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SEBI - Case Laws
Showing 41 to 60 of 641 Records
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2024 (8) TMI 25
Defalcation of the proceeds from the preferential issue - allegation of mis-utilization of the proceeds - inordinate delay in the issuance of the show cause notice - as decided by SAT [2023 (7) TMI 1440 - THE SECURITIES APPELLATE TRIBUNAL, MUMBAI] issuance of the preferential issue was known to the stock exchange as well as to SEBI and, therefore, there is no justification for issuance of show cause notice at this belated stage. No penalty could be imposed for the alleged deviation. We also find that there is no charge of defalcation of the proceeds from the preferential issue.
HELD THAT:- We do not find any good ground and reason to interfere with the impugned judgment and hence, the present appeals are dismissed.
The question(s) of law is left open.
Pending application(s), if any, shall stand disposed of.
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2024 (7) TMI 935
Liquidation of attached assets - time-bound public auctions - refund of the due amount to all the investors as well as various statutory, foreseen or unforeseen liabilities - Direction to SEBI to liquidate the attached assets in a time-bound manner and disburse the sale proceeds to genuine investors as early as possible - HELD THAT:- The entire process in the case in hand might take more than a year, it seems to us that fixation of monthly honorarium may not be desirable. Similarly, we do not want to leave it for the learned Chairperson or members of the HPSC to fix their own honorarium as it is likely to cause embarrassment to them. Considering all these aspects in view, we issue the following directions:-
(i) The Chairperson of the HPSC shall be entitled to an honorarium of Rs. 2 lakhs per sitting day, when effective proceedings are held. This will be in addition to travelling, boarding and other miscellaneous expenses as may be incurred in discharging the assigned responsibilities;
(ii) The learned Member, who is a former Judge of the High Court shall be entitled to an honorarium of Rs. 1.50 lakhs per sitting day, when effective proceedings are held. This will be in addition to travelling, boarding and other miscellaneous expenses as may be incurred in discharging the assigned responsibilities;
(iii) The Member nominated by SEBI shall not be entitled to any remuneration—since he is a full-time officer of SEBI. However, he shall be entitled to travelling, boarding, and other miscellaneous expenses as may be incurred in discharging the assigned responsibilities;
(iv) The Member Secretary cum Nodal Officer of the Committee shall be entitled to an honorarium of Rs. 75 thousand per sitting day, when effective proceedings are held. This will be in addition to travelling, boarding and other miscellaneous expenses as may be incurred in discharging the assigned responsibilities;
(v) Remuneration of experts like Chartered Accountant, Civil Engineer, Architect, Certified Valuer etc. shall be determined by the HPSC; and
(vi) The expenditure towards honorarium, hiring of office, secretarial assistance, as well as for following the prescribed procedure of auction, etc., shall be reimbursed from the sale proceeds. The initial expenditure shall be reimbursed from the sale proceeds of the properties which have already been sold, namely, the amount which the SEBI will transfer to the Escrow Account.
The States of Chhattisgarh, Maharashtra, Madhya Pradesh, Rajasthan, Uttar Pradesh and Haryana are hereby directed through their Chief Secretaries and Financial Commissioners (Revenue), to extend full cooperation and provide complete assistance as may be required by the HPSC for the purpose of execution and fulfilment of the assigned task. There must not be any delay on their part to comply with the instructions as may be received from the Chairperson of the HPSC.
Directors General of Police of the above-mentioned States are directed to provide assistance, if so required for the purpose of securing and protecting possession of the properties of the Companies. In addition, the HPSC, if so required, may deploy private guards for the protection of the properties of the Companies.
SEBI and the Petitioners are also directed to extend full cooperation to the HPSC.
To facilitate the sale and disbursement process and keeping in mind the period of incarceration already undergone, Petitioner Nos. 1 and 2 are directed to be enlarged on interim bail to the satisfaction of the MPID Court, Mumbai in Case No. 7 / 2016. This will be treated as interim bail in all of the FIRs. We order this on the basis of the special facts of the case, in exercise of our power under Article 142 of the Constitution of India.
HPSC shall be at liberty to seek further guidelines or clarifications as may be required, for which its Member Secretary cum Nodal Officer shall be at liberty to move an appropriate application before this Court.
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2024 (5) TMI 1227
Condonation of delay in filing appeal - constrained to file the appeal after SEBI had instituted an appeal before this Court against the order of the Securities Appellate Tribunal “SAT” - HELD THAT:- From a reading of the impugned order, it appears that while the appellants have succeeded on the first issue, an order of remand has been passed on the second issue to the Whole Time Member by SAT.
Appellants, submits that, as a matter of fact, after the order of SAT, a notice was issued to the appellants requiring them to file written submissions before the Whole Time Member which they have complied with. However, it has been submitted that no hearing has taken place before the Whole Time Member and since an appeal has been filed by SEBI against the order of SAT, these appeals may be tagged with the companion appeal filed by SEBI.
In the facts and circumstances, we condone the delay. Issue notice.
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2024 (5) TMI 798
Validity of freezing the Demat Accounts of the petitioners by the Calcutta Stock Exchange (CSE) - petitioner no. 1 forms a part of the “promoter group” as defined under regulation 2 (1) (w) of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“2015 Regulations”) and the family of the petitioners control the management and affairs of the proforma respondent no. 5-Company.
HELD THAT:- In the present case, petitioner no. 1 has subsequently issued e-mails to the respondent no. 1, showing his willingness to deposit the fines. Although no such intention appears from the conduct of the petitioners to comply with the other formalities, which were amply clarified to the petitioners by the several e-mails, notice and publication made by the CSE, the fact remains that no separate notice was given to the petitioner no. 1/promoter before freezing the Demat Accounts where the petitioner no. 1 is a joint holder.
Clause 5 of Annexure-I specifically distinguishes between the first notice, which is to be given to the listed entity itself, and the second notice which is to be given not to the listed entity but the promoter of the non-compliant entity. The said requirement having not been satisfied by the CSE/respondent no. 1, the impugned act of freezing the Demat Accounts of the petitioners was unlawful and not sustainable in the eye of law.
It cannot be denied that the stages prior to the same have been duly complied with by respondent no. 1. Hence, the laches on the part of respondent no. 1 can be rectified if a notice as contemplated in Clause 5 of Annexure–I is issued prior to freezing the Demat Accounts of the petitioner.
Accordingly is allowed on contest, thereby setting aside the Notice dated January 1, 2024, insofar as the petitioners are concerned and the e-mails dated January 3, 2024 and January 5, 2024 issued by the respondent no. 1 and quashing the freezing of the Demat Accounts of the petitioners.
Nothing in this order, however, shall preclude respondent no. 1 from proceeding afresh with issuance of a notice to the petitioner no. 1 and the other promoters/promoter group of the proforma respondent no. 5-Company individually under the second limb of Clause 5 of Annexure-I of the SEBI Circular dated January 22, 2020 to ensure compliance with the requirements and pay fines within ten days from the date of such notice.
In the event the defaults are not made good by compliance with the requirements and payment of fine, the respondent no. 1 shall be at liberty to proceed as per the procedure laid down in Clause 6 of Annexure-I of the said Circular by intimating the depositories to freeze the entire shareholding of the promoters as well as other securities held in the Demat Accounts in case of failure of the non-compliant listed entity/proforma respondent no. 5-Company to comply with the requirements and pay the fine levied under the said Circular.
In the said notices, the respondent no. 1 shall specify the exact amount of fine payable by the petitioners.
