TaxTMI 
TaxTMI 
2013 (4) TMI 537
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....l focus on the violations, if any, of the provisions of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines 2000 read with the relevant provisions of the Companies Act, 1956. It has been further decided that a formal order would be issued appointing an investigating authority who shall investigate the matter, without being prejudiced by any observations made in the said order, and shall complete the same as expeditiously as possible. If any violations are found in the investigation, the SEBI shall proceed in accordance with law. 2. Respondent no.2 claims to have entered into business transactions with respondent no.3, Sudipti in the year 2006. At that time of point of time, Sudipti was controlled by two promoters, namely, DLF Home Developers Ltd. (DHDL) and DLF Real Estate Developers Ltd. (DREDL), both of whom were wholly owned subsidiaries of DLF - the petitioner. Sudipti was claimed to have been incorporated on 24.03.2006. It was claimed that the aforesaid promoter companies were a part of DLF group, of which the flag ship company is DLF, the petitioner herein. 3. In connection with its proposed public issue, the petitioner herein filed a Draft Red Herring Pr....
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....owed the writ petition and issued a direction to SEBI to undertake an investigation into the complaints of respondent no.2 by also looking into the averments in the affidavits and additional affidavits filed by the petitioner in the said writ petition. 8. The petitioner DLF, Sudipti and SEBI challenged the judgment of the learned Single Judge dated 09.04.2010 in the aforesaid writ petition, by filing their respective Letters Patent Appeals (LPAs). These LPAs (LPA Nos. 436/2010, 441/2010 and 488/2010) were taken up for hearing by the Court simultaneously and disposed of on 21.07.2011. The observations made by the Court and the directions issued by it in paras 4 and 5 of the order of the Division Bench, being relevant, are reproduced herein below:- "4. In course of hearing of the appeals, it is accepted that two complaints were made to the SEBI on 4th June, 2007 and 19th July, 2007, but no decision or outcome was communicated to the respondent. Thus, in the obtaining factual matrix the only mandamus that could have been issued to the SEBI is to take a decision on the basis of the complaints filed and communicate the decision to the complainant respondent. Needless to say, an ap....
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.... at its decision "after hearing the parties within a period of three months from the date of receipt of the order passed today". However, SEBI did not grant a hearing to the petitioner, inasmuch, as, the complainant i.e. the respondent no.2 was heard first in the absence of the petitioner, DLF, and thereafter the petitioner was called for a hearing, when respondent no.2 was not present. Consequently, the petitioner did not have the advantage of knowing as to what was submitted by respondent no.2 at the hearing and, therefore, obviously the petitioner could not respond to the complainant's submissions. Mr. Sorabjee submits that respondent no.2 filed detailed written submissions before the SEBI. These written submissions were also not provided to the petitioner. 13. He submits that the petitioner specifically recorded the aforesaid infirmity in the procedure adopted by SEBI in its submissions dated 03.10.2011. Mr. Sorabjee submits that such a procedure of holding one sided hearings has been held by the Supreme Court to be in breach of the principles of natural justice. In this regard, he places reliance on Payyavula Vengamma v. Payyavula Kesanna AIR 1953 SC 21, wherein the Supreme....
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....reputation and good name of the petitioner, and an investigation under Section 11C cannot be ordered lightly. 15. In support of this submission, Mr. Sorabjee places reliance on the decision of the Supreme Court in Rohtas Industries Ltd. v. S.D. Agarwal [1969] 1 SCC 325. The Supreme Court in this case was dealing with the power of the Central Government to take action under Section 235 of the Companies Act, i.e. to order an investigation into affairs of a company. The Supreme Court observed: .............. It may be noted that before the Central Government can take action under Section 235, certain preconditions have to be satisfied. In the case of an application by members of the company under Clause (a) or (b) of Section 235, the same will have to be supported by such evidence as the Central Government may require for the purpose of showing that the applicants have goods reason for requiring the investigation, and the Central Government may, before appointing an Inspector, require the applicant to give security for such amount not exceeding Rs. 1,000, as it may think fit for payment of the costs of the investigation. From the provisions contained in Sections 235 and 236, it ....
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....by SEBI under Section 11C, it is necessary that there exist circumstances which suggest that either the transaction in securities are being dealt with in a manner detrimental to the investors, or the securities market, or that any intermediary or person associated with the securities market has violated any of the provisions of the SEBI Act or the rules or the regulations made or directions issued by the Board thereunder. 19. In support of his submission that the jurisdiction under Section 11C to order an investigation is dependent on the existence of facts which give rise to "reasonable ground to believe", Mr. Sorabjee has placed reliance on S. Ganga Saran & Sons (P.) Ltd., v. ITO [1981] 3 SCC 143. In para-6, the Supreme Court observed: "6. It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclos....
