issued by the Registrars in this regard was submitted as proof. Copies of the correspondence entered into with the financial institutions, as advised by the BIFR and also with the BIFR for fixation of an early date of hearing and appointment of an operating agency were enclosed for perusal. b) The shares of TECIL were delisted about three years back. CONSIDERATION OF ISSUES: 7. I have taken into consideration, the facts and circumstances of the case, the material available on record, as also the relevant regulatory provisions. 8. 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.” 9. In view of the above, it is imperative for 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, either in house or through a SEBI registered RTA. 10. The object of the appointment of the common share agency as is evident from the SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, which required all issuer companies to appoint a common agency for handling all share registry work was 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. Thus the provisions of Regulation 53A of the Regulations would be applicable only to that company whose shares have been dematerialized or to those companies whose shares are both in the physical and demat mode and handled by different agencies. 12. In such a case, 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 Registrar and Transfer Agent (RTA).
13. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI. 14. I have also perused the circular issued by SEBI bearing no.FITTC/DC/Policy-Cir-01/2001 dated August 03, 2001 which advises all companies 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 had been advised to submit a compliance report to SEBI by October 15, 2001.
15. Subsequently SEBI circular no.D&CC/FITTC/ Cir-05/2001 dated December 26, 2001 has brought out the list of all the scrips that had established connectivity with the depositories. In terms of the said circular, the shares of the companies which 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. 16. Thus it appears that even as on date, there are companies that have not yet dematerialized their shares and instead have continued to retain their shares only 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.
17. From the facts earlier mentioned, it is noted that the shares of TECIL have not been dematerialized but continue to remain in the physical mode only. The same is also evident from their non-registration with both the depositories (NSDL & CDSL) which aspect has been verified from the respective websites. 18. In the absence of the shares of TECIL being dematerialized, the provisions of Regulation 53A of the Regulations would have no applicability to TECIL whose shares continue to remain in the physical mode and consequently which therefore cannot be held liable for their failure to appoint a common share agency to handle the share registry work relating to the shares of the company in terms therein. 19. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the issues enumerated above as well as after analysing all the material available on record and taking into consideration the facts and circumstances of the present case, I am of the considered opinion that the imposition of any penalty is not necessitated. ORDER: 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, the proceedings against M/s. TECIL Chemicals and Hydro Power Ltd are hereby dropped.
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