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TMI Blog2013 (7) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... rities market and also prohibiting them from buying, selling or dealing in the securities market in any manner whatsoever till further orders. The Appellants have also been called upon to furnish a bank guarantee for one year for an amount of USD 33.93 million within 30 days with other connected directions. The said order is stated to have been passed under Section 19 read with 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and Section 12A of the Securities Contracts (Regulation) Act, 1956 (SCR Act). 2. The operative portion of the said order reads as under:- "25. Therefore, in order to protect the interest of investors and the integrity of the securities market, I, in exercise of the powers conferred upon me by virtue of section 19 read with sections 11(1), 11(4) and 11B of SEBI Act, 1992 and section 12A of the Securities Contracts (Regulation) Act, 1956, pending investigation, hereby issue the following directions, by way of this ad-interim ex-parte order: i. The following promoters of ZIL are restrained from accessing the securities market and further prohibited from buying, selling or dealing in securities, directly or indirectly, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hearing the learned counsel for the parties the appeal is admitted. Two weeks' time is granted to the respondent to file their reply-affidavit with an advance copy to the other side. 2. Similarly, turning to the Misc. Application preferred by the interveners today itself, parties have been heard. Prima-facie the Tribunal is of the opinion that the interveners should also be heard in this matter before any final order is passed. Misc. Application is, accordingly, allowed and interveners are also granted two weeks time to file their reply in the matter. Copy of appeal shall be given forthwith to the interveners so as to enable them to do the needful. 3. Also heard parties on the question of interim relief. Keeping in view the totality of facts and circumstances of the case and submissions made by the parties, the operation of the impugned ad interim ex parte order dated March 25, 2013 is hereby stayed in so far as para 25(ii) is concerned during the pendency of the present appeal. Para 25(i) of the impugned order shall, however, operate against the appellants (six persons/entities mentioned in the said para 25(i) of the ad interim ex parte impugned order). 4. It is furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the FCCBs in question have been issued. It is emphatically submitted that FCCBs, therefore, do not fall under the provisions of the SEBI Act, 1992 or other securities laws in India. In this context, the Appellants submit that on their default to redeem the monies in question, the interveners and some other parties have already approached the Hon'ble High Court and Learned Small Causes Court, Mumbai in appropriate proceedings against the Appellants. It is, therefore, contended that SEBI is precluded from launching parallel proceedings against the Appellants on the same dispute involving exactly the same subject matter. 7. The case of the Appellants is that the FCCBs in question were issued and the monies collected by the Appellants at a time when the world economy was in boom almost everywhere. The rate of exchange of the American Dollar was between Rs. 41 to Rs. 45 during the relevant period. In the circumstances, it was the earnest belief of the Appellants that atleast a substantial part of the FCCBs would be converted into shares of the issuing Company by the FCCB holders. But, due to the global economic crash in the year 2008 recessionary trends across the whole world we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith RMM. The purpose of incorporating Zenith Monitoring was to make it a wholly owned subsidiary of Zenith RMM for the purpose of transferring about 550 employees in India along with movable assets of the MSD Business that were in India. The process of sale of the MSD Business was completed in the month of October, 2011. It is contended by the Appellants that the bondholders and trustees have always been aware of the fact that ZIL was in the process of mobilising funds for the purpose of, inter alia, redemption of FCCBs. In fact, the Appellants also seem to have made an attempt to negotiate amicably with the investors/bondholders for extension of time to redeem the FCCBs in question. In the process, the cutoff date i.e. September 21, 2011 meant for the maturity of the 2011 FCCBs lapsed and the trustees issued a notice of default on September 30, 2011 coupled with a notice of cross default for the 2012 FCCBs under Condition 11(D) of the Conditions relating to the said FCCBs. The trustees demanded payment of both the FCCBs i.e. 2011 and 2012. The Appellants submit that the maturity date of 2012 FCCBs could not be accelerated without the prior approval of the Reserve Bank of India ("R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being Notice of Acceleration and declaring the 2012 Bonds as due and payable". I am also prima facie satisfied that the Defendant Nos. 1, 5 and 6, despite representing their shareholders, Stock Exchange and the City Civil Court that the consideration received from the sale of the MSD business or at least part thereof would be applied towards buy-back/redemption of FCCBs, have after the sale of the MSD business, not paid any amount whatsoever towards buy back/redemption of FCCB series. 