2020 (1) TMI 366 - AT - SEBI

Ad-interim ex-parte order - appellants Restrained from accessing the securities market - violation of PFUTP Regulations 2003 - related party/related party transactions - Finding of manipulation of the books of account or misrepresentation of financials or diversion/siphoning off the funds of the Company - HELD THAT - We are unable to fathom why the explanations provided by the appellant both relating to the basic facts on the proposed merger and its failure was not given sufficient consideration in the impugned order particularly because of the given business model of Tree House. Tree House is operating in the area of education both for running its own schools through franchise system and/or by providing funds to various trusts. If that business is adversely affected due to unfavourable business environment obviously that would be a factor leading to the decline in performance as well as profitability. Therefore without passing any judgment on the veracity of the complaints between two groups/different entities the facts on record have to be analyzed in judging/evaluating business performance particularly when there are reliable evidence in the form of orders of the High Court etc. available. Similarly we are unable to agree with the contentions of SEBI that a trustee of a public charitable trust is a related party going by the correct reading of the definition in the Companies Act as well as in the LODR Regulations unless there is evidence to show that those Trusts have been set up or operating for the benefit of the appellant(s). Moreover there is nothing on record to show that Mr. Giridharilal the trustee has personally benefited in any manner not only by virtue of being a trustee or in general by any other means. Similarly we are also unable to appreciate fully the allegations relating to the inflated expenditure on furniture and fixtures etc. particularly in the absence of any evidence on diversion of money/resources belonging to Tree House being shown. How far SEBI can reassess or reevaluate business decisions and audited figures given in financial reports of a company unless explicit proof/evidence relating to siphoning off or manipulation of accounts is available is also a question that needs to be answered by SEBI. In the absence of such information authorities are not in a position to pass business judgments regarding what could be or what should be the cost/expenditure on a particular equipment/tool such as furniture and fixtures. These are all business decisions of the concerned entity and decisions to be taken by the authorized persons. If any malafide in terms of siphoning off of funds etc is observed in the accounts of the listed companies SEBI definitely has the power to intervene in the interest of investors and securities market. There is yet another aspect which makes the impugned order not fully sustainable. Admittedly based on media report an investigation was started by SEBI in December 2016. The investigation continued for more than a year and thereafter an ex-parte interim order dated March 7 2018 was passed. By the said interim order SEBI further directed NSE to appoint an independent auditor/audit firm for conducting a detailed forensic audit of the books of account from the financial year 2011-12 onwards for verifying inter alia the manipulation of the books of account misrepresentation of financials and/or business operations of the appellant Company and wrongful diversion/siphoning off the funds by the Company through related party transactions etc. As on date nothing has been shown on record to indicate any finding through interim audit report with regard to the manipulation of books of account or siphoning off the funds of the Company. The forensic audit is still underway. We find that the ex parte interim order was issued on the basis of presumption of certain transactions and after acknowledging the dispute between the appellant and Zee group in 2015 and the expenses incurred by the Company from the financial year 2011-12 onwards. No case of urgency was made out in the instant case for grant of an ex parte interim order or for continuation of the said interim order to restrain the appellant from the securities market. It is settled law that an ex parte interim order is required to be passed in order to curb further mischief or to stop large scale exercise of possible mischief of tampering with the securities market. If during a preliminary enquiry it is found prima facie that the person is indulging in manipulation of the securities market it would be obligatory for SEBI to pass an interim order or for that matter an ex parte interim order in order to safeguard the interests of the investors and to maintain the integrity of the market. The purpose of passing an ex parte interim order is to prevent further mischief or where the act to be prevented is imminent or where action to be taken brooks no delay.

Summary

Issues Involved:
1. Challenge to the confirmatory order by SEBI's Whole Time Member (WTM).
2. Allegations of related party transactions involving trustees.
3. Decline in business and performance of Tree House.
4. Alleged irregularities in furniture and fixtures expenditure.
5. Continuation of restraint order and forensic audit directive.

Issue-wise Detailed Analysis:

1. Challenge to the Confirmatory Order by SEBI's WTM:
The appellants challenged the confirmatory order dated November 16, 2018, which upheld the directions from the ad-interim ex-parte order dated March 7, 2018. The order restrained the appellants from accessing the securities market and directed a forensic audit of Tree House's accounts from the financial year 2011-12. The appellants argued that the WTM's order was passed without considering the prima facie findings of the Bombay High Court and without any contrary conclusion, simply confirming the ex-parte order.

2. Allegations of Related Party Transactions Involving Trustees:
The appellants contended that the WTM's order was based on the incorrect assumption that trustees of a public trust are related parties under the Companies Act, 2013, and SEBI Act/Rules/Regulations. They argued that trustees are not related parties as per the definitions in Section 2(76) of the Companies Act, 2013, and Regulation 2(1)(zb) of the LODR Regulations, 2015. The appellants emphasized that Mr. Giridharilal Bhatia, a trustee, had no personal/business interest or gain from the transactions, and hence, these were not related party transactions requiring disclosure.

3. Decline in Business and Performance of Tree House:
The appellants attributed the decline in Tree House's business and performance during 2015-16 and 2016-17 to the malafide actions of Zee Group promoters, including attempts to take over Tree House. They argued that the decline in the number of schools and profits was due to these external factors, not due to any mismanagement or diversion of funds. They provided evidence from annual reports and the Bombay High Court's anticipatory bail order to support their claims.

4. Alleged Irregularities in Furniture and Fixtures Expenditure:
The appellants addressed the allegations of irregularities in furniture and fixtures expenditure by stating that all records were available, and the expenditure was justified as standardized furniture and fixtures were essential for their centers. They argued that the closure of schools due to external factors led to incurred costs irrespective of the closure.

5. Continuation of Restraint Order and Forensic Audit Directive:
The Tribunal found no urgency for the ex-parte interim order or its continuation, as there was no prima facie evidence of manipulation of books, misrepresentation of financials, or diversion of funds. The order was based on presumptions rather than evidence. The Tribunal noted that the forensic audit was still underway, and no report had been submitted to indicate any findings of wrongdoing. The Tribunal held that SEBI could issue a fresh show cause notice if substantial new material/evidence emerged.

Conclusion:
The Tribunal quashed and set aside the confirmatory order dated November 16, 2018, and the ad-interim ex-parte order dated March 7, 2018, as far as the direction restraining the appellants from dealing in the securities market. However, it upheld the direction for a forensic audit of Tree House, with the appellants required to cooperate fully. The appeal was partly allowed, with no orders on costs.