2022 (7) TMI 774 - HC - SEBI

SEBI Offence - summons issued under Section 11-C(3), (5) (6) of the Securities and Exchange Board of India Act, 1992 before the learned single Judge - scope of amendment - HELD THAT - As investigation can be conducted after the Board has reasonable ground to believe that any person associated with the securities market has violated any of the provisions of the Act, rules or regulations. Since Section 11-C was inserted with effect from 29.10.2002, investigation under Section 11-C can be continued for the transactions occurred prior to 29.10.2002 as well, because the investigation is only a process to find facts, collect evidence materials of a suspected offence/contravention, therefore, the same being procedural in nature, it is retrospective in nature also. When the Board sought for information from the appellants who were found to have played a role in the matter of Sai Television, the appellants are duty bound to furnish information as sought for by the Board. Apex Court also in SEBI v. Ajay Agarwal, ( 2010 (2) TMI 600 - SUPREME COURT has held that Section 11-B is procedural in nature that prima facie applies to all actions, pending as well as future. When a provision that provides for imposition of directions which is in the nature of punishment itself is held to be retrospective, Section 11-C can very well be held to be retrospective in operation A cursory perusal of the above observations clearly tells us that Section 11-C is retrospective in nature only. Whether Section 11-C(3) covers past transactions also, a clear reading of Section 11-C(1) shows that there are two sub-clauses, namely, Section 11-C(1)(a) and Section 11-C(1)(b), while the former uses the expression are being meaning its application to the present transactions, the latter uses the expression has violated which clearly means the past transactions as well - As these two clauses are to be read disjunctively and not conjunctively, because even for past transactions the Section 11-C(1)(b) applies. Moreover, the writ petitions are not even maintainable, for the simple reason that when disputed questions have arisen as to whether the appellants/writ petitioners are individual investors or not, it is for them to prove that they are individual investors and that they have not violated any provisions before the Board. Now investigation has been ordered. The appellants have to furnish details/information regarding the transactions done by them during the particular period. On receipt of report from the investigating authority, the Board shall pass an order strictly in accordance with law. If the Board, for the reasons best known to them, comes to the conclusion that the appellants are individual investors and they do not fall within any of the categories of persons mentioned under Section 11-C of the Act, the matter ends therein. If for any reason, the Board comes to the conclusion that the appellants are persons associated with the securities market, they have to work out their remedy by filing appeal before the appellate authority. Therefore, when the appellants have got an effective statutory alternative appellate remedy, this Court finds that the writ petitions are not maintainable. Therefore, in our considered opinion, the findings and conclusions reached by the learned single Judge dismissing the writ petitions do not call for any interference.

Issues Involved:
1. Authority of SEBI to investigate transactions prior to the amendment of the SEBI Act in 2002.
2. Applicability of Section 11-C of the SEBI Act to individual investors.
3. Retrospective application of Section 11-C of the SEBI Act.
4. Maintainability of the writ petitions under Article 226 of the Constitution of India.
5. Interpretation of the word "or" in Section 11-C(1)(a) and (b).

Detailed Analysis:

1. Authority of SEBI to Investigate Transactions Prior to the Amendment of the SEBI Act in 2002:
The appellants argued that SEBI lacked the authority to investigate transactions prior to the introduction of Section 11-C on 29.10.2002. They contended that the SEBI Board could not exercise powers retrospectively for transactions that occurred before the amendment. The court, however, held that SEBI had inherent powers to investigate even before the amendment, as per the Securities Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995, and the 2003 Regulations. The court concluded that SEBI had the power to investigate any person dealing with securities, and the amendment merely provided a specific procedural framework for such investigations.

2. Applicability of Section 11-C of the SEBI Act to Individual Investors:
The appellants claimed that they were individual investors and not intermediaries or persons associated with the securities market, thus Section 11-C could not be invoked against them. The court rejected this argument, stating that the term "persons associated with the securities market" includes all persons dealing in securities, including individual investors. The court referenced the Gujarat High Court's interpretation in Karnavati Fincorp v. SEBI, which held that the expression encompasses all persons involved in the securities market.

3. Retrospective Application of Section 11-C of the SEBI Act:
The appellants argued that Section 11-C, being substantive in nature and creating criminal liability, could not be applied retrospectively. The court, however, determined that Section 11-C is procedural in nature, aimed at investigation and collection of evidence, and thus can be applied retrospectively. The court cited the Supreme Court's judgment in SEBI v. Ajay Agarwal, which held that procedural provisions, such as Section 11-B of the SEBI Act, apply retrospectively.

4. Maintainability of the Writ Petitions under Article 226 of the Constitution of India:
The appellants contended that their writ petitions were maintainable as the summons issued by SEBI were without jurisdiction. The court disagreed, stating that the investigation process is merely a fact-finding exercise and does not determine rights or liabilities. The court emphasized that the appellants should have exhausted the statutory appellate remedies available under the SEBI Act. Consequently, the writ petitions were deemed not maintainable.

5. Interpretation of the Word "or" in Section 11-C(1)(a) and (b):
The appellants argued that the word "or" in Section 11-C(1)(a) and (b) should be read as "and," making the clauses conjunctive. The court rejected this interpretation, stating that the clauses deal with separate subject matters: Clause (a) pertains to ongoing transactions, while Clause (b) addresses past transactions. The court concluded that the word "or" should be read disjunctively, allowing SEBI to investigate both ongoing and past transactions.

Conclusion:
The court upheld SEBI's authority to investigate transactions prior to the 2002 amendment, affirmed the applicability of Section 11-C to individual investors, and determined that Section 11-C could be applied retrospectively. The writ petitions were found not maintainable due to the availability of alternative remedies, and the word "or" in Section 11-C(1)(a) and (b) was interpreted disjunctively. Consequently, the writ appeals were dismissed.

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