2013 (4) TMI 539 - HC - Companies Law

Maintainability of orders under section 11C of the SEBI Act - as according to the petitioners orders impugned in the writ petitions which have been issued under section 11C of the SEBI Act are not sustainable as the said provision is only prospective in nature and the same is not applicable to the petitioners since the transactions which are said to have been done by the petitioners were prior to the Amendment Act 59 of 2002 - whether section 11C is purely procedural in nature or it is a substantive provision creating rights and liabilities - The petitioners were in the business of buying selling or dealing in shares of NEPC group of companies the second option is to impose a penalty under section 15A; and the third option is to issue any suitable direction under section 11B. Penalty under Chapter VI-A or any conviction under section 24 will be by means of appropriate adjudication by the competent authority/court after affording sufficient opportunity to the persons concerned. Thus investigation is only a means to collect evidences by the investigating authority by following the prescribed procedure and such investigation by itself does not result in penal or civil consequences. Therefore the investigation as provided in section 11C(1) by itself is not substantive in nature. Per contra it is purely procedural. Therefore as per the settled law section 11C(1) is retrospective in nature. The language used in section 11C(1)(b ) is not similar to the language used in section 11C(1)(a). In section 11C(1)(a) the language used is transaction in securities are being dealt whereas the language in section 11C(1)(b ) is has violated any of the provisions of the Act or Rules or Regulations etc. . This clearly shows that section 11C(1)(b) covers the past transactions. In other words section 11C(1)(a) deals with the transactions which are in progress whereas section 11C(1)(b) deals with the past transactions as well. Thus section 11C(1)(a) and 11C(1)(b) are to be read disjunctively as they deal with different aspects. That is the reason why Parliament has aptly used the word or in between these two provisions. Therefore the word or as employed in between these two provisions should not be read as and as it is contended by the petitioners. In other words these two provisions should be read disjunctively and not conjunctively. No merit in the writ petitions and the same are to be dismissed. Para 28

Summary

Issues Involved:
1. Validity of orders under Section 11C of the SEBI Act.
2. Retrospective application of Section 11C of the SEBI Act.
3. Grounds for belief under Section 11C(1) of the SEBI Act.
4. Status of petitioners as individual investors or intermediaries.
5. Relevance of investigation given the passage of time and cessation of business.

Issue-wise Detailed Analysis:

1. Validity of Orders under Section 11C of the SEBI Act:
The petitioners challenged the orders issued under Section 11C of the SEBI Act, directing them to appear before the investigating authority. The court noted that Section 11C was introduced to provide a specific provision for investigation within the SEBI Act. The court held that even before the introduction of Section 11C, SEBI had the power to investigate through the 1995 Regulations, which were not inconsistent with the Act. Thus, the orders under Section 11C were valid and within the jurisdiction of SEBI.

2. Retrospective Application of Section 11C of the SEBI Act:
The petitioners argued that Section 11C is prospective and cannot apply to transactions before its introduction on October 29, 2002. The court analyzed whether Section 11C is procedural or substantive. Citing the Supreme Court's judgment in K. S. Paripoornan v. State of Kerala, the court noted that procedural laws are retrospective unless stated otherwise. The court concluded that Section 11C is procedural, as it deals with the investigation process and does not directly result in penalties or punishments. Therefore, Section 11C has retrospective application.

3. Grounds for Belief under Section 11C(1) of the SEBI Act:
The petitioners contended that the impugned orders did not reflect the grounds for SEBI's belief that an investigation was necessary. The court referred to CIT v. Kelvinator of India Ltd., emphasizing that the reasons for belief must be recorded. Although the impugned orders did not mention the grounds, the court found that the records showed sufficient material and discussions indicating SEBI's application of mind before issuing the orders. Thus, the orders were not without jurisdiction.

4. Status of Petitioners as Individual Investors or Intermediaries:
The petitioners claimed they were individual investors and not intermediaries dealing in shares. The court noted that this was a factual question that could not be resolved in writ petitions. It was for the petitioners to prove their status to SEBI in response to the investigation orders.

5. Relevance of Investigation Given the Passage of Time and Cessation of Business:
The petitioners argued that since they had stopped their business long ago, the investigation served no purpose, and any potential prosecution would be time-barred under Section 468 of the CrPC. The court held that these questions were immaterial at the investigation stage. SEBI needed to complete the investigation to decide the future course of action. Therefore, the investigation was not a wasteful exercise.

Conclusion:
The court dismissed the writ petitions, allowing SEBI to proceed with the investigation. The petitioners were granted six weeks to comply with the impugned notices, after which SEBI could take further action in accordance with the law. No costs were awarded, and connected miscellaneous petitions were closed.