1997 (5) TMI 366 - HC - Companies Law

Summary

Issues Involved:
1. Legality of SEBI's show-cause notice and the applicability of Section 11B of the SEBI Act, 1992.
2. Alleged violation of principles of natural justice.
3. SEBI's authority to act under Section 11B without fulfilling the conditions of Section 11A.
4. The validity of the unilateral cancellation of the rights issue by the petitioner.

Detailed Analysis:

1. Legality of SEBI's Show-Cause Notice and Applicability of Section 11B of the SEBI Act, 1992:
The petitioner challenged the show-cause notice issued by SEBI, arguing that it was illegal and void due to the absence of a formal procedure prescribed under Section 11A of the SEBI Act. The petitioner contended that the proposed action did not fall within the purview of Section 11B, which primarily deals with disclosure matters under Section 11A. The court noted that Section 11A and Section 11B were inserted by the Securities Laws (Amendment) Act, 1995, and that no regulations had been framed under Section 11A for the protection of investors. Consequently, the court held that in the absence of such regulations, the parties were bound by the provisions of the Companies Act and other statutory instruments. Therefore, the court found that SEBI's action under Section 11B was not justified without fulfilling the conditions precedent laid down under Section 11A.

2. Alleged Violation of Principles of Natural Justice:
The petitioner argued that the impugned order was made in violation of the principles of natural justice, as they were not given an opportunity for further hearing and placing additional documents. The court observed that SEBI had relied on correspondences and legal opinions that were not disclosed to the petitioner. The court emphasized that principles of natural justice require that no document should be considered behind the back of a person without giving them an opportunity to respond. The court cited various precedents, including Mohinder Singh Gill v. Chief Election Commissioner, to highlight the importance of fair hearing and transparency in quasi-judicial proceedings. The court concluded that the petitioner had been prejudiced by the non-disclosure of relevant documents and the lack of a fair hearing, thereby violating the principles of natural justice.

3. SEBI's Authority to Act Under Section 11B Without Fulfilling the Conditions of Section 11A:
The court examined the interplay between Sections 11A and 11B of the SEBI Act. It noted that Section 11A empowers SEBI to specify matters relating to the issue of capital and other incidental matters for the protection of investors. Section 11B grants SEBI the power to issue directions in the interest of investors or the orderly development of the securities market. However, the court emphasized that any action under Section 11B must be preceded by fulfilling the conditions laid down in Section 11A. Since no regulations had been framed under Section 11A, the court held that SEBI's action under Section 11B was not valid. The court further clarified that the term "company" in Section 11B refers to a company offering rights issues and does not fall under "other persons" associated with the securities market.

4. The Validity of the Unilateral Cancellation of the Rights Issue by the Petitioner:
The petitioner argued that the unilateral cancellation of the rights issue was based on legal advice and was necessary due to the failure to achieve the minimum subscription of 90%. The court noted that the petitioner's action was in compliance with the statutory declaration required under the Companies Act and SEBI guidelines. The court found that the petitioner had acted in good faith and had refunded the subscription money to the applicants. The court also observed that the issue of the unilateral cancellation was sub-judice in a separate suit before the court. Therefore, the court held that SEBI's impugned order was not justified, as the petitioner was not statutorily obligated to seek SEBI's approval before canceling the issue.

Conclusion:
The court concluded that SEBI's impugned order dated 11-2-1997 was bad in law and directed it to be quashed. The court emphasized that SEBI or any other authority could take appropriate action against the petitioner for any statutory violations in accordance with the law. The application was allowed, but no order as to costs was made.

Application allowed.