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TMI Blog2018 (7) TMI 1450X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the petitioner are without jurisdiction and contrary to law. Factual Background 6. The petitioner is a shareholder of a listed company, namely, Himalaya Granites Ltd. By a letter dated 10.10.2011, the Bombay Stock Exchange Ltd. (BSE) had informed the Board that Anirudh Bubna Trust had acquired a significant number of shares of Himalaya Granites Ltd. and hence was required to make the disclosures in terms of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereafter the Takeover Regulations ) as well as the PIT Regulations. 7. On the basis of examination of the transaction statements, it was found that three persons/entities, namely, Anirudh Bubna Trust, Spark Securities Private Limited and the petitioner, had dealt with the shares of the Himalaya Granites Limited. And, it was observed that the said persons/entities had violated the Takeover Regulations and Regulation 13(3) and Regulation 13(5) of the PIT Regulations. The above was discussed at the meeting of Group of Assistant General Managers of SEBI held on 20.06.2012 and the said group recommended that the adjudicating proceedings be initiated again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 15A(b) of the Act. 10. The Adjudicating Officer issued the impugned notice on 14.11.2013. The enclosures with the said notice included a copy of the appointment order appointing the Adjudicating Officer and the said order was captioned as Proceedings of the Whole Time Member appointing the Adjudicating Officer . In addition, the impugned notice also enclosed a transaction statement of the petitioner during the period 01.01.2009 to 15.03.2012 as well as the communications issued by the Board to the BSE and to the company, Himalaya Granites Ltd. 11. On 09.01.2014, the petitioner appeared before the Adjudicating Officer. Thereafter, on 10.01.2014, the petitioner sent a letter requesting for a copy of the appointment letter/warrant through which the present Whole Time Member had been appointed, and, also requesting for a list of the powers delegated to the Whole Time Member. 12. Thereafter, the petitioner sent letters on 10.01.2014, 15.01.2014, and 20.01.2014. By the letter dated 10.01.2014, the petitioner requested for information on whether the transaction conducted by the petitioner had caused a loss to any investor or a group of investors of the Company; the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Regulation 15 of the PIT Regulations. He submitted that since the Board had not passed any order, it had also effectively precluded the petitioner from exercising its right to appeal under Section 15 of the PIT Regulations. Reasons and Conclusion 16. Regulation 13(3) of the PIT Regulations requires a person who holds more than 5% of the voting rights in any listed company to disclose to the company number of shares or voting rights held by him as well as the change in share holding if such change accedes 2% of the total shareholding or voting rights in the company. Regulation 13(3) of the PIT Regulations is set out below:- Continual disclosure. (3) Any person who holds more than 5% shares for voting rights in any listed company shall disclose to the company the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure made under sub-regulation (1) or under this sub-regulation; and such change exceeds 2% of total shareholding or voting rights in the company. 17. Regulation 13(5) of the PIT Regulations r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any person acquainted with the facts and circumstances, of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections. (3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it any, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify. Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter. Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any other person as referred to in Regulation 11(2)(i) of the Act stock exchanges, mutual funds, other persons associated with the security market, intermediaries and self regulatory organizations in the security market. Regulation 5 of the PIT Regulations provides for right of the Board to investigate and inspect the books of accounts, records and other documents of insider(s) or any other person as referred to in Section 11(2)(i) of the Act. Regulation 6 of the PIT Regulations provides for the procedure for investigation and Regulation 7 of the PIT Regulations provides for the obligation of an insider who is being investigated. Regulation 8 of the PIT Regulations mandates that the investigating authority would submit a report to the Board. Regulation 9(1) of the PIT Regulations mandates that the Board would consider the investigation report and communicate the findings for the person suspected to be involved insider trading or violation of these provisions. In terms of Regulation 9(2) of the PIT Regulations, the person to whom such findings have been communicated is required to submit a reply within a period of twenty one days; and in terms of Regulation 9(3) of the PIT Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in case the buyer is not in a position to deliver such securities, the market price prevailing at the time of issuing of such direction or at the time of transactions whichever is higher, shall be paid to the seller; (f) directing the person who has dealt in securities in violation of these regulations to transfer an amount or proceeds equivalent to the cost price or market price of securities, whichever is higher to the investor protection fund of a recognized stock exchange. Action in case of default 14. Without prejudice to the directions under regulation 11, if any person violates provisions of these regulations, he shall be liable for appropriate action under section 11, 11B, 11D, Chapter VIA and Section 24 of the Act. 28. It is relevant to note that the Regulations 4 to 11A of the PIT Regulations fall within Chapter 3 of the PIT Regulations but the said chapter bears the caption investigation . As the caption indicates, the provisions of Regulation 4A to Regulation 10 of the PIT Regulations relate essentially to the investigation that may be conducted by the Board either directly and/or indirectly. 29. Regulation 11 of the PIT Regulations provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riminal prosecution under Section 24 of the Act or initiating an action under Chapter VI of the Act. 31. The next question to be examined is whether the proceedings initiated are without jurisdiction as the Board has not formed any opinion that there are grounds for adjudging under any provisions of Chapter VIA of the Act. 32. The Central Government has framed rules for holding inquiry for the purposes of imposing penalty under Chapter VIA of the Act. Rule 3 of the SEBI (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 provided for appointment of an Adjudicating Officer for holding an inquiry. The said Rule reads as under:- Appointment of adjudicating officer for holding inquiry. 3. Whenever the Board is of the opinion that there are grounds for adjudging under any of the provisions in Chapter VIA of the Act, it may appoint any of its officer not below the rank of Division Chief to be an adjudicating officer for holding an inquiry for the said purpose. 33. It is apparent from the above that the formation of an opinion by the Board that there are grounds for adjudging under any of the provisions of Chapter VIA of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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. 36. The formation of an opinion that there are grounds for adjudging under Chapter VIA of the Act is the necessary pre-requisite for the Board to exercise its jurisdiction. Absent such opinion, the Board would have no jurisdiction to appoint an Adjudicating Officer. There is no dispute as to the above proposition. The only controversy is whether the fact that the Board (Whole Time Member) had formed such opinion can be inferred from appointment of the Adjudicating Authority. Plainly, there is no scope for inferring formation of such opinion merely for the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 148 of the Income Tax Act, 1961 beyond the specified period unless the Central Board of Direct Taxes [referred to as the Board] was satisfied on the reasons as recorded by the Income Tax Officer that it is a fit case for issue of such notice. 38. There are number of decisions where the courts have not accepted endorsement made mechanically as indicative of expression of any opinion or satisfaction that the necessary statutory conditions have been met. 39. 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. 40. 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. 41. The petition is disposed of in the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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