TaxTMI 
TaxTMI 
2025 (5) TMI 411
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....7 to R10; Sri. Vikram Huilgol, Senior Counsel for Sri. Laksha Kollappa, Advocate For R11; Sri. Udaya Holla, Senior Counsel For Proposed Impleading Applicants ON IA 3/24) ORAL ORDER The petitioner, a company incorporated under the Company Act challenges the communication issued by the respondent No.2/ Assistant General Manager, Corporate Finance Investigation Dept SEBI - appointing a Forensic Auditor to assist the investigating authority to conduct a forensic audit of the consolidated financial statement of the company for the financial years March, 31, 2018, March 31, 2019, March 31, 2020 and March, 31 2021 with Special focus on impairment of subsidiaries/wholly owned subsidized associate, loan and advances granted to the related parties and other entities etc. 2. A complaint was filed by respondents Nos.5 to 11 who are the shareholders of the petitioner- company with the Registrar of Companies on 8.5.2020 to investigate and specially audit into the affairs of the petitioner's company stating that petitioner's company has made an impairment loss provision of Rs.118.66 Crores for the financial year 2018-19 and other financial irregularities. Based on the compl....
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.... ii. Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd, (2010) 2 SCC 723, para 5, 7 iii. Amsa India Pvt Ltd. v. Commissioner of Income-Tax, (2017) 393 ITR 1578 - para 3,5 iv. State of Uttar Pradesh and Ors. v. Aryaverth Chawal Udyog and Ors., (2015) 17 SCC 324, para 19 onwards 4. In response, Sri RVS Naik, learned Senior counsel representing the SEBI submitted that in terms of sub- Section 3 of Section 4 and Section 19 of the Act, 1992 and Regulation 5 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities market) Regulations, 2003 (for short 'Regulations, 2003'). The respondent No.1/ Executive Director, SEBI has authority to appoint an Investigating Officer to investigate into the affairs of the company as stated under Section 11C of the Act, 1992. 4.1. Additionally, he argued that in terms of Section 19 of the Act, 1992, the Board has delegated the power to the Executive Director to order an investigation and appoint an investigating Authority under Section 11-C of the Act, 1992. 4.2. He further submitted that the Respondent No.1/ Executive Director, SEBI after perusi....
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.... lack of authority? 6.2. Whether there existed reasonable grounds of belief that the petitioner entity acted in a manner detrimental to the interest of the shareholders to warrant an investigation by the respondent No.1 - SEBI, Executive Director? Issue No.(i): 7. Before addressing the issues raised for consideration, it is appropriate to reproduce the relevant provisions of the SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. 7.1. Section 4 - Management of the Board... (3) Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by that Board. 7.2. Section 11 C - Investigation - (1) Where the Board has reasonable ground to believe that- (a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or (b) any intermediary or any person associated with the securities market has violated any of the provisions of this Act....
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....stipulated under Section 29 of the Act, including the power conferred on the Board under Section 11-C of the Act, to order investigation into market securities. Additionally, sub-section (3) of Section 4 of the Act, 1992, reserves with the Chairperson of the Board all powers of, 'general superintendence and direction of the affairs of the Board', and further exercise all powers and do all acts which may be exercised or done by the Board, independent of any general or special order which may be passed under Section 19 of the Act. 8.2. It may therefore be reasonably inferred that the Chairperson of the Board is statutorily empowered to exercise all such powers as may be exercised by the Board, save the limitations placed on such authority in the concerned regulations. A perusal of Regulation 5 of the Regulations, 2003 reveals that where there exists a reasonable ground to believe, the Executive Director is empowered to direct - by an order in writing, any officer (investigating authority), not below the rank of Division Chief to investigate any transactions in securities which are alleged to be carried in manner detrimental to the shareholders. 9. Shri R.V.S. Naik has adduced a....
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....nception the Company has been continuously declaring only Losses in the annual financial statements. This raises the doubts in the minds of Shareholders about the worst type of corporate governance practices followed by the Company. 5. The Management has got shares delisted from the NSE & now they are in the process of delisting the same from BSE also. What is the purpose of delisting shares from BSE also? The intentions of the Management of the NEL Holdings Ltd are very dangerous as they want to give exit route to the existing shareholders at very cheapest rate Rs.0.85 per share for face value of Rs.10/- per share. This is nothing but Loot of the valuable Investments of Shareholders Money. 6. Bad Corporate Governance & mismanagement has resulted in the erosion in the shareholders' Value & net worth of the Company. The share price which was Rs.55/- when the company got listed is Rs. 0.85 paise today 7. There need to be the complete investigation & special Audit of the related party transactions as well as Investment made by the Company in to its subsidiaries & associates concerns for bringing out the real truth of who actually got benefited from that.....
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....e SEBI (LODR) Regulations, 2015, the aforementioned impairment provision, which finds mention in the Consolidated Audited Financials of NEL Holdings were placed before the shareholders meeting dated 27.09.2019 and approved. The audited Standalone and Consolidated Results were also published within time as per SEBI (LODR) Regulations, 2015. 3. I wish to bring to your attention the notes made in NEL Holdings South Limited's Audited Financial Statement for the FY 2018-19 regarding the impairment provision in question, which reads as follows: "Impairment of non-financial assets The Group assesses, at each reporting dote, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs of disposal and its value in use, Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.....
