Tribunal affirms SEBI's power on ex parte orders in investor protection case, directs new officer appointment

The Tribunal upheld SEBI's authority to issue ex parte ad interim orders to protect investors and market integrity. The case involved alleged violations of SEBI regulations related to fund siphoning and round-tripping, stemming from a fixed deposit appropriation by Yes Bank. While the appellants raised concerns about procedural fairness, the Tribunal held that a post-decisional hearing sufficed in urgent cases. SEBI was directed to appoint a new officer to address potential bias concerns, and the appellants were instructed to file objections within two weeks, emphasizing that the Tribunal's observations were preliminary.

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Issues Involved:
1. Legality and urgency of ex parte ad interim order by SEBI.
2. Alleged violation of SEBI regulations by the appellants.
3. Principles of natural justice and procedural fairness.
4. Prima facie findings of fund siphoning and round-tripping.
5. Bias and influence in the decision-making process.

Summary:

Legality and Urgency of Ex Parte Ad Interim Order:
The appellants challenged the ex parte ad interim order dated June 12, 2023, issued by SEBI, arguing that there was no "tearing urgency" justifying the order, especially since the issue related to the financial year 2019-20. They contended that SEBI lacked the power to direct them to cease holding directorial positions under Section 11 and 11B of the SEBI Act. The Tribunal found that SEBI has the authority to pass such orders to protect investors and maintain market integrity, especially when prima facie evidence indicates a violation of securities laws or fund siphoning.

Alleged Violation of SEBI Regulations:
The case stemmed from the resignation of two independent directors of ZEEL in November 2019, who raised concerns about the appropriation of a fixed deposit by Yes Bank to square off loans of related parties of Essel Group. The investigation revealed that a "Letter of Comfort" issued by Subhash Chandra to Yes Bank was unknown to the Board of Directors and violated Regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Tribunal noted that the related entities repaid ZEEL with interest, but SEBI's investigation suggested round-tripping of funds, leading to the interim order.

Principles of Natural Justice and Procedural Fairness:
The appellants argued that the impugned order violated the principles of natural justice by not providing a pre-decisional hearing. The Tribunal held that while natural justice generally requires a pre-decisional hearing, in cases of urgency, a post-decisional hearing suffices. The Tribunal cited previous judgments affirming that SEBI can pass ex parte orders to prevent imminent mischief, provided a post-decisional hearing is granted.

Prima Facie Findings of Fund Siphoning and Round-Tripping:
The Tribunal found that SEBI's prima facie findings, based on bank statements, indicated fund siphoning and round-tripping from ZEEL to related entities and back within a few days. The appellants failed to provide evidence to counter these findings. The Tribunal emphasized that the appellants should present their objections and evidence to SEBI to prove the legitimacy of the transactions.

Bias and Influence in the Decision-Making Process:
The Tribunal noted potential bias as the same WTM who passed the impugned order was involved in the settlement proceedings and had considered an interim order in an unrelated case (Shirpur Gold Refinery Ltd.). To avoid any bias, the Tribunal directed SEBI to appoint another WTM to consider the appellants' objections.

Final Directions:
The appeals were disposed of with the direction for the appellants to file objections to the ex parte ad interim order within two weeks. SEBI was instructed to appoint a new WTM to hear the objections and pass appropriate orders. The Tribunal clarified that its observations were prima facie and should not influence the final decision.

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