2020 (2) TMI 869 - AT - SEBI

Liability for action in case of default - RTA Registrar to the Issue and Transfer Agent he appellant fails to comply with any conditions subject to which registration has been granted or contravenes any of the provisions of the Act, Rules, Regulations or By laws of the Stock Exchange the said RTA shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 ('Intermediaries Regulations of 2008') - HELD THAT - The impugned order is harsh and unwarranted. We are of the opinion that there was no real urgency in passing an ex parte ad interim restraint order which virtually amounts to passing a final order especially when a detailed enquiry has been ordered. The respondent is empowered to pass an ex-parte interim order only in extreme urgent cases and that such power should be exercised sparingly. In the instant case, we do not find that any extreme urgent situation existed which warranted the respondent to pass an ex-parte interim order. We are of the opinion that the impugned order is not sustainable in the eyes of law as it has been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. The restraint order is in our opinion unjustified. At this stage, we can stay the operation of the impugned order to a limited extent. We, however, find that no useful purpose would be served in keeping the appeals pending and directing the respondent to file a reply. Thus, we are deciding the appeal itself, without calling for a reply at the admission stage itself. The impugned order insofar as it restrains the appellant from accepting fresh clients is quashed. Other directions issued by the WTM of SEBI will continue to operate against the appellant. The appeal is partly allowed. In the circumstances of the case, there shall be no orders as to costs.

Summary

Issues Involved:
1. Legitimacy of the ex parte ad interim order and the confirmatory order passed by SEBI.
2. Alleged lack of due diligence by the appellant in processing requests for duplicate shares.
3. Applicability of SEBI's powers under Section 11(1) and 11(4) of the SEBI Act versus Regulation 27 of the Intermediaries Regulations, 2008.
4. Compliance with principles of natural justice in the issuance of the ex parte ad interim order.

Detailed Analysis:

Legitimacy of the Ex Parte Ad Interim Order and Confirmatory Order:
The appellant contested the ex parte ad interim order dated October 18, 2019, and the confirmatory order dated November 7, 2019, issued by SEBI's Whole Time Member (WTM). The orders prohibited the appellant from accepting new clients due to alleged non-compliance with due diligence requirements in processing requests for duplicate shares.

Alleged Lack of Due Diligence:
The issue arose from a complaint received by SEBI on May 14, 2019, alleging that the appellant failed to exercise due diligence in verifying the genuineness of requests for duplicate shares. The complaint highlighted discrepancies such as identical photos in different claimants' documents, multiple PANs with different names, and fake PAN cards. SEBI's examination revealed nine similar instances from 2014 onwards, where duplicate shares were issued without proper verification, leading to unauthorized transfers and dematerialization of shares.

Applicability of SEBI's Powers:
The appellant argued that under Regulation 22 of the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, any contravention should be dealt with under Chapter V of the Intermediaries Regulations, 2008. This chapter outlines procedures for suspension or cancellation of registration, which require an enquiry report and an opportunity for the appellant to be heard. The appellant contended that the ex parte ad interim order was issued without such procedures, making it arbitrary and harsh.

On the other hand, SEBI's counsel argued that the ex parte ad interim order was issued under Section 11(1) and 11(4) of the SEBI Act, which allows SEBI to take immediate action to protect investors' interests and maintain market integrity. SEBI emphasized that the discrepancies were significant enough to warrant immediate action without waiting for an enquiry report.

Compliance with Principles of Natural Justice:
The tribunal acknowledged that SEBI has the power to issue ex parte ad interim orders under Section 11 and 11B of the SEBI Act to prevent potential market manipulation and protect investors. However, it stressed that such orders should be issued only in cases of extreme urgency and should comply with principles of natural justice. The tribunal found that except for the complainant's case, the discrepancies did not indicate any gain for the appellant or loss for investors, making the ex parte ad interim order appear harsh and unwarranted.

Tribunal's Conclusion:
The tribunal concluded that while SEBI has the authority to issue ex parte ad interim orders, it should exercise this power sparingly and only in urgent situations. The tribunal found no real urgency in the present case to justify the ex parte ad interim order, especially when a detailed enquiry was already ordered. The order was deemed to violate principles of natural justice under Article 14 of the Constitution of India.

Judgment:
The tribunal quashed the part of the impugned order that restrained the appellant from accepting fresh clients. Other directions issued by SEBI's WTM would continue to operate. The appeal was partly allowed, with no orders as to costs.