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TMI Blog2015 (8) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeals together and are disposing them off by this common order by taking Appeal No. 254 of 2014 as the lead case. 2. The question posed before us by the Appellant is that even before deciding the question as to whether time sharing business carried on by the Appellant is covered under the Collective Investment Scheme or not, whether SEBI on the basis of its prima facie view is justified in directing the Appellant to virtually close their business by way of an ex parte interim order? The Appellant's one of the contentions is that by said ex parte interim Impugned Order, time sharing business of the Appellant being carried out by it for the last 15-16 years is abruptly brought to standstill, while a company carrying on similar business continues to carry on business pursuant to an order passed by Hon'ble High Court of Gauhati by its orders dated August 1, 2013 and November 6, 2013. Moreover, the Impugned Order was passed without hearing the Appellant by invoking powers under Sections 11(1), 11B and 11(4) of the SEBI Act read with Regulation 65 of CIS Regulations, 1999, inter alia, seeks to prohibit the Appellant from collecting any fresh money from its prospective customers; fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decades. 5. At the outset, the Appellant submits that it addressed a letter dated February 27, 2001 to the Respondent outlining the terms and conditions of the structure of its business. This was done with a view to assure itself that the Appellant was not accidentally carrying out a CIS. Another letter was issued on June 20, 2002 by the Appellant seeking clarity regarding the same. The Respondent vide letter dated July 19, 2002 sought from the Appellant various details of the Appellant's schemes. 6. Thereafter, no major communication took place between the parties for around 8 years, when SEBI issued a letter to the Appellant stating that some promotional material of the Appellant carried the statement, 'approved by SEBI', and asked for an explanation regarding the same. On November 25, 2010, the Respondent issued a press release stating that no scheme / plan of the Appellant's had been approved by the Respondent. The public was asked to exercise due care and caution while dealing with the Appellant. The Appellant issued letter dated December 10, 2010 responding to the Respondent's concerns and also informing the Respondent of the action taken against persons issuing wrong info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SEBI Act, 1992, submits that the Impugned ex parte interim order dated 31st July, 2014 fails to set out any reason for the urgency with which it was passed. The Impugned Order is in complete breach of the principles of natural justice and should be treated as void. The Impugned Order should not have been passed ex parte particularly in view of the fact that the Appellant had not only been in constant communication with SEBI since 2001, but also initiated it and was co-operating with the Respondent all along. 10. The alleged non-provision of names and details of the Appellant's customers does not justify passing of the order. Even though the Appellant had sought for clarification regarding whether or not its activities fall within the ambit of CIS Regulations as far back as in 2001, it was only in 2013 that SEBI in fact clarified that the Appellant's business did not fall within the provisions of CIS Regulations. It was an arduous task to compile details of few lac Members. However, as soon as the same was done, the details were furnished to the Respondent during the course of hearing of the present appeal before this Tribunal. 11. It is submitted by the Appellant that nothing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SEBI Act. 14. The Ld. Senior Counsel, Mr. Pradeep Sancheti, on behalf of the Appellant has relied upon following judgments in support of his arguments:- (a) Commissioner of Customs vs. National Shipping Agency reported in 2008(226) E.L.T. (Bom); (b) Babaji Shivram Clearing & Carriers Pvt. Ltd. vs. Union of India reported in 2011 (269) E.L.T. 222 (Bom); (c) Commissioner of Customs (General) vs. Burigih International reported in 2008 (226) E.L.T. (Bom); (d) Commissioner of Customs (General) vs. S.D. Dalal & Co. reported in 2008 (221) E.L.T. 488 (Bom); (e) Cosmic Radio vs. Union of India & Another reported in 1983 (12) E.L.T. 84 (Bom); (f) Mohindhr Singh Gill & Another vs. Chief Election Commissioner of New Delhi and Others reported in (1978) 1 Supreme Court Cases 405; (g) Order dated 23.7.2013 passed by Securities Appellate Tribunal, Mumbai in the case of Zenith Infotech Limited vs. Securities and Exchange Board of India; (h) Order dated 19.8.2014 passed by Supreme Court of India in the case of Securities and Exchange Board of India vs. Zenith Infotech Ltd. & Ors.; (i) SBQ Steels Ltd vs. Commissioner of Cus. C. Ex and S.T. Guntur reported in 2014 (300) E.L.T. 185 (A.P.); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, suspension of a CHA license under Regulation 20(2) of the 2004 Regulations can be ordered where immediate action is necessary. In the present case, the Customs Authority in the middle of January, 2011 were aware of the fact that the documents submitted by the Petitioners were fabricated, however, the impugned order has been passed belatedly on 28th March, 2011." In furtherance of his argument on the scope and ambit of the nature of power conferred by the Parliament on SEBI under Sections 11(1), 11B and 11(4) of SEBI Act, Mr. Sancheti has