2020 (1) TMI 523 - AT - SEBI

Tribunal Upholds SEBI Order on Fund Misappropriation and Violations

Gautam Thapar Versus Securities & Exchange Board of India

The tribunal upheld SEBI's ex-parte ad-interim order, citing urgency and prima facie evidence of fund diversion and misappropriation. The appellants' ... Ex-parte ad-interim order passed by the Whole Time Member ('WTM') of SEBI - HELD THAT:- SEBI has power to pass ex-parte ad-interim order pending investigation under Sections 11 & 11B of the SEBI Act. What has been disputed is, that considering the facts and circumstances in the instant case, there was no urgency to pass an ex-parte ad-interim order. There is no doubt that an ex-parte ad-interim order can be passed only when there is an urgency. In Liberty Oil Mills v. Union of India [1984 (5) TMI 236 - SUPREME COURT], the Supreme Court held that the urgency must be infused by a host of circumstances and further held that the regulatory agency must move quickly in order to curb further mischief and take action immediately in order to instill and restore confidence in the capital market. There is no doubt that only under emergent circumstances and spelling out a case of urgency that an ad-interim ex-parte orders can be passed. Such exercise of regulatory measures in the form of ad-interim ex-parte orders can only be done upon the existence of circumstances warranting such a drastic measure. Applying the aforesaid test, we find that considering the allegations spelled out in the ex-parte ad-interim order which we need not refer on merits at this stage, we find that upon the examination of the evidence, a prima facie opinion was correctly arrived at by the WTM based on objective facts indicating diversion of funds from a listed Company which was not in the interest of its shareholders. It was thus extremely necessary that an action on urgent basis was required to stop further defalcation/ diversion/ siphoning of the funds of the Company and to protect the interest of the investors and its shareholders and to instill confidence in the securities market. Such measures if not taken while the iron was hot would defeat the regulatory measures that has been provided to SEBI under the SEBI Act. We are of the opinion that, in the instant case, there was ample evidence to show urgency and, considering the material that has been brought on record, the matter being serious, warranted an inference by the regulator. Whether such transactions indicated in the ex-parte ad-interim order was dully authorized or not by the RAC or whether such transactions were approved by a resolution of the Board of Directors is a matter to be considered on merit by the appropriate authority and it is not appropriate for this Tribunal to consider such documents at this stage as consideration of these documents may prejudice not only the investigation but also the parties. We are of the opinion that the contention of the appellants that no case was made out for grant of an ad-interim ex-parte order is misconceived and cannot be accepted. Appellants are entitled for supply of documents from the Company so that they may file an appropriate reply before SEBI. Denial of such documents by the Company or by SEBI would be in violation of principles of natural justice as embodied in Article 14 of the Constitution of India. Without going into the controversy as to whether requisite documents were supplied or not, we are of the opinion that, if any, document is requested by the appellants either from the Company or from SEBI the same would be supplied in accordance with law. Order - The appellants shall file a reply before the WTM of SEBI on or before October 15, 2019. In the event the appellants want further time then appropriate application will be filed before the WTM of SEBI which will be considered and appropriate orders would be passed. In the event any document is required by the appellants either from Company or from SEBI a formal request to that effect shall be made by the appellants which document(s) shall be supplied in accordance with law within three working days. Issues Involved:1. Legitimacy of the ex-parte ad-interim order by SEBI.2. Alleged misappropriation and diversion of funds by the appellants.3. Violation of SEBI Act and Regulations.4. Right to access documents for defense by the appellants.5. Urgency and necessity of the ex-parte ad-interim order.Detailed Analysis:1. Legitimacy of the ex-parte ad-interim order by SEBI:The appellants challenged the ex-parte ad-interim order passed by SEBI, arguing that it was issued without a hearing and that SEBI acted in haste, branding the appellants as guilty without trial. They contended that the order was prejudicial and amounted to 'attachment before judgment,' which should not be done casually. SEBI, however, justified the order, stating it was necessary to protect the interests of investors and prevent further diversion of funds. The tribunal upheld SEBI's power to pass such orders under Sections 11 and 11B of the SEBI Act, emphasizing that the urgency and prima facie evidence warranted such a measure.2. Alleged misappropriation and diversion of funds by the appellants:The tribunal noted that SEBI's investigation revealed significant irregularities, including unauthorized use of company assets as collateral, routing transactions through subsidiaries and promoter-affiliated companies, inappropriate netting-off liabilities, and interest-free advances to promoter-affiliated companies. These actions were deemed prejudicial to the interests of CG Power and its shareholders. The tribunal found that SEBI's prima facie findings of misappropriation and diversion of funds were based on objective facts and warranted immediate regulatory action.3. Violation of SEBI Act and Regulations:The tribunal found that the appellants, including Gautam Thapar and others, had prima facie violated Sections 12A(a), (b), and (c) of the SEBI Act and various regulations under the PFUTP Regulations, 2003, and LODR Regulations, 2015. These violations included manipulation of books of accounts, misrepresentation of financials, and wrongful diversion of company funds. The tribunal upheld SEBI's findings and the subsequent ex-parte ad-interim order.4. Right to access documents for defense by the appellants:The appellants argued that they were denied access to crucial documents necessary for their defense, which violated principles of natural justice. The tribunal acknowledged the importance of document access for a fair defense and directed that any requested documents should be supplied by the company or SEBI within three working days. This direction aimed to ensure that the appellants could file an appropriate reply and participate effectively in the proceedings.5. Urgency and necessity of the ex-parte ad-interim order:The tribunal evaluated the urgency and necessity of SEBI's ex-parte ad-interim order. It referenced previous judgments emphasizing that such orders should only be issued in extreme urgent cases. The tribunal concluded that the evidence of fund diversion and misappropriation justified the urgency of SEBI's action to protect investor interests and prevent further defalcation. The tribunal found that SEBI's decision was based on substantial evidence and warranted immediate regulatory intervention.Conclusion:The tribunal dismissed the appeal, upholding SEBI's ex-parte ad-interim order. It directed the appellants to file a reply before SEBI and ensured that necessary documents would be provided to them. The tribunal emphasized the importance of protecting investor interests and maintaining confidence in the securities market through timely regulatory actions.