Securities Appellate Tribunal
Cameo Corporate Services Ltd. vs Adjudicating And Enquiry Officer, ... on 3 December, 2004
Equivalent citations: [2005]57SCL294(SAT)
JUDGMENT
B. Samal, Member
1. Appeal is taken up for disposal with consent of both parties.
2. The appeal is against the impugned order of the Respondent dated 30th June, 2004 which reads among others as under:
" It may be added here that allotment of shares in physical form to such of the applicants who opted to receive them in electronic mode causes undue hardship as they have to take steps to get these physical shares converted into electronic form which is a time consuming process. In the meanwhile, he is prevented from selling the shares immediately after listing as these shares have to be compulsorily traded in electronic form. Thus, he loses an opportunity to sell. More importantly, at a time when the primary markets are witnessing the revival of the interest of retail investors, this type of errors causing loss of opportunities for investors to sell will erode the investors confidence in the infrastructure of the capital market.
Section 15HB of sebi Act, 1992 read as under:
Penalty for contravention where non separate penalty has been provided:
"Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one core rupees."
ORDER Having regard to the gravity of the charges established, the number of applications in which the irregularities had taken place, the factors contained in section 15Jof SEBI Act, 1992, the mitigating factors as explained above and the facts and circumstances of the case. It would be fair and just to impose a penalty of Rs.7,00,000/- (Rupees Seven Lakhs Only). Accordingly, I impose a penalty of Rs.7,00,000/- on M/s. Cameo Corporate Services Ltd., Registrars and Share Transfer Agents in terms of section 15HB of SEBI Act, 1992.
The penalty amount shall be paid through a crossed demand draft drawn in favor of "SEBI - Penalties Remittable to Government of India" and payable at Mumbai, may be sent to Sheri Suresh B. Menno, General Manager, Securities and Exchange Board of India, 29th Floor, Cuffe Parade, World Trade Centre, Mumbai - 400 005."
3. An Adjudicating Officer was appointed by the Respondent by their order dated 23rd January, 2003 to enquire and adjudge under Section 15HB of SEBI Act, 1992 and SEBI (Procedure for holding inquiry and imposing penalties by Adjudicating Officer) Rules, 1995 the alleged violation of Clauses 2, 3, 29, and 30 of the Code of Conduct of SEBI (Registrars to an issue and share transfer agents) Regulations 1993 by the appellant in the public issue of Indian Overseas Bank for which the appellant had acted as Registrar to the Issue. Show Causes Notice was issued on 27th February, 2004 by the Respondent to the appellant indicating the irregularities made by them in the said Public Issue. The appellant filed the reply to the show cause notice vide its letter dated 18th March, 2004. The adjudication proceedings were conducted on 19th May, 2004 which was attended by Shri R. Ravi, Managing Director of the appellant and Shri R. D. Ramaswamy, General Manager.
4. The brief facts of the case is that the appellant is a company registered under the provisions of the Companies Act, 1956. The appellant is a SEBI registered Intermediary and Registrar & Share Transfer Agent having registration No.INR 000003753 which was last renewed on 1.4.2002 and is valid upto 31st March, 2005. The appellant is in the business of handling of Public/Rights issues of companies and share transfer work as Registrar & Transfer Agent for the last about 12 years in capital market. The appellant had acted as Registrar for 185 Public/Rights/Bonds Issues of various companies which include blue chip corporates such as State Bank of Travancore, Lord Krishna Bank, Indbank Merchant Banking Services Ltd., The South Indian Bank Ltd., Karur Vysya Bank Ltd., Henkel Spic India Ltd., Indian Bank, Indian Overseas Bank (Public Issue I & II), Ramco Systems Limited, Tamilnadu Industrial Development Corporation Ltd., Tamilnadu Industrial Investment Corporation Ltd., etc. The appellant submitted that it has an excellent track record of handling Public/Right Issues as also share transfer work of various companies. At present the appellant is acting as Share Transfer Agent of about 250 companies with more than 15 lakhs investors and has established electronic connectivity with both the Depositories i.e. NSDL and CSDL. The appellant has been in the Registrar business with an unblemished reputation and performance record and at no time committed any breach or contravention for violation of any rules, regulations and provisions of SEBI Act and/or of any Stock Exchange.
5. The appellant submitted that Indian Overseas Bank a leading Nationalised Bank appointed the appellant as Registrar for its public issue of 10 crores equity shares of Rs.10/- each for cash at a premium of Rs.14/- at a price of Rs.24/- each aggregating to Rs.240 crores. The Issue opened on 5th September, 2003 and got closed on 12th September, 2003. The issue was lead managed by SBI Capital Markets Ltd., (pre-issue) and Kotak Mahindra Capital Co. Ltd., (Post Issue)
6. The appellant further submitted that it had handled in the year 2000, Indian Overseas Bank's first Public Issue at which time Indian Overseas Bank had received about 1.47 lakhs applications in that offer. IOB had paid Rs.8,00,000/- towards professional fees to the appellant then. IOB agreed to pay and paid Rs.8,00,000/- as professional fees to the appellant for the assignment to act as a Registrar of the present issue. The said issue however, generated unprecedented response resulting into 7.5 lakhs applications which even surpassed the expectations of all concerned in the capital market.
