ORDER
1. SRG Infotec Limited, the appellants herein, are aggrieved by the order
dated 1-4-1999 made by the Adjudicating Officer, holding them guilty of
non-compliance of the requirements of Securities and Exchange Board of
India (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’) and imposing penalty of Rs. 3 lakhs.
2. The appellants, registered as a public limited company under the
Companies Act, 1956, are engaged in providing services of Registrars to an
Issue (Registrars) and Share Transfer Agents (Transfer Agents) to corpo-
rate entities. They are holding Category I registration certificate granted
by the Securities and Exchange Board of India (SEBI). On the basis of
information in the quarterly reports submitted by the appellants, the
SEBI prima facie felt that the appellants were not complying with the
requirements of the Rules and appointed an Adjudicating Officer on
28-9-1998 to conduct requisite enquiry and impose monetary penalty, if
so warranted. The Adjudicating Officer, conducted the enquiry and came
to the conclusion that the appellants had failed to comply with the
requirements of Rule 4(1)(b) of the Rules as they did not enter into the
requisite agreements with the clients before taking up the assignment of
Registrars/Transfer Agents and imposed a sum of Rs. 3 lakhs as penalty.
The Adjudicating Officer had reported appellant’s failure to enter into
agreement with the following nine companies:
(i) NCJ International Ltd.
(ii) Jay Rapid Roller Ltd.
(iii) Jay Vinyls Ltd.
(iv) KEI Industries Ltd.
(v) Punjab Communications Ltd.
(vi) Noida Medicare Centre Ltd.
(vii) Tarai Foods Ltd.
(viii) SBEC Systems (India) Ltd.
(ix) Liberty Shoes Ltd.
3. The present appeal is directed against the adjudication order dated
1-4-1999 referred to above. According to Rule 9 of the Securities Appellate
Tribunal (Procedure) Rules, 1995 predeposit of the penalty amount is a
condition for entertaining the appeal, unless the requirement is waived by
the Tribunal for sufficient reasons. The appellants vide application 4 of
1999 have prayed for waiver of the requirement of depositing the penalty
amount. In this context it is pertinent to mention that the respondents
have already filed their detailed reply to the appeal. Both the parties have
expressed their willingness to proceed with the appeal itself and that being
the case, I do not find any need to go into the merits of the waiver
application now, as waiver has become only a technical requirement.
Accordingly, I allow the application and proceed with the appeal as
consented to, by the parties.
4. A few facts, based on which the Adjudicating Officer has held the
appellants guilty, deserve to be narrated.
NCJ International Ltd. (NCJ)
(i) The appellants were acting as Registrars to the company’s public issue
opened on 16-1-1995. They were also acting as Transfer Agents thereafter.
According to the appellants, they had forwarded a Memorandum of
Understanding dated 4-5-1995 to NCJ vide their letter of 19-6-1995, with
a request to return the same duly signed. However, they could not
produce the same or any tangible evidence to show the existence of a valid
agreement between the parties. Their contention was that it could not
have been possible for them to act as Registrar and Transfer Agents
without the existence of an agreement and may not be viewed that the
agreement with NCJ never existed. They had stated before the Adjudi-
cating Officer that – ‘we have been carrying the job of Transfer Agents of
M/s. NCJ International Ltd. after public issue. We had prepared the
agreement and sent it to the company many times for signature, but we
have not received the same back’. In the light of the appellants’ own
admission that the agreement was not received back duly signed by NCJ,
the Adjudicating Officer concluded that the appellants had failed to enter
into a valid agreement with NCJ before taking up the assignment as
Registrars and Transfer Agents.
Jay Rapid Roller Ltd. (JRR)
(ii) The appellants were acting as Registrars to the company’s public issue
opened on 1-3-1994 and as Transfer Agents thereafter. According to them
the draft agreement relating to their appointments as Transfer Agents was
sent to the company on 28-1-1995. But they could not produce the
agreement or any evidence to show that the agreement was executed as
requirement under the rules. The appellants had produced correspondence
between them and JRR indicating that they were appointed as Transfer
Agents. However, they had admitted that they were not aware of the
implications of the requirements of continued existence of a valid agree-
ment with the company and that is why some times they were exchanging
letters with the issuer company after the expiry of the original agreement.