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.... conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under s. 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith : it cannot be merely a pretence. To....
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.... alternate remedy available under the SEBI Act itself. He submits that this Court should not interfere with the impugned order in exercise of its discretionary jurisdiction under Article 226 of the Constitution of India. 25. Mr. Tripathi also submits that SEBI, in exercise of its statutory powers, and discharge of its statutory functions, not only exercises quasi judicial functions, but also functions as an investigative body. He submits that the impugned order has been passed by SEBI in exercise of its power to investigate into complaints made before it. He submits that the impugned order does not determine any rights of the parties, and it also does not return any finding adverse to one or the other party. The impugned order merely discusses the existence of facts which give reasonable ground to believe the existence of circumstances in Clauses (a) and/or (b) of Section 11C of the SEBI Act, and, therefore, directs an investigation by an investigating authority under Section 11C of the Act. He submits that the impugned order is a step-in aid of the proceedings, and not the final decision. He places strong reliance on the decision of the Supreme Court in Competition Commission o....
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....n with assistance of experts or others. The Commission has the power in terms of Regulation 17(2) of the Regulations to invite not only the information provider but even 'such other person' which would include all persons, even the affected parties, as it may deem necessary. In that event it shall be 'preliminary conference', for whose conduct of business the Commission is entitled to evolve its own procedure". "(5) In consonance with the settled principles of administrative jurisprudence, the Commission is expected to record at least some reason even while forming a prima facie view. However, while passing directions and orders dealing with the rights of the parties in its adjudicatory and determinative capacity, it is required of the Commission to pass speaking orders, upon due application of mind, responding to all the contentions raised before it by the rival parties". 28. The Supreme Court, while discussing the scope of Section 26 of the Competition Act, observed as follows: "86. We may also notice that the scope of duty cast upon the authority or a body and the nature of the function to be performed cannot be rendered nugatory by imposition of unnecessary directions ....
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....gation relied on. Equally, the disciplinary authority/inquiry officer would frame definite charge or charges and would communicate the same together with a statement of the facts in support thereof sought to be relied on and would call upon the delinquent officer to submit his explanation or written statement of defence etc. At the trial/inquiry the person is entitled to reasonable opportunity to defend himself". 89. The exceptions to the doctrine of audi alteram partem are not unknown either to civil or criminal jurisprudence in our country where under the Code of Civil Procedure ex-parte injunction orders can be passed by the court of competent jurisdiction while the courts exercising criminal jurisdiction can take cognizance of an offence in absence of the accused and issue summons for his appearance. Not only this, the Courts even record pre-charge evidence in complaint cases in absence of the accused under the provisions of the Code of Criminal Procedure. Similar approach is adopted under different systems in different countries. 90. Reference in this regard can be made to the case of Azienda Colori Nazionali (ACNA) S.P.A. v. Commission of the European Communities: [1972....
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....6(1), we are of the considered view that the right of notice of hearing is not contemplated under the provisions of Section 26(1) of the Act". (emphasis supplied). 29. Mr. Tripathi submits that the procedure adopted by respondent no.1 in the present case, is no different from that adopted by it in other cases while considering the issue whether, or not, to order investigation under Section 11C of the SEBI Act. He submits that, in fact, there is no legal necessity that the SEBI should grant a personal hearing to the parties before ordering an investigation under Section 11C of the SEBI Act. 30. Mr. Tripathi further submits that the SAT, Mumbai has also ruled on the aforesaid aspect in the case of Bhoruka Financial Services Ltd. v. SEBI [2006] 68 SCL 495 (Sat-Mum.). He submits that in the aforesaid case, information was provided to SEBI on a mere telephonic call, of violation of conditions of renewal of recognition granted to the Magadh Stock Exchange at Patna. That case related to purchase of shares of Bhoruka Financial Services Limited (BFSL) by DLF Commercial Developers Limited (DCDL). By an ex-parte order, DCDL was restrained from dealing in the scrip of BFSL, and a directi....