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2024 (3) TMI 1183
Recovery proceedings by SEBI - Maintainability of provisions of IBC over the provisions of the SEBI Act - notice was challenged by the appellants on the ground that the same cannot be enforced as the proceedings under the Insolvency and Bankruptcy Code, 2016 and the provisions of the Provincial Insolvency Act, 1920 initiated against the appellants are pending and the orders of interim moratorium have been passed - penalty imposed and sought to be recovered from the appellants by issuing the impugned certificate fall within the meaning of ‘fine’, which is excluded under clause (a) of sub-section (15) of Section 79 of IBC and therefore, the interim moratorium order issued in favour of the appellant No. 1 has no application to the penalty sought to be recovered under the impugned certificate
HELD THAT:- Once an application is admitted under Section 100, a moratorium shall commence in relation to all the debts and shall cease to have effect at the end of the period of 180 days beginning with the date of admission of the application or on the date the adjudicating authority passes an order on the repayment plan under Section 114, whichever is earlier.
In the instant case, so far as appellant No. 1 is concerned, the period of moratorium commenced on 04.02.2022 which cease to operate on expiry of 180 days i.e., 04.08.2022. Similarly, in respect of appellant No. 2, the period of moratorium commenced on 13.12.2022 and the same expired on efflux of 180 days on 13.06.2023. The writ petition was heard by the learned Single Judge on 19.09.2023. Thus, it is evident that no moratorium was in force in favour of the appellants. Therefore, respondents No. 1 and 2 were justified in issuing the impugned certificate under Section 28A of the SEBI Act. It is pertinent to note that the provisions of Chapter IV of IBC, namely Sections 121 to 124 do not apply to the facts of the case as the application under Section 122 was not filed when the Certificate under Section 28A of the SEBI Act was issued. The issue whether the impugned levy is a fine or a penalty is also not required to be decided in the facts and circumstances of the case and we keep the same open to be adjudicated in an appropriate proceeding.
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2024 (3) TMI 1143
Jurisdiction/Validity of show-cause notice issued u/s 11(1), 11(2)(b), 11(4) and 11(B) of SEBI Act - as submitted show-cause notice is identical to what was issued to the Petitioner on the earlier occasion which came to be adjudicated and on which Petitioner was discharged and exonerated - Petitioner had earlier moved this Court by filing a Petition, however, the same was withdrawn by the Petitioner with liberty to approach the Security Appellate Tribunal and on such Interim Application came to be passed by the Tribunal ordered that in the interest of justice, the Respondent be directed to give an opportunity of a cross-examination and personal hearing and when an opportunity of a personal hearing before the WTM would be given to the Petitioner, the Petitioner could raise all issues including that of jurisdiction
Contention as urged on behalf of the Petitioner is that the impugned show-cause notice is without jurisdiction and the issue of jurisdiction is required to be decided as a preliminary issue before the show-cause notice itself is taken up for adjudication.
HELD THAT:- It appears to be not the case that the Petitioner at any point of time including in the proceedings filed before the tribunal had given up his case that the impugned show-cause notice was without jurisdiction. In fact, the Tribunal itself has observed that the Petitioner would be permitted to raise the issue of jurisdiction in the proceeding of the show-cause notice to be held on 16th February, 2024.
Thus we are of the opinion that the present Petition can be disposed of by directing the concerned Officer of the Respondent to decide the issue of jurisdiction being raised by the Petitioner as a preliminary issue and only after such issue is decided, take an appropriate call on the adjudication of the show-cause notice. All contentions of the parties in that regard are expressly kept open.
Petitioner shall be intimated the date on which the Petitioner would be heard on the issue of jurisdiction and appropriate orders in deciding such issue be passed as expeditiously as possible.
We clarify that till the issue of jurisdiction is decided, the concerned officer of the Respondent shall not adjudicate the show-cause notice on merits including recording of any evidence of the same.
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2024 (3) TMI 988
Rejection of Petitioner’s Settlement Applications - delay on the part of the Petitioner in making compliances of submission of documents and as per the Settlement Regulations, 2018 and more particularly Regulation 6(1)(b) - Petitioner made a representation to the Respondent requesting the Respondent to consider such documents by condoning the delay, which according to the Petitioner was not attributable to the Petitioner and for reasons which where not in Petitioner’s control - HELD THAT:- Certainly there was delay on the part of the Petitioner in not complying with the time lines on submission of the documents, which according to the Petitioner were relevant in regard to the Settlement Applications and as demanded by the Respondent in the course of the proceedings. We also find that the Respondent was required to follow the provisions of the Regulations in question.
Considering the peculiar facts of the case and the reasons which are set out by the Petitioner, in our opinion in not submitting these documents within the prescribed time, the Petitioner would certainly deserve an opportunity of his Settlement Applications being considered by the Respondent and it ought not to become inconsequential on account of a delay of 15 days in submission of the documents. This would certainly cause prejudice to the Petitioner. We are thus inclined to set aside the impugned order passed by the Respondent and restore the proceedings of the Settlement Applications with the Respondent to be decided in accordance with law.
Petitioner submits that the documents are already part of the record of the Settlement Applications, hence, there would not be any impediment for the Respondent to decide the Settlement Applications as filed by the Petitioner expeditiously.
Let the decision on the Settlement Applications be taken as expeditiously as possible within period of eight weeks from the date of copy of the order is made available to the parties.
All contentions of the parties on the adjudication of the Settlement Applications are expressly kept open.
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2024 (3) TMI 868
Attachment of Properties - Large-scale irregularities committed by some share brokers in collusion with the employees of Banks and Financial Institutions - diversion of funds from the banks/FIs to the individual accounts of certain brokers - Section 10 of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 - HELD THAT:- The entire case of the Custodian regarding subsisting debts of the appellant towards respondent Nos. 6, 7 and 8 was based on a communication received from the Income Tax Department. The appropriate witness to prove such communication would be the official concerned from the Income Tax Department. However, as has been mentioned above, no witness from the Income Tax Department was examined in support of the recovery application. Even the communication forwarded by the Income Tax Department and relied upon by the Custodian was not proved by proper evidence.
The appellants herein took a categoric stand in their depositions that they had returned the amounts borrowed from respondent Nos. 6, 7 and 8, but the books of accounts were not available because of lapse of time. The said plea of the appellants herein could not be treated as unnatural or an afterthought because once the transactions were completed and the loans were repaid, there was no reason for the appellants to have entertained a belief that after a period of about 13 years, they would be required to present the account books pertaining to transactions. It was neither a requirement in law nor could it be expected from the appellants herein to retain the books of accounts after more than a decade of the alleged suspicious transactions.
Resultantly, the conclusions drawn and the findings recorded in the impugned judgments passed by the Special Court that the appellants herein failed to prove the fact that the amounts had been repaid to the benami companies of the notified person, namely, Pallav Sheth do not stand to scrutiny and cannot be sustained as being contrary to facts and law.
Appeal allowed.
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2024 (2) TMI 1028
Exit Policy of SEBI - letter issued by SEBI calling upon CSE [Calcutta Stock Exchange] to apply for voluntary exit - Exit policy of SEBI in consonance with the provisions of the SCR Act [Securities Contracts (Regulation) Act] or not? - Was the CSE obliged to apply for continuance of its clearing house business in terms of the SECC Regulations, 2012 ? - Whether steps towards compulsory withdrawal of recognition of CSE suffer from a jurisdictional error and violation of the principles of natural justice
HELD THAT:- In the circular issued by the SEBI, it has been stated that the same has been issued in exercise of powers conferred under Section 11(1) and 11(2) (j) of the SEBI Act, 1992 read with Section 5 of the SCR Act to protect the interest of investors in securities and to promote the development of and to regulate the securities market. Thus, it is clear that the circular has been issued with a particular object and in exercise of the statutory power conferred on the SEBI as a statutory authority. It has a force of law and is binding to all the stock exchanges in the country. In the said conspectus, we are unable to accede to Appellants ’s argument that Exit policy of SEBI is not in consonance with the provisions of the SCR Act.
