BEFORE THE SECURITIES APPELLATE TRIBUNAL, MUMBAI 

Appearances : Sanjay Sharma for the Applicant. Sura Reddy for the Respondent. 

ORDER 

1. SRG Infotec Ltd., the appellants herein, are aggrieved by the order dated 1st April, 1999 made by the adjudicating officer, holding them guilty of non-compliance of the requirements of the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Rules, 1993 (hereinafter 'the Rules') read with section 15B of the Securities and Exchange Board of India Act, 1992 (hereinafter 'the Act') and imposing penalty of Rs. 3 lakh. 

2. The appellants, registered as a public limited company under the Companies Act, 1956, are engaged in providing services of registrars to an issue (hereinafter 'the registrars') and share transfer agents (hereinafter 'the transfer agents') to corporate entities. They are holding Category I registration certificate granted by the Securities and Exchange Board of India (hereinafter 'the SEBI'). On the basis of information in the quarterly reports submitted by the appellants, SEBI prima facie felt that the appellants were not complying with the requirements of the Rules and appointed an adjudicating officer on 28th September, 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 lakh 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.; and

(ix) Liberty Shoes Ltd. 

3. The present appeal is directed against the adjudication order dated 1st April, 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 No. 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) 

4.1 The appellants were acting as registrars to the company's public issue opened on 16th January, 1995. They were also acting as transfer agents thereafter. According to the appellants, they had forwarded a memorandum of understanding (hereinafter 'the MOU') dated 4th May, 1995 to NCJ vide their letter of 19th June, 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 registrars 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 adjudicating officer that "we have been carrying the job of transfer agents of NCJ 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) 

4.2 The appellants were acting as registrars to the company's public issue opened on 1st March, 1994 and as transfer agents thereafter. According to them the draft agreement relating to their appointment as transfer agents was sent to the company on 28th January, 1995. But they could not produce the agreement or any evidence to show that the agreement was executed as required 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 agreement 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 21st October, 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 1st March, 1994 and for carrying on the activities as transfer agents. 

Jay Vinyls Ltd. (JVL) 

4.3 The appellants had admitted that they had acted as registrars to the company's public issue opened on 9th August, 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 one year from 1st October, 1996 and again upto 30th September, 1997 and thereafter upto 20th October, 1998 by exchanging letters. A copy of the agreement dated 21st October, 1998 appointing them as transfer agents for a further period of one 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 21st October, 1998. 

KEI Industries Ltd. (KIL) 

4.4 According to the appellants, they were acting as registrars/transfer agents for KIL since the company's public issue opened on 16th January, 1995 that they had sent a MOU for their appointment as transfer agents for the period February, 1995 to 31st December, 1996 to the company vide letter dated 19th June, 1995 for their signature. But the agreement 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 1st January, 1997 covering a period of one year and another MOU dated 30th September, 1998 for two years with effect from 30th September, 1998. They had admitted that there was no formal agreement for their appointment as transfer agents for the period 31st December, 1997 to 30th September, 1998. The adjudicating officer concluded that the appellants were acting as registrars/transfer agents without entering into an agreement for a period of two years since their appointment and also there was no agreement to act as transfer agents for the period 31st December, 1997 to 30th September, 1998. 

Punjab Communications Ltd. (PCL) 

4.5 In this case the appellants were acting as registrars to the PCL's public issue opened on 24th October, 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) 

4.6 The appellants were registrars for the NML's public issue opened on 1st December, 1992 and transfer agents since then. They had taken the stand that since the Rules were notified only on 31st May, 1993 there was no need for entering into an agreement in 1992. According to them they could find only a copy of the agreement dated 1st January, 1996 for their appointment as transfer agents for the period covering 1st January, 1996 to 29th September, 1998. Through another agreement the period was extended by one year from 30th September, 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 16th October, 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) 

4.7 The appellants were appointed as registrars for the TFL's public issue opened on 24th November, 1993. It has been stated that on 23rd January, 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 30th September, 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 registrars/transfer agents since the public issue opened on 24th November, 1993, there was no valid agreement as mandated under rule 4(1)(b), till 30th September, 1998. 

