Kerala High Court:  N. Nagaresh, J., addressed the instant petition filed by a Non-Banking Finance Company to challenge show-cause notices issued by the Securities and Exchange Board of India. The petitioner had sought to declare that the show-cause notices were ultra vires to the provisions of the Companies Act, 1956, the provisions of the Securities and Exchange Board of India Act, 1992, and were violative of Article 14 and Article 19(1)(g) of the Constitution.

Brief facts of the case were, the petitioner company was a Public Limited Company registered with the Reserve Bank of India (RBI). It had been subjected to stringent monitoring by its Auditors and RBI Inspectors. To augment its capital base and resources, the petitioner had made a private placement of equity shares several time. Such private placements were made to very few persons who were associated with the petitioner as member/staff/borrower. Applications for equity shares were given to specific persons. SEBI had issued a letter dated 19-10-2017, seeking information from the petitioner regarding alleged deemed public issue and had called for information from the petitioner. On not being satisfied with the information and documents provided by the petitioner, SEBI had issued a show-cause notice dated 05-04-2019.

The petitioner, while relying on the judgment of the Supreme Court in Joint Collector Ranga Reddy District v. D. Narsing Rao, (2015) 3 SCC 695, contended that there had been 19 years of inordinate delay and laches in proceeding against the petitioner. Also, in spite of requests, the copies of the complaints on the basis of which the show-cause notice was issued were not made available to the petitioner, thereby offending the settled principles of natural justice.

The Bench noticed that the petitioner-Company had passed resolutions authorising issue of equity shares to any person including existing members of the Company in any manner the board may deem fit. The language of the resolution indicated that what was intended by the Company was not strictly private placement. The language of the resolutions indeed gives rise to a suspicion or indication that the Company proposed to issue shares to the public. It is for the said reason that the SEBI sought explanation from the petitioner. The Bench stated,

“It was true that the information sought for by the SEBI related back to the year 2001. However, the required information are those which are required by the petitioner to be statutorily maintained. Therefore, the delay in issuing these Show Cause Notices, cannot cause prejudice to the petitioner.”

Hence, the Bench stated, it could not be said that jurisdictional facts necessary to initiate proceedings did not exist. Even if the petitioner-company was incapacitated to provide any information required by the SEBI, it could very well give reasoned explanation for the same to the SEBI.  Lastly, it was held the issue being at show-cause stage, it would not be appropriate for the Court to interfere with the statutory proceedings at this stage. Thus, the petition was dismissed.[BRD Securities Ltd. v. SEBI, 2021 SCC OnLine Ker 1027, decided on 25-02-2021]

Kamini Sharma, Editorial Assistant has put this story together.

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