2019 (4) TMI 800 - AT - SEBI

Tribunal quashes SEBI order, stresses procedural fairness. Allegations unsubstantiated. Natural justice upheld.

North End Foods Marketing Pvt. Ltd. And Sandeep Sabharwal Versus Securities and Exchange Board of India, Mr. Janak Dwarkadas, Mr. Abhishek Aggarwal, Ms. Neetu Gupta, Mr. Yash Gupta, R.K. Commodities Services Pvt. Ltd., Mr. Rajendra Gupta, Mr. Navdeep Varshneya, Mr. Sundeep Chadha Versus Securities and Exchange Board of India, Mumbai

The Tribunal quashed the ex-parte interim order by SEBI, emphasizing the need for procedural fairness and urgency in such orders. SEBI's allegations of ... Validity of Ex-parte interim order - restraining the appellants and other entities from buying, selling or dealing in the securities market either directly or indirectly or being associated with the securities market, in any manner, whatsoever, pending investigation - HELD THAT:- On the basis of the enquiry, the rationale for taking urgent preventive actions is based on the fact that appellant, NEFM had accumulated/cornered stocks of Mentha Oil through entities in Group A and Group B by misusing the exchange platform. Such large accumulation of Mentha Oil was with the intention of acquiring a dominant position in the market in order to manipulate the future price of Mentha Oil during the lean season on the strength of the physical stock of Mentha Oil it held on the exchange platform. In our opinion, the impugned order is harsh and unwarranted. There was no real urgency at this late stage in passing an ex-parte restraint order which virtually amounts to passing a final order. The period of trades is 2017-2018. At the time when the impugned order was passed the future contracts had been executed. The lean season was over. There is nothing on record to indicate that the sales made by the appellants was on a higher side indicating manipulation in the price nor there is any prima-facie, finding that by accumulating large stocks of Mentha Oil, the appellant had dominated the market without making any comparison with the total volume of trades in the physical market. In our opinion, the basis of urgency was purely on account of presumption and was not based on any piece of evidence. There should be some shred of evidence to come to a prima-facie conclusion that the appellants are indulging in unfair trade practices in cornering the market with a manipulative intent to manipulate the price. Passing a restraint order which virtually puts a stoppage on the appellants right to trade based on a needle of suspicion, in our opinion, is harsh and unwarranted. In the absence of in depth analysis based on evidence, it was not such an urgent case where the WTM should have exercised its powers. We are, thus, of the opinion that the impugned order is not sustainable in the eyes of law as it has been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. Accordingly, the appellants are entitled to the reliefs claimed. The impugned order cannot be sustained and is quashed in so far as it relates to the appellants. The appellants will file their objections before the WTM on or before March 25, 2019. Issues Involved:1. Legality of the ex-parte interim order by SEBI.2. Allegations of market manipulation and cornering of Mentha Oil stocks.3. Urgency and necessity of the ex-parte interim order.4. Impact on the appellants' business and rights.Detailed Analysis:1. Legality of the ex-parte interim order by SEBI:The appellants challenged the ex-parte interim order passed by SEBI, which restrained them from dealing in the securities market. SEBI's order was based on its powers under Sections 11(1), 11(4), and 11B read with Section 19 of the SEBI Act, 1992. The Tribunal acknowledged SEBI's authority to pass such orders to protect investors and maintain market integrity. However, it emphasized that ex-parte orders should be based on urgent and compelling circumstances, and procedural fairness should be followed by providing post-decisional hearings.2. Allegations of market manipulation and cornering of Mentha Oil stocks:SEBI's order was triggered by an email from MCX, indicating that certain entities held more than 75% of the exchange deliverable stock of Mentha Oil. SEBI's investigation suggested that Group A and Group B entities, funded by NEFM, had taken large deliveries of Mentha Oil, violating SEBI's position limits. The investigation revealed that NEFM was the beneficial owner of the Mentha Oil stock, and Group A and B entities acted as proxies. SEBI concluded that this cornering of stocks was fraudulent under the PFUTP Regulations and violated Section 12A of the SEBI Act.3. Urgency and necessity of the ex-parte interim order:The Tribunal found that the urgency cited by SEBI was not justified. The period of trades was 2017-2018, and the future contracts had already been executed. The Tribunal noted that there was no evidence of price manipulation or market domination by the appellants. The urgency was based on presumption rather than concrete evidence. The Tribunal held that ex-parte interim orders should be reserved for extreme urgent cases and exercised sparingly. In this case, the order was deemed harsh and unwarranted.4. Impact on the appellants' business and rights:The appellants argued that the ex-parte interim order had a severe impact on their business, causing irreparable loss. They contended that the order restrained them from trading in all commodities, not just Mentha Oil, without any alleged violation in other commodities. The Tribunal agreed, stating that the order virtually amounted to a final order, affecting the appellants' right to trade and pursue their profession. The Tribunal emphasized that procedural fairness and natural justice principles, as embodied in Article 14 of the Constitution, were violated.Conclusion:The Tribunal quashed the ex-parte interim order, finding it unsustainable in law. It directed the appellants to file their objections before the WTM and mandated SEBI to provide a hearing before passing any further interim orders. The Tribunal's findings were tentative and would not influence the authority's final decision. The appeals were allowed, with no order as to costs.