Case BriefsTribunals/Commissions/Regulatory Bodies

Madhabi Puri Buch, Whole Time Member, SEBI in an interim order has restrained Hemant Ghai, co-anchor of a television show Stock 20-20 on CNBC Awaaz and his wife and mother from directly or indirectly dealing in securities until further orders. On analysing the trading pattern of Jaya Hemant Ghai and Shyam Mohini Ghai (wife and mother of Hemant Ghai) for the period between January 1, 2019 to May 31, 2020  it was seen that Hemant Ghai in the name of his wife and mother undertook a large number of “Buy-Today-Sell-Tomorrow” trades in synchronisation with the recommendations made in his morning show. Shares were bought on the previous day to the recommendations being made on the Stock 20-20 show and sold immediately on the recommendation day.

In violation of the SEBI Act, 2002 and Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 over Rs 100 crore in 90 trades were executed in trading accounts of the two family members which led to gains of approximately 3 crores as per the preliminary investigation.  Call data records of Hemant Ghai were also analysed which indicated regular communications with an equity analyst who handled the trades for the account of his wife and mother. Also, there was no data of call records from the registered numbers of his wife and mother to the brokers, therefore it was prima facie inferred that Mr Hemant Ghai was the one handling the transactions.

Also it was noted by SEBI that a discernible increase in price and volume of the recommended scrip on the day of recommendation took place frequently over the course of the relevant period. The preponderance of probability was that a buy recommendation given on the show had a significant positive effect on the price and volume of the scrip.

SEBI passed an ex-parte order to protect the interests of investors and preserve the safety and integrity of the securities market, granting the accused 21 days to file a reply or seek in-person hearings. Besides the bar or trading in securities and the freezing of their bank accounts, SEBI  also impounded the banks accounts of the accused to the extent of Rs 2.95 crore. CNBC, the employer of Mr Ghai was also advised to take action against Mr Ghai as per their rules of conduct and to inform readers of the action taken by SEBI.

[In the matter of CNBC Awaaz “Stock 20-20” Show co-hosted by Mr. Hemant Ghai, WTM/MPB/ISD/ 166 /2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty, (Whole Time Member) while holding the Noticees liable for manipulative trade practises explained,

“Establishment of direct quantified damage/loss to an investor in personam is not an essential ingredient to prove the charges of the price manipulation. The very acts of marking up the price of scrip higher by manipulative trading practices even by a selected few persons can induce the investors in rem.”

 Background

 A show caused notice (SCN) was issued by SEBI against the Noticees to ascertain whether the unusual price movement noticed in the scrip of Anukaran Commercial Enterprises Ltd.(“the Company”) was normal or it was caused by unscrupulous acts leading to any possible manipulation of the price of the scrip of the Company. The shares of the Company were listed on BSE. The price of the scrip saw an abnormal rise, which was not supported by any corporate announcements or material changes in the business activities of the Company. In this period, the first trade was executed at INR 35.15 whereas the last trade was executed at INR 256.25 and the scrip witnessed a sharp increase in price by INR 221.20 with just 60 trades executed within a period of 43 trading days. It is noticed that 16 entities sold the shares of the Company at a price higher than the last traded price (“LTP”) and contributed to the positive LTP. The investigation further revealed that out of the said 16 sellers, top 03 sellers have contributed more than 65% to the market positive LTP variance of the scrip.

Observations

 Regarding allegations against Noticee 1, the Board observed that, he had executed trades in minuscule quantities as over the period of 20 days, he had sold only 12 shares and further over a period of 15 trading days, and he preferred to sell only 1 share at a time aggregating to 15 shares. The notice 1 had been indulged in execution of sell trades with a minimum possible lot on each day, with an apparent motive to set a high closing price of the scrip, by contributing to the LTP variance to maximum possible limit, fixed by the Stock Exchange. It was also observed that, transfer of 100 shares of the Company to Noticee 1 by Noticee 2 was not genuine and was done only for the purpose of enabling manipulation in the price of the shares. Noticing the unique and unusual pattern of selling 01 share at a time on a continuous basis over a long period, trading in miniscule quantities by the Noticee no. 1 immediately after receipt of those 100 shares from notice 2, that consistently resulted in contributing to the LTP etc., the Board had reached to the findings that, the transactions were carried out with some ulterior motive to disturb market mechanism by artificially raising the price of shares of the Company.

It was further noticed that, Noticee 3 and Noticee 4 were involved in short selling of the shares, and by executing such trades in minimal quantities, they had indulged in the manipulation of the price of the scrip of the Company. Noticee 3 and 4 were involved in a series of unusual elements such as, absence of any other sellers on those trading days; execution of (short sale) trades at the fag end of the day leaving no time to off-set the contract; no intention of making profits; all trades being executed at prices higher than the LTP, no genuine effort to consolidate their shares stock when the scrip was witnessing price rise on a continuous basis etc. Therefore, there could not be any motive except; intention to carry out an agenda to manipulate the price.

The Board, while holding the Noticees liable for violating Regulation 3 (a), (b), (c), (d) and 4 (1), 4(2), (a) and (e) of PFUTP Regulations expressed,  “The market is governed by written rules and well established market practices have evolved over the period of time and any person resorting to any peculiar pattern of trading which has a cascading effect of distorting the market mechanism by way of creating artificial trading, leading to rise in the price of a scrip through manipulative trades by no means can be held as normal and fair trading in the market.”

Directions

On the basis of above considerations, the Board restrained all the Noticees from accessing the securities market and further prohibited them from buying, selling or otherwise dealing in securities or being associated with the securities market in any manner, for a period of six months. It was directed that, the existing holding of securities including the holding of units of mutual funds of the Noticees shall remain frozen. Further, all open positions, if any, of the aforesaid Noticees in the F&O segment of the stock exchange, were permitted to be squared off, irrespective of the prohibition imposed by this Order.[Anukarana Commercial Enterprises Ltd., In Re., 2021 SCC OnLine SEBI 3, decided on 08-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) imposed certain restrictions on GJ Advisory Services and Profit Ideas Advisory Services (“Noticees”) for indulging in unregistered Portfolio Management Services.

SEBI received several complaints against noticees alleging unregistered portfolio management activities. On examination, the Board noticed that the noticees had undertaken the management of funds as well as securities of their clients and the fees/funds were collected through the Banks Accounts of the noticees. It was found out that both the noticees were engaged in ‘portfolio management services. The Board observed that by virtue of providing unregistered Portfolio Management Services, the noticees had collected an amount of Rs 8,89,23,049 as fees towards the management of funds and securities of clients.  Thus, the activities noticees were prima facie, in violation of Section 12(1) of SEBI Act read with Regulation 3 of Portfolio Management Services (“PMS”) Regulations.