7. The appellant submitted that it received a total of 4.76 lakhs applications (including the rejected applications ) in response to the Public Issue. The valid applications and number of shares subscribed were as under:
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Category No. of applications No. of shares applied
received
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a. Public -
Upto 2000 shares 4,17,162 21,21,87,200 b. Public - above 2000 shares 8,886 33,83,73,300 c. Employees 16,772 1,00,18,700 d. NRIs/OCBs/FIIs 2,881 2,08,46,700 Total valid applications 4,45,701 58,14,25,900
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The aforesaid applications were received from 174 branches of Banks spread throughout the length of the country and on account of unexpectedly huge response and a large number of applications, the appellant was constrained to outsource some part of data entry work to outside agencies. This was partly because the appellant was also required to meet the various deadlines relating to post-issue activities so as to ultimately ensure that listing is done within a period of thirty days from the date of closure of the issue. Moreover, timeliness is an important aspect of any public issue more so when monies of lakhs of investors get locked till the shares are listed.
8. Sometime in the month of October, 2003 the respondent inspected the books and records of the appellant in the matter of the aforesaid IPO of Indian Overseas Bank. The main complaint as has been found during the inspection was that in allotment of shares of the above public issue, shares were allotted in physical form although they have requested to get shares in Demat Form.
9. During the inspection the Respondent found that of the top 100 allottees to the aforesaid issue of IOB, 16 applicants were allotted shares in physical mode though they had indicated their preference to receive shares in Demat mode, furnishing Demat account details. It is also stated in the Inspection report that 149 applicants were allotted shares in the physical form although they had preferred to receive shares in Demat mode. This is alleged to be on account of data entry errors by the RTA i.e. the appellant. Also after the allotment and listing of the shares, the appellant had received 71 requests from the allottees in physical mode to Demat their shares. Out of this 20 allottees had earlier furnished their Demat details in the application for the aforesaid Public Issue but were allotted shares in physical form due to data entry operators' mistake.
10. On behalf of the appellant it was submitted that there were some errors due to the unprecedented response that the Public Issue had generated. Contrary to the expectations the Public Issue had received nearly 5 lakh applications as against the anticipation of 3 lakh applications for which necessary logistic arrangements were made. As the entire process had to be completed within a period of 30 days from the closure of the Issue, the appellant was in tremendous pressure to complete the assignment and they only had processing time of nearly 10 to 12 days after the closure of the Issue as the schedules had to be received from 174 branches of the bank across the country. The appellant submitted that in fact they had only 15 days on hand to complete the assignment. Out of the top 100 allottees 16 applicants were allotted shares in physical form. This include banks, financial institutions, mutual funds and other institutions.
11. The Respondent has stated that the appellant has admitted that in 149 cases there were rejection of credits in Demat form which was apparently due to punching errors and mostly due to investors mistakes. The respondent stated that the main defence of the appellant seems to be that the investors of CDSL have mentioned DPID.
12. Heard both parties. The appellant submitted that in respect of 8 applications shares were allotted in physical form due to mis match in their name as appearing in the application with that of the Depository details. In one case there was wrong mentioning of Client ID in respect of Iyshuakoo Radhu which resulted in allotment of shares in physical form. This clarification has been accepted by the respondents. In 3 cases the appellant had stated that the error is due to illegible handwriting but on perusal of these applications by the respondent it was found that the handwriting was not illegible and the rejection on this ground is not justified. In six cases the appellant had considered that the rejection was owing to data entry errors on their part.
13. The appellant was asked to submit an affidavit indicating the latest position about the investors grievances which he did. The extract of said affidavit dated 23rd November, 2004 is furnished below:
"That I am the Managing Director of Cameo Corporate Services Ltd., (CCSL) . which is a SEBI category one Registrars and Transfer Agents and a professionally managed Company. CCSL has established electronic connectivity with both the depositories - NSDL and CDSL.
That CCSL handled 185 public / rights issues of the different companies in the past. CCSL has been acting as Registrar to issues and transfer agent for the past 12 years and is well known to the regulators, intermediaries and investors of the capital market. In the public issue of Henkel Spic India Ltd., CCSL handled nearly 12 lacs share applications and in the Right Issue of Essar Steels Ltd., CCSL processed about 5 lacs Application forms.