Regulations such as those which have been framed by the SECC Regulations, insofar as they define the conditions for recognition, of minimum net worth, composition of the board of directors, dispersal of ownership and norms for governance, do not infringe any legal right of the stock exchange. The challenge is, therefore, lacking in substance. Nothing has been indicated before the Court to establish that the determination of the threshold or the manner of its computation is untenable and is so disproportionately high so as to constitute the very negation of the right to carry on business.
CSE cannot be accused of any offence or wrongdoing. It is a question of existence of an institution which had operated for more than a century and thereafter it was not being able to conduct its business due to mandatory imposition of a condition towards having a turnover of Rs. 1000/- crore on continuous basis and to set up a separate clearing corporation or tie with an existing recognized clearing corporation. Such circumstances may not warrant a zero-tolerance approach moreso when the terms and conditions for compulsory derecognition are yet to be specified by SEBI.
Judiciary has a strong sense of justice and it works to maintain social justice and fairness as distinguished from misplaced sympathy. In the peculiar facts and circumstances of the case and though we are not inclined to interfere with the order impugned, we are left with an avenue to issue necessary direction on the basis of the findings of the learned Single Judge as regards the fourth issue which has been answered in the affirmative, in favour of SEBI and against CSE.
Disengaging ourselves from the logjam, we direct that CSE would be at liberty to establish a clearing corporation in compliance with the provisions of SECC Regulations, 2012 or to tie up with another clearing corporation eligible to clear trades as per SECC Regulations, 2012 to achieve the prescribed net worth within a period of six months from date. In the event CSE fails to do so, SEBI would be free to take necessary steps thereafter, in accordance with law.
With the above observations and directions, the appeals and all connected applications are disposed of.
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2024 (1) TMI 1022
Termination of petitioner as a Depository Participant of CDSL[Central Depository Services] - Requirement of meeting the net worth and minimum turnover - petitioners being required to have a turnover of Rs. 3 crores as not adhered - According to CDSL, the termination is in lieu of SEBI-2018 Regulations and more particularly the amendment brought about to the said 2018 Regulations with effect from 23 February, 2022 to Regulation 35 by insertion of a proviso inter alia in regard to a stock broker requiring to have a net worth of Rs. 3 crores within one year from the date of notification of the 2022 amendment to the 2018 Regulations - HELD THAT:- We are of the opinion that respondent no. 1 itself was in some state of uncertainty as to whether the consequence of noncompliance of regulations of the SEBI would entail a consequence as foisted on the petitioners. CDSL in such regard, had infact approached the SEBI, however, the SEBI did not inform the CDSL on any position it should be taking on such compliances.
In such context, as informed to us by Respondent No. 2/Mr. Sancheti, learned senior counsel for SEBI that once the SEBI had prescribed the requirements under the said regulations, the compliance was an issue between the CDSL and its participants on which SEBI would not have any control.
Thus prima facie we find much substance in the contentions as urged on behalf of the petitioners that petitioners being put to a notice by the CDSL for compliance to be submitted in terms of what was recorded in the letter dated 24 February, 2023 as noted by us hereinabove, which the petitioners complied by submitting a “Net Worth Certificate” on 20 April, 2023. Such a certificate was not rejected by CDSL even on the ground that it is not based on audited accounts. On behalf of the petitioners, it is stated that in fact it was issued only after an audit.
Prima facie, we find much substance in the contentions as urged on behalf of the petitioners and wonder whether the petitioner could have been foisted with termination and more particularly considering the decision the respondent had taken in its letter dated 24 February, 2023, by which also a legitimate expectation was created in the petitioners to achieve the compliance by 24 April, 2023.
CDSL could not have turned around and then shown the rule book to the petitioners, after having granted such opportunity in its letter dated 28 February, 2023 providing time to the petitioners to achieve compliance by 24 April, 2023. In our opinion, such course of action as adopted by CDSL was in fact in consonance of its bye laws which we have noted hereinabove.
SEBI mandated such compliance but compliance of such a nature, namely of a turnover, in our prima facie opinion cannot amount to compliance of such fundamental nature that a participant needs to instantly lose its right to do business as permitted by a registration as granted by respondent no. 1, when it otherwise acts in accordance with all the legal requirements, this more particularly when about 700 participants of the petitioners would suddenly be in a limbo.
All the aforesaid issues would require examination at the final hearing of the petition. We, accordingly, feel it appropriate to admit the petition. Hence, Rule. Respondents waive service.
Pending the hearing and final disposal of the petition, the impugned order of termination dated 10 November, 2023 as confirmed by the appellate order dated 8 January, 2024 shall remain stayed.
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2024 (1) TMI 985
Writ petitions impugning the Revocation Order within the territorial jurisdiction of Delhi High Court - Violation of SEBI’s Minimum Public Shareholding Norms (‘MPS Norms’) and disclosure requirements - SCN provided an option for settlement mechanism under the SEBI (Settlement Proceedings) Regulation, 2018 - SEBI passed a common Settlement Order as stated that certain monetary and non-monetary terms were imposed on the Appellants in the Settlement Order, and steps have been taken by the Appellants to implement the said Settlement Order - Settlement Order stood revoked and withdrawn by SEBI in terms of Regulation 28 of the Regulations of 2018 on the ground of alleged failure of the Appellants to comply with the terms of the Settlement Order.
HELD THAT:- The conclusion that the cause of the action of the Appellants to challenge the legality of the Impugned Revocation Order issued by SEBI at Mumbai has no nexus with the receipt of the said order at Delhi; as this is not the material or integral fact to the said cause of action. The Impugned Revocation Order was admittedly received by the Appellants in multiple jurisdictions and this fact if held to be determinative would enable Appellants to pick and choose jurisdictions which is the mischief that the Full Bench of Kerala High Court has opined should not be permitted and we agree with the same. Therefore, the receipt of the Impugned Revocation Order at Delhi cannot alone be held determinative of the jurisdiction of this Court.
Effect of the Impugned Revocation Order felt at Mumbai - grievance of the Appellants in the writ petitions is that the issuance of the Impugned Revocation Order of SEBI has resulted in re-initiation of the proceedings and hearing at Mumbai pursuant to the SCN dated 28.10.2020; thereby exposing the Appellants to regulatory proceedings - It is the facts pleaded in the grounds, which constitute the material and integral facts, which the Appellants will have to prove, if traversed by SEBI, to seek a judgment of the Court. The challenge to the Impugned Revocation Order has been raised on the grounds of inter-alia non-adherence to the principles of natural justice by SEBI. It has been pleaded that the SEBI failed to provide the Appellants an opportunity of hearing prior to revocation and the order is unreasoned. It is further pleaded that the impugned order is contrary to the extant law. It is the facts pleaded in these grounds which would constitute the cause of action in favour of the Appellants herein. A bare perusal of the grounds would show that each one of them allege acts and omissions by SEBI at Mumbai. Therefore, in our considered opinion as per the grounds set out in the writ petition the cause of action for challenging the impugned order against SEBI has arisen at Mumbai.