SBEC System (India) Ltd. (SSL) 

4.8 The appellants were acting as registrars to the public issue of SSL opened on 23rd November, 1993 and acted as transfer agents since then. They had stated that the original agreement with SSL dated 4th May, 1995 was valid for two years from 1st April, 1994 to 31st March, 1996.Thereafter the agreement was renewed for a further period of 1 year from 1st April, 1996 to 14th May, 1997 vide letter dated 1st April, 1996. A MOU was signed on 15th May, 1997 for two years with effect from 15th May, 1997. The adjudicating officer has doubted the authenticity of the agreement made on 4th May, 1995 on the ground that in clause 27 of the agreement originally the period was filled in handwriting as "one" and "1st April, 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 "1st April, 1994" in place of "one" and "1st April, 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 MOU executed on 15th May, 1997 it was noticed that the non judicial stamp paper used for the purpose was purchased on 14th September, 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 15th May, 1997 it was shown as the date of the agreement. The appellant ceased to be the share transfer agents of SSL with effect from 31st July, 1998. The adjudicating officer concluded that back dated agreement were executed to cover up the default for the period 1st April, 1994 to 4th May, 1995 and for the period 15th May, 1997 to 14th September, 1998. 

Liberty Shoes Ltd. (LSL) 

4.9 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 21st October, 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 adjudicating officer observed that "giving benefit of doubt to SRG, in view of the fact that LSL in their letter 29th January, 1996 has referred to the contract expiring on 21st July, 1995 it can be concluded that there existed an agreement between SRG and the company, i.e., LSL during the period 21st October, 1994 to 21st July, 1995 and the LSL's letter as produced later though undated, conveying an extension of the existing agreement from time to time can 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 appellants, 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 or 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 officer 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 Rs. 3 lakh imposed is only a token penalty, though the penalty could go upto Rs. 45 lakh as for each default the maximum penalty leviable being Rs. 5 lakh. 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 Act, brought into force with effect from 30th January, 1992, market intermediaries, including share transfer agents and registrars to an issue, are required to obtain a certificate of registration from SEBI within 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, on 31st May, 1993, which, inter alia, contain conditions for grant of renewal of certificate under rule 4. According to clause (b) of sub-rule (1) of 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 registrar 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) 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 25th January, 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 25th January, 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 Rules 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 registrars to an issue cover (i) collecting applications from investors in respect of an issue Of securities, (ii) keeping proper records of applications and monies received from investors or paid to the seller of securities, and (iii) assisting the issuer in determining the basis of allotment, finalising the list of persons entitled to allotment and processing and despatching allotment letters, refun 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 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, redemption, etc., of securities after the allotment is completed. Regulations notified by SEBI permit entities to carry on the activities of both registrars 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 entities who carry on the either of these activities are given Category II certificate. The appellants were granted a Category I certificate with effect from 16th October, 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 substantial compliance of the statutory requirement. The trust 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" rule 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 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 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 registrars, 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 issue 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 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) 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 25th January, 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 section 15B was not in existence. 

12. Coming to the contravention of rule 4(1)(b) with reference to the appellants failure to enter into agreement 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 that 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 requirements 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 agreement 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 enterinto agreement before taking up the assignment as transfer agents also. However, since the transfer agents continued to provide such service even after 25th January, 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 25th January, 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. 

14. Coming to the quantum of penalty it is seen that the adjudicating officer had imposed a lump sum monetary penalty of Rs. 3 lakh 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 lakh 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 25th January, 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 lakh 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. 

15. To sum up, the appellants cannot be held guilty of offence under section 15B of the Act 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 25th January, 1995. However, the adjudicating officer has conclusively established contravention of rule 4(1)(b) read with section 15B in respect of the appellants' failure to have requisite agreement with the concerned companies in respect of the services rendered by them as transfer agents, after the said date. The lump sum penalty of rupees 3 lakh imposed as against a maximum penalty of Rs. 5 lakh leviable for each default appears to be a token penalty. 

16. 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. 

The appeal is, therefore, dismissed.