That presently CCSL is extending share transfer services to 268 client companies and catering to about 18 lacs investors. CCSL has been ranked between 4th and 6th position for the past several years in respect of number of issues handled and applications processed (Source : Primary Directory). CCSL's prestigious clients for whom it acted as Registrars include State Bank of Travancore,. The South Indian Bank Ltd., Karur Vysya Bank Ltd., Indian Overseas Bank, Henkel Spic India Ltd., , Aban Loyd Chilles Offshore Ltd., Tamilnadu News Print Ltd., (TNPL) Ramco Industries Limited, Tamilnadu Industrial Development Corporation Ltd., (TIDCO) Tamilnadu Industrial Investment Corporation Ltd.,(TIIC) entire SUNDARAM GROUP companies, Tamilnadu Petroproducts Ltd., (TPL) That CCSL has 370 employees to look after the day-to-day activities.
That CCSL acted as Registrars for the public issue of Indian Overseas Bank (IOB), which opened on 05.09.2003 and closed on 12.09.22003. CCSL received around 4.76 lacs of applications data and details form which were procured, processed and verified during the period 13.09.2003 to 29.09.2003 and the basis of allotment with the Stock Exchange, Mumbai was finalized on 03.10.2003. I submit that IOB received overwhelming response to its public issue.
That the Executive Director, SEBI vide Order No.4/2003 dated 20.10.2003, directed the inspection of CCSL relating to the public issue of IOB and to ascertain the veracity of certain allegations regarding irregularities in the mode of allotment of shares.
That CCSL submitted a detailed reply to SEBI's Show Cause Notice on 18.03.2004 (Page 60 of Appeal Memo). In the said reply CCSL regarding resolving the complaints of investors confirmed that:
i) the main complaint of issuing shares in physical form instead of in demat mode was attended on a priority basis, mistakes rectified and converted the physical shares into electronic mode without much loss of time. In all the cases the CCSL has incurred the cost of demat.
ii) that complaints that were referred to in the Inspection Report were attended to meticulously and to the full satisfaction of the investors concerned immediately on receipt of the complaints. Not a single complaint remain unresolved at the relevant time.
iii) that post allotment and listing, seventy one requests from the allottees who were allotted shares in physical mode were received for dematerialization. This includes twenty allottees whose cases were referred by SEBI for explanation from CCSL. CCSL vide its reply dated 26.05.2004, furnished the clarifications and admitted data entry error in respect of six cases (Page 73 and 28 of Appeal Memo.)
iv) that requests received for dematerialization(of physical shares issued on account of mistake), through Demat Request Form post allotment were promptly attended and shares thereof dematerialized within 7 days from the date of receipt of such requests with no cost to investors.
v) that in case of SIDBI and G G Photo Ltd., (page 22), though complaints were not received, CCSL voluntarily demated their shares in the month of October/November, 2003 which were duly accepted by them.
vi) that CCSL promptly resolved the investors' complaints relating to allotment of shares in physical mode instead of in demat mode, non-receipt of share certificates /refund orders etc. satisfactorily within 7 to 15 days from the date of receipt of complaints. No complaint remained pending."
14. There is no dispute about the fact that the appellant had committed minor errors in some cases as stated by the Respondent. It is also a fact that they received large number of applications from the investors to the aforesaid Public Issue for which they were not prepared. The assignment had to be completed in a time bound period. The respondent is right in imposing the penalty which he has the authority. However, on the quantum of penalty the factors to be determined under section 15J are:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default,
(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.
Therefore, looking to the facts and circumstances and as the appellant attended to all the complaints speedily we are, inclined to reduce the penalty to Rs.50,000/- from Rs.7,00,000/- as imposed by the respondent.
15. The impugned order stands modified to this extent. The penalty amount shall be paid within four weeks from the date of receipt of this order.
16. Before we part with the order, we state that there is no dispute about the fact that certain minor errors were committed by the appellant, but it cannot be forgotten that contrary to expectation five lakhs applications were received by the appellant and the entire process was to be completed within a period of 30 days from the closure of the issue by the appellant-Registrar. Applications were received from 174 branches of the bank spread throughout the country. There were many mismatches in the data given in the application form when fed into the computer (such as spelling mistakes and other errors). The appellant has acted as Registrar of 185 public/rights/bonds issues of various companies, which included State Bank of Travancore, Lord Krishna Bank, Indbank Merchant Banking Services Ltd., The South Indian Bank Ltd., Karur Vysya Bank Ltd., Henkel Spic India Ltd., Indian Bank, Indian Overseas Bank (Public Issue I & II), Ramco Systems Ltd., Tamilnadu Industrial Development Corporation Ltd., Tamilnadu Industrial Investment Corporation Ltd., etc. The appellant, admittedly, has an excellent track record in handling rights issues. At present the appellant is acting as share transfer agent for about 250 companies with more than 15 lakhs investors. The appellant had electronic connectivity with both NSDL and CSDL. The appellant, admittedly, has an unblemished reputation as a Registrar. In these circumstances, we feel it appropriate that this penalty ought not be treated as a stigma by the respondent for the future growth of the securities market.
17. No order as to costs.
18. Any amount paid in excess of the amount stipulated by us in the order pursuant to an interim order shall be refunded to the appellant.