The Board opined that permitting the investors to receive a portfolio management service from an unregistered entity would cause irreparable injury to the development of the securities market as the objective of SEBI is not only the protection of investors but also orderly development of securities market. Hence, the Board held that Gourav Jain and Poonam Jain who were the proprietors of GJ advisory and Profit Ideas respectively, were liable for unregistered portfolio management services and, therefore, the Board issued following orders against the noticees:

  1. to cease and desist from acting as a portfolio manager and to solicit or undertake such activity or any other activities in the securities market.
  2. Not to divert any funds raised from investors.
  3. Not to dispose of or alienate any assets, or any interest or investment or charge on any of such assets held in their name, except with the prior permission of SEBI.
  4. Immediately withdraw and remove all advertisements, materials etc. in relation to their portfolio management activity or any other unregistered activity in the securities market.
  5. Not to access the securities market and buy, sell or otherwise deal in securities in any manner.

Consequently, the directions were made to the Banks not to allow any debits/ withdrawals and not to allow any credits to the accounts of the noticees, without permission of SEBI. The Depositories were also directed to ensure, till further directions, that no debit or credit be permitted in the demat accounts held by noticees. [GJ Advisory services and Profit Ideas Advisory Services, In Re., 2021 SCC OnLine SEBI 2, decided on 04-01-2021]

Legislation UpdatesRules & Regulations

Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2021
SEBI amends the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
In regulation 20,
(i) in clause (iv) of the proviso to sub-regulation (6), the symbol “,” shall be substituted with the symbol “:”
(ii) after clause (iv) of the proviso to sub-regulation (6), the following proviso shall be inserted, namely, –

“Provided further that clauses (i) and (ii) shall not apply to an Alternative Investment Fund in which each investor other than the Manager, Sponsor, employees or directors of the Alternative Investment Fund or employees or directors of the Manager, has committed to invest not less than seventy crore rupees (or an equivalent amount in currency other than Indian rupee) and has furnished a waiver to the Alternative Investment Fund in respect of compliance with the said clauses, in the manner specified by the Board.”


Securities Exchange Board of India

[Notification dt. 08-01-2021] 

Legislation UpdatesRules & Regulations

Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2021

In Regulation 112 of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, the existing clause (b) along with the proviso shall be substituted with the following, namely, –

“(b) where the equity shares of the issuer are frequently traded on a stock exchange for a period of at least three years immediately preceding the reference date, and:

(i)  the issuer has redressed at least ninety-five per cent of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date, and;

(ii)  the issuer has been in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for a minimum period of three years immediately preceding the reference date:

Provided that if the issuer has not complied with the provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, relating to the composition of the board of directors, for any quarter during the last three years immediately preceding the date of filing of draft offer document/offer document, but is compliant with such provisions at the time of filing of draft offer document/offer document, and adequate disclosures are made in the offer document about such non-compliances during the three years immediately preceding the date of filing the draft offer document/offer document, it shall be deemed as compliance with the condition:

Provided further that where the promoters propose to subscribe to the specified securities offered to the extent greater than higher of the two options available in clause (a) of sub-regulation (1) of regulation 113, the subscription in excess of such percentage shall be made at a price determined in terms of the provisions of regulation 164 or the issue price, whichever is higher.”

In Regulation 115, the existing proviso after clause (c), shall be omitted.

In Regulation 167, after the existing sub-regulation (4), the following new proviso shall be inserted, namely, –

“Provided that the lock-in provision shall not be applicable to the specified securities to the extent to achieve 10% public shareholding.”


Securities Exchange Board of India

[Notification dt. 08-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): B J Dilip, (Adjudicating Officer) imposed the penalty of 25 crores and 15 crore respectively on Reliance Industries Ltd. (RIL) and its MD,  Mukesh D. Ambani for making unfair and undue profits by means of fraudulent trade practices.

SEBI conducted an investigation into trading in the scrip of Reliance Petroleum Ltd. (RPL) to ascertain whether there was any violation of the provisions of SEBI Act, 1992.

A resolution was passed by BoD of RIL on 29-03-2007 which inter alia approved the operating plan for the year 2007-08 and resource requirements for the next two years, i.e., approximately Rs. 87,000 crore. Thereafter, RIL had entered into a scheme of manipulative trades in respect of the sale of 5% (up to 22.5 crore RPL shares) of RIL stake in RPL. However, before undertaking sale transactions in the Cash Segment, RIL fraudulently booked large short positions in the RPL November Futures through 12 Agents with whom it had entered into an agreement to circumvent position limits for a commission payment. Consequently, RIL fraudulently earned nearly 93% of open interest in RPL November Futures. RIL also undertook transactions in RPL shares in the cash segment. By employing these devices and acting through its 12 Agents, RIL had clandestinely accumulated position limits far in excess of limits permissible for a single client. The above steps in the F&O segment in view of its planned sale of 22.5 crore of RPL Shares in the cash segment was naturally expected to trigger steep price declines in the cash segment and alongside in the futures segment. The only way to take advantage of the sharp price decline would be by taking large positions in futures markets. By roping in 12 agent entities to act on its behalf, RIL had proportionately amplified its position taking capacity in futures which was fraudulent in nature as defined in section 12A (a), (b) & (c) of the SEBI Act and Regulations 3 and 4 of Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (PFUTP Regulations) Regulations, 2003.

The Board observed that after the sale of shares on 29-11-2007, RIL still had 2.21 crore shares left to sell out of the 22.50 crores shares which suggested that RIL’s real objective was to bring down the RPL share price by dumping huge quantity of shares in the cash segment during the last 10 minutes to influence the settlement price in F&O segment. The manipulative and deceptive transactions of RIL were prima-facie, covered under the definition of ‘fraud’ and therefore were “fraudulent”, as defined under regulation 2(1) (c) of the PFUTP Regulations, 2003

Managing Director of RIL,  Mukesh D. Ambani had been held liable for manipulative trading done by RIL. SEBI observed that it was difficult to believe that entire asset sale to raise Rs 87,000 crore could be done without the supervision of MD, that too when the said amount was a substantial percentage of its total assets and its turnover. It was held that Mukesh D. Ambani, being the Chairman and Managing Director of RIL, was responsible for its day-to-day affairs and thereby, liable under Section 15HA of SEBI Act for the manipulative trading done by RIL.

