2013 (4) TMI 537 - HC - Companies Law

SEBI function - Power to issue directions by SEBI - Whether SEBI functions in an inquisitorial capacity while examining issue, whether reasonable grounds exist to believe that transactions in securities are being dealt with in a manner detrimental to investors or securities market or, whether any intermediary or any person associated with securities market has violated any of provisions of SEBI Act or Rules & Regulations made thereunder, or directions issued by Board? - When can SEBI direct an investigation by an investigating authority under section 11C? Respondent No. 2 i.e. complainant had entered into business transactions with respondent No. 3, SEPL in the year 2006 as controlled by two promoters, namely, DHDL and DREDL, both of whom were wholly owned subsidiaries of DLF, the petitioner. In connection with its proposed public issue, the petitioner filed a Draft Red Herring Prospectus (DRHP) with the SEBI with the said DRHP, indicated that SEPL was one of the joint ventures of DLF which was, subsequently, withdrawn by the merchant bankers of the petitioner and a fresh DRHP was submitted, in which SEPL was not mentioned as being associated with DLF. Held that - The instant petition, is to be dismissed as petitioner did not have a right to hear the submissions of respondent No. 2 complainant, and it had only the right of making its own submissions before SEBI, i.e., respondent No. 1 in terms. One of the reasons for the Court not exercising jurisdiction under article 226 of the Constitution is that the matter involves technicalities, which are best left to be dealt with by experts in the field. This is one of the reasons given by the Court for its decision in Rose Valley Real Estates & Construction Ltd. (2011 (3) TMI 1476 - HIGH COURT OF CALCUTTA). But the issues raised by the petitioner in the instant case are purely legal & not factual, and do not involve any technicality. The submission of the petitioner that it ought to have been granted a full-fledged hearing by the board cannot be accepted as if accepted, it would lead to a piquant situation where the board shall, only on the basis of a prima facie assessment return its findings which would, in turn, impinge upon the functions to be discharged by the investigating authority to be appointed to investigate into the matter. There is no merit in the submission of the petitioner that the impugned order has been passed without jurisdiction inasmuch as, the jurisdictional facts were lacking, to cause the board to have reasonable grounds to believe that an investigation is called for into the affairs of the petitioner-company, either on account of the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market or any intermediary or any person associated with the securities market has violated any of the provisions of the Act or the rules or the regulations made or directions issued by the board thereunder. A perusal of the impugned order shows that the board has taken note of the submissions of respondent No. 2, he complainant as well as those of the petitioner-DLF, and of SEPL (though SEPL did not appear at the stage of hearing)& noted that the FIR was registered against SEPL and others. The board also notes that SEPL did not take the plea that it was not aware of the FIR. The board also takes note of the fact that the closure report filed by the police stated that they had interrogated the aforesaid individuals in connection with the FIR. The board, therefore, observes that in all probabilities, SEPL was aware of the FIR registered against it. In relation to the ignorance feigned by the petitioner-DLF about the filing of the FIR, the board observes that it is unable to be convinced with the submission of the petitioner-company that it was not aware of the registration of the FIR against SEPL. While observing that the original complaints dated 4-6-2007, 19-7-2007 did not contain allegations of the petitioner funding SEPL indirectly through a series of transactions involving its subsidiaries/associates and the manner of purchasing lands and creating development rights on the land acquired by the companies subsidiaries by indirect funding of such purchases, the board observes that in the interest of the securities market, the investors, as also the interest of justice, it would not be proper on the part of SEBI to dispose of the complaint by holding that those additional submissions are extraneous to the original complaint filed by the complainant/respondent No. 2. There is no bar or impediment cast on the board by the SEBI Act, to say that it would not entertain or look into evidence that the complainant may rely upon in support of his complaint earlier made, while considering whether, or not, to direct an investigation. There is no reason to put any such fetters on the powers of the board or to read such restrictions into the statute, which are clearly not there. The petitioner s submission that the Division Bench in its judgment had precluded the board from looking into any additional information/documents that respondent No. 2/complainant may produce in support of his complaints cannot be agreed with. A perusal of the order of the Division Bench in the three LPAs shows that the Division Bench set aside the judgment of the Single Judge because the Single Judge had himself directed investigation into the complaints of respondent No. 2, rather than requiring SEBI to examine the two complaints of respondent No. 2, and discharge its statutory duty under section 11C. This is clear from reading of the order of the Division Bench. Therefore, the submission of the petitioner that the board has taken into consideration the extraneous or irrelevant material while passing the impugned order is to be rejected. A perusal of the impugned order shows that it certainly cannot be said that it has been passed arbitrarily or irrational. The impugned order was clearly based on reasons which were relevant and material. The adequacy or sufficiency of the reasons which weighed with the board in entertaining the reasonable belief with regard to the possible existence of circumstances mentioned in clauses (a ) and (b) of section 11C(1) cannot be gone into. The submission of SEPL that SEBI has no jurisdiction over SEPL for the reason that it is a privately held company and is not traded in the Securities Market, and therefore, no investigation could have been ordered by SEBI against SEPL, also has no merit. The SEBI by the impugned order has directed investigation into the allegations levelled by the complainant-respondent No. 2 against the petitioner about the breach of the SEBI (Disclosure of Investor Protection Guidelines), 2000, read with the relevant provisions of the Companies Act, and in relation to the disclosure of information required to be made in the red herring prospectus by the petitioner-DLF. The involvement of SEPL in the said investigation is only to ascertain whether, or not, at the relevant time, the petitioner was liable to make a disclosure with regard to SEPL in the DRHP which, admittedly, was not made. It is not that SEBI has directed investigation against SEPL. However, since the allegations against the petitioner-DLF pertain to the disclosure of information about the registration of FIR against SEPL, which, the complainant alleges, to be a subsidiary and an associate company of the petitioner-DLF, at the relevant time, the investigation in that respect can and should be made in relation to SEPL. Writ petition is to be dismissed with costs to be shared between the respondent Nos. 1 and 2 equally.