In the facts pleaded by the Appellants for invoking the writ jurisdiction of the Courts at Delhi, undoubtedly, it cannot be said that the High Court of Delhi had no territorial jurisdiction for admittedly, the Appellants reside within the jurisdiction of this Court. However, none of the facts pleaded by the Appellants for invoking the jurisdiction of this Court are integral and material fact for challenging the Impugned Revocation Order. The said facts are not sufficient for compelling this Court to hear the matter on merits. For the same reason, the contention of the situs of shares of BNL is not an integral fact.
Forum Conveniens at Mumbai - In the facts of this case, admittedly the High Court of Judicature at Bombay has the jurisdiction as the decision of SEBI to revoke the Settlement Order took place at Mumbai and all events prior thereto with respect to issuing the SCN and passing of the Settlement Order also occurred at Mumbai.
The High Court while exercising its jurisdiction under Article 226 of the Constitution of India to entertain a writ petition, in addition to examining its territorial jurisdiction also examines if the said Court is the forum conveniens to the parties. The issue of forum conveniens is seen not only from the perspective of the writ petitioner but it is to be seen from the convenience of all the parties before the Court. In the facts of this case, as is evident from the record that the forum conveniens for the both the parties is Mumbai. The Appellants since the year 2020 have been appearing in Mumbai before SEBI.
This Court is of the view that the learned Single Judge has rightly concluded that applying the principles of forum conveniens, it would not be appropriate to entertain the writ petitions and the Appellants may approach the appropriate High Court.
Summoning of the record of the SEBI would be necessary for examining the rival contentions of the parties in the writ petition.
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2024 (1) TMI 734
Rights of the minority shareholders - Restoration of the Writ Petition - SEBI's Role and Response to Complaints
The case involves the petitioners, who are minority shareholders of Bharat Nidhi Ltd. (BNL), filing a writ petition against BNL and the Securities and Exchange Board of India (SEBI) for various alleged violations of securities laws. The petitioners claimed that SEBI had not provided them with the investigation report or relevant documents related to their complaints against BNL, despite them being shareholders. They argued that BNL, along with majority shareholders (respondent nos. 3 to 9), committed several illegalities and violations of securities laws, including the Minimum Public Sharing Norms and disclosure issues.
One key aspect of the case was SEBI's issuance of a show cause notice to BNL and others, which was later settled through the SEBI (Settlement Proceedings) Regulation 2018. The petitioners contended that the violations alleged in the show cause notice were serious and could not be settled.
During the final hearing, the petitioners requested SEBI to provide documents relevant to their complaints. Despite opposition from SEBI and other respondents, the Court ordered SEBI to provide these documents, emphasizing that minority shareholders are integral to a company and entitled to such information.
This order was challenged in the Supreme Court by both respondent nos. 2 and 9, and later by SEBI. However, the Supreme Court dismissed these challenges, upholding the High Court's order.
Subsequently, SEBI revoked the settlement order it had passed, which led to the contention that the substantive prayers in the original petition (prayers a and b) had become infructuous. However, the petitioners opposed this view, asserting that prayers c and d of the petition still required adjudication.
Ultimately, the High Court maintained its interim directions, requiring SEBI to furnish the documents and keeping open the contentions regarding prayer clauses c and d for future proceedings. The Court stressed that SEBI, as a public body, should act in public interest and comply with court orders.
The petitioners later filed an interim application to restore the writ petition for a final hearing, arguing that respondent nos. 2 to 9 had engaged in forum shopping and deceit by not informing the Court about their steps to challenge SEBI's revocation order in the Delhi High Court. This was viewed as potentially fraudulent behavior, intended to secure the disposal of the writ petition in their favor.
Respondent nos. 2 to 9 and SEBI, on the other hand, argued that the petitioners had no cause of action to seek restoration, that the reliefs in prayer clauses c and d could not be granted due to the completion of the buyback process, and that no prejudice was caused to the petitioners as these issues could still be agitated in appropriate proceedings.
In conclusion, the Court decided to keep open the issues related to prayer clauses c and d for future action.
The Court noted that the issue of the Postal Ballot Notice dated 22 September 2022, related to prayer clause (d) of the Writ Petition, became a moot point following the revocation of the Settlement Order by SEBI. The Court had previously decided to keep these matters open for future proceedings, allowing the petitioners to raise these issues at an appropriate time.
The Court further observed that the conduct of respondent nos. 2 to 9, particularly in not disclosing their intention to challenge the revocation of the Settlement Order, did not reflect a fair, just, or upright approach. However, it did not constitute fraud or deceit in the legal sense. The Court emphasized that the situation had not materially changed since its order on 1 December 2023, as the revocation of the Settlement Order was still in effect. Therefore, there was no cause for the Court to review or reverse its previous orders and directions.
In conclusion, the Court found no merit in the application to restore the writ petition and rejected it, maintaining its earlier orders and observations. The Court's decision was based on the principle that there was no material change in circumstances and that the substantive issues related to the revoked Settlement Order and subsequent actions remained open for future adjudication.
Application rejected.
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2024 (1) TMI 588
Issue of the Non-Convertible Debentures (NCDs) without complying with the listing provisions - Liability of directors - 'officer in default' - HELD THAT:- Learned counsel for the appellants have made an attempt to distinguish the role as assigned to the appellants as Directors. But at present, we are not influenced by such submissions. In view of the above, the civil appeals stand dismissed.
Pending applications stand disposed of.
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2024 (1) TMI 188
Violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957 - failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI - Precipitate decline in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group of Companies. “Adani group” - situation was purportedly caused by a report which was published on 24 January 2023 by an “activist short seller”, Hindenburg Research about the financial transactions of the Adani group.
The Hindenburg Report and certain newspaper reports allege that some Foreign Portfolio Investments “FPIs” in Adani group stocks in the Indian stock market are owned by shell companies based outside India, which have close connections with the Adani group. Such investments in Adani stocks allow the Adani group to maintain financial health and artificially boost the value of stocks in the market, in violation of Indian law;
Adequacy of SEBI’s investigation - scope of judicial review over SEBI’s regulatory domain - transfer of investigation from SEBI to another agency or to an SIT - Whether SEBI has prime facie conducted a comprehensive investigation? - Allegations of conflict of interest against members of the Expert Committee - petitioner’s case appears to rest solely on inferences from the report by the OCCRP, a third-party organization involved in “investigative reporting”. The petitioners have made no effort to verify the authenticity of the claims.
Whether there is no apparent regulatory failure attributable to SEBI? - petitioners have submitted, based on the Hindenburg Report and other newspaper reports, that the FPIs investing in Adani group stocks in the Indian stock market are shell companies outside India owed by the brother of the Chairperson of the Adani group
HELD THAT:- In a consistent line of precedent, this Court has held that when technical questions arise particularly in the financial or economic realm; experts with domain knowledge in the field have expressed their views; and such views are duly considered by the expert regulator in designing policies and implementing them in the exercise of its power to frame subordinate legislation, the court ought not to substitute its own view by supplanting the role of the expert. Courts do not act as appellate authorities over policies framed by the statutory regulator and may interfere only when it is found that the actions are arbitrary or violative of constitutional or statutory mandates. The court cannot examine the correctness, suitability, or appropriateness of the policy, particularly when it is framed by a specialized regulatory agency in collaboration with experts. The court cannot interfere merely because in its opinion a better alternative is available.
The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom over the regulatory policies of SEBI. The scope of judicial review when examining a policy framed by a specialized regulator is to scrutinise whether it violates fundamental rights, any provision of the Constitution, any statutory provision or is manifestly arbitrary.
No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question.
SEBI has completed twenty-two out of the twenty-four investigations into the allegations levelled against the Adani group. Noting the assurance given by the Solicitor General on behalf of SEBI we direct SEBI to complete the two pending investigations expeditiously preferably within three months - This Court has not interfered with the outcome of the investigations by SEBI. SEBI should take its investigations to their logical conclusion in accordance with law;
The facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, this Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist.