In view of the above, the Board imposed the penalty of 25 crore and 15 crore on RIL and its MD respectively. It was also observed that Navi Mumbai SEZ Pvt. Ltd. and Mumbai SEZ Ltd. had allegedly aided and abetted RIL by providing funds to agents appointed by RIL, for making the margin payments for the short positions in RPL November Futures. Therefore, penalty of 20 crore and 10 crore respectively were imposed on them as well. The Board disposed of the matter with further directions that the said amount of penalty should be remitted or paid within 45 days of receipt of order. [Reliance Petroleum Ltd. In Re.,  2021 SCC OnLine SEBI 1, decided on 01-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): S. K. Mohanty, (Whole Time Member) granted exemptions to the United Provinces Sugar Company Ltd. from the requirements of complying with Minimum Public Shareholding (“MPS”) norms as mandated under rule 19 (2) (b) of provisions of Securities Contracts (Regulations) Rules, 1957 (“SCRR”) and further from the provisions of regulation 27(3)(d) of SEBI(Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations, 2009”).

The company filed an application before SEBI under Regulation 25A of Delisting Regulations, 2009 seeking certain relaxations for voluntary delisting of the company. The equity shares of the Company were listed on CSE for more than 40 years, of which 94.88% were held by the promoters and the balance shares representing 5.12% were held by 274 public shareholders. There had been no change in the shareholding of the promoters and promoter group of the Company since 1997. The Company asserted that since CSE is non-operational and it is not listed on any nationwide stock exchange, there is no investor interest in the shares of the Company and hence, various methods prescribed by SEBI to achieve MPS compliance were not feasible. It was submitted that since most of the public shareholders were inactive, it was highly unlikely to receive the required 90% consent from such public shareholders for delisting.

The issues before the Board were:

  • Whether a company can be exempted from minimum public shareholding requirement and also
  • Whether the requirement for receiving the consent of the shareholders holding at least 90% of public shareholding of a company, as mandated under Regulation 27(3) (d) of the Delisting Regulations, 2009 can be relaxed?

The Board noted that SEBI Circular CIR/MRD/DSA/18/2014 dated 22-05-2014, inter-alia, exempted companies which were listed exclusively on de-recognized or non-operational stock exchanges from the requirements of MPS prescribed in rules 19(2)(b) and 19A of SCRR and Clause 40A of the Listing Agreement, for the purpose of enabling such companies to opt for voluntary delisting.

For the aforesaid reasons, SEBI, in the interest of investors granted relaxation from the applicability of regulation 27(3) (d) of Delisting Regulations, 2009 to the Company, with further directions that, the Company should ensure compliance with provisions of all other applicable laws including regulation 27(3)(c) of Delisting Regulations, 2009. Additionally, the Applicant should cause to publish the newspaper advertisement in at least one national newspaper in English and in local vernacular newspapers in each State where its public shareholders are residing, as per the addresses available in its records, announcing its delisting proposal within 30 days of this Order, and at least 10 days before the letter is sent to the public shareholders seeking their consent for the delisting proposal. [Delisting of The United Provinces Sugar Company Ltd., In Re., 2020 SCC OnLine SEBI 214, decided on 21-12-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT):The Bench of Justice Tarun Agarwala (Presiding Officer), Justice M. T. Joshi and Dr C. K. G. Nair Member dismissed the appeal on the ground that the trading strategy used by the appellants was violative of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations), 2003 i.e. PFUTP Regulations, 2003.

The facts of the case are such that the appellants have unilaterally manipulated the price of the scrip of Blue Blends by employing/adopting a strategy of trading called “Advancing the Bid”. According to this strategy, a person on one side of the trade places orders above or below the last traded price (LTP) resulting in an adverse impact on the market.  The Whole Time Member of Securities and Exchange Board of India i.e. SEBI debarred the appellants for a period of four weeks and vide order dated May 5, 2020, passed by the Adjudicating Officer of SEBI whereby a joint and several penalties of Rs 5 lacs have been imposed on the appellants. Aggrieved by the same, instant appeals was filed before the Securities Appellate Tribunal i.e. SAT.

Counsel for the appellants submitted that selling in minuscule quantity below the LTP itself does not prove manipulation. It was further submitted that appellants are big traders/jobbers dealing in several hundred scrips worth several crores; appellants trades resulted in both positive and negative LTP but SEBI cherry-picked some trades only to show negative impact; appellants followed a strategy called “momentum trading” i.e. being a big trader taking advantage of the movement in prices by placing a large number of orders and no meeting of the mind has been established and no other party has been debarred from the market.

Counsel for the respondents submitted that the strategy employed by the appellants in manipulating the market/price of the scrip is a unique one called “Advancing the Bid” which is found to be manipulative not only in the Indian jurisdiction but also in foreign jurisdictions like the European Union (EU). It was further submitted that selling below the LTP and that too on a large number of occasions is contrary to the normal market behavior and therefore, it stands on its own legs as violative of the stated provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

The Tribunal observed that the nature/pattern of trading adopted by the appellants is not in the nature of what a rational investor would do. A large number of sell orders were placed repeatedly on several trading dates at less than the LTP; it is illogical. Therefore, the contention of the appellants that it was following momentum trading has no meaning as by placing a large number of orders below the LTP the appellants themselves were creating a momentum.  When such trades are done on a large number of occasions, such as 166 times, one cannot but come to the conclusion that such trades are manipulative in nature.

The Tribunal thus held that the strategy of momentum trading adopted by the appellants was creating its own momentum inimical to the interest of the securities market. Even if it affected only about 10 % of the market volume in the scrip of Blue Blends, as contended by the appellants, it is no consolation since influencing 10% of the market by 2 entities is a significant deviation from market equilibrium. Therefore, dehors the connectivity issue itself, the appellants are in violation of the PFUTP regulations by the very nature of their trading strategy and trading pattern. It was further held “4 weeks restrain from the securities market as directed by the WTM and Rs. 5 lakhs joint and several penalty imposed by the AO are not harsh or disproportionate in the given facts and circumstances for us to interfere with the impugned orders. However, if the appellants so desire they may pay Rs 2.5 lakh each.”