According to the Adjudicating Officer, the correspondence exchanged
between the parties could at the most be considered as extending the
existing agreement subject to the same terms and conditions, if at all there
existed any agreement originally. Text of any agreement for the period
prior to 21-10-1998 was not available though they were acting as Transfer Agents since 1994. The Adjudicating Officer came to the conclusion that
the requisite agreement was not entered into by the appellants with JRR
before taking up the work of Registrars for the public issue opened on
1-3-1994 and for carrying on the activities as Transfer Agents.
Jay Vinyls Ltd. (JVL)
(iii) The appellants had admitted that they had acted as Registrars to the
company’s public issue opened on 9-8-1994 and thereafter as Transfer
Agents. Relevant agreement was not produced. But they had stated that
‘an agreement must have been entered into with JVL, however, we are not
able to locate the same and cannot produce the same’. According to them,
they were appointed as Transfer Agents for a further period of 1 year from
1-10-1996 and again upto 30-9-1997 and thereafter upto 20-10-1997 and thereafter upto 20-10-1998 by
exchanging letters. A copy of the agreement dated 21-10-1998 appointing
them as Transfer Agents for a further period of 1 year was produced.
Since they did not produce any agreement, to which the subsequent
appointment letters referred to, the Adjudicating Officer concluded that
no agreement was entered into for acting as Registrars and as Transfer Agents, till 21-10-1998.
KEI Industries Ltd. (KIL)
(iv) According to the appellants, they were acting as Registrars/Transfer
Agents for KIL since the company’s public issue opened on 16-1-1995 that
they had sent a Memorandum of Understanding for their appointment as
Transfer Agents for the period February, 1995 to 31-12-1996 to the
company vide letter dated 19-6-1995 for their signature. But the agree-
ment or even its copy was not produced before the Adjudicating Officer.
They repeated the excuse that ‘since we had handled the public issue of
the company, there must have been an agreement with the company’.
However, they had produced copy of an agreement dated 1-1-1997
covering a period of 1 year and another Memorandum of Understanding
dated 30-9-1998 for 2 years with effect from 30-9-1998. They had admitted
that there was no formal agreement for their appointment as Transfer
Agents for the period 31-12-1997 to 30-9-1998. The Adjudicating Officer
concluded that the appellants were acting as Registrars/Transfer Agents
without entering into an agreement for a period of 2 years since their
appointment and also there was no agreement to act as Transfer Agents
for the period 31-12-1997 to 30-9-1998.
Punjab Communications Ltd. (PCL)
(v) In this case the appellants were acting as Registrars to the PCL’s public
issued opened on 24-10-1994 and thereafter as Transfer Agents. However,
they did not produce the agreement or a copy thereof, though they
asserted that an agreement had been entered into with PCL at the time of
public issue and that the said initial agreement was for one year. This
statement remained unsupported with any evidence. They had admitted
that they had not entered into any formal agreement with PCL, that they
had written several times to PCL explaining the need for executing such
an agreement. The Adjudicating Officer concluded that there was no valid agreement in existence to act as Registrar and Transfer Agents.
Noida Medicare Centre Ltd. (NML)
(vi) The appellants were Registrars for the NML’s public issue opened on
1-12-1992 and Transfer Agents since then. They had taken the stand that
since Rules were notified only 31-5-1993 there was no need for entering
into an agreement in 1992. According to then they could find only a copy
of the agreement dated 1-1-1996 for their appointment as Transfer Agents
for the period covering 1-1-1996 to 29-9-1998. Through another agree-
ment the period was extended by one year from 30-9-1998. Though the
Adjudicating Officer admitted the appellant’s contention that there was
no statutory requirement to have an agreement executed in 1992, it was
incumbent on them to enter into an agreement in 1993, after their
registration with SEBI on 16-10-1993 as Registrars and Transfer Agents.