The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner’s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI’s Additional Director General, the CESTAT and this Court;
The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected.
The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market and SEBI and the investigative agencies of the Union Government shall probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, suitable action shall be taken.
Before concluding, we must observe that public interest jurisprudence under Article 32 of the Constitution was expanded by this Court to secure access to justice and provide ordinary citizens with the opportunity to highlight legitimate causes before this Court. It has served as a tool to secure justice and ensure accountability on many occasions, where ordinary citizens have approached the Court with well-researched petitions that highlight a clear cause of action. However, petitions that lack adequate research and rely on unverified and unrelated material tend to, in fact, be counterproductive. This word of caution must be kept in mind by lawyers and members of civil society alike.
We are grateful to all the members and the Chairperson of the Expert Committee for their time, efforts, and dedication in preparing their erudite, comprehensive, and detailed report in a time-bound manner. Subject to the consent and availability of the members and Chairperson of the Expert Committee, SEBI and the Government of India may draw upon their expertise and knowledge while taking necessary measures pursuant to the recommendations of the Committee.
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2023 (12) TMI 1371
Petition u/s 482 Cr.P.C. against the order passed by ASJ, Patiala House Court, New Delhi whereby his application u/s 203 Cr.P.C. was dismissed on the ground the petitioner is not proposed accused in complaint filed by respondent - HELD THAT:- As perused the present petition and the order passed by this court by virtue of which the same relief was claimed and the same was dismissed as withdrawn. A further perusal for the same shows that the present petition has been filed by the petitioner on the grounds which were enumerated in the previous appeal but couched differently.
It is pertinent to note here that nothing has been bought before this court to show that there are changes in the circumstances which emerged since the dismissal of the earlier petition that prompted him to file the present petition. One cannot lose sight of the fact that the petitioner is still not a proposed accused as submitted by the learned counsel for the respondent, in the complaint filed by the respondent – SEBI.
Since nothing has changed from the dismissal of the previous petition and the present petition has been filed under the guise of seeking the similar relief which was already dealt by this court [2023 (5) TMI 1395 - DELHI HIGH COURT] this court is of the view that under the garb of filing the present petition the petitioner cannot be permitted to reassert or reiterate the same grounds seeking identical reliefs.
It is essential to uphold the principles of judicial economy and finality in legal proceedings to avoid unnecessary duplication and protraction of legal process. Therefore, in light of the foregoing, the present petition is dismissed.
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2023 (12) TMI 915
Determination of jurisdiction of High Court for SEBI violations - Violation of SEBI’s minimum public shareholding norms and violation of SEBI’s minimum public shareholding norms - Separate and independent settlement applications were also filed by respondent nos. 2 to 8 - Whether this court is the appropriate forum for deciding the present writ petitions and granting the reliefs as prayed for? - HELD THAT:- A perusal of Clause 2 of Article 226 indicates that the writ jurisdiction can be exercised by the High Court primarily in relation to the territories within which the cause of action, wholly or in part arises. However, the location of such Government or authority or residence of such person, outside the territories of the High Court will not deter the High Court from issuing the appropriate writ.
The introduction of Clause (2) in Article 226 of the Constitution of India widened the width of the area for issuance of writs by different High Courts, however, the same cannot be construed to completely dilute the original intent of the Constitution makers which is succinctly encapsulated in Clause (1) of Article 226. Rather, Clause (2) is an enabling provision, which supplements Clause (1) to empower the High Courts to ensure an effective enforcement of fundamental rights or any other legal right. Therefore, the power of judicial review cannot be circumscribed by the location of the authority against whom the writ is issued, however, the same does not mean that the constitutional mandate enshrined under Article 226 (1) can be completely neglected or whittled down.
The ‘cause of action’ means a bundle of facts, which is necessary for the plaintiff to prove in order to succeed in the proceedings. It does not completely depend upon the character of the relief prayed for by the plaintiff. It is rather the foundation upon which the plaintiff lays his/her claim before the court to arrive at a conclusion in his/her favour. It depends on the right which the plaintiff has and its infraction.
Section 20 of the Civil Procedure Code, 1908, provides a generic definition of the term ‘cause of action’ to mean fact, which is necessary to establish to support a right to obtain a judgment.
The question whether cause of action has arisen within the territorial jurisdiction of a court, has to be answered based on the facts and circumstances of the case. The cause of action, thus, does not comprise of all the pleaded facts; rather it has to be determined on the basis of the integral, essential and material facts which have a nexus with the lis.
It is also a settled proposition of the law that the location where the tribunal/appellate authority/revisional authority is situated would not be the sole consideration to determine the situs of the accrual of cause of action, ignoring the concept of forum conveniens in toto. Hence, even if a small part of the cause of action is established, and the same is found to be non-integral or non-material to the lis, the court may invoke the doctrine of forum non-conveniens and decline to exercise its writ jurisdiction, if an alternative, more efficacious forum for the same exists.
It is, thus, unequivocally clear that the petitioners participated before SEBI’s Internal Committee on different dates at Mumbai and thereupon, a settlement had arrived at. It is, thus, seen that it is not merely the location of the respondent-SEBI’s Head Office at Mumbai, but rather the entire genesis of the dispute lies in Mumbai itself. The settlement was finalized at Mumbai. The determination of the settlement not being fulfilled was made at Mumbai. The consideration to that effect has taken place at Mumbai and the decision to revoke the settlement has also been passed at Mumbai only.
Merely because some of the writ petitions were entertained by this court relating to certain violations of norms and regulations of respondent-SEBI by the respondent companies therein and issues arising out of consequential settlement application, that in itself would not determine the integral, essential and material part of the cause of action as the pendency of the writ petition before this court has no relation with the impugned revocation order which has taken place subsequent to the said writ petition. The law relating to the doctrine of forum conveniens, as discussed above, already makes it explicitly clear that the jurisdiction has to be determined on the facts and circumstances of each case.
With respect to the averment that this court is the most convenient forum for the petitioners, it would be inappropriate and myopic to assume that while determining the jurisdiction, only the convenience of the aggrieved party approaching the court has to be looked into. In fact, with the advent of technology in contemporary times, the courts have transcended the geographical barriers and are now accessible from remote corners of the country. Therefore, the convenience of the parties cannot be the sole criterion for the determination of jurisdiction considering the broader perspective of dynamism of technology and increased access to justice. The determination of cause of action and territorial jurisdiction has to be in line with the constitutional scheme envisaged under Article 226 of the Constitution of India.
Moreover, the litigation history of the present writ petitions reveals that the parties have, in fact, agitated their concerns before the Hon’ble High Court of Judicature at Bombay. Nothing has been put before this court, that shall allow the conclusion of the Hon’ble High Court of Judicature at Bombay being a non-convenient forum. The forum, in the considered opinion of this court, is available, convenient, as also approachable.
In all fairness, the petitioners herein ought to have disclosed the said fact before the Hon’ble High Court of Bombay regarding reserving the right to challenge the settlement order. Undoubtedly, they can challenge the same without prior intimation to the Hon’ble High Court of Bombay, but the recourse must have been taken before an appropriate forum/court. The burden of a fair demeanour on the part of litigants considerably amplifies when they approach the courts under the extraordinary jurisdiction. Therefore, at times, it is the constitutional courts upon which falls the burden to prevent the abuse of jurisdiction and eliminate any susceptibility of forum shopping.