 In view of the above, appeal failed and was dismissed.[B.P. Comtrade (P) Ltd. v. SEBI, 2020 SCC OnLine SAT 251, decided on 20-11-2020]


Arunima Bose, Editorial Assistant has put this story

Cabinet DecisionsLegislation Updates

The Union Cabinet has given its approval for the proposal of Securities & Exchange Board of India (SEBI) to sign a bilateral Memorandum of Understanding (MOU) between Securities and Exchange Board of India and Financial and Commission de Surveillance du Secteur Financier (CSSF), Luxembourg.

Objectives

The MoU is likely to strengthen cross border cooperation in the area of securities regulations and facilitate mutual assistance, contribute towards efficient performance of the supervisory functions aid in imparting technical domain knowledge and enable effective enforcement of the laws and regulations governing the securities markets of India and Luxembourg.

Major impact:

CSSF, like SEBI, is a co-signatory to International Organization of Securities Commissions’ Multilateral MOU (IOSCO MMoU). However, the IOSCO MMoU does not have under its scope the provision for technical assistance. The proposed bilateral MOU would, in addition to contributing towards strengthening the information sharing framework leading to effective enforcement of securities laws, also help in establishing a technical assistance programme. The technical assistance programme would benefit the Authorities by way of consultations on matters relating to capital markets, capacity building activities and training programmes for the staff.

Background

The Securities and Exchange Board of India (SEBI) was established under the Securities and Exchange Board of India Act, 1992 to regulate the securities markets in India. The objectives of the SEBI are to protect the interest of the investors and to regulate and promote development of securities markets in India. The main functions of SEBI include registration, regulation and supervision of intermediaries operating in the securities market; promoting and regulating self-regulatory organizations; prohibiting fraudulent and unfair trade practices relating to securities markets; and calling from or furnishing to other authorities, whether in India or abroad, such information as may be necessary for the efficient discharge of its functions.

The Commission de Surveillance du Secteur Financier (CSSF) of Luxembourg is a public law entity, with administrative and financial autonomy, established by the law of 23rd December 1998. The CSSF is the competent authority for the prudential supervision of the entire Luxembourg financial centre, except for the insurance sector. The CSSF is also legally responsible for the regulation and supervision of the securities market.


Cabinet

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): S.K. Mohanty, (Whole Time Member) has barred two promoters of NDTV, namely Mr Prannoy Roy and Mrs Radhika Roy (the Noticees) from the securities market for 2 years and directed them to disgorge illegal gains of more than Rs 16.97 crore for indulging in insider trading under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992. These directions came after a probe was launched by SEBI to check various allegations of insider trading between September 2006 to June 2008.

The SEBI noted that both the noticees were in possession of unpublished sensitive information (PSI-6) with respect to proposed reorganisation of the company. The discussions around reorganisation of the company started around 7-09-2007, and was finally disclosed to the public on 16-04- 2008. During this time, SEBI noted Mr Roy was the chairman and whole-time director whereas, his spouse, Mrs Roy was the managing director. Both were privy to the sensitive information with respect to reorganisation of the company.

On 17-04-2008, the noticees sold their shares making a profit of more than 16.97 crores when the trading window for them was closed.

SEBI found them to have contravened Regulation 3(i) and Regulation 4 of the PIT Regulations, 1992 read with Regulation 12 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 12A(d) and (e) of the SEBI Act, 1992; and the NDTV’s Code of Conduct and regulation 12(2) read with 12(1) of the PIT Regulations, 1992. NDTV’s code of conduct for prevention of insider trading prohibited them from trading at least till 24 hours after the information was disclosed to the stock exchanges.

The Noticees were directed to disgorge the amount of wrongful gain of ₹16,97,38,335/- as computed in the show cause notice, along with interest at the rate of 6% per annum from April 17, 2008, till the date of actual payment of disgorgement amount alongwith interest, within 45 days from the date of coming into force of this order.  They were also restrained from accessing the securities market and further prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 2 years.[In the matter of New Delhi Television Ltd. WTM/SM/IVD/ID2/9711/2020-21, decided on  27-11-2020]


Nilufer Bhateja, Associate Editor has put this story together

Legislation UpdatesNotifications

1. SEBI issued circular SEBI/HO/DDHS/DDHS/CIR/P/2019/143 dated November 27, 2019, providing guidelines for the preferential issue and institutional placement of units by listed InvITs. The said circular stands modified as under:

1.1. Clause 4.1 of Annexure I is modified as under:

“4.1. Preferential issue of units shall not be made to any person who has sold or transferred any units of the issuer during the six months preceding the relevant date. Explanation: Where any person belonging to sponsor(s) has sold/transferred their units of the issuer during the six months preceding the relevant date, the sponsor(s) shall be ineligible for allotment of units on a preferential basis.”

2. This circular is being issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 33 of the InvIT Regulations.


Securities Exchange Board of India

[Circular dt. 17-11-2020]

Business NewsNews

In order to give more flexibility to the mutual funds and taking into account the recommendations of Mutual Fund Advisory Committee (MFAC), a new category named “Flexi Cap Fund” under Equity Schemes will be available with the following scheme characteristics.

Category of Scheme

Scheme Characteristics

Type of scheme (uniform description of scheme)

Flexi Cap Fund

Minimum investment in equity & equity related instruments – 65% of total assets

An open-ended dynamic equity scheme investing across large-cap, mid-cap, small-cap stocks

  •  The AMC shall ensure that a suitable benchmark is adopted for the Flexi Cap Fund.
  • For easy identification by investors and in order to bring uniformity in names of schemes for a particular category across Mutual Funds, the scheme name shall be the same as the scheme category.
  • Mutual Funds have the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.
  • Scheme under the aforesaid mentioned new category can be launched with effect from the date of this circular.
  • This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Securities and Exchange Board of India

[Circular dt. 06-11-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

 Securities Exchange Board of India: G. Mahalingam, Whole-time member retrained the promoters of the Dewan Housing Finance Limited i.e. DHFL from accessing the securities market.

Dewan Housing Finance Limited (“DHFL”) was incorporated on April 11, 1984, and registered with National Housing Bank (NHB) under Section 29A of the National Housing Bank Act, 1987 has been carrying on the business of providing loans to retail customers for construction or purchase of residential property, loans against property, etc.

The equity shares of the Company are listed on BSE Limited and NSE Limited. The Company had issued Non-Convertible Debentures (NCDs) through public issue as well as private placements, which are listed on the stock exchange(s)and had more than Rs. 24000 crores worth of outstanding NCDs issued through the public issue as on May 31, 2019.

