9911796707
TMI Blog2002 (4) TMI 831X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders of petitioner No. 3 viz. First Global Stockbroking (P.) Ltd. ( FGSP Ltd. ) and petitioner No. 4 viz. Vruddhi Confinvest India (P.) Ltd. ( Vruddhi Confinvest ). The petitioner No. 5 First Global Finance (P.) Ltd. is wholly owned subsidiary of FGSP Ltd. The respondent No. 1 is Securities and Exchange Board of India ( SEBI ) which is a regulatory body incorporated under the Securities and Exchange Board of India Act, 1992 ( the Act ). The respondent No. 2 was the Chairman of the SEBI at the relevant time and a member of the Board thereof. The respondent No. 3 is the enquiry officer who was appointed by the SEBI and its Chairman to enquire into the allegations against the petitioners relating to market fall on 2-3-2001 and market movements between mid February and mid March 2001 and alleged manipulative activities of the petitioners in respect thereof. On 28-2-2001 the budget was presented by the Finance Minister of the Union Government in the Parliament. There was steep fall in the market on 2-3-2001. On that day itself the SEBI initiated enquiries into the crash. On 18-4-2001 the Chairman, SEBI passed a ban order under section 11 of the Act, whereby the petitioners wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SS Regulations 1992) and regulation 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets), Regulations, 1995 ( FUTP Regulations, 1995 ), and Regulation 34 of SEBI (Portfolio Managers) Regulations, 1993 ( PM Regulations, 1993 ) to enquire into the contraventions referred to in the order. Shri, Krishna Mohan (Respondent No. 3) was appointed as the enquiry officer under the order dated 31-5-2001. The enquiry officer, after his appointment under the order dated 31-5-2001, issued notice to the petitioners on 17-7-2001. The said show cause notice refers to provisions viz., regulation 28(2) of SS Regulations, 1992. Regulation 13 of FUTP Regulations, 1995 and regulation 34(2) of PM Regulations, 1993. It is alleged in the notice that the petitioners had indulged in large trading transactions in the scrips of (1) Global Telesystems, (2) HFCL, (3) DSQ Software, (4) Zee Telefilms, (5) Wipro, (6) Satyam Computers, (7) MTNL, (8) SBI, (9) Infosys Technologies and (10) Sterlite Opticals with a view to artificially depress the prices of the said securities between mid February and mid March 2001 in a concerted manner. It also recorded that the conduct of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued under regulation 28(2) of SS Regulations, 1992. It would not be out of place to mention here that the petitioners filed writ petition lodging No. 2639 of 2001 on 9-10-2001 before this Court for production of certain information which was subsequently withdrawn. On 10-10-2001 further hearing in the matter was held by the enquiry officer. The petitioners were represented by their counsel and they prayed for production of documents. It appears that proceedings continued before the enquiry officer and hearing took place before him on various dates. Ultimately on 9-1-2002 the enquiry officer submitted his report to the SEBI. The enquiry officer in his report recommended cancellation of certificate of registration granted to FGSP Ltd. as stockbroker and portfolio manager and also cancellation of certificate of registration granted to Vruddhi Confinvest as sub-broker. These recommendations were made by the enquiry officer under regulation 13 of FUTP Regulations, 1995 for consideration by the SEBI in terms of regulation 28(7) of SS Regulations, 1992 and regulation 34(7) of PM Regulations, 1993. Upon receipt of the enquiry officer s report, by notice dated 10-1-2002 the SEBI called upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner Nos. 1, 2 and 5 shall be at their risk. 5. We, accordingly, dismiss the writ petition as withdrawn in so far as the petitioner Nos. 1, 2 and 5 are concerned. 