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....urities market and ask for a report. The word 'investigation' as it finds mention in Section 11(4) obviously refers to the investigation in terms of Section 11C as both these provisions were inserted simultaneously. When we read this newly added provision it becomes clear that where the Board has reasonable grounds to believe that the securities market is being dealt with in a manner which is detrimental to the investors or the securities market or any intermediary or person associated with such market, it may at any time, by order in writing direct any person to investigate the affairs of any intermediary or persons associated with the securities market and submit a report. It is, thus, clear that investigation can be made only by an order in writing and not otherwise.............................." 34. Mr. Tripathi submits that the jurisdiction and responsibility of the Board to examine possible violations of its regulations and guidelines relating to listing/trading of securities in the securities markets cannot be curtailed by limiting the materials, evidences and facts that the Board may consider. He submits that in any event, a perusal of the impugned order shows that the B....
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....the High Court when approached raising the question of jurisdiction or violation of the principles of natural justice or both is to exercise its discretion applying the principle that non-exhaustion of available statutory remedy is no bar to seek the Article 226 remedy; and when after exhaustion of the other or further remedy the Article 226 remedy is not available, the High Court, when approached, should not entertain an Article 226 petition unless it is absolutely necessary to exercise the power in the interest of justice or for preventing a miscarriage of justice. 27. Now in so far as this case is concerned s. 15T of the Act provides that any person aggrieved by an order of the Board under the Act or the rules or regulations made there under may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter; that the Tribunal may pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against; and that it shall deal with the appeal as expeditiously as possible and Endeavour to dispose of it finally within six months from the date of receipt thereof. 28. An extraordinary feature in this case is that s. 15Z ....
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....t that the Tribunal is incompetent to decide whether a decision or order of the Board under appeal to it is without jurisdiction or vitiated by violation of the principles of natural justice. On the contrary, it is quite competent to do that. 32. In my opinion, in view of the charted specific statutory course, up to the highest Court of the country, that the proceedings initiated by the Board, the lowest in the three-tier machinery, are supposed to travel, it cannot be said that the remedy of appeal under s. 15T is an alternative to the Article 226 remedy. And, as to the s. 15Z remedy, under no circumstances, it can be considered an alternative to the Article 226 remedy. Hence, in my opinion, even if it is alleged that the decision or order of the Board is without jurisdiction or is vitiated by violation of the principles of natural justice, a petition under Article 226 should not be entertained for exercising the power of judicial review, unless there are exceptional reasons, e.g. absence of a functioning Tribunal. 33. In my opinion, while the power under Article 226 can be exercised for (a) judicially reviewing a decision or order of the Board in absence of a functioning Tr....
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....ge of the Supreme Court or sitting or retired Chief Justice of the High Court. He submits that the Appellate Tribunal is, therefore, fully geared and competent to determine all issues including the issue of jurisdiction as well as the issue of breach of the principles of natural justice, as alleged by the petitioner, in the passing of the impugned order. 39.1 Mr. Sibal submits that the argument of the petitioner that the investigation report made under Section 11C by the investigating authority may adversely affect the reputation and business of the petitioner is neither here nor there. That cannot be a ground not to direct an investigation under Section 11C, if, otherwise, there is justification for directing such an investigation to be made. He submits that the report made by the investigating authority under Section 11C is to be submitted to the Board. Thereafter, it is for the Board to consider what appropriate action, if any, it has to take on the basis of the said report. 40. Mr. Sibal submits that the Chapter VIA of the Act deals with the aspect of penalties and adjudication. He submits that the right of the petitioner to be heard would arise only when action is taken ....
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....t, relevant extracts of which read as follows : "55A. Powers of Securities and Exchange Board of India. - The provisions contained in sections 55 to 58, 59 to 84 ........................................... (a) in case of listed public companies; (b) in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and (c) In any other case, be administered by the Central Government. ** ** ** 63. Criminal liability for mis-statements in prospectus. - (1) Where a prospectus issued after the commencement of this Act includes any untrue statement, every person who authorised the issue of the prospectus shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true." [Emphasis supplied] 45. Mr. Sibal submits that the petitioner has not made any allegations of mala fide....
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....r the relevant provisions of the Companies Act, 1956. Therefore, on a consideration of the complaints and the submissions of the complainant during the hearing, the counter submissions made on behalf of the Company and Sudipti, I am of the considered view that the ends of justice would be effectively met if an investigation into the matter is ordered". 46. Mr. Sibal further submits that the submission that the petitioner was not aware of the respondents grievances, and the case advance by it before the SEBI in its complaints or written submissions, is a farce. He submits that respondent no.2 has not only narrated its grievances in the complaints which are available with the petitioner, but the grievances had been set out elaborately in the writ petition preferred by the respondent no.2 before this Court, as aforesaid, and the additional affidavits filed in those proceedings. The petitioner is, therefore, not correct in contending that it was not aware of the submissions made by respondent no.2 before SEBI. 47. Mr. Arvind Nigam, learned senior counsel who appears on behalf of respondent no.3, Sudipti submits that the impugned order, insofar it directs an investigation into the....