On January 29, 2019, Cobrapost, a media portal, published an article alleging that the promoters of the Company- Mr Kapil Wadhawan and Mr Dheeraj Wadhawan, had siphoned off more than Rs. 31,000 crores of public money primarily through grants and advances to shell companies pursuant to which DHFL issued a press release stating that the allegations are baseless.

On November 20, 2019, Reserve Bank of India (“RBI”) vide its Order superseded the Board of Directors of DHFL and appointed Shri. R Subramaniakumar as the Administrator and later filed an application to initiate corporate insolvency resolution process (“CIRP”) under Section 227 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and National Company Law Tribunal, Mumbai Bench admitted the application and confirmed the appointment of Shri R Subramaniakumar as the administrator. Grant Thornton India LLP (“Transaction Auditor”) was appointed to assist the RP in conducting a transaction audit of the Company which filed an initial report stating that certain transactions entered into by DHFL during the period FY 2006-07 to FY 2018-19 are fraudulent in nature, as per Section 66 of the IBC.

Observations made in the initial report

  1. DHFL has entered into certain fraudulent transactions, which were shown as bonafide transactions in its published financial statements as well as corporate announcements disseminated in the public domain.
  2. The Company had created a ‘logical partition’ in the Enterprise Resource Planning (ERP) Software used for bookkeeping and loan management purposes to store data pertaining to only one branch – Bandra, which was a virtual branch having a parallel set of books of accounts maintained by the Company and all the loan accounts presented in the said module appeared to be non-genuine.
  3. Out of Rs 23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs 11,755.79 crores was actually disbursed to 91 entities, but was shown as 2, 60,315 home loan accounts in the books of the company.
  4. On verifying the financial statements of 50 of the said 91 entities it was noted that 34 entities had invested a portion of the loan amount received from the lender in companies which were linked to the promoters of DHFL having weak financial strength. These loans were unsecured and given without taking any collateral.
  5. The report concluded that the Company suffered a notional loss of Rs 3,348 crores as the interest charged on such loans was lower than the interest charged for other similar entities by the Company in the normal course of business.

Order by the Board

The Board observed that financial statements of a company are relied upon by debt investors for assessing the financial health and repayment capacity of the Company and hence their investment decisions would have been sullied by these fraudulent misstatements. The interests of investors who bought equity shares of the Company during this period have also been prejudiced because the financial statements of the company did not state the true and fair picture of the affairs of the Company

The Board relied on Regulation 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 and Regulation 4(1) of SEBI, Regulation 4(2)(f) and Regulation 4(2)(k)  (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“SEBI PFUTP Regulations, 2003”) which provides as under-

12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) No person shall directly or indirectly engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.”

Regulation 4(2)(f) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities.”

Regulation 4(2)(k) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities.

The Board thus held that the interest of investors who take the decision of investing in the securities of the Company on the basis of financial position of the Company and disclosures made in the financial statements have been, prima facie, affected adversely due to the aforesaid transactions entered into by the Company and the consequent fraudulent misstatements in the financial statements of the Company and have violated Section 12A(a), (b) and (c) of the SEBI Act, 1992, Regulation 3(b), (c), (d), (d), Regulation 4(1) and Regulation 4(2)(f), (k) and (r) of the SEBI PFUTP Regulations, 2003 and Rakesh Kumar Wadhawan and Kapil Wadhawan have prima-facie violated Regulation 4(1) and other related provisions of the SEBI LODR Regulations, 2015.

The Board thus restrained the defaulting promoters from accessing the securities market and are prohibited them from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly and associating themselves with any listed public company and any public company as directors/ promoters which intends to raise money from the public or any intermediary registered with SEBI.

In view of the above, the order was passed without any prejudice to Direction(s) or Order that may be passed by NCLT during CIRP of the Company under IBC, 2016.[Dewan Housing Finance Corporation Ltd., In Re., 2020 SCC OnLine SEBI 138, decided on 22-09-2020]


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Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Abhay S. Oka CJ. and Ashok S.Kinagi J., while allowing the present writ petition held, “the decision of the Trustees (the Franklin Templeton Trustee Services private Limited) to wind up six Schemes mentioned in paragraph-1 of the Judgment by taking recourse to sub-clause (a) of clause (2) of Regulation 39 of the Mutual Funds Regulations cannot be implemented unless the consent of the unit-holders is obtained in accordance with sub-clause (c) of clause (15) of Regulation 18.”

 Facts of the Case

Withdrawal of 6 schemes by Franklin Templeton Mutual Fund enumerated herewith, were in challenge. Three separate petitions were moved under High Courts of Delhi, Gujarat and Madras which by an order dated 19-06-2020 by the Supreme Court was transferred to the Karnataka High Court, for final disposal. The matter also includes the challenge to the validity of Regulations 39, 40 and 41 of the Mutual Funds Regulations by SEBI.

Schemes of the Franklin Templeton Mutual Fund under challenge;

i) Franklin India Low Duration Fund

ii) Franklin India Ultra Short Bond Fund

iii) Franklin India Short Term Income Plan

iv) Franklin India Credit Risk Fund

v) Franklin India Dynamic Accrual Fund

vi) Franklin India Income Opportunities Fund

 Issues

  1. Whether the present writ petition against AMC, Trustees and Sponsors maintainable?
  2. Whether the Regulations 39 to 42 of the Mutual Funds Regulations are ultra vires the provisions of the Securities and Exchange Board of India Act, 1992 and unconstitutional being vague, manifestly arbitrary and unreasonable?
  3. Whether obtaining the consent of the unit-holders in accordance with the provision of clause (15)(c) of Regulation 18 of the Mutual Funds Regulations is a condition precedent for winding up of a Scheme in accordance with the provision of sub-clause clause (2)(a) of Regulation 39 of the Mutual Funds Regulations?
  4. Whether compliance with clause (15A) of Regulation 18 of the Mutual Funds Regulations is a condition precedent for winding up of a Scheme in accordance with sub-clause (a) of clause (2) of Regulation 39?
  5. Whether SEBI has jurisdiction under Section 11B of SEBI Act to interfere with the decision of winding up of a Scheme, taken pursuant to sub-clause (a) of clause (2) of Regulation 39?
  6. Whether, after issue and publication of notice as contemplated by clause (3) of Regulation 39, AMC or Trustees can borrow money for the purposes of repayment of a loan or for the purposes of meeting the requisition for redemption requests received?
  7. Assuming that the decision of winding up is valid, whether the Trustees have established that they have complied with sub-clauses (a) and (b) of clause (3) of Regulation 39?
  8. Whether the Court exercising writ jurisdiction, interfere with the decision of the Trustees to wind up of the said Schemes by going into the merits of the decision?
  9. Whether it is justified to make public, a copy of the report by the forensic auditor?
  10. Whether the petitioners are entitled to have true/original copy of the resolutions dated 20th April 2020 and 23rd April 2020 passed by the Board of Directors of the Trustees?
  11. Whether any directions are required to be issued against SEBI? 