17. Order 38 Rules 5 to 13 of the CPC, 1908 pertains to attachment of properties of a party before judgment. Rule 5 provides that where, at any stage of a suit, the Court is satisfied by affidavit or otherwise, that the Defendant, with intent to obstruct or delay the execution of any decree that may be passed against him, (a) is about to dispose of the whole or any part of his property, or (b) is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court, the Court may direct the Defendant, within a time to be fixed by it, either to furnish security, in such sum as may be specified in the order, to produce and place at the disposal of the Court, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertake to the Court not to dispose of any of their assets disclosed on oath save and except the cash and bank balances and the amounts received by them from their sundry creditors from time to time to enable them to carry on their business which would include payment of wages to 1000 workmen. Attaching the Bank balances of approximately Rs. 28 crores and the amount to be received from sundry creditors is bound to stop the day to day business of the Company affecting the lives of 1000 workmen and their family members. This will not be in the interest of anyone including the Plaintiff. Even otherwise, I am also not inclined to pass such a drastic order of stopping the entire business of the Defendant No. 1 at the ad-interim stage. In view thereof, until further orders, I pass the following order: (i) The undertaking given by Defendant Nos. 1, 5, and 6 viz. that the Defendants shall until further orders not dispose of, sell, transfer alienate or create any third party right or interest in respect of their Cloud Computing Business valued by the Plaintiff's Valuers M/s. Grant Thornton between 198 Crores and Rs. 239.8 Crores and by M/s. Ernst & Young Pvt. Ltd. in their second re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they have deposited Rs. 25 crore pursuant to the order of the Hon'ble High Court. 10. Per contra, the case of Respondent No. 1 is that not only, there was failure on the part of the Appellants to inform the BSE and NSE regarding the defaults with respect to the FCCBs in question, but the funds purportedly raised for redemption of said FCCBs were used for other purposes. This amounts to fraud within the meaning of provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and is also opposed to various provisions of the SEBI Act, 1992, the SCR Act, 1956 as well as the SEBI (Prohibition of Insider Trading) Regulations, 1992. The Respondent No. 1 has drawn our attention towards findings arrived at by the Ld. WTM in the impugned order dated March 25, 2013 particularly in paragraphs 15, 16, 18, 19 and 20 which can be summarised as below:- i) The amount received from the sale of the MSD division was not utilized for the purposes for which it was raised i.e. to redeem the FCCBs but was diverted for the other purposes. ii) The Appellants did not inform BSE/NSE, about the fact that Appellant No. 1 was going to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and bonds, which shall be payable at par at such centres as may be agreed to between the Exchange and the Company and which shall be collected at par, with collection charges, if any, being borne by the Company, in any bank in the country at centres other than the centres agreed to between the Exchange and the Company, so as to reach the holders of shares, debentures or bonds on or before the date fixed for interest on debentures or bonds or redemption money, as the case may be." 13. Learned senior counsel for the Respondent No. 1, Mr. Shyam Mehta, submitted that the expression "bonds" used in above said Clause 21 covers FCCBs as well, for the simple reason that it is not excluded in the definition. Secondly, Mr. Mehta submits that a purposive and dynamic interpretation is required to be given to Clause 21 of the Listing Agreement so as to further enhance the definition and concept of "securities" as used in the SEBI Act, 1992 as well as SCR Act, 1956. Regarding the timely information required to be given to the stock exchange by the Appellants, the Respondent No. 1 has drawn our attention towards Clause 36 of the Listing Agreement which requires a company to inform the stock ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act." Regulation 3 of SEBI (PFUTP) Regulations, 2003 "Prohibition of certain dealings in securities No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the securities market and may tarnish the image and reputation of the Indian securities market amongst foreign investors which is bad for development of the markets. 