Summary

Issues Involved:
1. Quashing of SEBI's order for investigation.
2. Breach of principles of natural justice.
3. Jurisdiction of SEBI to order an investigation.
4. Adequacy of reasons to believe for SEBI's investigation.
5. Alternative remedy under Section 15T of SEBI Act.
6. SEBI's jurisdiction over a private company.

Issue-Wise Detailed Analysis:

1. Quashing of SEBI's order for investigation:
The petitioner sought the quashing of SEBI's order dated 20.10.2011, which directed an investigation into allegations against DLF Ltd. and Sudipti Estates Private Limited for potential violations of SEBI (Disclosure and Investor Protection) Guidelines 2000 and relevant provisions of the Companies Act, 1956. SEBI decided to appoint an investigating authority to complete the investigation expeditiously.

2. Breach of principles of natural justice:
The petitioner argued that SEBI did not follow the principles of natural justice. SEBI heard the complainant in the absence of the petitioner and did not provide the petitioner with the complainant's written submissions. The petitioner contended that this one-sided hearing was in breach of natural justice, referencing the Supreme Court's decision in Payyavula Vengamma v. Payyavula Kesanna.

3. Jurisdiction of SEBI to order an investigation:
The petitioner contended that SEBI lacked jurisdiction to order the investigation, arguing that the jurisdictional facts necessary to invoke Section 11C of the SEBI Act did not exist. The petitioner cited Rohtas Industries Ltd. v. S.D. Agarwal to argue that investigations should not be ordered lightly and must be based on satisfactory grounds.

4. Adequacy of reasons to believe for SEBI's investigation:
The petitioner argued that SEBI needed "reasonable ground to believe" that the transactions were detrimental to investors or that there was a violation of SEBI regulations. The petitioner referenced S. Ganga Saran & Sons (P.) Ltd. v. ITO and S. Narayanappa v. CIT to emphasize that the belief must be based on relevant and material reasons.

5. Alternative remedy under Section 15T of SEBI Act:
SEBI and respondent no.2 argued that the petitioner had an alternative remedy of appeal under Section 15T of the SEBI Act before the Securities Appellate Tribunal (SAT). They contended that the High Court should not exercise its discretionary jurisdiction under Article 226 of the Constitution when an efficacious alternative remedy was available. The Calcutta High Court's decision in Rose Valley Real Estates & Constructions Ltd. v. SEBI was cited to support this argument.

6. SEBI's jurisdiction over a private company:
Respondent no.3, Sudipti, argued that SEBI had no jurisdiction over it as it was a private limited company not traded in the securities market. SEBI clarified that the investigation was directed at DLF's disclosure obligations in its prospectus, and Sudipti's involvement was relevant only to ascertain whether DLF should have disclosed information about Sudipti.

Judgment:
The High Court dismissed the writ petition, stating that the petitioner did not have a right to hear the complainant's submissions and only had the right to make its own submissions before SEBI. The court found that SEBI's limited inquiry was inquisitorial and not adjudicatory. The court also held that SEBI had reasonable grounds to believe that an investigation was warranted and that the reasons provided were relevant and material. The court rejected the petitioner's argument that SEBI's order was without jurisdiction and found no breach of natural justice. The court also dismissed the argument that SEBI had no jurisdiction over Sudipti, as the investigation pertained to DLF's disclosure obligations. The court imposed costs of Rs. 2 lacs on the petitioner, to be shared equally between SEBI and respondent no.2.