Observations & Decision

  1. While answering the said issue in affirmation, the Court placed reliance over the case of Praga Tools Corporation v. CA Imanual, (1969) 1 SCC 585 and Rohtas Industries Ltd. v. Rohtas Industries Staff Union, (1976) 2 SCC 82. The said case essentially dealt with the maintainability of a dispute between a private entity and its employees, against award rendered by the Arbitrator. The Court held a similar rationale observing that, the power of the Court under Article 226 is of the widest amplitude and covers within the disputes of private entity, irrespective of any alternate remedy available. Clarifying further the Court reiterated the findings of the former case mentioned above; “An order of mandamus is, in form, a command directed to a person, corporation or an inferior tribunal requiring him or them to do a particular thing therein specified which appertains to his or their office and is in the nature of a public duty. It is, however, not necessary that the person or the authority on whom the statutory duty is imposed need be a public official or an official body. A mandamus can issue, for instance, to an official of a society to compel him to carry out the terms of the statute under or by which the society is constituted or governed and also to companies or corporations to carry out duties placed on them by the statutes authorising their undertakings. A mandamus would also lie against a company constituted by a statute for the purposes of fulfilling public responsibilities.”
  2. Declaring Regulations 39 to 40 of the Mutual Funds Regulations valid, the Court held, “(…) the Regulations which have been framed for regulating the action of winding up of the Schemes can be said to have been framed for carrying out the purposes of the SEBI Act. In absence of Regulations 39 to 42, the action of winding up of the Schemes will remain completely unregulated which will defeat the very object of enacting the SEBI Act”
  3. “When the Board of Directors of a Trustee company, by majority, decides to wind up a Scheme by taking recourse to sub-clause (a) of clause (2) of Regulation 39, the Trustee company is bound by its statutory obligation under sub-clause (c) of clause (15) of Regulation 18 of obtaining consent of the unit-holders of the Scheme. The consent of unit-holders will be by a simple majority. In view of the obligation of the Trustees under sub-clause (c) of clause (15) of Regulation 18, a notice as required by clause (3) of Regulation 39 can be issued and published only after making compliance with the requirement of obtaining consent of the Unit-holders.” The Court further relied on OP Singla v. Union of India, (1984) 4 SCC 450, Union of India v. Brigadier PS Gill, (2012) 4 SCC 463 so to establish a constructive interpretation of any provision.
  1. “Clause 15A of Regulation 18 of the Mutual Funds Regulations 1996 operates in a different field which has nothing to do with the process of winding up of a Scheme. Therefore, compliance with Clause 15A of Regulation 18 is not a condition precedent for winding up of a Scheme pursuant to sub-clause (a) of clause (2) of Regulation 39.”
  1. The Court reproduced Section 11B of the SEBI Act which mentions about power to issue directions and levy penalty in addition to Section 30 enumerating SEBI’s power to make regulations. In exercise of the powers under Section 11B of the SEBI Act, SEBI has no jurisdiction to interfere with the decision of winding up of a Scheme made by taking recourse to Regulation 39 (2) (a).”
  1. “On compliance being made with sub-clauses (a) and (b) of clause (3) of Regulation 39, Regulation 40 triggers in and therefore, AMC or Trustees have no right to continue the business activities of the Schemes which will include borrowings. Similarly, from the date of publication of the notice in accordance with sub-clause (b) clause (3) of Regulation 39, AMC is disentitled to honour the redemption requests made earlier.” 
  1. The said issue was answered against the trustees. The Court discussed the obligations of Trustees finding that the same was not complied with in the present case.
  1. “Considering the duties of the Trustees under the Mutual Funds Regulations, they perform a public duty. Therefore, when it is found that the Trustees have violated the provisions of the SEBI Act or Mutual Funds Regulations, a Writ Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, can always issue a writ of mandamus, requiring the Trustees to abide by the mandatory provisions of the SEBI Act or the Mutual Funds Regulations.” Reflecting upon the powers of Court while examining the decision of the Trustees, under Article 226, it was said, “no interference can be made with the decision of the Trustees dated 23rd April 2020 of winding up of the said Schemes. However, the decision can be implemented only after obtaining the consent of unit-holders as required by sub-clause (c) of clause 15 of Regulation 18. Issue No.(v) is answered accordingly.”
  1. “The copy of the Forensic Audit report produced in a sealed cover, does not contain final findings and it is specifically mentioned therein that after taking the views/responses of SEBI, AMC and Trustee company, some of the conclusions in the report may undergo a change. Hence, the said report can at best be termed as a tentative report. Hence, the same is not relevant for deciding these petitions. As the said document is not relevant, it is not necessary for this Court to go into the legality of the claim for privilege.” 
  1. Clause (22) of Regulation 18 clearly lays down that the Trustees shall abide by the Code of Conduct as specified in the Fifth Schedule. Clause (2) of the Code of Conduct prescribed in the Fifth Schedule reads; “2. Trustees and asset management companies must ensure the dissemination to all unit-holders of adequate, accurate, explicit and timely information fairly presented in a simple language about the investment policies, investment objectives, financial position and general affairs of the Scheme.”
  1. “After receiving the final findings/report of the Forensic Auditors, SEBI is bound to consider of initiating an action as contemplated by Regulation 65, depending upon the findings recorded therein.”

 [SEBI v. Franklin Templeton,  2020 SCC OnLine Kar 1650, decided on 24-10-2020]


Sakshi Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Securities Appellate Tribunal (SAT): Justice Tarun Agarwal quashed the order under challenge in the present appeal as Adjudicating Officer has no power to proceed under SEBI Act, 1992 inspite of a moratorium having come into effect under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The present appeal has been filed questioning the legality and validity of the order dated 29-05-2020 passed by the Adjudicating Officer under Section 15-I of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’) whereby the authority has imposed a penalty of for a sum of Rs 20 lakhs under Section 15A (b) and 15HB of the SEBI Act on the appellant which is a housing finance company undergoing corporate insolvency resolution process. The adjudicating officer while imposing the penalty held that the moratorium declared under Section 14 of the IBC would not prevent the adjudicating officer from determining the liability of the corporate debtor and that the moratorium declared under the IBC would be applicable to the enforcement/recovery of the determined liability and that the instant proceedings are in the nature of determining the liability for the alleged non-compliance of the LODR Regulations and other Rules.

