2015 (8) TMI 485 - AT - Companies Law

Non-compliance of CIS regulation Ex-parte order of termination was issued to protect rights of investors against Appellant s activities considering it beyond ambit of CIS Regulations Held that -Respondent passed Impugned Order to protect interest of investors as per Sections 11(1), 11(4) and 11B read with Sections 11AA(1), 11AA(2) of SEBI Act, 1992 along with Regulation 65 of CIS Regulations of 1999 Appellant who was directly and adversely affected by ex-parte interim impugned order had atleast legitimate expectation of getting opportunity of being heard before such directions were issued Impugned Order was based more on speculative inferences rather than legal conclusions. Although, SEBI have power to pass ex-parte interim orders but it must do so only upon showing existence of circumstances which warrant such drastic measure If Respondent, after conducting in-depth analysis of scheme comes to conclusion that schemes do not fall within ambit of CIS, Appellant would already have suffered irreparable loss due to its Members not being able to avail themselves of services offered by Appellant Unless necessity or emergency of grave nature was shown by SEBI to take ex parte interim action in form of extreme directions there was no reason to halt business of Appellant especially in light when SEBI has not yet determined whether or not provisions of CIS were attracted to Appellant s business Impugned order cannot be sustained in eyes of law Decided in favour of Appellant.

Issues Involved:
1. Legitimacy of SEBI's ex parte interim order.
2. Applicability of Collective Investment Scheme (CIS) Regulations to the Appellant's business.
3. Adherence to principles of natural justice.
4. Urgency and necessity for SEBI's interim order.
5. SEBI's change of stance on the Appellant's business.
6. Impact of previous judicial decisions and orders.

Detailed Analysis:

1. Legitimacy of SEBI's ex parte interim order:
The Appellant challenged the ex parte interim order dated July 31, 2014, issued by SEBI under Sections 11(1), 11B, and 11(4) of the SEBI Act, 1992, and Regulation 65 of CIS Regulations, 1999. The Appellant contended that the order was passed without a hearing and abruptly halted their business, which had been operational for 15-16 years. The Tribunal noted that SEBI's powers to issue such orders should be exercised sparingly and in cases of extreme urgency. The Tribunal found that no such urgency was demonstrated in this case, and the order was passed based on speculative inferences rather than legal conclusions.

2. Applicability of CIS Regulations to the Appellant's business:
The Appellant argued that their time/room sharing business did not fall within the ambit of CIS as defined by Section 11AA of the SEBI Act. SEBI had previously concluded that the Appellant's activities did not attract CIS Regulations. However, SEBI revisited its stance following the Supreme Court's judgment in PGF Ltd. and a complaint from an MP. The Tribunal refrained from making any comments on the applicability of CIS to the Appellant's business, as SEBI had only formed a prima facie view and the matter was pending a detailed inquiry.

3. Adherence to principles of natural justice:
The Tribunal emphasized the importance of adhering to the principles of natural justice, which require giving the affected party an opportunity to be heard. The ex parte interim order was found to be in breach of these principles, as it was passed without hearing the Appellant, despite their long-standing communication and cooperation with SEBI. The Tribunal noted that post-decisional hearings could not cure the defect of not providing a pre-decisional hearing.

4. Urgency and necessity for SEBI's interim order:
The Tribunal found no emergent circumstances justifying the ex parte interim order. SEBI had not demonstrated any imminent danger or necessity that required immediate action without a hearing. The Tribunal noted that the Appellant had been in the time-sharing business for over a decade without any complaints, and SEBI's sudden action was not warranted.

5. SEBI's change of stance on the Appellant's business:
The Appellant had sought SEBI's clarification on the applicability of CIS Regulations to their business as early as 2001. SEBI had not indicated any issues with the Appellant's activities until 2013, following the Supreme Court's judgment in PGF Ltd. and the MP's complaint. The Tribunal noted that SEBI's change of stance after more than a decade, without providing a hearing to the Appellant, was unjustified.

6. Impact of previous judicial decisions and orders:
The Tribunal considered various judgments cited by both parties. Notably, the Tribunal referred to the Gauhati High Court's interim order in the Rose Valley case, which stayed SEBI's similar ex parte interim order against another time-sharing business. The Supreme Court had dismissed SEBI's appeal against the Gauhati High Court's order. The Tribunal found that SEBI's actions against the Appellant were inconsistent with the principles established in these judicial decisions.

Conclusion:
The Tribunal quashed and set aside the ex parte interim order dated July 31, 2014, issued by SEBI. It directed SEBI to pass an appropriate order on merits after hearing the Appellant, preferably within eight weeks from the date of the Appellant tendering all documents/particulars to SEBI. The Appellant was directed not to launch any new CIS schemes or dispose of assets until the final decision. The Tribunal emphasized the need for SEBI to exercise its powers with caution and adhere to the principles of natural justice.

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