24. Given the vital function of protecting investors and safeguarding the integrity of the securities market vested in SEBI and the commensurate powers given to it under the securities laws, it is necessary for SEBI to exercise these powers firmly and effectively to insulate the market and its investors from the fraudulent actions of the participants in the securities market. One of the basic premise that underlies the integrity of securities market is that the participants conform to standards of transparency, good governance and ethical behavior prescribed in securities laws and do not resort to fraudulent activities. In this case, the conduct of the promoters/directors, as brought out above has been violative of this basic premise. Therefore, in view of the aforesaid prima facie findings, it is felt necessary to intervene in this matter to safeguard the interest of the retail shareholders of ZIL and protect the integrity of the securities market. I am convinced that this is also a case where, pending investig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent Nos. 2 & 3 also filed Suit No. 2865 of 2011 before the Hon'ble Bombay High Court along with a Winding-up Petition against the Appellant No. 1 being Company Petition No. 28 of 2012. The trustees also filed Notices of Motion No. 3520 of 2011 and No. 3527 of 2011 for attachment before judgment and for other ad-interim reliefs. The Notices of Motion were heard and disposed of by the Hon'ble High Court by its order dated October 9, 2012 which recorded the undertakings of Appellant Nos. 1 to 3 as under:- 1. Shall not dispose of, sell, transfer, alienate or create any third party right or interest in respect of Cloud Computing Business of the Company. 2. Shall maintain status quo in respect of the Company's fixed assets valued at INR 163.34 crores as of 10th May 2012; 3. Shall maintain status quo in respect of the Company's investments aggregating to INR 66.01 crores; 4. Shall maintain status quo in respect of the money held in joint escrow account amounting to approximately INR 32.27 crores; 5. In the event any of its subsidiaries return any of its loans aggregating to INR 50 crores, the same shall not be utilized by the Company, Rajkumar Saraf and Aka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptive practices in contravention of the SEBI Act or its Regulations whether employed directly or indirectly in connection with the issue, purchase or sale of any securities listed in the Stock Exchange must be dealt with in accordance with the provisions of the Act, which is absolutely necessary for investors protection and to avoid market abuse. In paragraph 35, the Hon'ble Supreme Court lays down the parameters regarding the concept of market abuse and directs that the SEBI to act as an auditor and an overseer to ensure that no market abuse takes place. The Hon'ble Supreme court states that SEBI has a duty to send out a message to foreign investors that market security is the motto of the securities market in India. In fact, the principles enunciated in the Sahara Case have further been approved by the Supreme Court in the Narayanan's case. It is stated that the submissions of the Appellants that the findings of Sahara Case and Narayanan's Case are after the final order of SEBI are wholly irrelevant in as much as the law laid down by the Hon'ble Supreme Court in both the judgments would be applicable to SEBI at any and every stage at which it exercises its r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Appellant No. 1 who are not the plaintiffs in the Civil Suit. The impugned order is infact an order which is in the interests of the minority public shareholders who due to small holdings would not have the wherewithal to approach the Civil Court. 24. The relevant provisions of law under which the ad-interim ex-parte order is stated to have been passed are reproduced hereinbelow:- SEBI Act, 1992 Delegation. "Section 19 The Board may, by general or special order in writing delegate to any member, officer of the Board or any other person subject to such conditions, if any, as may be specified in the order, such of its powers and functions under this Act (except the powers under section 29) as it may deem necessary." Functions of Board. "Section 11(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit." "Section 11(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or (iii) to secure the proper management of any such intermediary or person, it may issue such directions, - (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market." SCR Act, 1956: Power to Issue directions. "Section 12A. If, after making or causing to be made an inquiry, the Securities and Exchange Board of India is satisfied that it is necessary - (a) in the interest of investors, or orderly development of securities market; or (b) to prevent the affairs of any recognised stock exchange or clearing corporation, or such other agency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a reply within three weeks is nothing but an empty formality. 27. We have given our thoughtful consideration to the matter and the submissions made by Mr. Fredun Devitre, learned senior counsel for the Appellants, Mr. Shyam Mehta, learned senior counsel for Respondent No. 1 and Mr. Janak Dwarakdas, learned senior counsel for Respondent Nos. 2 and 3. We are of the considered opinion that the impugned ad-interim ex-parte order dated March 25, 2013 is not sustainable in the eyes of law as it has been passed in gross violation of the principles of natural justice. No complaint as mentioned in the impugned order has ever been supplied to the Appellants by giving them an opportunity of hearing in the matter before the order could be passed. We hasten to add that Respondent No. 1 is empowered to pass ex-parte ad-interim orders in urgent cases but this power is to be exercised sparingly in most deserving cases of extreme urgency. In the case in hand, on its own showing, we note that Respondent No. 1 had knowledge of the matter from the very beginning. Paragraph 8 of the impugned order itself makes it abundantly clear that the share price of ZIL fell from Rs. 190/- on September 23, 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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