Tribunal quashes SEBI ex-parte order, directs appellants to reply to Show Cause Notice and deposit funds.

Rajeev Vasant Sheth Versus Securities And Exchange Board of India

Rajeev Vasant Sheth Versus Securities And Exchange Board of India - TMI Issues Involved:
1. Ex-parte order by SEBI.
2. Alleged insider trading and violation of the Code of Conduct.
3. Appellants' defense and contention of no UPSI.
4. SEBI's justification for the impugned order.
5. Relevance of precedents from previous cases.
6. Tribunal's decision and directions.

Detailed Analysis:

1. Ex-parte Order by SEBI:
The appeal arises from an ex-parte order passed by the Whole Time Member (WTM) of SEBI on September 04, 2020. This order directed the impounding of alleged unlawful notional loss avoided by the appellants during the UPSI period. The appellants were also directed to credit the amounts to an interest-bearing Escrow Account and were restricted from disposing of their assets without SEBI's permission.

2. Alleged Insider Trading and Violation of the Code of Conduct:
The appellants, who were promoters of Tara Jewels Limited (TJL), were accused of insider trading during the period from October 01, 2017, to December 31, 2017. It was alleged that they traded shares while in possession of unpublished price-sensitive information (UPSI) about the company's declining profits, thereby avoiding losses. Additionally, they were charged with violating the Code of Conduct by not obtaining pre-clearances for their trades.

3. Appellants' Defense and Contention of No UPSI:
The appellants contended that the impugned order was passed hastily without a show-cause notice, depriving them of the opportunity to present their case. They argued that the declining profits of TJL were public information since 2016, and their share sales were intended to infuse funds into the company to revive its fortunes. They claimed full disclosure and cooperation with SEBI and emphasized that no UPSI existed. They cited the Tribunal's decision in Abhijit Rajan v. SEBI, where similar actions were justified due to the necessity to infuse funds.

4. SEBI's Justification for the Impugned Order:
SEBI's counsel argued that the order was justified due to the appellants' attempt to become unsecured creditors by lending funds to the company, which had gone into liquidation. SEBI emphasized the necessity to secure the amount of loss averted by the appellants while trading as insiders. They highlighted the appellants' failure to pre-clear trades as a violation of the insider trading code of conduct. SEBI sought to protect investors' interests and the integrity of the securities market.

5. Relevance of Precedents from Previous Cases:
The Tribunal referred to its previous orders in Abhijit Rajan's case and Dr. Udayant Malhoutra's case. In Abhijit Rajan's case, the Tribunal held that the appellant could not be blamed for insider trading if they did not trade "on the basis of the information" and had a necessity to sell shares. In Dr. Udayant Malhoutra's case, the Tribunal quashed a similar impounding direction, stating that no amount towards disgorgement could be directed to be deposited in advance unless adjudicated and quantified. The Tribunal emphasized that ex-parte interim orders should be passed sparingly and only in extreme urgent matters.

6. Tribunal's Decision and Directions:
The Tribunal quashed and set aside the impugned order, except as a Show Cause Notice (SCN). The appellants were directed to file a reply to the SCN within four weeks. SEBI was instructed to decide the matter finally after giving the appellants a hearing within six months. The appellants were directed to deposit the specified amounts in an interest-bearing Escrow Account with SEBI within four weeks to safeguard investors' interests and protect the securities market's integrity. The Tribunal's order was digitally signed due to the Covid-19 pandemic, and parties were directed to act on the digitally signed copy.

This comprehensive analysis covers all relevant issues and preserves the legal terminology and significant phrases from the original text.