6. Mr. P. Chidambaram, the learned senior counsel then submitted that proceedings against the petitioner Nos. 3 and 4 by issuance of order dated 31-5-2001, notices dated 17-7-2001 and 6-10-2001 issued by the respondent No. 3, the enquiry report dated 9-1-2002 and the show-cause notice dated 10-1-2002 are in breach of law, regulations and ultra vires, illegal and without jurisdiction. The learned senior counsel submitted that the order appointing enquiry officer is dated 31-5-2001 and it was made under regulation 28(1) of SS Regulations, 1992. The reference to regulation 13 of the FUTP Regulations therein is meaningless because : ( i ) Regulation 13 does not relate to appointment of an Enquiry Officer; and ( ii ) Regulation 13 can be invoked only after following the procedure contained in regulations 7 to 11 thereof. He submitted that in the show-cause notice dated 17-7-2001, the Enquiry Officer alleged that the acts of commission and omission violate the 1992 and 1995 Regulations - no allegations were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdiction under regulation 13 having not been complied with, the notice under regulation 13 suffers from patent lack of jurisdiction relied upon the judgment of the Apex Court in Calcutta Discount Co. Ltd. v. ITO AIR 1961 SC 372, Whirlpool Corpn. v. Registrar of Trade Marks [1998] 8 SCC 1, Chief of Army Staff v. Major Dharam Pal Kukrety [1985] 2 SCC 412, Dr. (Smt.) Kuntesh Gupta v. Management of Hindu Kanya Mahavidyalaya [1987] 4 SCC 525 and the Division Bench judgment of this Court in S.L. Kirloskar v. Union of India [1993] 1 BCR 555. 7. The learned Attorney General, per contra , submitted that the contentions regarding non-compliance of regulations 7, 10 and 11 of FUTP Regulations, 1995, the infirmity in the appointment of the Enquiry officer and the show-cause notices dated 17-7-2001 and 6-10-2001 issued by enquiry officer were raised by the petitioners in the hearing before the enquiry officer on 10-10-2001 and 22-11-2001 onwards. The petitioners also filed writ petition lodging No. 2958 of 2001 (numbered as writ petition No. 71 of 2002) wherein the petitioners challenged the show-cause notices dated 17-7-2001 and 6-10-2001 as well as the appointment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition is a circuitous method to by-pass and circumvent the provisions of sections 15T and 15Z. As regards the contention raised by the learned senior counsel for the petitioners that pre-requisite procedure for issuance of notice under regulation 13 of FUTP Regulations, 1995 has not been complied with as contemplated under regulations 7 to 11 of the Regulations, 1995, the learned Attorney General submitted that the scope and meaning of regulations 10, 11 and 13 of FUTP Regulations, 1995 are capable of two interpretations; and one of the interpretation can be that there is no requirement for any prior hearing to be given before the appointment of enquiry officer when dealing with the question of cancellation or suspension of registration of the intermediary under regulation 13 of FUTP Regulations, 1995. He also clarified that the SEBI has not invoked regulation 12 at this stage and, therefore, the question of hearing under regulation 11 does not arise. The learned Attorney General, thus, submitted that all these questions can be very well considered by the Board and if necessary, by SAT under section 15T and thereafter by this Court under section 15Z. The learned Attorney Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said order dated 31-5-2001 reads thus : In the wake of excessive volatility in the index movements in stock exchanges during mid February to mid March 2001 and apprehension of possible attempts by certain entities to distort the true price discovery and manipulate the securities markets, investigations were undertaken by SEBI. Preliminary investigations in the role of various entities including entities controlled/connected with Mr. Shankar Sharma and Mrs. Davina Mehra, both directors of First Global Stock Broking Pvt. Ltd., a SEBI registered stock broker were carried out to find out, inter alia, whether there are any violations of provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, 1995, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and SEBI (Portfolio Managers) Regulations, 1992. Preliminary investigations reveal that First Global Stock Broking Pvt. Ltd. and Vrudhi Confinvest India Pvt. Ltd. have indulged in large trading transactions in the scrips of Global Telesystems, HFCL, DSQ Software, Zee Telefilms, Wipro, Satyam Computers, MTNL, SBI, Infosys Technologies, Sterlite Opticals. These t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Prohibition of Fraudulent Unfair Trade Practices Relating to the Securities Market) Regulations, 1994 and Regulation 34(2) of SEBI (Portfolio Managers) Regulations, 1993." 