2013 (7) TMI 1077 - Board - Companies Law

SEBI Order Set Aside for Lack of Natural Justice: Importance of Fair Hearing & Expedited Process

The Tribunal set aside the SEBI order due to a lack of natural justice, emphasizing the importance of giving parties a fair hearing before issuing ... SEBI proceedings - Passed ad-interim ex-parte order - violation of the principles of natural justice - HELD THAT:- the impugned ad-interim ex-parte order 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. 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 ₹ 190/- on September 23, 2011 to ₹ 45/- on November 30, 2011 just in 45 days. In our considered opinion September - October 2011 would have been the right time for SEBI to act, to protect interests of investors, provided it had jurisdiction to do the same in respect of the FCCBs in question. This, however, was not done for almost 15 months for reasons not made known to this Tribunal and any sort of urgency having already disappeared, Respondent No. 1 should have given an opportunity to the Appellants by supplying a copy of the complaint and calling upon them to present their defence. This has admittedly not been done and no cogent and convincing reason has been put forth for depriving the Appellants of such a valuable right of being heard before passing the impugned order in question. Hence, This court set asides the impugned order and remanding the matter to Respondent No. 1 for fresh consideration in accordance with law by supplying a copy of the complaint to the Appellants in advance and also by deciding the jurisdictional issues raised by the Appellants in the present Appeal before hand. Ordered accordingly. Issues Involved:1. Jurisdiction of SEBI over Foreign Currency Convertible Bonds (FCCBs).2. Non-compliance with principles of natural justice.3. Alleged fraudulent actions and misrepresentation by the appellants.4. Alleged diversion of funds from the sale of MSD Division.5. Impact of the SEBI order on the appellants' ability to access the securities market.6. Parallel proceedings in the High Court and SEBI's authority.Issue-wise Detailed Analysis:1. Jurisdiction of SEBI over Foreign Currency Convertible Bonds (FCCBs):The appellants contended that SEBI lacks jurisdiction over FCCBs as they are not listed on any Indian stock exchange and are not covered by the definition of 'securities' under the SEBI Act, 1992 and the SCR Act, 1956. They argued that disputes regarding FCCBs should be governed by the laws of the country where they were issued, and SEBI's involvement constitutes parallel proceedings given the ongoing litigation in the High Court.2. Non-compliance with principles of natural justice:The appellants argued that the SEBI order was passed without affording them an opportunity to be heard, violating principles of natural justice. They claimed that the post-decisional opportunity to file a reply within three weeks was inadequate and merely an 'empty formality.'3. Alleged fraudulent actions and misrepresentation by the appellants:SEBI alleged that the appellants failed to inform the BSE and NSE about defaults on FCCBs and misled the exchanges regarding the utilization of funds from the sale of the MSD Division. SEBI cited violations of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, and the SEBI (Prohibition of Insider Trading) Regulations, 1992.4. Alleged diversion of funds from the sale of MSD Division:SEBI found that the appellants diverted funds from the sale of the MSD Division for purposes other than redeeming the FCCBs, which was the stated purpose approved by shareholders. This diversion was considered fraudulent and detrimental to the interests of shareholders.5. Impact of the SEBI order on the appellants' ability to access the securities market:The SEBI order restrained the appellants from accessing the securities market and directed them to furnish a bank guarantee of USD 33.93 million. The appellants argued that this order was almost final in nature and severely prejudiced their interests without due process.6. Parallel proceedings in the High Court and SEBI's authority:The appellants contended that the same issues were already being addressed in the High Court, where the interests of FCCB holders were protected by an interim order. They argued that SEBI's parallel proceedings were unnecessary and beyond its jurisdiction.Judgment Summary:The Tribunal found that the SEBI order was passed in violation of the principles of natural justice as the appellants were not given an opportunity to be heard before the order was issued. The Tribunal emphasized that SEBI's power to pass ex-parte orders should be exercised sparingly and only in cases of extreme urgency, which was not demonstrated in this case. The Tribunal noted that SEBI had knowledge of the matter since September-October 2011 but did not act promptly.The Tribunal held that the post-decisional opportunity to file a reply was insufficient to cure the lack of natural justice. Consequently, the Tribunal set aside the SEBI order and remanded the matter to SEBI for fresh consideration, directing SEBI to provide the appellants with a copy of the complaint and decide on the jurisdictional issues before proceeding further. The Tribunal also urged all parties to cooperate with SEBI to expedite the matter within six weeks.Conclusion:The Tribunal's decision underscores the importance of adhering to principles of natural justice and ensuring that affected parties are given a fair opportunity to present their case before any prejudicial orders are passed. The judgment also highlights the need for regulatory authorities to act promptly and transparently in exercising their powers.