2024 (11) TMI 738 - HC - SEBI

Validity of SEBI Settlement Proceedings Regulations - scope of Regulations 6(1)(f) and 13(2)(ba) of the SEBI (Settlement Proceedings) Regulations, 2018 - Communication by which the petitioners settlement proposal came to be rejected - non following specific condition precedent(s) that they would have to comply with for consideration of their settlement applications - allegation of petitioners conduct of stalling or delaying the adjudication of the SCN. Allegations about the noticees acting in concert while acquiring shares of Abans Enterprises Ltd. (AEL) without making the required disclosures under the SAST Regulations. There are allegations about the noticees creating false and misleading appearance of trade and contributing to price rise by manipulative trading practices leading to inflated contribution of net market Long Term Plan (LTP) during the prescribed patches. HELD THAT - The SCN dated 29 August 2023 issued to 8 noticees, including the petitioners, gives a glimpse into the allegations against the noticees. Since the adjudication of the SCN is in progress, it would be premature to comment one way or the other on the various allegations contained therein. We cannot help observing that the allegations in the SCN, if proven, are indeed grave. Mr Daruwalla was justified in contending that the main objective of the petitioners, and perhaps the other noticees, was to stall, as long as possible, the adjudication on the SCN dated 29 August 2023. Regulation 8 of the Settlement Regulations provides that filing an application for settlement of any specified proceedings shall not affect the continuance of the proceedings save that the passing of the final order shall be kept in abeyance till the application is disposed of . Thus, as long as the settlement applications remained pending, no final order could be made on the SCN dated 29 August 2023. The record shows that the petitioners made all kinds of applications and even refused to cooperate with the personal hearing offers. Requests in the applications, at times, contradicted each other. From the record, we cannot dismiss Mr Daruwalla s contention about the petitioners are attempting to stall the proceedings in the SCN, including by way of filing settlement applications and then even insisting that no orders be passed on the settlement applications until the preliminary or other issues raised by them in the SCN were first resolved. From the above perspective, the conduct of the present petitioners is no different from that of the petitioners in Binny Limited V/s. Securities and Exchange Board of India 2023 (7) TMI 1491 - BOMBAY HIGH COURT There, Binny Limited, by submitting a settlement proposal and insisting that the same should have been considered on merits had sought a restraint on the proceedings in the Show Cause Notice issued to them alleging massive diversion of funds of several crores leading to loss to investors and an adverse impact on the integrity of the market. Excessive delegation and manifest arbitrariness in the SEBI Settlement Regulations - Considering the scope and the actual provisions of the SEBI Act, 1992, it is too much to suggest that there is any case of excessive delegation involved in vesting the SEBI with the powers to frame regulations for dealing with proposals for settlement by defaulters. Section 15-JB specifically empowers the SEBI to determine the settlement terms and procedure for settlement. The SEBI or its Board must consider the nature, gravity, and impact of defaults. These, coupled with the very purpose of enacting the SEBI Act, offer more than sufficient guidelines for formulating the Settlement Regulations and their implementation. Accordingly, the argument based upon any alleged excessive delegation is liable to be rejected and is hereby rejected. Applying the test in the context of Settlement Regulations, which is subordinate legislation, there is nothing to suggest any failure to account for vital facts required by the SEBI Act or the Constitution to be considered. The impugned Regulations conform with the parent Acts. There is no serious charge for the regulations defying constitutional values or lacking logical consistency. Therefore, the charge of manifest arbitrariness cannot stick. The Constitution Bench has also held that a provision can be struck down as manifestly arbitrary if its determining principle does not align with constitutional values and lacks logical consistency. The standard laid down is that the courts, while testing the validity of a law on the grounds of manifest arbitrariness, must determine if the statute is capricious, irrational, and without an adequate determining principle or excessive and disproportionate. Again, nothing in the impugned provisions suggests they lack any determining principle or logical consistency. The impugned provisions are not capricious, irrational and/or excessively disproportionate. In Franklin Templeton Trustee Services (P.) Ltd. V/s. Amruta Garg And Ors. 2021 (7) TMI 751 - SUPREME COURT explained that the principle of manifest arbitrariness requires something to be done in exercise in the form of delegated legislation, which is capricious, irrational or without adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. These observations were made in the context of a challenge to the constitutional validity of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. Hon ble Supreme Court, while upholding the constitutional validity of the SEBI, 1996 Regulations, held that since the Regulations are like economic regulations while exercising the power of judicial review, the Court would exercise restraint unless clear grounds justify interference. The Court reiterated that manifest arbitrariness requires something to be done in the form of delegated legislation, which is capricious, irrational, or without an adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. The Court concluded that the SEBI 1996 Regulations did not suffer from the vice of manifest arbitrariness. Incidentally, the decision of the Division Bench of Gujarat High Court in Alka Synthetics Ltd. 1998 (12) TMI 452 - HIGH COURT OF GUJARAT was also approved in this case. Thus, applying the above principles, we think a challenge based on excessive delegation or manifest arbitrariness has no merit. We detect no infirmity whatsoever regarding the impugned rejection letter. The condition precedent(s) did not prevent the petitioners proposal from being considered by the HPAC and, finally, the panel of WTMs. We see nothing unreasonable, irrational or capricious in the conditions itself. Merely because such conditions may not be to the liking of the petitioners, such conditions cannot be styled as arbitrary or unreasonable. The conditions must be considered in the backdrop of the allegations in the SCN about the petitioners acting in concert with the other noticees. There are allegations about common directors or employees, trustees, common bank accounts, common signatories and manipulations. The question at this stage is not whether those allegations are correct. However, from the show cause notice, it is difficult to state that the allegations are based on no prima facie material. Therefore, to say that the conditions should never have been imposed, particularly the condition regarding the other noticees joining in the settlement proposal, cannot be accepted. As noted earlier, it is not the petitioners' right to insist that their settlement proposal be accepted on the terms they deem most appropriate. The scope of judicial review in examining counterproposals by experts is minimal. It is not for the Courts to second-guess or suggest counterproposals. There is discretion vested in the authorities. This does not appear to be a case where such discretion has been exercised unreasonably, capriciously, or irrationally. Fairness is not a one-way street; litigation is not a chess game. The settlement regulations need to be pragmatically construed, having regard to their objective and balancing the interests of the defaulters and the public interest. The scheme of the settlement regulations contemplates exchange proposals and counterproposals to see if some settlement could be reached without compromising the public interest. Therefore, there is nothing wrong if the IC suggests terms, adding that it would not favourably recommend a settlement should such terms not be agreed to. Petitioners have even declined to furnish proper information about the disclosures to the waivers or undertakings by arguing that the same would prejudice their case in the SCN. The proceedings in the SCN are also stalled for one reason or another. At least, prima facie, even the settlement application appears to have been made only to benefit from the provisions of Regulation 8, which requires that the final order in the SCN be kept in abeyance until the settlement application is disposed of. Petitioners perhaps expected to benefit from the tremendous pressure on the Court s docket and the consequent inability to decide issues of constitutionality or ultra vires on a priority basis. Often, the strategy is to challenge the constitutional validity of some provision, launch long-winded arguments and, in an alternate, insist on interim relief until the Court can cull out some time despite the tremendous pressure on its docket - As in Binny Limited 2023 (7) TMI 1491 - BOMBAY HIGH COURT noticed and adversely commented upon this tendency. In this case, however, Mr Gaurav Joshi, the learned Senior Advocate for the petitioners, was focused and precise. Thus no merit in this petition and consequently dismiss the same.