Even after coming into force of the Rules, the appellants had failed to
enter into a valid agreement with NML for the period 1993 to 1995.
(Tarai Foods Ltd. (TFL)
(vii) The appellants were appointed as Registrars for the TFL’s public issue
opened on 24-11-1993. It has been stated that on 23-1-1995 the appellants
forwarded a draft copy of the agreement relating to their appointment as
Transfer Agents to the company. However, this agreement was not
executed but returned with certain suggestions for modification. The
correspondence went on. The agreement was ultimately executed on
30-9-1998 appointing the appellants as Transfer Agents of the company
for 3 months from the said date. The Adjudicating Officer, in the light of
the facts, concluded that though the appellants were acting as Registrar/
Transfer Agents since the public issue opened on 24-11-1993, there was no
valid agreement as mandated under Rule 4(1)(b), till 30-9-1998.
SBEC System (India) Ltd. (SSL)
(viii) The appellants were acting as Registrars to the public issue of SSL opened on 23-11-1993 and acted as Transfer Agents since them. They had
stated that the original agreement with SSL dated 4-5-1995 was valid for
two years from 1-4-1994 to 31-3-1996. Thereafter the agreement was
renewed fro a further period of 1 year from 1-4-1996 to 14-5-1997 vide
letter dated 1-4-1996. A Memorandum of Understanding was signed on
15-5-1997 for 2 years with effect from 15-5-1997. The Adjudicating Officer
has doubted the authenticity of the agreement made on 4-5-1995 on the
ground that in Clause 27 of the agreement originally the period was filed
in handwriting as ‘one’ and ‘April 1, 1995’, as the date from which the
agreement was to be effective. According to the Adjudicating Officer the
clause was interpolated by substituting the words ‘two’ and ‘April 1, 1994’
in place of ‘one’ and ‘April 1, 1995’ apparently to cover up the gap. The
appellants could not explain this interpolation on the ground that Shri A.K.
Srivastav, Vice-President, the signatory of the agreement was not with
them. Further in the case of Memorandum of Understanding executed on
15-5-1997 it was noticed that the non-judicial stamp paper used for the
purpose was purchased on 14-9-1998. The agreement was executed
obviously pre-dated to cover up the default. To this the appellants
explanation was that since there was an agreement on plain paper made
on 15-5-1997 it was shown as the date of the agreement. The appellant
ceased to be the share Transfer Agents of SSL with effect from 31-7-1998.
The Adjudicating Officer concluded that back dated agreements were
executed to cover up the defaults for the period 1-4-1994 to 4-5-1995 and
for the period 15-5-1997 to 14-9-1998.
Liberty Shoes Ltd. (LSL)
(ix) In this case the appellants were acting as Registrars to the company’s
public issue opened in August 1994. A copy of the agreement dated
21-10-1994 appointing the appellants as the Transfer Agents for a year
from the said date was produced before the Adjudicating Officer. Letters
exchanged thereafter renewing the agreement on the original terms and
conditions for different spells were also produced before the Adjudicating
Officer. Taking into consideration the material produced, the Adjudicat-
ing Officer observed that ‘giving benefit of doubt to SRG, in view of the
fact that LSL in their letter 29-1-1996 has referred to the contract expiring
on 21-7-1995 it can be concluded that there existed an agreement between
SRG and the company i.e., LSL during the period 21-10-1994 to 21-7-1995
and the LSL’s letter as produced later though undated, conveying an
extension of the existing agreement from time to time an be construed
as maintaining the continuity of the agreement to act as Share Transfer
Agents. But SRG has failed to produce any agreement, which was entered
into by them before taking up the assignment as Registrar to an Issue for
LSL’s public issue, which is in violation of Rule 4(1)(b) of the said Rules.’