It is, thus, seen that under the facts of the instant matters, the integral, essential and material part of the cause of action had arisen with the territorial jurisdiction of the Hon’ble High Court of Judicature at Bombay and even assuming that a slender part of cause of action has arisen within the jurisdiction of this court, applying the principles of forum conveniens as has been held by the Hon’ble Supreme Court in the case of State of Goa [2023 (3) TMI 683 - SUPREME COURT], this court does not deem it appropriate to entertain the instant writ petitions. The instant writ petitions are, therefore, dismissed.
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2023 (12) TMI 381
Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - misconduct dereliction of duties and abhorrence of due diligence while conducting statutory audit - auditor as directed that the certified copy of the order be forwarded to the Institute of Chartered Accountants of India ("ICAI") and National Financial Reporting Authority ("NFRA") for appropriate action against the appellants - HELD THAT:- The scope of inquiry by SEBI is very limited and is confined only to the charge of conspiracy of involvement of the appellant in the fraud, if any, and to take consequential action if there is connivance or conspiracy with the appellant and its directors. Only then, SEBI could take action under the SEBI Act and the PFUTP Regulations otherwise it is not open to SEBI to inquire into any charge of professional negligence of the auditor since the audit firm is not dealing directly in securities.
The scope and jurisdiction of SEBI to conduct an inquiry against a Chartered Account or a Chartered Accountant Firm was considered by the Bombay High Court in Price Waterhouse & Co. & Another vs. SEBI [2010 (8) TMI 173 - HIGH COURT OF BOMBAY] it is not open to SEBI to encroach upon the powers vested with the Institute under the CA Act and if there is any material against the Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts then SEBI has powers to take remedial or preventive measures under the SEBI Act. The Bombay High Court held that the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry and if it is found that a particular Chartered Accountant has concocted false accounts in connivance and in collusion with the Officers / Directors of the Company then SEBI could take action.
Jurisdiction of SEBI would depend upon the evidence which is available and if there was some omission without any mens rea or connivance with anyone, in any manner then SEBI cannot issue any further direction and was required to drop the proceedings.
In the instant case, the WTM has given a categorical finding that there is no evidence showing fraud or connivance by the appellants with the officers or directors of the Company. WTM has further given a finding that there is insufficient evidence to hold that the appellants had actually manipulated the books of accounts with knowledge and fraudulent intention and that there was no tangible evidence to show that the appellant had committed a fraud in collusion or connivance with the officers of the Company or its management.
Once there is a finding that the appellants have not manipulated the books of accounts with knowledge and fraudulent intention or in connivance with the officers or management of the Company then no directions could be issued by the WTM to the ICAI or NFRA to consider dereliction of duties and abhorrence of due diligence while conducting statutory audit as in our opinion it was outside the domain of the WTM to issue such directions. At best, administrative directions could have been issued by SEBI to the aforesaid institutions to consider the alleged irregularities but beyond that no adjudicatory directions could be issued by the WTM.
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2023 (12) TMI 318
Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - Charge of conspiracy and involvement in the fraud against CA firm - statutory auditor working against the fiduciary capacity - appellant is a leading firm of Chartered Accountants consisting of 14 partners and 250 accountants, article assistants and others - appellant was appointed as the joint statutory auditor - appellant had acted against the fiduciary capacity and instead of working in the interest of the shareholders of the company the appellant facilitated the scheme of cleaning up the books of account of the Company despite being aware of the irregularities and misstatements in the financial statements of the Company - investigation report alleged that on the basis of the hand written note the appellant had facilitated the scheme of cleaning up of the books of the Company and therefore recommended initiation of adjudication proceedings. Accordingly, adjudication proceedings were initiated against the appellant under Section 15HA of the SEBI Act - Whether appellant was not involved in the fudging of the books of accounts?
HELD THAT:- In Price Waterhouse Co. Vs. SEBI [2019 (9) TMI 592 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] this Tribunal while considering the role of the appellant as a firm of the C.A.s found that the scope of the enquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the C.A. / C.A. firm were not dealing directly in the securities. This Tribunal held that in absence of inducement, fraud was not proved nor there was connivance or collusion by the C.A.s and therefore, the provision of section 12 (A) of SEBI Act and Regulation 3 & 4 of PFUTP Regulations are not applicable. This Tribunal held that gross negligence or recklessness in adhering to the accounting norms in the course of auditing can only point out to the professional negligence which would amount to a misconduct to be taken up only by ICAI.
Once an investigation or a finding in the inquiry comes that the appellant was not involved in the fudging of the books of accounts and that there was no collusion or connivance by the appellant as a statutory auditor with any employee, promoter or director of the Company then the matter has to be dropped and SEBI could not proceed any further. The scope of inquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the chartered accountant or chartered accountant firm were not dealing directly in the securities.
Considering the aforesaid the show cause notice only alleged that the appellant had facilitated the scheme of cleaning up of the books of accounts of the Company.
There is no finding of the appellant’s direct involvement in the cleaning up of the books of accounts or in the fudging of the books of accounts of the Company. There is also no finding of the appellant’s collusion or connivance with any director, promoter or employee of the Company and consequently the appellant cannot be charged under Section 12A of the SEBI Act read with Regulation 3 and 4 of the PFUTP Regulations.
While conducting the statutory audit of a company, one of the objectives of an auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. For this purpose, the relevant standard is the Standard of Auditing (‘SA’) 315 titled ‘identifying and Assessing the Risk of Material Misstatement Through Understanding the entity and its Environment’. As per the said standard, identification of risk of material misstatement is a matter of professional judgement.
In the context of SA-315 pertaining to identifying and assessing the risks of material misstatements in financial assessment, it is pertinent to bear in mind that any audit is subject to inherent limitations and that owing to such inherent limitations of an audit, there is an unavoidable risk that some material misstatement of the financial statements may not be detected even though the audit is properly planned and performed in accordance with the SA’s which was also stated by the appellant in the engagement letters executed with CG Power. Risk of not detecting a misstatement resulting from fraud is higher than the risk of not detecting a misstatement resulting from an error. Similarly, the risk of not detecting a material misstatement resulting from management fraud is greater than that resulting from an employee fraud.
The standard of accountancy framed by the ICAI makes a distinction between a statutory auditor and a forensic auditor. We may state here that the role of a statutory auditor is not to function like a forensic auditor. Any statutory audit unlike an internal or forensic audit is inherently carried out on a test check / sampling basis which in the instant case had been done by the appellant. As part of the audit process the appellant had duly carried out the exercise of identifying and assessing the risk of material misstatements in the financial statements in accordance with SA 315.
Accordingly, in its professional judgement and after exercising reasonable professional skepticism, ledger accounts with zero balance in the advance to suppliers / advance from customer account were not identified as those which were subject to risk of material misstatement since zero balances would not have impacted the financial statements and therefore, were not considered for further audit procedures.
Conversely, those accounts which had a closing balance in advance to suppliers / advance from customer account were considered for further audit procedures such as obtaining balance confirmation, verification of underlying service agreements and supply contracts etc. Further, any statutory audit, unlike an internal or a forensic audit, is inherently carried out on a test-check / sampling basis, which was done by the appellant in the case of CG Power also.
We are of the view that if the appellant had not carried out the statutory audit as per the accounting standards framed by the ICAI and in the event the appellant could not have resigned without filing the complete audit report or had failed to consider the netting of amount transferred as loans to Action and Avantha then it was open for SEBI to refer to the ICAI to take disciplinary action against the appellant for violation of the accounting standards. SEBI’s role was limited and confined to the conspiracy charge against the appellant with regard to fudging of the accounts of the Company.
