Securities Appellate Tribunal quashes ex-parte order freezing banking transactions, finds no extreme urgency for interim measures

Securities Appellate Tribunal, Mumbai quashed WTM's ex-parte interim order directing appellant to deposit alleged illegal gains in escrow account and freeze banking transactions. Tribunal found no extreme urgency warranting ex-parte order, noting trades occurred in 2017 but proceedings initiated in February 2019 with order passed after 4-month delay. Court held that prima facie insider trading case alone insufficient without considering balance of convenience or irreparable injury. Since illegal gains not yet adjudicated and no evidence of asset disposal or obstruction, impugned order unsustainable. Appeal allowed with direction for appellant to provide Rs 2.6 crore fixed deposit as interim protection measure.

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Issues Involved:
1. Legality of the ex-parte interim order.
2. Urgency and necessity of the ex-parte interim order.
3. Compliance with principles of natural justice.
4. Requirement of pre-decisional hearing.
5. Validity of impounding illegal gains without adjudication.

Detailed Analysis:

1. Legality of the ex-parte interim order:
The appellants challenged the ex-parte interim order dated 24th August 2020, which directed them to deposit Rs. 2,60,93,085.85 in an escrow account. This order was issued by the Whole Time Member (WTM) of SEBI, alleging that the appellants made illegal gains using unpublished price-sensitive information (UPSI). The WTM also ordered the freezing of bank accounts and suspension of debits in depositories to prevent the disposal of assets until the amount was credited to the escrow account. The appellants were further directed to provide details of all bank accounts, demat accounts, shareholdings, and companies in which they held a substantial or controlling interest.

2. Urgency and necessity of the ex-parte interim order:
The appellants argued that there was no urgency in passing the ex-parte order, citing the timeline of events. Trades in question occurred between April and June 2017, and the first summons were served in February 2019, followed by another in November 2019. The appellants complied promptly with all requests for information. Despite this, the impugned order was only passed in August 2020, indicating a lack of urgency. The appellants contended that the delay demonstrated there was no immediate need for such an order, making it illegal and violative of natural justice.

3. Compliance with principles of natural justice:
The appellants asserted that they were not insiders privy to any UPSI and that the ex-parte interim order was unnecessary without a hearing. They argued that the impounding of funds could have been done post-adjudication after providing an opportunity for a hearing. The respondents, however, maintained that the order was necessary to protect the securities market and investors, emphasizing that the prima facie findings justified the impounding of illegal gains to prevent investor loss.

4. Requirement of pre-decisional hearing:
The Tribunal referred to previous decisions, including North End Foods Marketing Pvt. Ltd. vs. SEBI and Dr. Udayant Malhoutra vs. SEBI, which established that SEBI has the power to pass ex-parte interim orders under Section 11 and 11B of the SEBI Act. These orders can be passed to prevent further tampering with the securities market. However, it was noted that such orders should only be issued in cases of extreme urgency and that procedural fairness, embodying natural justice, should be applied. In cases where immediate action is necessary, a post-decisional hearing may suffice.

5. Validity of impounding illegal gains without adjudication:
The Tribunal found that the reasoning for the ex-parte interim order was flawed. The order directed the appellants to deposit the possible disgorgement amount in advance without adjudication on merits. The Tribunal emphasized that no such order should be passed without evidence justifying the action, and it cannot be based on mere possibilities. The principles of attachment before judgment, as outlined in Order 38 Rule 5 to 13 of the Code of Civil Procedure, 1908, were deemed applicable. These principles require evidence that the appellant is about to dispose of the property to obstruct or delay proceedings. The Tribunal concluded that there was no finding that the appellants were attempting to divert the alleged gains or obstruct proceedings.

Conclusion:
The Tribunal quashed the impugned order, stating that it could not be sustained, especially given the lack of extreme urgency and the absence of evidence that the appellants were disposing of property or obstructing proceedings. The Tribunal directed the appellants to file a reply to the show cause notice and for SEBI to decide the matter finally within six months, providing an opportunity for a hearing. To safeguard investor interests, the appellants were instructed to provide a fixed deposit of Rs. 2,60,93,085.85 in SEBI's name, which would be kept in safe custody and not encashed until three months after the final order. The Tribunal also noted that the order would be digitally signed due to the COVID-19 pandemic.

Separate Judgments:
No separate judgments were delivered by the judges in this case.

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