brought to our notice a judgement of this Tribunal in Zenith Infotech (supra) decided on July 23, 2013 in Appeal No. 59 of 2013. This Tribunal was dealing with a situation where an ex parte interim order was passed by the SEBI invoking powers / discretion under Section 11(1), 11B and 11(4) of the SEBI Act calling upon the Appellant therein, inter alia, to deposit a bank guarantee of USD 33.9 within 30 days. The Tribunal held that such a mandatory direction could have been passed by the Respondent only after affording an opportunity of being heard to the Appellant in that appeal. It was, therefore, considered to be non-sustainable in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The submission made by Mr. Sancheti is that an order taken on file by an authority is sufficient and its communication is merely an administrative act and that in the absence of formal communication of the same, the legal sanctity of the order is not lost and the parties are bound by it. This submission is made to emphasize the point that the Respondent had already taken a decision quite some time ago on file to the effect that the time sharing scheme business of the Appellant did not fall within the purview of the definition of CIS as mentioned in the Section 11AA of the SEBI Act read with the one given in the CIS Regulations of 1999. 17. The case of Mohindhr Singh Gill (supra) at serial no. (f) above is relied upon by Mr. Sancheti to emphasize that when an authority makes an order based on certain grounds, its validity has to be judged on the reasons so mentioned in the order and cannot be supplemented by fresh reasons in the form of an affidavit. Relying upon the observation of the Hon'ble Supreme Court at paragraph 8 of Mohindhr Singh Gill that "Orders are not like old wine becoming better as they grow older", Mr. Sancheti submits that there has been no change in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated thus, we are of the view, though tentative, that in the facts and attending circumstances of the present case and taking into account, more particularly, the fact that the State of Assam has not been able to present before this Court, at this stage, any clear material to show that the SEBI has jurisdiction to interfere with the affairs of the petitioners' business and the SEBI, having not concluded till date that the business of the petitioners falls within the meaning of the expression Collective Investment Scheme as defined in Section 11AA(1), the nature of directions, which the SEBI has passed by the impugned order, need to be suitably interfered with so that the SEBI's directions do not completely restrain the petitioners from carrying out their day to day business. Considering, therefore, the matter in its entirety and in the interest of justice, it is hereby directed, as an interim measure, that, until returnable date, the operation / execution of the directions, contained in the Clauses (a) and (d) of paragraph 10 of the impugned order, dated 11.07.2013, shall remain suspended and, while the petitioners shall not divert the fund, they shall remain free to operate thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies against governmental action. 21. The Respondent further submits that in April 2013 an investor query was received by the Respondent regarding activities of the Appellant, followed by the reference from MP Mr. Sanjay Dina Patil in July 2013. Thereafter, a CBI enquiry was received in July 2013 regarding the schemes of the Appellant. Mr. Sachin Pilot, the then Minister of State in the Ministry of Corporate Affairs had informed the Parliament regarding the receipt of representations / complaints of financial frauds committed by various companies. All these developments made the Respondent reconsider its former view regarding the nature of the Appellant's activities. In September 2013, the Respondent sought information from the Appellant regarding its schemes. 22. The Respondent states that the communication between the Respondent and MP Mr. Sanjay Dina Patil was not a representation to the Appellant but private communication between the Respondent and Mr. Patil. Moreover, the Respondent had already issued letter dated September 17, 2013 to the Appellant alleging it of carrying on activities in the nature of CIS without SEBI's approval, much prior to letter dated October 21, 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh there is a lapse of around 10 years between the Appellant seeking the Respondent's advice on whether its activities might be covered under CIS on one hand; and the Respondent's decision to initiate action against the Appellant in the year 2013 on the other. 26. The Ld. Senior Counsel for the Respondent has relied upon following rulings in support of the Respondent's case:- (a) Karnataka Public Service Commission and Others (KPSC) vs. B.M. Vijaya Shankar and Others (1992) SCC 206 (b) Ajit Kumar Nag vs. General Manager (PJ) Indian Oil Corporation Ltd., Haldia and Others (2005) 7 SCC 764 (c) Maharshi Dayanand University vs. Surjeet Kaur (2010) 11 SCC PG.159 (d) M.I. Builders P. Ltd. vs. Radhey Shyam Sahu and Others (1999) 6 SCC 464 (e) M/s. P.G.F. Ltd. & Ors. vs. Union of India and Anr. AIR 2013 Supreme Court 3702 27. We have heard the learned counsel for the parties at length and perused the appeal along with the other documents provided and records of the case summoned by the Tribunal. 