11. The details of the transactions in various scrips by the petitioners were referred which, according to the Enquiry Officer, led to artificial depressing of the prices in the said securities between mid February and mid March 2001. In the said notice after setting up the details of transactions it was noted thus: "The aforesaid acts of omissions and commissions in the securities transactions involving circular trading, heavy short selling with a view to depress the market, structured arrangements or carrying on of portfolio trades with assured returns disguised as arbitraged trading and the attempts to depress the market by manipulative transactions are prejudicial to the safety and integrity of the securities market and are in violation of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. SEBI (Prohibition of Fraudulent Unfair Trade Practices Relating to the Securities Market) Regulations, 1994 and SEBI (Portfolio Managers) Regulations, 1993." 12. Accordingly the petitioners were called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report dated 9-1-2002. 13. Coming now to the principal contention raised by Mr. Chidambaram, the learned senior counsel for the petitioners that issuance of notice dated 10-1-2002 SEBI which as per the submission of the learned Attorney General has been issued under regulation 13 of FUTP Regulations, 1995, that the pre-requisite procedure contemplated under regulations 7 to 11 has not been followed and, therefore, the notice is without jurisdiction ex facie, we observe that since there is no dispute that the SEBI has power and competence to issue notice under regulation 13 of FUTP Regulations, 1995 for cancellation and suspension of registration, it cannot be said that issuance of notice dated 10-1-2002 is totally and wholly without jurisdiction. The objection raised by Mr. Chidambaram about non-compliance of procedure contemplated in regulations 7 to 11 of FUTP Regulations, 1995 before issuance of notice dated 10-1-2002 purported to be issued under regulation 13 of FUTP Regulations, 1995 is at best a matter of irregularity and erroneous exercise which in our view can be considered by the SEBI Board. In the facts and circumstances of the present case, we do not deem it exped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal under section 15T before the SAT and, if necessary, under section 15Z before this Court. The interpretation of regulation 13 of FUTP Regulations, 1995 put forth by Mr. P. Chidambaram, the learned senior counsel for the petitioners, cannot be said to be the only interpretation and, therefore, it cannot be said at this stage that the issuance of notice dated 10-1-2002 is totally and wholly without jurisdiction and suffers from patent lack of jurisdiction. The argument raised by the petitioner Nos. 3 and 4 about non-compliance of the procedure contemplated under regulations 7, 10 and 11 of FUTP Regulations, 1995 and its effect on the issuance of notice dated 10-1-2002 can, therefore, be conveniently examined, considered and decided by the SEBI Board whose order will be subject to scrutiny further by the SAT if necessary and by this Court under section 15Z, if occasion arises. It is in this view of the matter that we do not deem it necessary to consider various provisions of SS Regulations, 1992 and FUTP Regulations, 1995 relied upon by the learned senior counsel for the petitioners as any observation by us may directly or indirectly influence the decision that may be taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng by the SEBI Board, they may also be given liberty to file comprehensive reply before the Board in addition to the reply already filed on 24-1-2002. 16. In the light of the discussion aforesaid, we are satisfied that no case for invocation of writ jurisdiction under article 226 is made out. 17. We, accordingly, dismiss the writ petition in limine, however, with following directions: ( i )In response to the notice dated 10-1-2002, the petitioner Nos. 3 and 4 shall be at liberty to file comprehensive additional reply within two weeks from today. ( ii )Upon receipt of the additional reply from petitioner Nos. 3 and 4, the respondent No. 1 SEBI Board shall fix date/s of hearing expeditiously and preferably within two weeks from the date of receipt of additional reply. ( iii )All contentions raised by the petitioner Nos. 3 and 4 in the writ petition and which have been raised in the reply already submitted or in the additional reply that may be submitted by them, are kept open to be considered on their own merits by respondent No. 1 - the SEBI Board uninfluenced by any statement made in the reply affidavit or withdrawal of earlier writ petitions or dismissal of this w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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