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.... Further by nature of the real estate business, the Company and its management were required to create a "Special Purpose Vehicle"/"Subsidiaries" for ring fencing the corresponding lenders to its projects from other lenders in its specific projects. As we know the reasons for creating "Special Purpose Vehicle" as wholly owned Subsidiaries was to create separate verticals in businesses, which includes: a. Separate Vertical for Facility Management Services b. Separate Vertical for Mid Segment Housing c. Separate Vertical for Shopping Malls and Rental business d. Separate Vertical for Luxury Housing, etcs" 15. It further appears on perusal of the material on record that the respondent No.2 had issued two letters dated 05.04.2021 and 08.09.2021 seeking modus operandi in the functioning of the petitioner's subsidiaries and the loans advanced thereto and, provisions for impairment losses. The respondent No.2 had further asked for financial statements of certain entities, prescribed therein. It appears that the petitioner has not responded to the same. However, the above letters issued by respondent No.2 do not disclose any reference to....
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....18.66 Crores in the balance sheet placed before the share holders for the financial year 2021-22, 2022-2023 and 2023-24, there cannot be any occasion warranting investigation suo motu, against the petitioner under Section 11-C of the SEBI Act. 21. However, before proceeding to pronounce the order it is apposite that the authorities adduced by the parties herein be dealt with. The learned counsel for the petitioner relies on the decision of the Hon'ble Supreme Court in the case of Mohindhr Singh Gill and Anr. v. Chief Election Commissioner, New Delhi, (1978) 1 SCC 495 to emphasise that the rule of audi alteram partem has two facets - 'notice of the case to be met' and 'opportunity to explain'. The three Judge Bench of the Apex Court has further observed that any administrative decision which infringes upon the rights without "apprising the affected and appraising the representations" cannot be considered to be fair. 21.2. The Bench further observed that the validity of administrative orders must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of an affidavit. It further reiterated the observations made in its earlier decision of C....
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....her there was any material available on the record from which the requisite belief could be formed by any competent authority and further, whether that material had any rational connection or a live link for the formation of the requisite belief to warrant reassessment. 24.3. In conclusion, the Apex Court in Aryaverth observed that reason to believe cannot be to the subjective satisfaction of the competent authority, but is to be construed to be an objective view based on the disclosed information in any particular case, and on firm and concrete facts. The same cannot be arbitrary, irrational, vague, distant or irrelevant. 25. Similarly, perusal of the material on record does not disclose any application of mind by the investigating authority towards the substance of the allegations in the complaint, or the replies of the petitioner to the aforementioned notices issued by the Assistant General Manager. A mere reproduction of the allegations, or a summary thereof would not amount to an objective assessment of the things as they stood, much less, when the allegations, as referred to in the preceding paragraphs, were withdrawn by the complainants. As such, the precedents relied ....
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....belief warranting an investigation under section 11-C of the Act be arrived at after considering the manifestly relevant replies dated 17.02.2021, and 30.03.2021 issued by the subject entity of such investigation, and the auditors report on standalone financial results of the petitioner's entity pursuant to Regulation 33 of SEBI (LODR) Regulations, 2015. 26.1.3 Moreover, it has been reiterated by the Apex Court in the cases of Ganga Saran and Sons (Pvt) Ltd., Calcutta v. Income Tax Officer, (1981) 3 SCC 143 and S Narayanappa v. Commissioner of Income Tax, (1967) 1 SCR 590, that issues of jurisdiction and existence of rational nexus between the reasons and the belief formed thereupon must be held in good faith, and cannot be merely a pretence. 26.1.4. Therefore, where the internal notings of the respondent - Executive Director, dated 28.9.2021, do not disclose any reason or the deductive belief therefrom, to warrant an investigation under Section 11-C of the Act, 1992 into the withdrawn allegations, the respondent - authority cannot be permitted to exercise any powers to order investigation, suo motu. Any such exercise clearly amounts to excess of statutory authority. Furtherm....
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....tigation) (2024) 4 SCC 115, the Apex Court referred to its earlier decisions in Prakash Gupta v. SEBI, (2021) 17 SCC 451 and IFB Agro Industries Ltd. v. SICGIL India Ltd., (2023) 4 SCC 209, and observed the following: "(a) Courts do not and cannot act as appellate authorities examining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy which they are entitled to formulate; (b) The scope of judicial review, when examining a policy framed by a specialised regulator, is to scrutinise whether it: (i) violates the fundamental rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review; (c) When technical questions arise - particularly in the domain of economic or financial matters - and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be int....
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....t a bare perusal of the internal notings does not reveal any application of mind by the Executive Director, of having taken into consideration the relevant material, such as the replies of the petitioner to the notices issued by respondent No. 2/ Assistant General Manager, SEBI, or the compelling circumstances warranting an investigation suo motu despite withdrawal of the complaint. As such, the above case-law is not applicable to the case at hand as this review does not challenge the adequacy of the purported reasons behind the passing of an order under Section11-C, but of the very existence thereof. 27. In conclusion, it is observed that the existence of reasonable grounds is sine qua non for directing an investigation under Section 11-C of the Act. Thus, where a review of the material on record indicates that the competent appointing authority has merely reiterated the allegations made in a subsequently withdrawn complaint, and further contains no reference to notices and replies of the petitioner entity to the same, or the compelling circumstances warranting an investigation suo motu into the subsequently withdrawn allegations levelled by the shareholders, the respondent No.....