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....sions before SEBI, i.e. respondent No. 1 in terms of the order of the Division Bench in the LPA Nos. 436/2010, 441/2010 & 488/2010 disposed of on 21.07.2011. The limited enquiry conducted by SEBI at this stage was merely to examine whether or not the facts disclosed the entertainment of a reasonable belief to cause an investigation under Section 11C of the SEBI Act, which is an inquisitorial exercise, and not an adjudicatory exercise conducted by SEBI. 51. Though I find much force in the respondent's argument that the petitioner has an alternative efficacious remedy of appeal under Section 15 T of the SEBI Act before the SAT, and a further statutory appeal under Section 15 Z before the Supreme Court, and even though I find great force in the judgment of the Calcutta High Court in Rose Valley Real Estates & Constructions Ltd. (supra), I am not inclined to dismiss this petition on the ground that the petitioner has an alternative efficacious remedy of preferring an appeal before SAT under Section 15 T of the SEBI Act for the following reasons: (i) Firstly, the case of the petitioner in the present petition is that there has been a breach of the principles of natural justice by ....
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.... Court not exercising jurisdiction under Article 226 of the Constitution is that the matter involves technicalities, which are best left to be dealt with by experts in the field. This is one of the reasons given by the Court for its decision in Rose Valley Real Estates & Construction Ltd. (supra). But the issues raised by the petitioner in the present case are purely legal and not factual, and do not involve any technicality. 52. While I respectfully agree with the judgment of the Calcutta High Court in Rose Valley Real Estates & Constructions Ltd. (supra), in my view, the petitioner's case can be distinguished on facts and I am, therefore, not inclined to relegate the petitioner to seek its remedy of appeal under Section 15 T of the SEBI Act. 53. I now turn to the primary submission of Mr. Sorabjee that the impugned order has been passed in violation of principles of natural justice and also that the respondent No. 1/SEBI did not have the jurisdiction to pass the said order, as the jurisdictional facts did not exist in the present case to reasonably conclude that SEBI had reasonable ground to believe that the conduct in question, namely the non-disclosure of the existence of....
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....gation, as any such investigation would be influenced by the decision of the Central Government. The petitioner has had its say in the matter, as it was made aware of the complaint against it and heard by SEBI on the said complaints. The submissions/case of the petitioner has been taken note of in the impugned order. 57. On the other hand, reliance placed by the respondents in the case of Competition Commission of India (supra), in my view, is most apposite. The Competition Commission of India functions in a dual capacity. It not only investigates into complaints of alleged anti-competitive transactions and activities, but it also adjudicates upon such complaints. As held by the Supreme Court, while discharging its functions under Section 26 (1) of the Competition Act, the Competition Commission of India functions in an inquisitorial capacity, and not in a quasi judicial capacity. The Competition Commission of India has to only examine whether a prima facie case exists of alleged contravention of Section 3 (1) or Section 4 (1) of the Competition Act, and if it is of the opinion that a prima facie case exists, the Commission is obliged to direct the Director General to cause an i....
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...., cannot be accepted. If accepted, it would lead to a piquant situation where the Board shall, only on the basis of a prima facie assessment return its findings which would, in turn, impinge upon the functions to be discharged by the investigating authority to be appointed to investigate into the matter. Pertinently, an investigating authority is extensively empowered to unearth facts (see Section 11C(2) to 11C(9) of the SEBI Act), and cause a detailed investigation into the matter. That exercise would get defeated if the Board were to, on the basis of a prima facie view, return findings of fact by itself holding a full fledged hearing. As in the case of Competition Commission of India, in the present case as well, the functions to be performed by SEBI cannot be rendered nugatory by imposition of unnecessary directions or impediments which are not postulated by the plain language of Section 11C. 60. The decision of the Supreme Court in Payyavula Vengamma (supra) has no application in the facts of this case, as that was a case dealing with arbitration proceedings which, undoubtedly, are quasi-judicial in character. Turning to the submissions of Mr. Sorabjee that the impugned orde....
