2025 (1) TMI 15 - AT - SEBI

Validity of SEBI's interim directions - lack of an opportunity for the appellant to be heard provided as alleged - appellant has executed Related Party Transactions without obtaining prior approval from the shareholders in terms of Regulation 23(4) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 - As argued there have been series of correspondence between the appellant and the SEBI but the impugned order interim ex-parte order has been passed without any tenable reasons - HELD THAT - We are of the opinion that prima facie, is indubitable that appellant and SEBI were in exchange of correspondence since 2020, although it was vehemently contended by Shri. Kapadia that the relevant date to be reckoned is September 2023. In any event, it cannot be gainsaid that appellants have been called upon to file their reply within 21 days from the date of the impugned order. As recorded hereinabove, Shri Kapadia has submitted that SEBI shall pass orders within 30 days from the date of conclusion of hearing. The Learned Senior Advocate for the appellant is also in agreement with the proposed course of action. Thus, it would not be just and appropriate to continue the impugned interim ex-parte order any further keeping in view that - The appellant has been directed to file reply within 21 days; and SEBI has made a statement before us to pass orders within 30 days from the date of conclusion of hearing and in the event of any adverse order, SEBI is enjoined with all powers to pass appropriate directions including an order of disgorgement.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment presents the following core issues:

Whether the SEBI's interim order dated April 29, 2024, against the appellant, necessitates interference.
Whether the appellant executed Related Party Transactions (RPTs) without obtaining prior shareholder approval as mandated by Regulation 23(4) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).
Whether SEBI's interim order was issued in violation of the principles of natural justice, given the lack of an opportunity for the appellant to be heard.
Whether SEBI has the authority to issue such interim orders without prior notice to prevent potential harm to public shareholders.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Necessity of Interference with SEBI's Interim Order

Relevant legal framework and precedents: The SEBI's power to issue interim orders is derived from its mandate to protect investor interests and ensure market integrity. The LODR Regulations, particularly Regulation 23, govern related party transactions and require shareholder approval for material transactions.
Court's interpretation and reasoning: The Tribunal considered whether the interim order was justified and whether SEBI followed due process. It acknowledged the ongoing correspondence between the appellant and SEBI since 2020, implying that the appellant was not given a fair opportunity to present its case before the interim order was issued.
Key evidence and findings: The Tribunal noted the extensive exchange of correspondence between the appellant and SEBI, indicating ongoing discussions and cooperation from the appellant's side.
Application of law to facts: The Tribunal found that the appellant had been engaging with SEBI and that the interim order was issued without a pressing need, as the appellant was already cooperating.
Treatment of competing arguments: SEBI argued that the interim order was necessary to protect public shareholders from potential harm due to ongoing RPTs without approval. The appellant contended that the order was premature and issued without a hearing.
Conclusions: The Tribunal concluded that the interim order was not justified and set it aside, directing SEBI to provide the appellant with an opportunity to respond and be heard.

Issue 2: Execution of RPTs without Shareholder Approval

Relevant legal framework and precedents: Regulation 23(4) of the LODR Regulations requires shareholder approval for material RPTs. The Tribunal examined whether the appellant violated this regulation.
Court's interpretation and reasoning: The Tribunal noted that the appellant had sought shareholder approval, which was rejected. It considered whether the appellant proceeded with RPTs despite this rejection.
Key evidence and findings: The appellant argued that it acted based on legal opinions and that the business allocation with the related party was legitimate.
Application of law to facts: The Tribunal did not conclusively determine whether the appellant violated Regulation 23(4) but highlighted the need for a full hearing to assess the facts.
Treatment of competing arguments: SEBI maintained that the appellant violated the regulation, while the appellant argued that its actions were legally justified and transparent.
Conclusions: The Tribunal did not make a final determination on this issue, emphasizing the need for further proceedings to establish the facts.

Issue 3: Violation of Principles of Natural Justice

Relevant legal framework and precedents: The principles of natural justice require that parties be given an opportunity to be heard before adverse decisions are made.
Court's interpretation and reasoning: The Tribunal found that the appellant was not given an opportunity to present its case before the interim order was issued, thus violating natural justice principles.
Key evidence and findings: The Tribunal noted the lack of a hearing before the interim order and the appellant's ongoing cooperation with SEBI.
Application of law to facts: The Tribunal determined that SEBI should have provided the appellant with a chance to respond before issuing the order.
Treatment of competing arguments: SEBI argued for the necessity of the order, while the appellant emphasized the lack of procedural fairness.
Conclusions: The Tribunal concluded that the interim order violated natural justice principles and should be set aside.

Issue 4: SEBI's Authority to Issue Interim Orders

Relevant legal framework and precedents: SEBI has the authority to issue interim orders to prevent harm to investors and maintain market integrity.
Court's interpretation and reasoning: The Tribunal acknowledged SEBI's authority but emphasized the need for procedural fairness and the absence of imminent harm justifying the interim order.
Key evidence and findings: The Tribunal noted the lack of urgency in the appellant's case, undermining the justification for the interim order.
Application of law to facts: The Tribunal found that SEBI's authority must be exercised with due regard to procedural fairness.
Treatment of competing arguments: SEBI argued for its authority, while the appellant highlighted the lack of immediate threat.
Conclusions: The Tribunal concluded that SEBI's interim order was not justified in this case.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "In our considered opinion, it would not be just and appropriate to continue the impugned interim ex-parte order any further keeping in view that the appellant has been directed to file reply within 21 days."
Core principles established: The principles of natural justice require that parties be given an opportunity to respond before adverse orders are issued. SEBI's authority to issue interim orders must be balanced with procedural fairness.
Final determinations on each issue: The Tribunal set aside the interim order, directing SEBI to provide the appellant with an opportunity to respond and be heard, and emphasized the need for a full hearing to assess the facts regarding RPTs.

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