5. Shri Sanjay Sharma, authorised officer, who appeared for the appel-
lants, reiterated the submissions made in their appeal memorandum. The
appellants had submitted that the present enquiry is based on the information voluntarily provided by them in one of their quarterly reports and
this shows to prove their bona fides, that the impugned order is a non-
speaking order as it does not bring out the material facts forming the basis
for the alleged contravention by the appellants, that mens rea of the
appellants essential for the offence and the motive and the benefit derived
if any, have not been established, that the order is arbitrary in nature and
that the conclusions arrived at by the Adjudicating Officer are based on
surmises, conjectures and imaginations. Main thrust of Shri Sharma’s
oral submission was to convince the Tribunal that penalty imposed was
disproportionate to the offence, if any, committed by the appellants. he
did not controvert any of the facts relied upon by the Adjudicating Officer.
6. Shri Sura Reddy, authorised of SEBI appearing for the respondents also reiterated the submissions made in their reply. He submitted
that the Adjudicating Officer had conclusively established the offence
and the penalty of rupees three lakhs imposed is only a token penalty,
though the penalty could go upto Rs. 45 lakhs as for each default the
maximum penalty leviable being Rs. 5 lakhs. He submitted that no
leniency should be shown to the appellants as they are not short of
expertise to understand the requisite provisions of law for compliance.
7. I have very carefully considered the submissions made by the parties.
The appellants contention that since the enquiry was on the basis of
information provided by them, penalty should not have been imposed,
does not stand to reason. The allegation that the adjudication order is a
non-speaking order, lacking material facts and reasoning, is totally baseless. The Adjudicating Officer in her 35 pages order has very clearly
arrayed the facts and reasons leading to the conclusion in each case.
Findings are supported by facts. Referring to the absence of mens rea, it
may be stated that it is not an ingredient of the offence prescribed under
Section 15B of the Act. The allegation that the decision of the Adjudicating
Officer is arbitrary and against the principles of natural justice is also
baseless as is evident from the order itself that the appellants were given
sufficient opportunity to present their case and they had fully made use
of the same.
8. In terms of Section 12 of the Securities and Exchange Board of India Act,
brought into force with effect from 30-1-1992, market intermediaries,
including Share Transfer Agents and Registrars to an Issue, are required
to obtain a certificate of registration from SEBI with the time frame
prescribed therein for carrying on their activities. They are required to
comply with the conditions stipulated in the certificate of registration
granted for the purpose. The Central Government had notified the rules
viz. Securities and Exchange Board of India (Registrars to an Issue and
Share Transfer Agents) Rules, 1993 on 31-5-1993, which, inter alia, contain
conditions for grant or renewal of certificate under Rule 4. According to
Clause (b) of Sub-rule 4, Registrars to an Issue or Share Transfer
Agent is required to enter into a valid agreement with the person for or on
whose behalf he is buying or selling or dealing in securities as a Registrars
to an Issue or as Transfer Agent and that agreement amongst other things
should define the allocation of duties and responsibilities between him
and such body corporate. The certificate of registration is liable to be
cancelled or suspended by SEBI, under Section 12(3) of the Act for
sufficient reasons, which may include non-compliance of the conditions
governing grant of certificate of registration. Further, the Registrars/
Transfer Agents is also liable to prosecution for violation of the provisions
of the Act and the rules and regulations made thereunder in terms of
Section 24 of the Act. These were the only penal provisions available to
meet the contravention till the Act was amended in 1995. Through an
amendment to the Act with effect from 25-1-1995 a new Section 15B was
added. According to this newly introduced Section 15B, 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 his client,
fails to enter into such agreement, he shall be liable to a penalty not
exceeding five lakh rupees for every such failure. Section 15B is applicable
prospectively. It was brought into force from 25-1-1995. Since the section
has no retrospective application, the offences covered therein, committed
prior to the said date cannot be booked and penalised with monetary
penalty as provided therein.
