2017 (8) TMI 456 - AT - Companies Law

Suspected to be the shell companies - investigation in respect of 331 companies by SEBI - suspension of trading in securities - Held that - As rightly contended by counsel for appellants, letter addressed by MCA on 09.06.2017 merely required SEBI to investigate as to whether the 331 companies named therein which were suspected to be shell companies, were in fact shell companies and whether the said companies had any credentials/ fundamentals and if so SEBI was required to take action in accordance with SEBI Act and the regulations framed thereunder. Without conducting any investigation in respect of 331 companies which as per the letter of MCA dated 09.06.2017 were suspected to be shell companies, SEBI on 07.08.2017 (nearly after two months) sought to take action on the letter of MCA, by directing the three stock exchanges to suspend the trading in the securities of those companies on daily basis, by moving the securities of those companies under Stage VI of GSM against all those companies out of the 331 companies which were listed on their exchanges. Thus, it is apparent that SEBI passed the impugned order without any investigation. Even if the letter of MCA dated 09.06.2017 was considered by SEBI to be a direction given for implementation without investigation, very fact that SEBI took nearly two months to comply with the directions given by the MCA clearly shows that there was no urgency in issuing the impugned communication without even investigating the credentials/ fundamentals of those companies. In the facts of these two appeals, we are prima facie of the opinion, that the impugned communication issued by SEBI on the basis that the appellants are suspected shell companies deserves to be stayed. Accordingly while staying the communication of SEBI dated 07.08.2017, qua the two appellants, we direct BSE and NSE to forthwith reverse their decisions both dated 07.08.2017 in case of these two appellants.

Summary

Issues Involved:
1. Maintainability of the appeals under Section 15T of the SEBI Act.
2. Nature of SEBI's communication dated 07.08.2017.
3. SEBI's compliance with the Ministry of Corporate Affairs’ (MCA) directive.
4. Procedural fairness and opportunity of hearing to the appellants.
5. Prima facie assessment of SEBI's action and the need for interim relief.

Issue-wise Detailed Analysis:

1. Maintainability of the Appeals under Section 15T of the SEBI Act:
The primary issue raised was whether the appeals filed by the appellants were maintainable under Section 15T of the SEBI Act. SEBI contended that the communication dated 07.08.2017 was an administrative direction and not appealable. However, the Tribunal found no merit in this preliminary objection, determining that the impugned communication was not a general direction but a specific one affecting only the 331 companies identified by the MCA. The Tribunal held that the communication had serious civil consequences and was quasi-judicial in nature, thus making it appealable under Section 15T.

2. Nature of SEBI's Communication Dated 07.08.2017:
The Tribunal analyzed whether SEBI's communication was an administrative order or a quasi-judicial one. It found that the directions issued by SEBI to the stock exchanges were specific to the 331 companies suspected to be shell companies by the MCA. The Tribunal concluded that the communication, which impacted the rights and obligations of the appellants, was quasi-judicial and not merely administrative.

3. SEBI's Compliance with the Ministry of Corporate Affairs’ (MCA) Directive:
SEBI argued that it merely implemented the MCA's directive without conducting an independent investigation. The Tribunal noted that SEBI took nearly two months to act on the MCA's letter, indicating a lack of urgency. The Tribunal criticized SEBI for not investigating the credentials of the 331 companies before issuing the impugned communication, which directed the stock exchanges to take stringent measures against these companies.

4. Procedural Fairness and Opportunity of Hearing to the Appellants:
The appellants argued that SEBI issued the communication without giving them an opportunity to be heard, making the action arbitrary and unreasonable. The Tribunal agreed, noting that SEBI did not investigate the companies' credentials or financial health before taking action. The Tribunal emphasized that procedural fairness required SEBI to provide an opportunity for hearing before issuing such a prejudicial communication.

5. Prima Facie Assessment of SEBI's Action and the Need for Interim Relief:
The Tribunal found that SEBI's action to suspend trading in the securities of the appellants without investigation was prima facie unjustified. Given the serious prejudice caused to the appellants, the Tribunal granted interim relief by staying SEBI's communication dated 07.08.2017 and directing the stock exchanges to reverse their decisions against the appellants.

Conclusion:
The Tribunal concluded that SEBI's communication prejudicially affected the appellants without proper investigation or procedural fairness. The appeals were found maintainable, and interim relief was granted to the appellants, staying SEBI's communication and reversing the stock exchanges' actions. The matter was adjourned for further hearing on September 04, 2017.