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of <h1>Ex Parte Order Violates Natural Justice Under Article 14; Appeal Allowed and Matter Remanded for Fresh Hearing</h1> <h3>Spectrum Technoprojects Private Limited Versus Securities and Exchange Board of India, Mumbai</h3> Spectrum Technoprojects Private Limited Versus Securities and Exchange Board of India, Mumbai - TMI 1. ISSUES:1.1 Whether imposition of penalty under Section 15HA of the SEBI Act, 1992 for alleged violations of Regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 can be sustained where a Show Cause Notice (SCN) was not served and the adjudicating order was issued ex parte.1.2 Whether failure to adhere to Regulation-7 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and the absence of service of the SCN amount to a violation of principles of natural justice and Article 14 of the Constitution of India.1.3 Whether allegations that an Authorized Person participated in large-scale reversal trades creating 'artificial volume' in illiquid stock options can be upheld without direct evidence linking the entity to the trades, where trades were allegedly in client accounts.1.4 Whether the availability of Settlement Schemes providing a 'one-time opportunity' to settle illiquid stock options matters bears on the validity of adjudication proceedings initiated against entities that did not avail the scheme.2. RULINGS / HOLDINGS:2.1 On service and ex parte order: The adjudicating order imposing penalty is unsustainable where the SCN was not served and the order was issued 'ex parte'; such procedure is 'violative of principles of natural justice' and Article 14 of the Constitution of India.2.2 On Regulation-7 compliance: Failure to adhere to Regulation-7 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 insofar as service of the SCN was not effected renders the impugned order liable to be set aside.2.3 On sufficiency of evidence for attribution: The record as examined by the Court indicates that allegations based on reversal trades and 'creation of artificial volume' require proper opportunity for defence where there is contention that trades were executed in client accounts and no direct evidence was placed on record linking the entity to trades; the impugned order based on such material cannot be sustained without fresh adjudication after service of SCN.2.4 On Settlement Schemes: The existence of Settlement Schemes framed as a 'one-time opportunity' for settlement is relevant background; however, adjudication proceedings against entities that did not avail the scheme may proceed provided statutory procedural safeguards (including service of SCN) are complied with.3. RATIONALE:3.1 Legal framework applied: The Court applied Section 15HA of the SEBI Act, 1992 and substantive provisions of the PFUTP Regulations (Regulation 3(a)-(d), 4(1) and 4(2)(a)) as the statutory basis for alleged market-manipulative conduct, and procedural obligations under SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (notably Regulation-7) and constitutional protections under Article 14.3.2 Procedural due process emphasis: The decision emphasizes that service of a Show Cause Notice (SCN) and opportunity to be heard are essential preconditions to imposing penalties; absence of service and issuance of an 'ex parte' order constitute breach of natural justice and require setting aside and remittal for fresh consideration.3.3 Evidentiary considerations: Where the allegation is participation in 'large-scale reversal trades' resulting in 'creation of artificial volume,' attribution to an Authorized Person who contends trades were in client accounts cannot rest on surmise or conjecture; proper adjudication with evidence and opportunity to defend is required.3.4 Remedy and direction: The appropriate remedy is to quash the impugned order and remit the matter for fresh adjudication after valid service of the SCN and an opportunity to be heard; no substantive determination on the merits of the alleged PFUTP violations was upheld in the absence of compliance with procedural safeguards.
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