2020 (6) TMI 742 - AT - SEBI

Tribunal quashes ex-parte order, emphasizes evidence-based decisions in securities market cases.

Dr. Udayant Malhoutra Versus Securities and Exchange Board of India, Mumbai

The Tribunal quashed the ex-parte order directing deposit in an Escrow Account, citing lack of extreme urgency and violation of natural justice ... Ex-parte order passed by the Whole Time Member (“WTM‟) of Securities and Exchange Board of India (“SEBI‟) - direction to deposit a sum plus interest till date in an Escrow Account towards notional loss - Using unpublished price sensitive information - Direction that the bank accounts / demat accounts of the appellant shall remain frozen till such time the amount is not deposited - HELD THAT:- There is no finding that the appellant will remove the property or will dispose of all the property or that he would obstruct the proceedings or that he would delay the proceedings pursuant to the show cause notice. In the absence of any such finding, the ex-parte interim order cannot be sustained especially when the trades were of 2016 and from 2016 till the date of the impugned order there is no evidence to show that the appellant was trying to divert the alleged notional gain/loss As held in North End Foods Marketing Pvt. Ltd. [2019 (4) TMI 800 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] there is no real urgency in the matter to pass an ex-parte interim order especially during the pandemic period. There is no doubt that SEBI has the power to pass an interim order and that in extreme urgent cases SEBI can pass an ex-parte interim order but such powers can only be exercised sparingly and only in extreme urgent matters. In the instant case, we do not find any case of extreme urgency which warranted the respondent to pass an ex-parte interim order only on arriving at the prima-facie case that the appellant was an insider as defined in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations‟ for short) without considering the balance of convenience or irreparable injury. The impugned order cannot be sustained and the same is quashed at the admission stage itself without calling for a counter affidavit except the show cause notice. The appeal is allowed. We further direct that the appellant to file a reply to the show cause notice within four weeks from today. The respondent will decide the matter finally after giving an opportunity of hearing to the appellant either through physical hearing or through video conference within six months thereafter. During the interim period, in order to safeguard the interests of the respondent and more particularly the interest of the investors in the securities market and also to protect the integrity of the securities market, we direct the appellant to give an undertaking to the respondent within four weeks from today that he will not alienate 50% of his total shareholdings of the company DTL held as on date, as stated by the learned counsel for the appellant. Issues:Appeal against ex-parte order directing deposit in Escrow Account, Allegations of using unpublished price sensitive information, Urgency of passing ex-parte order, Violation of principles of natural justice, Applicability of SEBI Act, Urgency during pandemic, Power to pass interim orders, Adherence to natural justice, Urgency criteria for interim orders, Attachment before judgment principles.Issue 1: Appeal against ex-parte order directing deposit in Escrow AccountThe appellant filed an appeal against an ex-parte order by SEBI directing deposit of a sum in an Escrow Account towards alleged avoided loss using unpublished price sensitive information. The appellant contended that freezing accounts was arbitrary and the order violated natural justice principles. The appellant argued that shares were sold due to a loan agreement, not insider information. The respondent justified the order to prevent diversion of gains and protect investors.Issue 2: Allegations of using unpublished price sensitive informationThe appellant, CEO of a listed company, was accused of selling shares with inside knowledge of unaudited financial results. The investigation started in 2017, with the order passed in 2020. The appellant argued no urgency existed for the ex-parte order, especially during the pandemic. The respondent claimed the order was necessary to prevent market manipulation.Issue 3: Urgency of passing ex-parte orderThe Tribunal referred to previous judgments emphasizing the power of SEBI to pass ex-parte interim orders to safeguard investor interests. However, it noted that urgency must be justified, and such orders should be sparingly used. The Tribunal found no extreme urgency in this case and quashed the order at the admission stage.Issue 4: Violation of principles of natural justiceThe appellant argued that the ex-parte order violated natural justice by not allowing a fair hearing. The Tribunal agreed, stating that such orders should be based on evidence and not mere possibilities. It emphasized the importance of post-decisional hearings in urgent cases.Issue 5: Applicability of SEBI ActThe Tribunal discussed the powers of SEBI under the SEBI Act to regulate securities markets and protect investors. It highlighted the need for adherence to natural justice principles while passing interim orders.Issue 6: Urgency during pandemicThe Tribunal considered the impact of the pandemic on the urgency of passing orders. It concluded that the pandemic alone did not justify the urgency in this case, especially given the timeline of events from 2016 to 2020.Issue 7: Power to pass interim ordersThe Tribunal clarified SEBI's power to pass interim orders under the SEBI Act, emphasizing the need to balance investor protection with procedural fairness. It noted that interim orders should be based on evidence and urgency criteria.Issue 8: Adherence to natural justiceThe Tribunal reiterated the importance of natural justice in passing orders affecting parties' rights. It emphasized the need for evidence-based decisions and post-decisional hearings in urgent cases.Issue 9: Urgency criteria for interim ordersThe Tribunal emphasized that urgency must be demonstrated for passing ex-parte interim orders. It stated that such orders should only be used in extreme urgent matters, not merely based on possibilities.Issue 10: Attachment before judgment principlesThe Tribunal discussed the principles of attachment before judgment under the Civil Procedure Code, applicable in this case to prevent disposal of assets. It noted the need for evidence of intent to obstruct proceedings for such orders to be justified.In conclusion, the Tribunal quashed the ex-parte order, emphasizing the need for evidence-based decisions, adherence to natural justice, and demonstration of urgency for passing interim orders. It directed the appellant to reply to the show cause notice and set a timeline for final adjudication, while also imposing restrictions on shareholdings to protect investor interests. The Tribunal highlighted the importance of balancing regulatory powers with procedural fairness and evidence-based decision-making in securities market cases.