9. Even though the Securities and Exchange Board of India (Registrars to
and Issue and Share Transfer Agents) Rules, 1993 are applicable to
Registrars and Share Transfer Agents, it cannot be said that the duties and
functions of both these entities are one and the same. This is evident from
the definitions of these two expressions provided in the Rules. The
activities of Registrar to an Issue cover (i) collecting applications from
investors in respect of an issue of securities (ii) keeping proper records of
application and monies received from investors or paid to the seller of
securities (iii) assisting the issuer in determining the basis of allotment,
finalising the list of persons entitled to allotment and processing and
despatching allotment letters, refund orders, certificates, etc. A Share
Transfer Agent on the other hand is one who on behalf of any body
corporate, maintains the records of holders of securities issued by such
body corporate and deals with all matters connected with the transfer and
redemption of its securities. It can be said that the activities of Registrar
is basically related to issue of securities and matters incidental thereto and
that of a Share Transfer Agent, relate to transfer, transmission, redemp-
tion, etc. of securities after the allotment is completed. Regulations
notified by SEBI permit entities to carry on the activities of both Regis-
trars and Transfer Agents, subject to their fitness to carry on this ‘two in
one’ activities. In such cases a combined certificate of registration is
granted for carrying on the activities of Registrars and Transfer Agents.
The ‘two in one’ entities are granted Category I certificate and those
entites who carry on the either of these activities are given Category II
certificate. The appellants were granted a Category I certificate with
effect from 16-10-1993 and thereafter the certificate of registration was
renewed for further periods. One of the conditions for grant/renewal of
certificate of registration is that a Registrar/Transfer Agent shall enter
into a valid agreement with the person for or on whose behalf they are
acting and that the agreement should define the allocation of duties and
responsibilities between him and such person. Apart from the rules and
regulations, SEBI had issued certain operational guidelines/instructions
in this regard alongwith two model agreements for the purpose. If a
Category I certificate holder enters into an agreement with an issuer
company clearly defining the allocation of duties between him and the
company in respect of his role as Registrars and also as Transfer Agents,
it cannot be said that the intermediary has contravened the provisions of
Rule 4(1)(b); as such a combined agreement would be treated as sub-
stantial compliance of the statutory requirement. The thrust is for a valid
agreement with clear allocation of duties and responsibilities between the
company and the Registrar or Transfer Agent or in that ‘two in one’ role
recognised by SEBI. It is also evident that the agreement is required to be
executed before taking up the assignment and should remain alive during
the currency of that assignment. Normally the activities of Registrars are
concluded once the issue related matters are over. But this is not the case
with the Transfer Agents. Transfer/transmission of securities is an on
going activity and as such the Transfer Agents’ activities are of continuing
nature. It has been clearly mentioned in the certificate of registration that
the SEBI had granted the certificate of registration to the appellants as
Registrars and Transfer Agents subject to the conditions in the rules and
in accordance with the regulations to carry out the activities as specified
therein. Therefore, compliance of the requirements under Rule 4(1)(b) is
a requirement of the condition subject to which the certificate was
granted and failure to do so would attract penal consequences.
10. The Adjudicating Officer in the impugned order has charged the
appellants on two counts that (i) they had not entered into any valid
agreement with 9 companies before taking up the assignment as Regis-
trars and (ii) there was no valid agreement for discharging the functions
of Transfer Agents for certain periods.
11. In this context it is pertinent to mention that in all the 9 cases, discussed
in the order the appellants had acted as Registrars to public issues opened
on a date prior to the date on which Section 15B was brought into force.
It is true that failure to enter into and agreement in terms of Rule 4(1)(b)
was an offence even at that time, but the penal consequences were
restricted to suspension or cancellation of registration certificate as
provided in Section 12(3) of the Act or prosecution under Section 24.
Imposition of monetary penalty provided under Section 15B was not
possible for an offence committed on a date prior to 25-1-1995 i.e., date on
which the said section came into force. In view of this, the Adjudicating
Officer invoking the provisions of Section 15B against the appellants for
non-compliance of the requirements of Rule 4(1)(b) with reference to their
appointment as Registrar, for the public issues opened earlier is not legally
sustainable. It is noticed from the facts that all those public issues were
made before the section was brought into force. Imposition of monetary
penalty invoking Section 15B in these cases is not acceptable as the cause
of action relates to a period when 15B was not in existence.
