TaxTMI 
TaxTMI 
2013 (11) TMI 957
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....aud unearthed by the Securities and Exchange Board of India (SEBI) constituted under the SEBI Act relating to the first sale of shares by 21 private companies to the general public known as Initial Public Offering ('IPO's' for short). 3. SEBI Act is enacted by the Parliament with a view to promote orderly and healthy growth of securities market and for investor's protection. SEBI, interalia monitors the activities of the stock exchanges, mutual funds, merchant banker's etc. to achieve goals with which the SEBI Act has been enacted. 4. Prior to 1995, securities such as share certificates were issued by the Companies in physical form. With the introduction of depository system regulated under the provisions contained in the Depositories Act, 1996, holders of securities who would have otherwise held their securities in the physical form could hold the said securities in the electronic form through the Depository Participants ('DPs' for short), another class of market intermediaries with whom 'Beneficial Owner Accounts' ('BO Accounts' for short) are opened. Thus, under the depository system, securities such as shares are held in dematerialized form and trading in the said shares ....
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.... allotment of shares in the category of retail investors in IPOs, the said shares were transferred to the demat accounts of the 'key operators'. Thereafter the said key operators transferred the shares through off market deals to the ultimate financiers (hereinafter referred to as 'financiers'). Thus by opening multiple demat accounts in fictitious names, key operators cornered/acquired shares through IPO's to the detriment of retail investors. 7. On the basis of above investigation, ex-parte ad-interim orders were passed by the respondent against concerned DPs with whom fictitious demat accounts were opened and also against both depositories viz, the appellant and CDSL on December 15, 2005, January 12, 2006 and April 27, 2006, in the case of IPOs of Yes Bank Limited, IDFC Limited and 19 other companies under Section 11, 11B & 11(4) of SEBI Act read with Section 19 of the Depositories Act 1996 respectively. By the said ex-parte orders the appellant and CDSL were inter-alia directed to verify the "Know Your Customer" documents known as KYC documents in respect of certain demat accounts opened by DPs named therein. By the said ex-parte ad-interim orders, some of DPs named therein ....
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.... 78 of 2006 filed by the appellant against the ex-parte ad-interim order dated April 27, 2006 by recording a statement made by the counsel for the Board to the effect that observations made in the said ex-parte ad-interim order dated April 27, 2006 regarding the alleged failures and directions for revamping the management were only prima facie observations. By another order also dated November 22, 2007 SAT allowed Appeal No. 147 of 2006 filed by the appellant, whereby disgorgement order passed by respondent on November 21, 2006 was set aside. By a common order dated January 14, 2009 Appeal no. 68 of 2007 filed by appellant and Appeal No. 69 of 2007 filed by CDSL were allowed by SAT thereby setting aside the adjudication orders passed against the appellant and CDSL both dated April 27, 2007. Admittedly, the respondent has not challenged the aforesaid orders passed by SAT in the case of the appellant as well as CDSL and thus the said orders passed by SAT have attained finality. 12. Thereafter, in the case of CDSL, Whole Time Member of the respondent passed an order on January 15, 2009 to the effect that since SAT has deleted the penalty and has set aside the adjudication order pas....
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....er 4, 2008 (which is impugned in this appeal) listing therein various lapses on the part of the appellant as well as the respondent in relation to IPO investigation and directed both the appellant as well as the respondent to carry out certain directions as more particularly set out therein. On the same day i.e. on December 4, 2008, two more orders were passed by the said two member committee i.e., in the case of DSQ Software Ltd. and in the case of Rajnarayan Capital Market Services Ltd. where in similar lapses on the part of the appellant were noticed. 17. In SEBI Board meeting held on November 9, 2009 impugned orders both dated December 4, 2008 relating to IPO investigation and DSQ software Ltd. were considered and it was resolved that the findings recorded in the above two orders to the extent it related to the respondent were outside the mandate of the delegation and since the findings recorded against the appellant cannot be segregated from the findings recorded against the respondent, both the said orders are liable to be treated as null and void and non-est and that SEBI Board as a whole (excluding Chairman Mr. Bhave) would dispose of the said two matters afresh. 18. ....
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.... consideration. The costs awarded by the High Court stands deleted. Adjourned by four weeks." 23. Thereafter, on May 9, 2011 the Apex Court passed further order in the said SLP as follows:- "On 28.03.2011, this Court made the following order: The Securities and Exchange Board of India (SEBI) to consider whether its Board will re-consider the order/Report of its Special Committee dated 4.12.2008 with reference to NSDL/DSQ and pass appropriate resolution and place it before this Court for further consideration." In pursuance of the same, the SEBI has considered the matter at its 137th meeting held on 26.04.2011 and resolved to reconsider the decision dated 9.11.2009 by which it treated the reports dated 4.12.2008 of the sub-Committee in respect of IPO/DSQ of NSDL as non-est. It has further resolved that it would reconsider the Order/Report of its sub-Committee dated 4.12.2008 with reference to NSDL/DSQ with a view to accept it except the portion relating to SEBI which was passed ex-parte. On examination of the repor....
