2023 (8) TMI 199 - AT - SEBI

Siphoning of the funds of the listed company through related entities - offence under SEBI Act - Need for Urgent provisional action for passing ex parte ad interim order - As contented issue relates to the financial year 2019-20 and therefore there was no emergent circumstances which led the respondent to pass an interim order after more than 3 years - HELD THAT - In the instant case the WTM has found that the related entities of ZEEL had defaulted in the repayment of the loan taken by them as a result of which the fixed deposit given by ZEEL was encashed by the Bank. The related entities alleged that the money was eventually repaid to ZEEL along with interest. In this regard the details of the payment was sought by SEBI and the information supplied by ZEEL led to a further enquiry which showed prima facie a round tripping of the funds by ZEEL. It was found that the funds originated from ZEEL and listed companies of Essel Group and ultimately through multiple layers the funds travelled back to ZEEL within 2 to 3 days. This evidence based on bank statements prima facie led to a conclusion that there has been a siphoning of the funds of the listed company through related entities and which is to the detriment of the shareholders and the investors. These bank statements made the WTM to observe prima facie that there has been a siphoning of the funds and round tripping of the funds from ZEEL to ZEE through related entities. Contention of the appellants that the transaction related to the financial year 2019-20 and therefore there was no tearing hurry to pass such kind of interim order at this stage is not acceptable. There is nothing on record to indicate that the details of the repayment made by the related entities was made known to the SEBI or to the Stock Exchange in 2019-20. These details only surfaced when ZEEL provided the information on May 8 2023. Thus prima facie at this stage there is no delay in the passing of the impugned order. Contention that no prima facie case existed in passing the impugned order is wholly erroneous. The contention that the conclusion of siphoning of the funds cannot be arrived at on the basis of the bank statements is an attractive argument but such contention cannot be considered in view of the fact that a prima facie opinion was arrived at based on objective facts indicating diversion of funds from a listed company which was not in the interest of its shareholders and the investors coupled with the fact that no evidence of any sort has been placed before us to show that the prima facie finding is perverse. In the instant case we find that an ex parte ad interim order was issued considering the sense of urgency which was infused by a host of circumstances namely diversion of funds from a listed company to related parties which are controlled by the appellants. In the absence of any evidence being filed by the appellants before us we do not find any perversity irregularity illegality or irrationality in passing of the impugned order. Since the appellants have failed to provide any cogent evidence barring the fact that one of the entities namely Pen India Ltd. which according to the appellants is not a related entity we are of the opinion that the appellants should file an appropriate reply for vacation / modification of the impugned order dated June 12 2023. No possible reason to interfere in the impugned order at this stage and we dispose of the appeals directing the appellants to file a reply / objection along with a stay vacating application to the ex parte ad interim order dated June 12 2023 within two weeks from today.

Summary

Issues Involved:
1. Legality and urgency of ex parte ad interim order by SEBI.
2. Alleged violation of SEBI regulations by the appellants.
3. Principles of natural justice and procedural fairness.
4. Prima facie findings of fund siphoning and round-tripping.
5. Bias and influence in the decision-making process.

Summary:

Legality and Urgency of Ex Parte Ad Interim Order:
The appellants challenged the ex parte ad interim order dated June 12, 2023, issued by SEBI, arguing that there was no "tearing urgency" justifying the order, especially since the issue related to the financial year 2019-20. They contended that SEBI lacked the power to direct them to cease holding directorial positions under Section 11 and 11B of the SEBI Act. The Tribunal found that SEBI has the authority to pass such orders to protect investors and maintain market integrity, especially when prima facie evidence indicates a violation of securities laws or fund siphoning.

Alleged Violation of SEBI Regulations:
The case stemmed from the resignation of two independent directors of ZEEL in November 2019, who raised concerns about the appropriation of a fixed deposit by Yes Bank to square off loans of related parties of Essel Group. The investigation revealed that a "Letter of Comfort" issued by Subhash Chandra to Yes Bank was unknown to the Board of Directors and violated Regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Tribunal noted that the related entities repaid ZEEL with interest, but SEBI's investigation suggested round-tripping of funds, leading to the interim order.

Principles of Natural Justice and Procedural Fairness:
The appellants argued that the impugned order violated the principles of natural justice by not providing a pre-decisional hearing. The Tribunal held that while natural justice generally requires a pre-decisional hearing, in cases of urgency, a post-decisional hearing suffices. The Tribunal cited previous judgments affirming that SEBI can pass ex parte orders to prevent imminent mischief, provided a post-decisional hearing is granted.

Prima Facie Findings of Fund Siphoning and Round-Tripping:
The Tribunal found that SEBI's prima facie findings, based on bank statements, indicated fund siphoning and round-tripping from ZEEL to related entities and back within a few days. The appellants failed to provide evidence to counter these findings. The Tribunal emphasized that the appellants should present their objections and evidence to SEBI to prove the legitimacy of the transactions.

Bias and Influence in the Decision-Making Process:
The Tribunal noted potential bias as the same WTM who passed the impugned order was involved in the settlement proceedings and had considered an interim order in an unrelated case (Shirpur Gold Refinery Ltd.). To avoid any bias, the Tribunal directed SEBI to appoint another WTM to consider the appellants' objections.

Final Directions:
The appeals were disposed of with the direction for the appellants to file objections to the ex parte ad interim order within two weeks. SEBI was instructed to appoint a new WTM to hear the objections and pass appropriate orders. The Tribunal clarified that its observations were prima facie and should not influence the final decision.