Summary

Issues Involved:

1. Validity of Regulations 6(1)(f) and 13(2)(ba) of the SEBI (Settlement Proceedings) Regulations, 2018.
2. Challenge to the rejection of the petitioners' settlement proposal by SEBI.
3. Allegations of excessive delegation and manifest arbitrariness in the SEBI Settlement Regulations.
4. Petitioners' rights concerning settlement proposals and SEBI's discretion in accepting or rejecting them.
5. The role and authority of the Internal Committee (IC) and Whole Time Members (WTM) in settlement proceedings.

Issue-wise Detailed Analysis:

1. Validity of Regulations 6(1)(f) and 13(2)(ba):

The petitioners challenged these regulations, arguing they were ultra vires the SEBI Act and manifestly arbitrary. The court examined the statutory framework under which SEBI operates, emphasizing that SEBI is empowered to make regulations for settlement proceedings, including imposing conditions precedent. The court found no excessive delegation, as the SEBI Act provides sufficient guidance for SEBI to frame such regulations. The court held that the regulations were within SEBI's delegated authority and aligned with the legislative intent to regulate securities markets effectively.

2. Rejection of the Settlement Proposal:

The petitioners' settlement applications were rejected by SEBI, which they contested as arbitrary. The court noted that SEBI's rejection was based on due consideration by the High-Powered Advisory Committee (HPAC) and the panel of WTMs. The court emphasized that petitioners do not have an absolute right to have their settlement proposals accepted on their terms. The rejection was found to be within SEBI's discretion, exercised reasonably and in alignment with public interest considerations.

3. Allegations of Excessive Delegation and Manifest Arbitrariness:

The petitioners argued that the regulations allowed the IC excessive discretion, leading to arbitrary outcomes. The court rejected this, stating that the SEBI Act and Settlement Regulations provide ample guidance on exercising discretion. The court referred to precedents emphasizing that economic regulations require flexibility and expert discretion. The court found no merit in the claim of excessive delegation or manifest arbitrariness, as the regulations were consistent with the parent statute and did not lack logical consistency.

4. Petitioners' Rights and SEBI's Discretion:

The court clarified that while petitioners have the right to a fair consideration of their settlement applications, they cannot dictate the terms of settlement. SEBI's role as a regulator involves balancing public interest with the parties' interests, and it is not obligated to accept settlement proposals that compromise regulatory objectives. The court reiterated that SEBI's discretion in settlement matters is guided by public interest and regulatory compliance.

5. Role and Authority of IC and WTMs:

The petitioners contended that the IC's imposition of conditions precedent prevented their proposals from reaching the WTMs. The court found that the IC's role in suggesting conditions is part of the settlement process to ensure seriousness and protect public interest. The court noted that the IC's recommendations are subject to review by the HPAC and WTMs, ensuring a comprehensive evaluation process. The court upheld the structured approach in the regulations, allowing SEBI to manage settlement proceedings effectively.

Conclusion:

The court dismissed the petition, affirming the validity of the challenged regulations and SEBI's rejection of the settlement proposal. The court emphasized the importance of SEBI's discretion in regulatory matters and the need for flexibility in economic regulations. The judgment underscored the balance between individual rights and public interest in the context of securities market regulation.