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....r dated 4.12.2008 relating to Rajnarayan Capital Markets Services Ltd. was not warranted. 12. We find that the order of the Securities Appellate Tribunal is not a reasoned order, in so far as the direction to expunge the remarks against NSDL. In fact, the Tribunal has noted that as the counsel for SEBI and NSDL had agreed that reasons need not be recorded for expunging the remarks against NSDL it was not recording reasons. In the changed circumstances, we are of the view that a reasoned order would be necessary. The order of the Tribunal cannot be sustained in the absence of reasons. 13. In view of the above, this appeal is allowed in part. The public interest litigation filed by the appellant in so far as the challenge to the order of the Tribunal dated 22.6.2010 is allowed and the said order is set aside and the matter is remitted to the Securities Appellate Tribunal for fresh consideration in accordance with law. It is open to the appellant to get itself impleaded as the second respondent in the said appeal before the Tribunal and assist the Tribunal. In so far as prayers relating to order of SEBI dated 9.11.2009 and 2.2.20....
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....the adjudication order would not survive. (e) The decision of the respondent to continue the proceedings against the appellant to the exclusion of CDSL is wholly unreasonable, arbitrary, discriminatory and violative of Articles 14 & 19 of Constitution of India, because, the alleged lapses recorded in the adjudication orders passed against the appellant and CDSL were common and after the said adjudication orders were set aside by SAT on January 14, 2009, the respondent, having dropped the proceedings against CDSL could not have decided to continue to proceed against the appellant. (f) Even on merits, first direction contained in the impugned order does not survive, because, requisite investigation has already been carried out by the appellant and after SAT order dated January 14, 2009 by which the charges levelled against the appellant have been set aside, there is no question of conducting fresh inquiry to fix individual responsibility. Moreover, remedial measures to strengthen the system in the context of IPO irregularities have been taken from time to time by the appellant on its own and at the instance of the respondent. Mo....
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....llant cannot question the sanctity behind the directions contained in the impugned order. (c) The first direction contained in the impugned order merely requires the appellant to conduct an independent inquiry and fix individual responsibility for failures on the part of appellant, in discharge of its legal duties and responsibilities identified in the impugned order. This direction contained in the impugned order neither casts any stigma on the appellant nor seeks to penalize the appellant or its officers and hence grievance against impugned order is wholly unjustified. (d) From correspondence exchanged between the parties it is seen that second direction contained in the impugned order stands complied with and only thing required to be done by the appellant is to effectively implement the same, in future. (e) The argument of the appellant that in view of SAT order dated January 14, 2009 the impugned order does not survive is not correct. The SAT order dated January 14, 2009 deals with issue of supervision/physical inspection of DPs during pre-registration period and not in relation to supervision/....
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....s on November 9, 2009 and February 2, 2010 SEBI Board became functus officio in relation to implementation of the impugned order dated December 4, 2008. However, in this case, since Apex Court having wide powers under Article 142 of the Constitution to pass such order as is necessary to do complete justice in any matter had called upon the respondent to consider whether its Board would reconsider passing appropriate resolutions in the matter, the decision of the Board to reconsider its resolutions relating to implementation of the impugned order dated December 4, 2008 cannot be faulted. Accordingly, we hold that ordinarily, SEBI Board cannot review its own resolutions, however, in the facts of the present case, for the reasons stated hereinabove, decision of the Board to review its earlier decisions cannot be faulted. 31. The question then to be considered is, whether the statement of the respondent recorded in Apex Court order dated September 5, 2011 to the effect that the respondent has decided to accept the impugned order dated December 4, 2008 and release the said order for compliance by the appellant amounts to Apex Court endorsing the correctness of the impugned order date....
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....are adequate to ensure the integrity of the overall depository system and the securities market; and identify any remedial measures needed: (i) selection of DPs; (ii) opening and operation of depository accounts including the KYC system; (iii) audit, (iv) supervision; (v) inspection and (vi) penalties and sanctions. Such audit should be in accordance with terms of reference satisfactory of SEBI and should be completed within six months. Within three months of the receipt of the audit report NSDL should send to SEBI its own independent assessment of the above and a comprehensive set of proposed measures necessary to correct any deficiencies." 35. As noted earlier, counsel for the respondent has fairly stated before us that the 2nd direction set out here in above has already been complied with. Therefore, the only question to be considered is, whether the grievance of the appellant against 1st direction set out hereinabove is justified or not. 36. The 1st direction contained in the impugned order requires the appellant to conduct an independent inquiry to establish individual responsibility for failures of the appellant in performing its legal duties and responsibilities in rel....
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....ing the same yardstick, the two member committee, in view of the lapses on the part of the respondent in discharging its regulatory responsibilities, would have directed the respondent to investigate and fix individual responsibility on their part. The very fact that the two member committee has not passed any such direction against the respondent, clearly shows, that lapses noticed while discharging regulatory responsibilities could not be the basis for ordering fresh investigation. Therefore, the mere fact that certain lapses were noticed during the course of investigation could not be a ground for ordering fresh inquiry to fix individual responsibility especially when the investigation already conducted did not suggest any individual complicity and no fault was found with such investigation carried out by the appellant. 41. Moreover, in the SAT orders both dated January 14, 2009, various commissions and omissions on the part of the appellant/ CDSL in the matter of IPO irregularities set out in the respective adjudication orders were considered and while setting aside the penalty of Rs. 5 crore/ 3 crore imposed under the said adjudication orders, the SAT observed that the char....