28. First of all we deem it appropriate to deal with the contention advanced by Mr. Shyam Mehta, Ld. Senior Counsel on behalf of the Respondent regarding alleged fabrication of a document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 11AA to the activities of the Appellant. However, since SEBI itself has only come to a prima facie conclusion in the Impugned Order regarding the matter, we too shall refrain ourselves from making any comment regarding the same which may thwart independent enquiry to be made by the Respondent pursuant to SCN dated June 26, 2014 as to whether the activities of the Appellant are covered by CIS or not. 30. One of the issues before us today is whether there were any emergent circumstances justifying an ex parte interim order against the Appellant by invocation of process under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992. Before analysing the nature of powers conferred by the statute on the Respondent by Scheme of Section 11 of the SEBI Act, 1992, we deem it fit to deal with certain undisputed facts which have come to light during the course of the matter. Firstly, on February 27, 2001, the Appellant itself approached SEBI to seek clarification regarding the applicability of CIS Regulations to the Appellant's membership scheme. Then again on June 20, 2002, the Appellant, after providing SEBI with details of its business asked for SEBI's advice on whether or not its activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own, approached the Respondent for guidance, advice and clarity a decade ago. Exercise of discretion in an unruly manner is not envisaged in the scheme of SEBI Act, particularly sections 11(1), 11(4) and 11B thereof. Invocation of discretion under these provisions therefore, has to be rational and be guided by sound principles of natural justice and fair play in action. The Impugned Order is based more on speculative inferences rather than legal conclusions drawn after analysing questions of law and disputed facts after affording an opportunity of being heard to the Appellant. 33. Power of the kind that the Respondent possesses begets a monumental responsibility and needs to be exercised with great care and caution so that no one might question the acts of the sole regulator of the Indian securities market purely on the basis of non-observance of the principles of natural justice. Giving every party an opportunity of being heard is one of the most significant limbs of natural justice. Although, SEBI does have the power to pass ex-parte interim orders in certain cases, it must do so only upon showing the existence of circumstances which warrant such a drastic measure. It is a sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already have suffered irreparable loss due to its Members not being able to avail themselves of the services offered by the Appellant. In such an eventuality, as stated hereinabove, even the customers, would be put to a loss. Strictly speaking, the Impugned Order may not be stigmatic in nature but it has the potential to lower the image and reputation of the Appellant in the field of time share business, particularly when other companies, like Rose Valley etc., are continuing with their business. 38. It is also pertinently noted that since 2001, the nature of the activities of the Appellant has not undergone any change. At any rate, the Respondent has neither brought any such change to our notice during the course of the hearing of the matter nor does the record reveal such a scenario. It is clear that in the letter dated October 21, 2013 addressed to MP Mr. Patil, the Respondent has stated that it is of the opinion that the Appellant's activities do not constitute CIS. In the absence of any change in circumstance or business or nature of the Appellant's activities, we fail to see what prompted the Respondent to lash out at the Appellant with such a harsh order, without first prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the exceptional situation contemplated by clause (VI) of standing order 20 of Certified Standing Order of the Corporation, i.e., on satisfaction of the General Manager that immediate action was required, he could dismiss or remove an employee without giving him an opportunity of being heard. A similar provision is to be found in the second proviso of Article 3(11) (2) of the Constitution of India which has been interpreted by Hon'ble Supreme Court in several cases, particularly from Union Of India vs. Tulsi Ram Patel (1985) 3 SCC 398 onwards that such a power of dismissal/removal of a delinquent employee has to be invoked in grave and extraordinary situations alone. Otherwise the normal rule is to hold an enquiry against the employee concerned and take appropriate action only after giving him reasonable opportunity of being heard in the said enquiry. This is the fundamental rule of audi alteram partem and its exclusion is an exception. 42. In the case of Ajit Kumar Nag the gravity of the situation can be gauged from the fact that the appellant Ajith Kumar Nag, an employee of IOCL laid a batch of hooligans to Halidia Refineries Hospital and severely assaulted and abused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estoppel which is an equitable doctrine, would not apply against the University just because the Respondent was allowed to appear in the examination. The Hon'ble Supreme Court, therefore, simply reiterated the established legal position that there can be no estoppel/promissory estoppel against the legislature in exercise of the legislative function nor can the Government or a Public authority be debarred from changing its stand in a given situation. Thus, the question of estoppel has to be determined on the basis of facts in each case. 45. Advancing his argument further on the doctrine of estoppel, Mr. Shyam Mehta relied upon the judgment