N.K. Sodhi, J. (Presiding Officer) -
(1.) WHETHER the Securities and Exchange Board of India (for short the Board) was right in cancelling the certificate of registration of the appellant as Registrar to an issue and share transfer agent (RTA) is the short question before us in this appeal. Facts giving rise to this appeal are these.
(2.) PARSOLI Corporation Ltd. is a public limited company incorporated under the provisions of the Companies Act, 1956 whose shares are listed on the Bombay Stock Exchange Limited, Mumbai (BSE). It shall be referred to hereinafter as 'Parsoli'. It carries on the business of a non -banking finance company and is also a stock broker on the National Stock Exchange of India Limited and BSE. Parsoli is also a depository participant affiliated with the Central Depository Services (India) Limited providing depository services to its clients. Every listed company is mandatorily required to have a share transfer facility either in -house by whatever name called or through an RTA. Parsoli opted to avail the services of an RTA for handling the share transfer work. RTAs are intermediaries of the securities market registered with the Board under the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 (hereinafter called 'the Regulations'). On April 25, 2003 Parsoli entered into an agreement with Pinnacle Shares Registry Pvt. Ltd., the appellant herein and appointed the latter as its share transfer agent to handle the share transfer work, both physical and electronic. The appellant had been registered as an RTA with the Board on 12.3.2003 and it undertook to perform and fulfill the functions, duties and obligations as a share transfer agent and to provide such other services as mentioned in the agreement. Every share transfer agent is required at all times to abide by the code of conduct as specified in Schedule III to the Regulations. A share transfer agent is required to ensure that enquiries from investors are adequately dealt with, grievances of investors are redressed without delay and transfer of securities held in physical form and confirmation of dematerialization / rematerialization requests is done within the time specified by law. It is also the requirement of the code of conduct that an RTA should make reasonable efforts to avoid misrepresentation and ensure that information provided to the investors is not misleading. An RTA is required not to reject the dematerialization / rematerialization requests on flimsy grounds and that such requests could be rejected only on valid and proper grounds supported by relevant documents. An RTA is expected to maintain an arms length distance from the body corporate on whose behalf it acts as an RTA and is required to exercise due diligence and ensure proper care. The two basic qualifications of an RTA needed for the purpose are (a) they should work in an ethical and professional manner and (b) in the performance of their duties, they should not only be prompt but also show high standards of integrity and independence of judgment. This apart, a share transfer agent is also required to maintain records of holders of securities of such body corporate on whose behalf he is carrying on the activities as share transfer agent and is required to deal with all maters connected with the transfer and redemption of its securities. It is required to maintain the names of transferor and transferee and the dates of transfer of securities and such other records as may be specified by the Board for carrying out the activities as share transfer agent. The Board in exercise of its powers under Section 11 of the Securities and Exchange Board of India Act, 1992 (for short the Act) read with Regulation 14(3)(c) of the Regulations issued a circular dated 11.10.1994 requiring all share transfer agents to maintain, among others, specimen signature cards and transfer deeds. In compliance with these statutory provisions, the agreement executed between Parsoli and the appellant contains the following clause:
29. The Company and Transfer Agent shall maintain following documents and records pertaining to Transfer activities by way of hard copies and if required may be stored by way of tape drives / in computers.
a) Check -list, inward register, transfer register, buyer / sellers register with net effect as on date of approval of transfer proposals, transfer deeds, specimen signature cards / signature captured on signature scanner, despatch register / postal journal, objection memos, mandates, Power of Attorney / Board Resolution, RBI Approval in case of NRI, Jumbo Transfer Deeds of in case of FIIs, Register of Members, Annual Returns / Return of Allotment, Interest / Dividend Register.
