TaxTMI 
TaxTMI 
2012 (11) TMI 1324
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.....2011 made by a whole time member of the Securities and Exchange Board of India (SEBI). The order of SEBI held that investigations would be made by it (i.e. SEBI) into the complaints dated 04.06.2007 and 19.07.2007 made by the second respondent, Kimsuk Krishna Singha, (hereafter called "complainant") against DLF, and Sudipti Estates Private Limited, the third respondent (hereafter "Sudipti"). SEBI's order indicated that investigations would be made into transactions and the alleged violations of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines 2000 ("the Guidelines") read with the relevant provisions of the Companies Act, 1956. SEBI also indicated that an investigating authority would look into the matter, without being prejudiced by any observations made in the SEBI's order, and would complete investigations expeditiously, and if any violations were found, they are to be proceeded with in accordance with law. BRIEF OVERVIEW The brief facts are that the second Respondent claimed having entered into business transactions with Sudipti, in 2006; that concern was controlled by DLF Home Developers Ltd.(DHDL) and DLF Real Estate Developers Ltd.(DREDL). The....
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.... Single judge after considering the materials, and hearing the parties, by judgment dated 09.04.2010, allowed the writ petition and directed SEBI to investigate into the complaints (of the second respondent). While doing so, the single judge also took into consideration averments in the affidavits and additional affidavits filed by the petitioner in the writ petition (i.e. the complainant). DLF, Sudipti and SEBI challenged the judgment of the Single Judge and filed Letters Patent Appeals (LPAs, being Nos. 436/2010, 441/2010 and 488/2010). All these appeals were heard and disposed of by a common order of the Division Bench, dated 21.07.2011. The order of the Division Bench contained the following observations and directions: 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 appeal would lie from s....
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....en argued that SEBI could legitimately direct such investigations only if it had, under Section 11 (of the Securities and Exchange Board of India Act, 1992, hereafter called "the SEBI Act") "reasonable grounds" to believe that such a step was essential. To arrive at such a prima facie determination, it is necessary that there is some tangible basis for the allegations which can in turn lead to a reasonable opinion regarding the grounds which may exist, calling for investigation. SEBI's stand was that writ proceedings were not an appropriate remedy, and that DLF ought to have availed its statutory right of appeal against the order under Section 15-T. SEBI and the complainant had contended that DLF could not have claimed a right to hearing as a prelude to the issuance of an investigation order, as such a step was not mandated under the SEBI Act. The argument, in the writ petition, that DLF was not heard, was resisted. 6. In the impugned judgment, the learned single judge held that judicial review power under Article 226 of the Constitution of India, enabled exercise of restricted jurisdiction in such cases and did not enable the Court to examine the adequacy or sufficiency of ....
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.... which means are not known to and capable of being met and resisted by the other party, that it is impossible, for a moment, not to see, that this W.P.(C) 8128/2011 Page 8 of 61 was an extremely indiscreet mode of proceeding, to say the very least of it. It is contrary to every principle to allow of such a thing, and I wholly deny the difference which is alleged to exist between mercantile arbitrations and legal arbitrations. The first principles of justice must be equally applied in every case. Except in the few cases where exceptions are unavoidable, both sides must be heard, and each in the presence of the other. In every case in which matters are litigated, you must attend to the representations made on both sides, and you must not, in the administration of justice, in whatever form, whether in the regularly constituted Courts or in arbitrations, whether before lawyers or merchants, permit one side to use means of influencing the conduct and the decisions of the Judge, which means are not known to the other side." 9. This case of Harvey v. Shelton (1844) 7 Beav. 455 at p. 462, is the leading case on this point and it has been followed not only in England but in India. ....
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....ive circumstances relating those facts, invoking the power under Section 11-C would be without jurisdiction and unjustified. Counsel relied on M/s S. Ganga Saran and Sons (Pvt.) Ltd., Calcutta v. Income Tax Officer & Ors (1981) 3 SCC 143 where the Supreme Court observed that: 6. The important words under Section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapa....