of Supreme Court in M.I. Builders P. Ltd. wherein the Hon'ble Supreme Court held that decision of the Municipal Corporation (Lucknow) to handover a park of historical importance under an agreement to a private builder for construction of an air-conditioned underground shopping complex on the pretext of decongesting the area without inviting tender and without obtaining any project report was not an informed objective decision, as it was contrary to statutory provisions. Finding the Corporation's action unreasonable, arbitrary, unfair and opposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess such grievances should the Respondent have taken appropriate action against the Appellant as per law. The Respondent cannot call upon the Appellant to close its business and refund the amount received to its Members without first deciding the issue whether the Appellant's business of time sharing is covered by the definition of CIS. 48. Turning to the case of Rose Valley the Ld. Senior Counsel, Mr. Shyam Mehta submitted that SEBI has initiated action against almost 44 similar cases and that the Appellant was not singled out for this treatment. On being asked by the Tribunal if SEBI had taken action against any other similarly placed schemes, Mr. Mehta could point out only one case of time sharing scheme of one company, namely, Rose Valley. The concerned order dated July 10, 2014 passed by the Ld. WTM of SEBI issuing almost similar directions against Rose Valley was produced before us. However, the Respondent did not bring to our notice that the said order dated July 10, 2013 had been stayed by the Hon'ble Gauhati High Court in Writ Petition (C) No. 4298 of 2013 by orders dated August 1, 2013 and November 6, 2013 and that the SLP preferred by SEBI against the stay order granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commenced and this main issue is yet to be decided by the Ld. AO. Documents in support of their case have not been filed and exchanged by the parties before the Ld. AO. Issues have not been framed by the Ld. AO and witnesses, if any, have not been examined and cross-examined by the parties before the Ld. AO. At this stage, it is, therefore, too premature to halt the business activities of the Appellant on the basis of a tentative view formed by the Respondent. This apart, the potential nature of findings in the Impugned Order is likely to affect a fair trial of the main issue pending before the Ld. AO. 52. Furthermore, Ld. Senior Counsel Mr. Mehta contends that the sudden spurt in activities of the Respondent is the result of the judgment of Hon'ble Supreme Court in PGF Ltd. It is difficult for us to reconcile with this submission because the PGF order was passed by the Hon'ble Supreme Court on March 12, 2013 whereas the Impugned ex parte interim order has been issued after about 16 months of the PGF judgment i.e. on July 31, 2014. The Respondent should have, therefore, exercised restraint in exercising discretion conferred upon him under Sections 11(1), 11B and 11(4) of the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e totality of the facts and circumstances of the case, the Impugned Order is quashed and set aside. 55. To sum up, in the present case, Appellant has been knocking on the doors of SEBI since 2001 by seeking its decision on the question as to whether the time sharing business carried on by the Appellant is covered under CIS or not. Although no formal order was issued in the year 2001, it is now admitted by counsel for SEBI that since the very beginning SEBI was of the opinion that time sharing business is not covered under CIS. In fact, in the year 2010, SEBI once again scrutinized the documents relating to the business carried on by the Appellant and it is evident from the letter addressed by SEBI to a Member of Parliament (MP) on October 21, 2013 that even after scrutiny of documents furnished by Appellant in the year 2010 SEBI was of the opinion that the time sharing business carried on by the Appellant was not covered under CIS. However, on the basis of letter addressed by the said MP, SEBI decided to reconsider the issue. From the impugned ex parte interim order it is seen that the basis for such order, is the letter addressed by a Member of Parliament, the Economic Offences W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments would be furnished within a period of two weeks from today. Accordingly, we set aside the impugned ex parte interim order dated July 31, 2014 and direct WTM of SEBI to pass appropriate order on merits after hearing the Appellant as expeditiously as possible, preferably within a period of eight weeks from the date of Appellant tendering all documents / particulars to SEBI. Till then, the Appellant shall not launch any new CIS schemes and both Appellants shall not sell or dispose of or create any third party rights in respect of the assets belonging to them in any manner whatsoever. As noted in the order of High Court of Gauhati, we also direct the Appellant to maintain separate account of amounts which the Appellant may receive in respect of existing schemes in the meanwhile. 57. Appellants in both appeals, who have taken more than a year to furnish requisite particulars called for by SEBI, shall cooperate with SEBI in the matter of tendering all particulars / documents called for by SEBI and in SEBI passing order on merits within the time stipulated herein. 58. Both appeals, thus stand disposed of in terms of above directions. In view of disposal of appeals, the Miscellaneo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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