b) to f) 99
On receipt of complaints from the shareholders of Parsoli about the rejection of their dematerialization / share transfer requests, the Board conducted an inspection of the records of the appellant in June and July, 2008 to look into the role played by the appellant as RTA to Parsoli. The Board found that the appellant committed several irregularities while handling the share transfer work and that it aided and abetted Parsoli in the fraudulent transfer of physical shares from various investors' accounts by using transfer deeds containing forged signatures of investors. The inspection revealed that all fraudulent transfers took place in off -market trades from various investor accounts to the accounts which were in the names of persons either belonging to the promoter group of Parsoli or the front entities of the promoters and that such transfers were approved by a transfer committee consisting of the representatives of the promoters of Parsoli. Further, there were instances of delay in dematerialization and improper rejection of the dematerialization requests made by the investors and this, according to the Board, was violative of the code of conduct prescribed for RTAs under the Regulations. Accordingly, a notice dated May 4, 2009 was issued to the appellant under Regulation 28 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (for short Intermediary Regulations) for the alleged fraudulent acts in dematerialization, delay, non - transfer of shares and issuance of duplicate share certificates of Parsoli. It was alleged that the appellant had violated the code of conduct and also Regulations 53A and 54(5) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, the provisions of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP Regulations) and the Board's circular dated December 27, 2002. It was further alleged that the appellant had functioned as a share transfer agent without taking possession of the specimen signature cards which are essential for the purpose of transfer of securities and that it failed to maintain statutory records. It was also pointed out in the show cause notice that the appellant on the basis of a letter from Parsoli had rejected the requests of the investors for dematerialization on the ground that the shares already stood dematted whereas the investors were given a different reason that the duplicates had already been issued. It was further alleged that even though Parsoli was informing the investors through letters marked to the appellant that certificates had already been dematted, it nevertheless gave credit in the demat account of the investors by off -market credit of shares for which the appellant did not raise any objection thereby violating Clause 7 of the code of conduct. Another allegation made in the show cause notice is that the certificate numbers mentioned in the demat request forms and the numbers on the transfer deeds used for fraudulent transfers were the same in many cases implying that no duplicate certificates had been issued and since the appellant had admitted that it did not verify the antecedents of the share certificates sent for transfer by the investors, it failed to exercise care and due diligence before rejecting the demat requests. The appellant is also alleged to have transferred shares into the accounts held in the names of promoter group and their entities without following the procedure for such transfers and that it dematerialized shares even when the signatures on the demat request forms were not tallying with those on the transfer deeds or even when the transfer deeds were without signatures. The appellant is also said to have delayed the process of the demat requests of the investors beyond 15 days prescribed by law. A copy of the inspection report was enclosed with the show cause notice and the appellant was called upon to show cause why its certificate of registration be not suspended or cancelled. The appellant filed its reply on May 28, 2009 denying and refuting all the allegations. The enquiry officer conducted an enquiry and after giving the appellant sufficient opportunity of being heard submitted his report on July 1, 2009 holding the appellant guilty of the charges levelled against it. He recommended that a penalty of prohibiting the appellant from taking up any new assignment or contract for a period of 3 years may be considered in terms of Regulation 28(iii) of the Intermediary Regulations. On receipt of the report from the enquiry officer (designated authority), the whole time member (designated member) issued a show cause notice on the same day and sent a copy of the enquiry report along with it calling upon the appellant to show cause why action be not taken against it as recommended by the enquiry officer for the irregularities/illegalities committed by it while functioning as an RTA. The appellant filed its reply on July 24, 2009 denying all the allegations once again. Thereafter a supplementary show cause notice dated September 16, 2009 was issued to the appellant pointing out that the designated member having considered the findings of the designated authority was of the view that in the light of the serious allegations having been established in the enquiry report, a higher penalty was called for including the cancellation of the certificate of registration. Accordingly, the appellant was called upon to show cause why a higher penalty be not imposed on it. The appellant filed its reply on September 23, 2009 and after considering the same and the enquiry report including the inspection report and other material on the record, the designated member by his order dated October 14, 2009 cancelled the certificate of registration of the appellant as RTA with effect from February 28, 2010 with a further direction that during the intervening period the appellant shall not take on new clients in its business. The appellant was also directed to wind up its business as RTA and its clients were required to make alternative arrangements to avail the services of other RTAs. It is against this order that the present appeal has been filed under Section 15T of the Act.
(3.) WE have heard the learned senior counsel on both sides.;