2018 (7) TMI 1450 - HC - Companies Law

Violation of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 - petitioner although held more than 5% shares in a listed company, Himalaya Granites Ltd., he had failed to make the disclosure as required under Regulation 13(3) read with 13(5) of the PIT Regulations - Eligible grounds for adjudging under Chapter VIA of the Act - Held that - This Court is of the view that the noting made by the Whole Time Member cannot be read as an expression of his opinion that there are grounds for adjudging under Chapter VIA of the Act, which is a pre condition for appointment of an Adjudicating officer. The contention that the Whole Time Member was required to give reasons and pass an order is unmerited. There is no such requirement under the Rules. Further, an opinion to be formed is also not a judicial or quasi judicial order, which would require the Whole Time Member to articulate his reasons in detail. However, he as a delegate of the Board is required to examine the allegations made and independently form and express an opinion that there are grounds for adjudging under Chapter VIA of the Act. The Board has to form an independent opinion that there are grounds for adjudging under Chapter VIA of the Act. It is not necessary for the Board to elaborate its opinion or to provide reasons for the same. However, the least that is required for the Board is to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VIA of the Act before proceeding to appoint an Adjudicating Officer. It is necessary that the record clearly bears out that there is an application of mind on the part of the Board. The power to appoint an Adjudicating Officer has been delegated to the Whole Time Member. Therefore, it was necessary for him to have formed such opinion before proceeding further. In the present case, the Whole Time Member has not even made an endorsement that he is of an opinion that there are grounds for adjudging under Chapter VIA of the Act and, therefore, the question of inferring that he had formed such an opinion does not arise. In view of the above, the proceedings initiated against the petitioner are set aside. The impugned notice is also set aside. However, it is clarified that the Board/Whole Time Member may examine the file and if the Board is of the view that there are grounds for adjudging under Chapter VIA of the Act, an Adjudicating Officer may be appointed for holding an inquiry and pass an order in terms of the Rules.

Summary

Issues Involved:
1. Jurisdiction of the Adjudicating Officer's appointment.
2. Requirement of prior order under Regulation 14 of the PIT Regulations.
3. Compliance with procedural requirements for forming an opinion under Rule 3 of the SEBI Rules.

Detailed Analysis:

Jurisdiction of the Adjudicating Officer's Appointment:
The petitioner challenged the jurisdiction of the Adjudicating Officer's appointment on the grounds that the Securities and Exchange Board of India (SEBI) did not form the necessary opinion under Section 15-I of the SEBI Act before appointing the Adjudicating Officer. The petitioner argued that the appointment was without jurisdiction as no such opinion was formed by the Board. The court noted that the formation of an opinion by the Board is a precondition for appointing an Adjudicating Officer, as per Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995. The court found that the Whole Time Member of SEBI merely noted "Ms Anita Kenkare is appointed as A.O." without explicitly stating that there were grounds for adjudging under Chapter VIA of the Act. This lack of an explicit opinion rendered the appointment of the Adjudicating Officer without jurisdiction. Consequently, the court set aside the proceedings initiated against the petitioner and the impugned notice.

Requirement of Prior Order under Regulation 14 of the PIT Regulations:
The petitioner contended that proceedings for imposing a penalty could not be initiated without a prior order under Regulation 14 of the PIT Regulations. The petitioner argued that SEBI was required to exhaust the process of investigation and form a firm opinion before initiating any penalty proceedings. The court examined the regulatory framework, including Regulations 4A, 11, and 14 of the PIT Regulations. It concluded that it is not necessary for SEBI to exhaust the investigation procedure before initiating action under Chapter VIA of the Act. The court clarified that SEBI's independent action under Chapter VIA is not contingent upon the completion of procedures specified in the PIT Regulations. Therefore, the petitioner's contention that SEBI was required to determine the violation before appointing an Adjudicating Officer was found to be unmerited.

Compliance with Procedural Requirements for Forming an Opinion:
The court emphasized the necessity for SEBI to form an independent opinion that there are grounds for adjudging under Chapter VIA of the Act before appointing an Adjudicating Officer. The court highlighted that the Whole Time Member's noting did not indicate any independent formation of opinion. The court referred to precedents where mechanical endorsements were not accepted as indicative of statutory compliance. It concluded that the Whole Time Member's noting "Ms Anita Kenkare is appointed as A.O." did not fulfill the requirement of forming an opinion. The absence of an explicit opinion led the court to set aside the proceedings and the impugned notice. However, the court clarified that SEBI or the Whole Time Member could re-examine the file and, if grounds for adjudging are found, appoint an Adjudicating Officer and proceed in accordance with the rules.

Conclusion:
The court set aside the proceedings and the impugned notice due to the lack of an explicit opinion by the Whole Time Member of SEBI regarding grounds for adjudging under Chapter VIA of the Act. The court clarified that SEBI could re-examine the file and appoint an Adjudicating Officer if it finds sufficient grounds for adjudging. The petition was disposed of accordingly.