The impugned order cannot be sustained and is quashed. The appeal is allowed.
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2023 (12) TMI 295
Request to place on record a compilation of documents - Writ petitions by minority shareholders - HELD THAT:- This Court is apprised of the fact that the proceedings are listed tomorrow (29 November 2023) before the High Court of Judicature at Bombay. Hence, it is not necessary for this Court to entertain the Special Leave Petition at this stage, particularly bearing in mind what has been observed in paragraphs 2 and 3 of the earlier order [2023 (12) TMI 241 - SC ORDER] which read as follows:
“2 Since the impugned orders of the High Court are purely of an interlocutory nature, we are not inclined to entertain the Special Leave Petitions under Article 136 of the Constitution.
However, the parties would be at liberty to pursue their remedies in accordance with law on all counts after the final judgment of the High Court.”
Should it become necessary for SEBI to raise the issue of interpretation of Regulation 29 at a future date, that issue is kept open to be agitated. SLP dismissed.
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2023 (12) TMI 260
Unlawful gains by fraudulent and manipulative strategy made by Reliance Company - responsibility of noticee no. 2 i.e. the Managing Director - violating Section 12A of the SEBI Act r/w Regulations 3 and 4 of the SEBI PFUTP Regulations - vicarious liability on both criminal and civil liability for contravention of the SEBI Act, Rules and Regulations - Liability against violations committed by the company - WTM issued directions to disgorge the unlawful gains of Rs. 447.27 crores along with interest @12% per annum and further prohibited the Company and the 12 entities from dealing in equity derivatives in the F&O segment of the stock exchanges directly or indirectly for a period of 1 year - Whether Section 27 of the SEBI Act prior to its amendment w.e.f. March 08, 2019 provided for vicarious liability only in respect of criminal proceedings initiated against a Company for contravention of the SEBI Act - Allegation of manipulative scheme - HELD THAT:- There is a distinction between “offence” and “contravention”. Consequently, one has to see the intention of the Parliament when it uses the word “offence” or where it uses the word “contravention”.
Section 27 prior to the amendment i.e. prior to March 08, 2019 had no application to civil liability and only after the amendment w.e.f. March 08, 2019 that Section 27 provided for vicarious liability on both criminal and civil liability for contravention of the SEBI Act, Rules and Regulations.
Finance Act, 2018 did not give retrospective effect to this amendment nor can such effect be inferred by necessary implication from the language of the amendment. The amendment, being substantive in nature can only be prospective and cannot have any retrospective application. The impugned order holding the amendment to be clarificatory in nature is thus patently erroneous.
The meaning of the term “offence” is required to be understood in the context in which it is used in the legislation. A suggestion that the term “offence” as occurring in the SEBI Act also covers civil proceedings is at odds with the range of provisions in Chapter VII of the SEBI Act which is a facet that was not even examined by the AO, much less ruled upon. We find that parliament was conscious of the usage of the two words “contravention” and “offence” in the SEBI Act and consciously chose to replace “offence” with “contravention” explicitly, in order to enlarge the scope of Section 27.
Section 27 of the SEBI Act as it stood prior to the amendment did not apply to civil liability and, therefore, the Managing Director could not be penalised by SEBI u/s 27 of the Act.
It is not necessary for us to deal with the issue as to whether the Managing Director could be made vicariously liable under Section 27 of the SEBI Act for contravention of the Section 12A and Regulations 3 and 4 of the PFUTP Regulations.
Board of Directors had specifically directed the two officers to explore, identify and implement optional avenues of funding and thereafter on 19.11.2007 the Board of Directors were informed by these two persons that the funds are being raised by disposing 5% of RPL shares through trades in RPL securities. In view of this impeccable evidence, notice No. 2 had discharged the burden under Section 27 of the Act and the onus shifted upon SEBI to prove that notice No. 2 was complicit. The finding that the appellant was complicit to the violations committed by the company and, therefore, liable under Section 27 of the Act is patently erroneous and is based on surmises and conjectures.
Specific denial was made by noticee no. 2 of his involvement in the trades executed by the two officers of the company. We also find that the AO in paragraph 64 holds that it is relevant to examine the role of the Managing Director in terms of direct involvement or knowledge with regard to the manipulative scheme or trades undertaken by the company. We find that the AO failed to establish either direct involvement or knowledge of the Managing Director with regard to the trades undertaken by the company and, therefore, the finding that the Managing Director was ‘complicit’ to the violations committed by the company through its two officers is based on surmises and conjectures and on the basis of the figment of his imagination.
The burden that the Managing Director of the Board of Directors exercised all due diligence was discharged and, therefore, the onus shifted back to SEBI to show that the Managing Director was responsible for the execution of the trades in question. In the absence of any finding being given by the AO establishing direct involvement or knowledge of the Managing Director in the execution of the trades the finding that the Managing Director was complicit in the execution of the trades with the two officers is purely based on surmises and conjectures. Thus, on this score noticee no. 2 i.e. the Managing Director cannot be held responsible for the execution of the shares in the facts and circumstances of the present case.
The limited role played by the Board was only to take note of the transactions after they had been executed by the two senior executives. Without considering the findings of the WTM the AO in the impugned order has misdirected itself in holding that the Managing Director was responsible under Section 27 of the SEBI Act merely on the ground that he was the Managing Director.
Assuming that Section 27 of the SEBI Act is applicable for civil proceedings, we find that the requirement to impute a vicarious liability is not satisfied. The law is well settled that the mere fact that a person holds a designation of Managing Director does not suffice for imputing a vicarious liability to such person. It has been repeatedly held that the proof of “active role” in the alleged contravention in issue must be demonstrated by clear and concrete evidence of his active role coupled with criminal intent as a necessary pre-condition for affixing vicarious liability.
Board of Directors in a company is supreme. The Managing Director reports to the Board. The Board has the full authority to delegate any function to any officers of the Company to the exclusion of the Managing Director. The contention of the respondent that the Managing Director is responsible for the day to day affairs of the Company and the officials report to him and, therefore, the Managing Director is responsible is deemed to be in the knowledge of the transactions is not applicable in the case in hand, especially when the Board had specifically authorised the two senior most officials to execute the trades in question. We also find that in the instant case the two officials have reported to the Board and not to the Managing Director.
AO in the impugned order does not arrive at any conclusion that the appellant was involved in the actual conceptualisation and execution of the alleged trades by RIL. We are of the opinion, that whereas the AO recognises that knowledge by the appellant was a pre-requisite for a finding that noticee no. 2 was liable for RIL’s alleged violation yet without giving a conclusive finding has travelled beyond the show cause notice to conclude in paragraph 72 of the impugned order that noticee no. 2 had implicit knowledge of the alleged trades and authorised the implementation plan. The AO further went on to hold that it is highly unlikely that noitcee no. 2 was not aware of the execution of the trades. The findings given by the AO in our opinion is purely based on surmises and conjectures.
In this regard, the word “complicit” means involvement with others in an activity which is unlawful. On the other hand, the word “implicit” is suggestive though not directly expressed.
Thus, in the absence of any specific finding by the AO on noticee no. 2 complicit involvement in the execution of the implementation plan or in the execution of the trades, the AO cannot dwell into surmises and conjectures and base its findings on presumption to hold that the noticee no. 2 was implicitly involved in the transactions on the ground of being a Managing Director and which implies a high level of accountability of knowledge of overall functioning of the Company.
The burden under Section 27 was discharged by noticee no. 2 and the AO has miserably failed to prove that noticee no. 2 was involved in the execution of the trades carried out by two senior executives.