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.... that the writ petition itself was not maintainable, by reason of an alternative remedy to the SEBI's under Section 15-T, which allows any person aggrieved by an order of the Board (SEBI) to appeal to the Securities Appellate Tribunal (SAT). SEBI's counsel, Mr. Parag Tripathi, submitted that the single judge was aware of the fact that it performed multifarious activities, including those which were investigative and quasi-judicial. SEBI issued the order impugned under Article 226 in exercise of its investigative power to look into complaints made to it. That order did not determine or adjudicate upon any dispute, or lis resulting in any adverse order against any party. The impugned order discussed the existence of facts which gave reasonable ground to (SEBI) to believe the existence of circumstances in Clauses (a) and/or (b) of Section 11C of the SEBI Act, necessitating an investigation under Section 11C of the Act. That order was a step-in aid of the proceedings, and not the final decision. Reliance is placed upon the decision of the Supreme Court in Competition Commission of India v. Steel Authority of India Ltd. & Anr., (2010) 10 SCC 744. He submits that in this case, wh....
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....oceedings, the grounds for invocation of such law and the requirement of compliance to the principles of natural justice in light of the above noticed principles. *********** **************** 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 or impediments which are not postulated in the plain language of the section itself. 'Natural justice' is a term, which may have different connotation and dimension depending upon the facts of the case, while keeping in view, the provisions of the law applicable. It is not a codified concept, but are well defined principles enunciated by the Courts. Every quasi-judicial order would require the concerned authority to act in conformity with these principles as well as ensure that the indicated legislative object is achieved. Exercise of power should be fair and free of arbitrariness. *********** **************** 91. The jurisdiction of the Commission, to act under this provision, does not contemplate any adjudicatory function. The Commission i....
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....SEBI, for the first time, to investigate the affairs of any intermediary or persons associated with the securities market and seek a report. The term 'investigation' in Section 11(4) is also similar in terms to Section 11C; both provisions were inserted simultaneously. Such being the case, the only statutory requirement is that the order directing investigation should be in writing; no further condition can be read into the statute. SEBI submits that its responsibility to examine irregularities and violation of its regulations, guidelines, etc. in regard to various matters prescribed by it would be severely curtailed if pre-conditions as to the materials, evidence and facts are set by Courts. It is submitted that in any case, the impugned order did not take into consideration the additional documents and information given by the complainant. They are not adverted to in SEBI's order. If they are relevant, at the stage of investigation, the power under Article 226 cannot preclude their consideration. 14. The appeal was opposed on behalf of the complainant; its counsel, Mr. Sibal argued that DLF should have availed its alternative remedy under Section 15-T of the SEBI A....
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.... be administered by the Securities and Exchange Board of India; and (c) In any other case, be administered by the Central Government. x x x x x x x x x x 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 1 [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. Findings of the Learned single judge 17. The impugned judgment held that the argument on behalf of SEBI that the writ petition was precluded by an alternative remedy was substantial and persuasive. However, the learned single judge exercised his discretion and considered the merits of the submissions made on behalf of the parties about the legality of the SEBI's order. It was held, in connection with the nature of SEBI's power, and t....
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....sion does not say, and it cannot be taken to mean that even before launching an investigation under Section 235 of the Companies Act, the Central Government is required to hold a full-fledged hearing, by hearing all the persons concerned in the presence of each other; granting each concerned person the right to meet the case of the other; deciding issues of fact or law, or; returning a finding of fact. If the Central Government were to be expected to itself function in a quasi judicial capacity while considering whether, or not, to order an investigation under Section 235 of the Companies Act, the purpose of directing an investigation into the affairs of the company itself would get diluted, if not totally defeated, and the same would also impact the rights of the parties in the course of investigation, 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. ************** **************** 58. Similarly, ....