Counsel for the appellant relied on judgments titled Alchemist Asset Reconstruction Company Ltd. v. Hotel Gaudavan Pvt. Ltd. (2018) 16 SCC 94 and Rajendra K. Bhuta v. Maharashtra Housing and Area Development Authority 2020 SCC Online 292 and submitted that the provisions of Section 14 of IBC is patently clear and explicit and is not vague which requires use of external aid. It was submitted that when the provision is clear and there is a direct decision of the Supreme Court it was not open to the adjudicating officer to use external aid in interpreting the provisions of Section 14 of the IBC.

Counsel for the respondent submitted that the ambit of the word ‘proceedings’ under Section 14(1) (a) of the IBC needs to be given a wider meaning and if one considers the Insolvency Law Committee Report of March, 2018 one would find that the IBC Act and moratorium prescribed under Section 14 of IBC was basically for the creditors and not for the regulators/statutory authorities, namely, the respondent. It was further submitted that the moratorium declared under Section 14 of the IBC does not prevent the adjudicating officer from determining the liability of the corporate debtor and that the moratorium declared under IBC would be applicable only to the enforcement/recovery of the determined liability.

The Court relied Rajendra K. Bhuta v. Maharashtra Housing and Area Development Authority, 2020 SCC Online 292 which held

“4. The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect Under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against corporate debtors.

  1. This being the case, we are surprised that an arbitration proceeding has been purported to be started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act are being entertained. Therefore, we set aside the order of the District Judge dated 6.7.2017 and further state that the effect of Section 14(1) (a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law.”

 Thus the Court observed that after bare perusal of Section 14 of IBC it is clear that pursuant to a moratorium declared under Section 14 the institution of suits or proceedings against the corporate debtor is prohibited or continuation of a suit or proceedings. Further, execution of any judgment or order in any court of law, tribunal, arbitration panel or other authority is also prohibited. It was further observed that where a moratorium has been declared under Section 14 of IBC, the authority which in the instant case is SEBI/AO will have no jurisdiction to institute any proceedings. Where a proceeding has already been instituted and during the pendency of the proceedings a moratorium order is passed under section 14 then the authority is prohibited from continuing with the proceedings.

The Court held that in the instant case the moratorium kicked in when the petition was filed on November, 2019 under Rule 5(a)(i) of the Insolvency and Bankruptcy (Insolvency and liquidation proceedings of financial service provider and application to Adjudicating Authority) Rules, 2019 and thereafter it was admitted on 3-12-2019. The adjudicating officer issued notice subsequently on 24-12-2019. It is quite clear that the proceedings were initiated by the adjudicating officer after the moratorium had come into effect.

In view of the above, the impugned order of penalty is quashed and appeal allowed.[Dewan Housing Finance Corporation Ltd. v. SEBI, 2020 SCC OnLine SAT 162, decided on 09-10-2020]


Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Justice Tarun Agarwal allowed the appeal and substituted the penalty imposed by the impugned order with a warning.

The facts of the case are such that the appellant in the instant case is National Highway Authority of India i.e. NHAI an autonomous body set up by the Parliament under ‘NHAI Act’. It is also listed on the Bombay Stock Exchange and National Stock Exchange and is subject to the provisions of the (Listing Obligations and Disclosure Requirements) Regulations, 2015 i.e. LODR Regulations, 2015. Regulation 52(1) of the LODR Regulations, 2015 mandates filing of the unaudited half-yearly financial results within 45 days from the end of the half financial year. An extension application under Regulation 102 of LODR Regulation 2015 was filed on two occasions with a  procedural fee of Rs 1 lakh pursuant to which SEBI asked for certain clarification which were given therewith yet the request was rejected. The appellants failing which, as there was a delay in filing the half-yearly financial results for the period ending 30-09- 2018 and 31-03-2019, has been slapped with a penalty of Rs 7 lakh by SEBI Board vide order dated 26-05-2020. Being aggrieved by the said order present appeal has been filed.

Counsel for the petitioners Rajesh Ranjan and Neeraj Matta submitted that the delay was a procedural delay which was beyond the control of the officers of NHAI as the NHAI body constituted under the NHAI Act mandates the composition to be from among the high level secretaries from the Union Ministries which makes it difficult for regular meetings to be convened due to lack of adequate quorum and it is also mandated under Regulation 4 of NHAI (Transaction of Business) Regulations, 1997 that no meeting of the Board would be legal or valid unless it was approved by two-third of the members failing which even after the financial results being ready on time it could not been signed and submitted/ furnished. It was further submitted that in view of Section 27 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’) no proceedings could have been initiated for imposing penalty under Section 15A of the SEBI Act unless and until the Officers in default were identified and prosecuted under Section 27 of the Act. It was also submitted that the extension application was rejected without giving proper reasons for doing so and hence is against principles of natural justice and Section 15 J was not taken into consideration before imposing penalty.

Counsel for the respondents Abhiraj Arora and Rashi Dalmia opposed the submissions by petitioners stating that the penalty has been imposed as per Regulation 52 of the LODR Regulations and there being no provision for relaxation, relaxation has not been granted and penalty imposed keeping in mind that such callousness has been shown by NHAI on previous 7 instances and thereby 7 Lakh has been imposed.

Regulation 52(1) “Financial Results.

52(1) The listed entity shall prepare and submit un-audited or audited financial results on a half yearly basis in the format as specified by the Board within forty five days from the end of the half year to the recognised stock exchange(s).”

 Regulation 102 “Power to relax strict enforcement of the regulations. 102.The Board may in the interest of investors and securities market and for the development of the securities market, relax the strict enforcement of any requirement of these regulations, if the Board is satisfied that: (a) any provision of Act(s), Rule(s), regulation(s) under which the listed entity is established or is governed by, is required to be given precedence to; or (b) the requirement may cause undue hardship to investors; or (c) the disclosure requirement is not relevant for a particular industry or class of listed entities; or (d) the requirement is technical in nature; or (e) the non-compliance is caused due to factors affecting a class of entities but being beyond the control of the entities.”

