2021 (2) TMI 1177 - HC - SEBI

Court dismisses challenge to securities regulator's show-cause notices on NBFC; emphasizes statutory obligations

The Court dismissed the writ petition challenging show-cause notices issued by the Securities and Exchange Board of India to a Non-Banking Finance ... SEBI seeking information from the petitioner regarding alleged deemed public issue - HELD THAT:- Awareness Programme conducted by the SEBI during the year 2017, a few investors reported that the petitioner Company has been mobilising funds from the public and have issued bonus shares. As alleged that the petitioner subsequently stopped buying back the shares - A preliminary enquiry made by the SEBI, it was noticed that the petitioner-Company has passed resolutions authorising issue of equity shares to any person including existing members of the Company in any manner the board may deem fit. The language of the resolution indicated that what was intended by the Company was not strictly private placement. It was under the said circumstances that the SEBI issued notices to the petitioner-Company. Though the information sought for were expected to be maintained by the petitioner in their statutory records and registers, such information was not made available to the SEBI. It was under such circumstances that the SEBI has issued the show-cause notices impugned in the writ petition. The information sought for by the SEBI related back to the year 2001. However, the required information are those which are required by the petitioner to be statutorily maintained. Therefore, the delay in issuing these Show Cause Notices, cannot cause prejudice to the petitioner. Reasons for the delay in initiation of the proceedings, it is to be noted that under Section 11(2)(f) of the SEBI Act, 1992, promoting investor education is one of the functions of the Board. In one of such meetings of investors, allegations were raised against the petitioner. The SEBI made their own enquiry and noted that the annual reports of the Company indicated authorising issue of shares to any person including existing members of the Company in any manner the Board may deem fit. The language of the resolutions indeed gives rise to a suspicion or indication that the Company proposed to issue shares to the public. It is for the said reason that the SEBI sought explanation from the petitioner. Petitioner, instead of cooperating with the SEBI, providing requisite information, has approached this Court challenging the show-cause notices. Allegation against the petitioner and the information sought for by the SEBI would indicate that what was sought for by SEBI are information a Company is expected to maintain. Going through the show-cause notices impugned in the writ petition, it cannot be said that jurisdictional facts necessary to initiate proceedings do not exist. Prima facie, the delay in initiation of the proceedings will not cause prejudice to the petitioner, in the nature of the information sought for by SEBI. Even if the petitioner is incapacitated to provide any information required by the SEBI, the petitioner can very well give reasoned explanation for the same to the SEBI. The issue is presently only at a show-cause stage. It will be thoroughly inappropriate for this Court to interfere with the statutory proceedings at this stage. Issues:Challenging show-cause notices by a Non-Banking Finance Company issued by the Securities and Exchange Board of India under the Companies Act, 1956 and the Securities and Exchange Board of India Act, 1992, alleging violation of constitutional provisions.Analysis:The petitioner, a Non-Banking Finance Company registered with the Reserve Bank of India, challenged show-cause notices issued by the Securities and Exchange Board of India, claiming they were ultra vires the Companies Act, 1956, the SEBI Act, 1992, and violated constitutional provisions. The petitioner engaged in private placements of equity shares to augment capital resources, subject to monitoring by auditors and RBI inspectors. The respondent issued multiple show-cause notices, leading to the petitioner's challenge based on delay, vagueness, lack of disclosure, and violation of natural justice principles.The petitioner argued significant delay in initiating investigations, spanning nearly two decades, prejudicing their position and business operations. They contended that the notices lacked specificity, prejudged the issue, and failed to meet jurisdictional requirements as per relevant legal precedents. The petitioner emphasized that the belated initiation of proceedings and absence of complaint copies infringed upon principles of natural justice and flouted established legal standards.In response, the respondent highlighted the petitioner's failure to provide requested documents, indicating a lack of cooperation. They argued that the resolutions passed by the Company suggested public issues rather than private placements, necessitating the show-cause notices. The respondent asserted that the SEBI acted promptly upon receiving information, justifying the proceedings as per legal precedents on continuing offences and jurisdictional facts.The Court noted that the SEBI's actions were based on information indicating potential violations by the petitioner, emphasizing the statutory obligations of the Company to maintain relevant records. Despite the delay in issuing show-cause notices, the Court found no prejudice caused to the petitioner, as the requested information should have been readily available. The Court declined to interfere at the show-cause stage, emphasizing the importance of allowing statutory proceedings to continue, ultimately dismissing the writ petition for lacking merit.