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....nugatory by imposition of unnecessary directions or impediments which are not postulated by the plain language of Section 11C 18. The decision of the Supreme Court in Payyavula Vengamma was distinguished. The learned single judge also kept in mind the decision in Ganga Saran, and other cases, in regard to relevant considerations as to what constitute "reasonable ground to believe" under Section 11C. He noticed that DLF's position was that DHDL and DREDL were its wholly owned subsidiaries. They had sold their entire share-holding to Sudipti in the year 2006 and, consequently, ceased to be an associated company of the petitioner-DLF at the time of filing of the revised DRHP in January, 2007. He also noticed that SEBI had noted submissions of the complainant as well as DLF and Sudipti (even though Sudipti did not appear at the stage of hearing). The impugned judgment noted the following observations of SEBI, in its order: In the FIR (submitted alongwith the complaint dated June 4, 2007), it was stated that Mr. Praveen Kumar represented himself to be a authorized signatory/director of Sudipti and related to the promoters of DLF Group and was also in the board of many DL....
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....ote that, in terms of Clause VII(c) of Schedule II of Companies Act, 1956, a duty is cast upon the issuer company to disclose any material development which could impact performance and prospects. For the said purpose, it would be necessary, in the interest of justice, to determine as to how Sudipti was related to the company at the relevant period. It is an admitted fact that Sudipti was once an associate of the Company and ceased to be so since November 2006. Sudipti was originally promoted by two of the DLF group companies namely, DLF Home Developers Limited and DLF Estate Developers Limited. The said two companies were holding 50% each of the equity of Sudipti. Further, Mr. Praveen Kumar, who was disclosed as the key managerial person of the Company, was one of the directors of Sudipti and was one of persons against whom the FIR was registered. Mr. Praveen Kumar, who was closely associated with the Company through Sudipti and the DLF group companies before the Company's dissociation with Sudipti, is also mentioned as a key managerial person of the Company in its DRHP (filed in 2007). Thus, Mr. Praveen Kumar continues to be closely associated with the Company even a....
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....mediary companies to purchase land which forms part of the land disclosed in the DRHP. The case of the complainant is that the DLF purchases land through a maze of intermediary companies controlled by it, through a series of back to back purchases of debentures through which the purchase money flows to an entity that purchases the land and that the company enters into a series of back to back development rights agreements whereby it acquires the development rights in the land so purchased, by paying the same amount of money to the entity purchasing the land in lieu of the development rights, which money is then used to redeem the back to back debentures. 68. The case of the complainant/Respondent No. 2 is that the DLF did not, in its DRHP, disclose its modus operandi for the purchase of lands and selectively avoided disclosure of information about the intermediary companies it uses to purchase lands, so as to avoid disclosure of any potential liability, civil or criminal proceedings that have arisen or may arise in connection with land purchases. 69. The Board also takes note of the fact that DLF in its DRHP filed in the year 2007 disclosed that out of the total l....
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....e Board has made it clear that no observation is made.//Pertinently, the Division Bench has also observed in its order ?Needless to emphasize, SEBI, if so advised in law, can always call for documents. 73. There is no bar or impediment cast on the Board by the SEBI Act, to say that it would not entertain or look into evidence that the complainant may rely upon in support of his complaint earlier made, while considering whether, or not, to direct an investigation. There is no reason to put any such fetters on the powers of the Board or to read such restrictions into the statute, which are clearly not there. The Board is the Sole authority created by law to deal with complex issues which arise in the management and supervision of the securities markets. Any such restrictions, artificially introduced would denude the Board of its powers and hamper its functioning. It appears, the Division Bench was conscious of this position when it made its aforesaid observations. 74. I do not agree with the petitioner's submission that the Division Bench in its judgment had precluded the Board from looking into any additional information/documents that Respondent No. 2/Complain....
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....7, levelling similar allegations and requesting investigation under Section 11 of the SEBI Act. Alleging inaction by SEBI, as regards investigation of the complaints made, the complainant preferred WP (C) No. 7976 of 2007 (under Article 226) seeking issuance of an appropriate writ directing SEBI to investigate into DLF's affairs. The Learned Single Judge granted the relief. That judgment, however, was set aside 'in its entirety'- (by the Division Bench, in LPA Nos. 436, 441, 488/2010). The reason for doing so was that the learned Single Judge had issued a direction to the SEBI to investigate not only into the two original complaints, but also into the, materials further placed on record during the course of the writ proceedings. Accordingly, the Division Bench noted that a mandamus could only be granted as regards the two complaints which were not acted upon, as the other material had never been placed before the SEBI, negating any cause of action (failure to act) for the issuance of a writ in respect of that information. The reasons which resulted in setting aside the judgment of the Learned Single Judge are relevant to determining the context of the earlier Division B....