Inordinate delay in the initiation of the proceedings against the noticees - Both noticee nos. 3 and 4 are involved inter alia in the business of construction of building, infrastructure, setting up of a Special Economic Zone (SEZ) and acquisition of properties and invested their idle funds by lending the same by way of short term inter corporate deposits to other companies in order to earn interest and, if necessary, also avail inter corporate deposits from other companies by paying interest - After 10 years the show cause notice dated 21.11.2017 was issued alleging that noticee nos. 3 and 4 were promoted by the Reliance Group and that noticee nos. 3 and 4 by financing the monies to Vinamra were complicit and aided and abetted the manipulation of the trade executed by RIL through its 11 agents - AO has rejected the contention of the appellants holding that there is no delay on the ground that SEBI had taken an internal decision to await the Section 11B proceedings against RIL and its agents before taking further action in the matter.
HELD THAT:- The Limitation starts running from the day the impugned order is passed. Limitation order does not stop on the whims and fancies of a regulator. The regulator cannot stop the clock on the ground that they would await the decision in proceedings initiated u/s 11B before taking further action in the matter. In our opinion, there is no legal bar of initiation of adjudication proceedings during pendency of Section 11B proceedings. In our opinion, adjudication proceedings and Section 11B proceedings can be held in parallel.
There has been an inordinate delay in the issuance of the show cause notice. Even though there is no period of limitation prescribed in the Act and the Regulations for issuance of a show cause notice and for completion of the adjudication proceedings, nonetheless, the authorities are required to exercise its powers within a reasonable period
Time starts to run from the date of commission of the alleged violation. The respondents being aware of this fact and having knowledge of the alleged transactions chose deliberately not to initiate proceedings and, consequently, the action of the respondents cannot be justified by initiating a belated show cause notice.
There is a violation of principles of natural justice in not supplying the documents to noticee nos. 3 and 4 which documents were relied upon in the show cause notice. We find that noticee nos. 3 and 4 had repeatedly addressed letters to SEBI on 11.06.2018 and 25.06.2018 requesting certain documents which were specifically mentioned in the show cause notice. Some of these documents were provided by SEBI vide letter dated 17.06.2019 and 08.03.2019. The documents which were not provided were specifically again asked for which also included a copy of the investigation report.
As decided in T. TAKANO VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. [2022 (2) TMI 907 - SUPREME COURT] investigation report is an intrinsic component of the Board’s satisfaction for determining whether there has been any violation of the regulations and that the investigation report forms the material on the basis of which a show cause notice is issued. Since the show cause notice is on the basis of the investigation report there was an obligation imposed upon the respondent to provide the documents asked for by the appellants which they failed to supply. Non supply of the documents was violative of the principles of natural justice. We are also of the opinion that prejudice caused because of non-disclosure of the relevant material was writ large.
On merits finding has been given by the AO that on a combined reading of the Facility Agreement and Agency Agreement it can be inferred that noticee nos. 3 and 4 had prior knowledge of the scheme of alleged manipulative trades by RIL and that noticee nos. 3 and 4 were fully aware that the funds given by them to Vinamra was meant for financing the alleged trades in question and, therefore, noticee nos. 3 and 4 aided and abetted in the manipulative scheme.
This finding in our opinion cannot be sustained as Facility Agreement was signed on August 04, 2007 and September 22, 2007. The execution of these documents is not disputed nor there is any allegation that these agreements were manufactured for the purpose of this case. The starting point for the alleged manipulative scheme by RIL was the decision taken in an around October 30, 2007 to sell RPL shares. These facts are noted in paragraph 26 of the impugned order. On or before October 30, 2007 noticee no. 3 had already advanced funds to the tune of Rs. 625 crores and noticee no. 4 had loaned an amount of Rs. 45 crores on or before October 30, 2007. We are of the opinion, that as on the date of the execution of the Facility Agreement it was not possible for noticee nos. 3 and 4 to have knowledge that RIL would sell shares in the cash segment in November 2007 and that RIL would take positions in the futures segment through its agents. There is no evidence to show that prior to October 30, 2007 the decision of RIL to sell shares of RPL and appoint 12 agents was known to noticee nos. 3 and 4.
Execution of the Facility Agreement had nothing to do with the Agency Agreement which came two months later and, therefore, the Facility Agreement and the Agency Agreement cannot be read together. The two agreements are wholly unconnected and cannot raise any kind of an inference as held by the AO in the impugned order.
The evidence that has been brought on record does not indicate that noticee nos. 3 and 4 could have known in August / September 2007, namely, at the time of execution of the Facility Agreement that RIL would decide in end of October to sell the RPL shares or that RIL would take position in the November futures through its agents or that RIL would enter into agency agreements with the 12 agents or that RIL would trade in the last 10 minutes on November 29, 2007 in such a manner so as to suppress the price of the RPL shares. Thus, in our opinion, when the Facility Agreement was executed, noticee nos. 3 and 4 could not have known that RIL would enter into the cash segment or would take positions in the November 2007 futures.
Assumption / presumption drawn by the AO that the Facility Agreement was entered into solely for the purpose of funding RIL transactions in the November 2007 futures market is wholly erroneous. Pursuant to the Facility Agreements ICDs were placed as early as on September 2007 much before the subject transactions took place and continued to be placed from time to time till March 2008. The finding given by the AO that Rs. 2,775 crores advanced by noticee nos. 3 and Rs. 550 crores advanced by noticee no. 4, to Vinamra were utilised by the 12 agents for the purpose of funding the manipulative trades of RIL is patently erroneous and cannot be sustained. The ICDs given by noticee nos. 3 and 4 were from September to March whereas the funds required by the 12 agents were from November 01, 2007 to November 06, 2007 when they took short positions in the futures segment.
AO however has considered the entire loans of Rs. 2775 crores given by noticee no. 3 and Rs. 550 crores given by noticee no. 4 from the period September 2007 to March 2008. We may note that noticee no. 4 did not lend any money to Vinamra between November 01, 2007 to November 06, 2007 and that noticee no. 3 had given a loan of Rs. 350 crores in two transactions of November 05, 2007 and November 06, 2007 to Vinamra. Thus, the finding of the AO that Rs. 2775 crores and Rs. 550 crores totalling Rs. 3325 crores were given by noticee nos. 3 and 4 that funded the 12 agents for the alleged trades is patently erroneous.
One of the basic charge against noticee nos. 3 and 4 was that noticee nos. 3 and 4 were promoted by Reliance Group. This allegation was found to be false. The AO found that Anand Jain was the Chairman of noticee nos. 3 and 4 and that noticee nos. 3 and 4 were not promoted by the Reliance Group. Once this fact became clear that noticee nos. 3 and 4 were not promoted by the Reliance Group, the AO should have dropped the matter instead of going into a tirade that Anand Jain was closely associated with Reliance Group as a strategic advisor or that Sanjay Punkhia was a common director of noticee nos. 3 and 4 and Vinamra and, therefore, there is a connection between noticee nos. 3 and 4 with Reliance Group. In our view, the reasoning adopted by the AO in coming to a conclusion that noticee nos. 3 and 4 are connected to RIL is baseless and cannot be accepted. Such indirect connection without any further evidence of their involvement cannot be a ground to hold that noticee nos. 3 and 4 were aware of the manipulative trades allegedly conducted by RIL and its agents. It is thus not necessary for us to go into the question of their connection in detail.
It is not necessary for us to go into the question as to whether noticee no. 3 and 4 by giving loans to Vinamra could be held to be dealing in securities violating the PFUTP Regulations as in our view no case is made out of any violation by noticee nos. 3 and 4. Appeal allowed.
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