12. Coming to the contravention of Rule 4(1)(b) with reference to the
appellants failure to enter into agreements for acting as Transfer Agents
in the 8 cases (LSL has been absolved of this charge), it may be stated that
the appellants have not seriously rebutted the material facts relied upon
by the Adjudicating Officer. From the evidence discussed in the impugned
order it is clear that the appellants had not produced the original or copy
of the relevant agreement relating to their assignment as Transfer Agents,
either for the whole period during which they rendered the service or for
certain periods during the currency of such assignment as pointed out by
the Adjudicating Officer. The argument that the appellants would not
have taken up the assignment without executing an agreement deserve to
be discarded. Further, the contention that the appellants had exchanged
letters with their clients and these letters constituted valid agreement, per
se is not acceptable. No doubt, a valid agreement can be constituted
through exchange of letters. But if the law prescribes any particular
requirement to be put in an agreement, the failure thereof would not
recognise such a default agreement as an agreement in terms of the
regime. In the present case Rule 4(1)(b) stipulates as to what should contain
in the agreement. So an agreement not in conformity with those require-
ments is not a proper agreement for the purpose. The appellants had not
produced any evidence to show that the so called letters defined the
allocation of duties and responsibilities of each party as required under
Rule 4(1)(b). A letter by itself, without including the mandatory clause
provided in the rule, cannot be considered to have constituted an agree-
ment under the said rule.
13. Legal position regarding applicability of Section 15B is the same as discussed in para 11 above, in respect of failure to enter into agreement
before taking up the assignment as Transfer Agents also. However, since
the Transfer Agents continued to provide such service even after
25-1-1995, it was necessary to execute the requisite agreement thereafter.
It is seen that in all 8 cases the appellants had carried on their assignment
as Transfer Agents even after 25-1-1995 and default was noticed for
certain periods during the currency of their assignment. I have carefully
considered the evidence and find that the appellants had defaulted in this
regard in the post-amendment period. Therefore, it cannot be said that the
appellants had not contravened any legal provision to attract the penalty
provided under Section 15B.
Coming to the quantum of penalty it is seen that the Adjudicating Officer
had imposed a lump sum monetary penalty of Rs. 3 lakhs though as per
Section 15B, for every failure by any person to enter into agreement with
clients as required under the Act, or any rule or regulations, a maximum
penalty of Rs. 5 lakhs is leviable. The Adjudicating Officer has conclusively
established the appellants’ failure to have necessary agreements with 8
companies on whose behalf they had acted as Transfer Agents even after
25-1-1995. The Adjudicating Officer has stated in the order the factors
which guided her in deciding the quantum of penalty. The penalty was
imposed ‘taking into account the corrective steps taken by the SRG by
way of entering into the presented agreement with some of the above
companies, after receipt of letter from SEBI and also an undertaking as
submitted by SRG that they shall be more careful in future and shall
ensure compliance with the said Rules and Regulations and shall not give
any chance to SEBI to raise any such complaint in future’. Thus, it appears
that the sum of Rs. 3 lakhs imposed as penalty is not arrived at on any pro
rata basis. It is only a token penalty. I do not consider it necessary to
interfere with the quantum of penalty decided by the Adjudicating
Officer.
To sum up, the appellants cannot be held guilty of offence under Section
15B for not entering into any agreement before taking up the assignment
as Registrars to an Issue, as the cause of action relates to a period prior to
25-1-1995. However, the Adjudicating Officer has conclusively estab-
lished contravention of Rule 4(1)(b) read with Section 15B, in respect of the
appellants’ failure to have requisite agreement with the concerned com-
panies in respect of the services rendered by them as Transfer Agents,
after the said date. The lump sum penalty of rupees 3 lakhs imposed as
against a maximum penalty of Rs. 5 lakhs leviable for each default appears
to be a token penalty.
In the light of the above discussion, it cannot be said that the appellants
are not guilty of any offence to warrant imposition of monetary penalty.
14. The appeal is, therefore, dismissed.