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....er to act on a complaint. Concededly, a right to hearing exists in quasi-judicial and even administrative proceedings (Swadeshi Cotton Mills v. Union of India AIR 1981 SC 818). However, this is so only when the decision is based on the adjudication of the rights of parties. In fact, it is instructive to notice that while Section 237 of the Companies Act, was construed in Barium Chemicals Ltd., and Rohtas Industries Ltd., it was neither argued before nor hinted by the Court that any question of an opportunity being given to the company before taking action arises in construing Section 237. 24. The Supreme Court, in State of Gujarat v. Jamnadas, [1975] 2 SCR 330, noted that a right to hearing "is given before the penalty or final action is taken." Similarly, Lord Denning's words in Selvarajan v. Race Relations Board, (1976) 1 All ER 12 are instructive: "It [the investigating body] need not hold a hearing. It can do everything in writing. It need not allow lawyers." It is also settled that the right to a hearing is contextual-(See The New Prakash Transport Co. Ltd. v. The New Suwarna Transport Co. Ltd. AIR 1957 SC 232 and Haryana Financial Corporation and Anr. v. Kailash Chandr....
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....y then that he will be able to put forward his defence. 26. In this case, no charges were made against DLF by SEBI. Quite to the contrary; the impugned order of the Whole Time Member notes that: "A formal order would be issued appointing the Investigating Authority. The said Officer shall investigate the matter without being prejudiced by any observations made hereinabove ... If [at the time when the investigation under Section 11C is carried out] violations are brought out in the investigation, the Securities and Exchange board shall proceed in accordance with law". 27. The Supreme Court, in the Competition Commission of India case when considering Section 19 of the Competition Act, 2002, noted that [t]he provisions of Section 19 do not suggest that any notice is required to be given to the informant, affected party or any other person at that stage. Such parties cannot claim the right to notice or hearing but it is always open to the Commission to call any 'such person', for rendering assistance or produce such records, as the Commission may consider appropriate. The wide amplitude of SEBI's power, to invoke its authority, and enforce regula....
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.... character, and thus, determining rights and obligations of parties. However, as discussed above, in this case, no decision is taken so as to prejudice either party, or any direction given. The mandate of the law, at the stage of SEBI's deciding whether to direct investigation or not, was to decide in writing, that reasonable grounds existed, calling for investigation. 29. DLF's argument was that the Division Bench's direction that "SEBI shall examine the complaints and take a decision and communicate it to the parties. Needless to emphasize, SEBI, if so advised in law, can always call for documents ... The decision shall be taken after hearing the parties within a period of three months from the date of receipt of the order passed today " and its further direction setting aside the judgment of the Learned Single Judge in its entirety, conferred a right to hearing, whereby fair procedure had to be necessarily followed. 30. As noted previously, the reason for setting aside the judgment of the learned Single Judge was very specific, and did not mean to grant an independent right of hearing to either party for all stages of the investigation. The reason was that t....
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....he SEBI was free to investigate and take into account any additional material in keeping with its plenary powers under the SEBI Act (Securities Exchange Board of India v. Ajay Agarwal, decided by Supreme Court on 25-2-2010). In fact, the Division Bench noted that "Needless to emphasize, SEBI, if so advised by law, can always call for documents". Thus, the Division Bench did not seek to restrict the statutory powers under the SEBI Act, but rather, required it to exercise its discretionary powers wholly and with utmost objectivity. It would be unjustified therefore to claim that the SEBI was restricted while conducting appropriate investigation, by disallowing a consideration of material relevant to the original complaints. Such a restrictive interpretation would mock the statute, and restrict the powers of SEBI, which are otherwise plainly wide. Moreover, as long as the material is relevant, and germane to the question, i.e. whether to hold an inquiry or not, it would have to be taken into account. The findings of the learned Single judge on this aspect are sound, and call for no interference. Point No. 3 32. DLF had argued that the jurisdictional pre-requisite under Section 11C,....