2017 (9) TMI 392 - AT - Companies Law

SEBI proceedings - discretion on SEBI to pass ad interim orders - unnatural or unreasonable delay on the part of the SEBI in passing the impugned order - Held that - It is true that Section 11, 11(b) and 11(4) do confer wide discretion on SEBI to pass ad interim orders in order to protect the investors interest and for a healthy and orderly growth of the capital market. It is also equally true that by way of various judicial pronouncements this Tribunal has consistently held that the power conferred under 11, 11B and 11(4), particularly after introduction of Section 11(4), SEBI do empower it to issue ad interim ex-parte orders to achieve the twin objective enshrined in the SEBI Act, i.e, the protection of investors interest and orderly growth of capital market. If market abuses likely to occur, SEBI shall invoke such powers subject to the satisfaction of the Board/Members of SEBI. This discretion is a vital discretion conferred upon SEBI to be used sparingly and not in a routine manner. In normal, routine cases where investigation reveals some mischief or fraud being conceived or perpetrated in the market, SEBI should resort to adjudicating proceeding by appointing an Adjudicating Officer as per Chapter IV-A of the SEBI Act. But keeping in view the gravity of the matter, SEBI was not unjustified in invoking such extra-ordinary power. Similarly, SEBI has justified the delay of few months in passing the impugned order against the Appellant. Similarly, there is no unnatural or unreasonable delay on the part of the SEBI in passing the impugned order. In this context, a perusal of the original file on which the case of Dr. Vijay Mallya was processed reveals that decision to initiate action against the Appellant was taken at the highest level in SEBI to look into the matter and take action as per law. So it cannot be argued that no investigation or inquiry was pending against the Appellant when the SEBI invoked powers under Sections 11(1), 11(4)(b) and 11B of the SEBI Act.We are inclined to dismiss the appeal with a direction to the appellant to appear before SEBI, in person or through a legally authorized representative, and make his submissions before SEBI within 21days from today. Thereafter, SEBI shall consider the same and proceed further in the matter and pass final orders expeditiously and preferably within a period of four months in accordance with law to give finality to the issue. We make it clear that after receiving Mr. Vijay Mallya s reply, if SEBI considers it appropriate to relax any of the conditionalities prescribed in the impugned ad-interim ex-parte order it shall be free to do so as early as possible and according to law. Ordered accordingly.

Issues Involved:
1. Legality of the Show Cause Notice-cum-ad interim ex-parte order by SEBI.
2. Alleged violations of SEBI Act and PFUTP Regulations by the Appellant.
3. Principles of natural justice and opportunity of hearing.
4. SEBI's reliance on third-party audit reports.
5. SEBI's jurisdiction and procedural adherence.

Detailed Analysis:

1. Legality of the Show Cause Notice-cum-ad interim ex-parte order by SEBI:
The Appellant challenged the SEBI order dated January 25, 2017, which restrained him from accessing the securities market and holding any directorial or key managerial position in any listed company. The order was issued based on prima facie findings of fund diversion from United Spirits Limited (USL) to United Breweries Group Companies, allegedly under the Appellant's direction. SEBI's order invoked Sections 11(1), 11(4)(b), and 11(B) of the SEBI Act.

2. Alleged violations of SEBI Act and PFUTP Regulations by the Appellant:
The Appellant was accused of violating Section 12A(c) of the SEBI Act and Regulations 3(d), 4(1), and 4(2)(e), (f), and (k) of the PFUTP Regulations. SEBI's prima facie view was that the Appellant engaged in acts that operated as fraud or deceit on public shareholders by diverting funds from USL to UB Group Companies.

3. Principles of natural justice and opportunity of hearing:
The Appellant argued that the SEBI order was passed without affording him an opportunity of hearing, thereby violating principles of natural justice. He contended that there was no urgency justifying an ex-parte order and that SEBI did not conduct a formal investigation or inquiry before issuing the order. SEBI countered that the order was based on substantial material, including statutory audit reports and information from stock exchanges.

4. SEBI's reliance on third-party audit reports:
The Appellant contended that SEBI improperly relied on biased third-party reports from PWC-UK and Ernst & Young. He argued that these reports, influenced by Diageo (a competitor), should not be the sole basis for the ex-parte order. SEBI maintained that these reports, along with other gathered material, provided sufficient grounds for the order.

5. SEBI's jurisdiction and procedural adherence:
The Appellant argued that SEBI did not meet the jurisdictional prerequisites of pending investigation or inquiry as required under Sections 11(4) and 11(B) of the SEBI Act. SEBI asserted that it had substantial material and had taken cognizance of the matter following public announcements and communications with USL.

Conclusion:
The Tribunal dismissed the appeal, directing the Appellant to submit his reply to SEBI within 21 days. SEBI was instructed to consider the reply and pass final orders within four months. The Tribunal noted that SEBI's ex-parte order was based on a prima facie view and substantial material, and the Appellant should have availed the opportunity to defend himself before SEBI. The Tribunal also allowed the Appellant to request SEBI for partial relief regarding his position as Chairman of UBL. Appeals of other involved parties were similarly directed to be resolved by SEBI within the stipulated timeframe.

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