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.... Statute does not mean a purely subjective satisfaction on the part of the concerned authority. (6) The belief must be held in good faith: it cannot be merely a pretence. To put it differently, it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief, and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the concerned authority in starting proceedings/investigation is open to challenge in a court of law. 61. It is these principles enunciated by the Supreme Court which have to be kept in mind while examining the submission of the petitioner with regard to the lack of jurisdiction in the SEBI to order an investigation under Section 11C of the SEBI Act. 62. Section 11C mandates that the Board should have "reasonable ground to believe" the existence of the state of affairs as mentioned in Clauses (a) & (b) above. 63. As already noticed hereinabove in paragraphs 2 to 5, the stand of the petitioner-DLF was that DHDL and DREDL were wholly owned subsidiaries of the petitioner-DLF. They had sold their entire share holding t....
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....e promoters of DLF Group and was also in the board of many DLF Group companies including DLF Estate Developers Limited, which according to the complainant is one of the two shareholders of Sudipti during the relevant period. During the course of hearing, it is submitted that Mr. Praveen Kumar is the nephew of Mr. K.P. Singh, the promoter/Chairman of the Company. In terms of the DRHP of the Company filed in 2007, Mr. Praveen Kumar is also mentioned as one of the key managerial persons in Company and reports to the board. The complainant further stated that Sudipti was incorporated on March 24, 2004 as a wholly owned subsidiary of the Company and that during the period of his transaction, Sudipti was controlled by the promoters through their key management personnel, namely, Mr. Praveen Kumar, Mr. Jaiprakash Gaur and Mr. Pradeep Singh. It was further stated by the complainant that Mr. Praveen Kumar and Mr. Jaiprakash Gaur were the signatories to the bank account of Sudipti and that the entire transaction (from price negotiation, payment of consideration for purchase of additional land till execution of sale deeds for and on behalf of the Sudipti) was done by Mr. Praveen Kumar and Mr.....
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....y managerial person of the Company in its DRHP (filed in 2007). Thus, Mr. Praveen Kumar continues to be closely associated with the Company even after the alleged dissociation of Sudipti from the Company. As stated above, the Complainant has alleged that Sudipti is now being indirectly controlled by the spouses of certain key managerial persons of the company whose names were mentioned in the DRHP of the Company filed during January 2007. The company has in its written submission stated that three of its subsidiaries who were holding shares in Felicite Builders and Constructions Private Limited had transferred their holding to several persons who were unconnected to the promoters of the Company. However, there is no dispute to the fact that the spouses of the key managerial persons of the Company are the shareholders in Felicite Builders and Constructions Private Limited which in turn holds shares of Shalika Estate Developers Private Limited. The entire shareholding of Sudipti is being held by Shalika Estate Developers Private Limited. It is an admitted fact that the erstwhile shareholders of Felicite Builders and Constructions Private Limited, Shalika Estate Developers Private Lim....
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....closed that out of the total land holdings of approximately 10,000 acres, only 0.5% holding was held by the company and the balance holding was held in the name of the company's subsidiaries/associate/group company/companies under the control and management of key management personnel of the company. 70. The complainant produced before the Board additional submission to support the allegation against the petitioner. The Board observes that it does not deem it proper to disregard the same without testing the veracity of such submissions in the interest of justice and in the interest of the securities market and the investors. The Board further observes that : "Having considered the submissions and the fact that the first DRHP (filed in May 2006) was withdrawn and a fresh DRHP was filed in January, 2007 after the sale of state in Sudipti, an examination is required as to whether Sudipti was dissociated for the purpose of avoiding any relevant disclosures that could arise if the entity continued to be part of the DLF group." 71. While observing that the original complaints dated 4th June, 2007, 19th July, 2007 did not contain allegations of the petitioner funding Sudipti indi....
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....in support of his complaints. Reading and understanding of the petitioner of the judgment of the Division Bench in the three LPAs does not appear to be correct. A perusal of the order of the Division Bench in the three LPAs shows that the Division Bench set aside the judgment of the learned Single Judge because the learned Single Judge had himself directed investigation into the complaints of respondent No.2, rather than requiring SEBI to examine the two complaints of respondent No.2, and discharge its statutory duty under Section 11C of the SEBI Act. This is clear from reading of para 4 of the order of the Division Bench. I, therefore, reject the submission of the petitioner that the Board has taken into consideration the extraneous or irrelevant material while passing the impugned order. 75. A perusal of the impugned order shows that it certainly cannot be said that it has been passed arbitrarily or irrational. The impugned order is clearly based on reasons which are relevant and material. The adequacy or sufficiency of the reasons which weighed with the Board in entertaining the reasonable belief with regard to the possible existence of circumstances mentioned in Clauses (a) ....