2020 (9) TMI 1304 - AT - SEBI

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

Affluence Fincon Services Pvt. Ltd., Amee Dhiren Shah, Dhiren Mahendrakumar Shah HUF Versus Securities & Exchange Board of India Mumbai

Securities Appellate Tribunal, Mumbai quashed WTM's ex-parte interim order directing appellant to deposit alleged illegal gains in escrow account and ... Ex-parte interim order passed by WTM - illegal gains made using unpublished price sensitive information - directing the Appellant to deposit a sum in an escrow account in a Nationalised Bank towards - WTM further directed the Banks to freeze all debits to the extent of the above amount till such time the escrow account is opened and the amount is transferred and directed the depositories to suspend all debits and, therefore, restrained the Appellants from disposing or alienating any assets or properties till such time the amount is credited in the escrow account - Appellant contented that there was no urgency in passing an ex-parte order with regard to the trades done by the Appellants HELD THAT: In the instant case, we do not find that the matter is one of extreme urgency which requires passing of an ex-parte interim order. We find that the trades were done in the year 2017. Nothing has come on record as to when the Respondent became aware of these transactions. However, we find that the proceedings were initiated in February, 2019 which continued till 11th March, 2020 and, thereafter, it took the Respondents another 4 months to pass the impugned order. This by itself indicates that there was no extreme urgency in passing the impugned order. We, therefore, are of the opinion that merely by arriving at a prima facie case that the Appellants were an insider as defined under the PIT Regulations, 2015 cannot be made the sole basis for passing the impugned order without considering the balance of convenience or irreparable injury. Only reason given for passing the interim order has been provided in para 34 of the impugned order namely that the illegal gains should be impounded otherwise it would result in irreparable injury to the interest of the securities market and investors. In our view, illegal gains are yet to be adjudicated and, therefore, in the absence of adjudication it will not be proper to impound the so called illegal gains especially when there is no assertion that the Appellants are disposing of the property in question or they are obstructing or delaying the proceedings. The impugned order in so far as it relates to the Appellants cannot be sustained and is quashed at the admission stage itself without calling for a reply except the show cause notice. The Appeal is allowed and the Misc. Application are accordingly disposed of. We further direct the Appellants to file a reply to the show cause notice on or before 7th October, 2020. The Respondent will thereafter decide the matter finally after giving an opportunity of hearing to the Appellants either through physical hearing or through video conference within 6 months thereafter. During the interim period, in order to safe guard the interest of the investors in the securities market and also to protect the integrity of the securities market, we direct the Appellants to provide a fixed deposit of Rs 2,60,93,085.85 in the name of SEBI for a period of one year, within two weeks from today. This fixed deposit receipt will be kept in the safe custody with the respondent and will not be encashed till three months after the passing of the final order by the respondent. 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.