 The Tribunal stated that in the instant case penalty became leviable under Section 15A (b) of the SEBI Act as the unaudited half-yearly financial results were not filed within the stipulated period. The Tribunal observed that prosecution under Section 27 of the SEBI Act can be initiated against the Company and its Directors/Officers and persons responsible for the default but penalty proceedings can be initiated under Section 15A for non-filing of the financial results without taking recourse to Sec. 27 of the Act. However, there is an exception to the rule and exemption can be granted by extending the time to comply with the provisions Regulation 102 of the LODR Regulations. It was further observed that the Appellate Authority consists of senior government functionaries who are entrusted with multifarious functions in the Union Government and hence strict compliance must be subject to consideration for the extension of time under Regulation 102 of the LODR Regulations.

The Tribunal held that imposing 7 lakh as penalty without assigning reasons as well as the reason cited by the authorities that the amount so fined is due to his default 7 times is wholly arbitrary as not filing the financial results for the financial years 2015-2016 to 2018-2019 cannot be taken into consideration as a ground for imposition as the violation was only for non-filing of the unaudited half-yearly financial results for the year ending 30-09-2018 and 31-03-2019. The delay in the filing of the returns for the earlier financial years stood exempted and condoned by the respondent themselves which cannot be taken as a mitigating circumstance for the imposition of penalty.

The Tribunal also relied on judgment titled Adjudicating Officer, SEBI v. Bhavesh Pabari, (2019) 5 SCC 90 which held that the conditions stipulated in clause (a), (b), and (c) of Section 15-J SEBI Act, 1992 are not exhaustive and, in a given case, the AO can take note of other factors which are not specified in clause (a), (b), and (c) of Section 15-J of the Act. The Adjudicating Officer also could have taken into consideration the mitigating circumstances in addition to the factors mentioned under Section 15J while considering the imposition of penalty.

The Tribunal held that the Adjudicating Officer failed to take into consideration the mitigating circumstances as a factor under Section 15-J while considering the imposition of penalty.

In view of the above, the Court allowed the appeal and found the imposition of Rs 7 lakhs as unsustainable.[National Highway Authority of India v. Securities Exchange Board of India, 2020 SCC OnLine SAT 158, decided on 27-08-2020]


Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Division Bench of Justice Jarat Kumar Jain (Judicial Member) and Balvinder Singh (Technical Member) while addressing the present appeal observed that,

Scheme under Section 230 of the Companies Act, 2013 cannot be used as method of rectification of the actions already taken.

Appellant preferred the instant appeal under Section 421 of the Companies Act, 2013 challenging the impugned order passed by the National Company Law Tribunal, Mumbai.

What led to the filing of the present appeal?

Respondent 1 presented a Scheme of Arrangement under Sections 391-394 of Companies Act, 1956 (Existing Sections 230-232 of Companies Act, 2013) for sanction of the Arrangement embodied in the scheme originally filed before Bombay High Court which by virtue of MCA notification got transferred to NCLT, Mumbai.

Appellant pointed out certain irregularities and non-compliance and raised the objections that the Scheme of Arrangements is a mere rectification of action already taken by the respondent company without obtaining approval of Tribunal and other Regulatory Authorities as required under the provisions of Companies Act.

Since, NCLT, Mumbai in its order held that the scheme appeared to be fair and reasonable, the appellant being aggrieved with the same filed the present appeal.

Observations of the Tribunal

Bench noted that the in view of the records it was apparent that there were irregularities and non-compliances from a very long time due to which Stock Exchange took action against the respondent 1 company and suspended the trading of its securities in the year 2002.

No action being taken on behalf of the respondent 1 company had a serious impact on the investors who invested their hard-earned money in the company. The non-compliances and irregularities or any illegal act already committed cannot be ratified under the umbrella of “scheme” as envisaged under Section 230-232 of Companies Act, 2013.

Further, even if the objection of the Respondent 1 Company that the Appellant has no locus standi under Section 230 (4) to object the scheme is accepted but this will not affect the power of Regional Director as there is no such limitation prescribed for the Regional Director to file his objections as he is a public authority and has to look after the interest of the public/shareholders/investors at large.

Bench noted from the observations made by the Regional Director that there were irregularities and non-compliances that were present at the time of sanctioning of the scheme by the NCLT.

Company must be in compliance of the provision of law and cannot act just on the basis of a legal opinion.

The respondent 1 Company should have instantly rejected the application money for 10,375 shares as the Application applied were for less than the minimum lot size i.e. 100 shares.

Since the scheme appeared to be used as a course of action to rectify the irregularities previously done/committed by respondent 1 company, grounds raised by the regional director for dismissing the petition was just and reasonable.

Main objective behind the establishment of SEBI is to protect the interest of the investors and their hard-earned money trading in the stock exchanges, to regulate and facilitate efficient and flawless functioning of the securities market, to promote its development and to resolve the matters connected to it.

NCLT overruled the objections of the Regional Director in view of the said being procedural in nature.

Wrong Precedent

For the above aspect, Bench stated that even if the objections were procedural in nature, it is the jurisdiction of the Tribunal that such procedural aspects need to be duly complied with before sanctioning of the scheme as it would lay down a wrong precedent which would allow companies to do whatever acts without the compliance and confirmation of the Court and other sectoral and regulatory authorities and thereafter get it ratified by the Court under the Umbrella of “scheme”.

Decision

Tribunal held that before the sanctioning of Scheme under Section 230 of the Companies Act, 2013, no action should be pending against the company by the public authorities.

It is the duty of the Tribunal or any Court that their Orders should encourage compliances and not defaults.

Hence, the appeal was allowed and the impugned order set aside. [Ashish O. Lalpuria v. Kumaka Industries Ltd., 2020 SCC OnLine NCLAT 676, decided on 20-10-2020]

Case BriefsHigh Courts

Bombay High Court: A Division bench of Nitin Jamdar and Milind Jadhav, JJ., observed that there is no duty on the SEBI Board while considering an exemption application under Regulation 29 of the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, to give a personal hearing.

Petitioner requested respondent– SEBI for a personal hearing regarding exemption application filed by it under a regulation governing employee stock options. Though SEBI Board refused the rest fro personal hearing.

Question in the present petition is:

Whether the Board is obliged to grant a personal hearing to the petitioner while considering an exemption application under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014?

Answer for the above-stated question is — NO.

Facts and reasons in regard to the above-stated have been laid down.

An employee welfare trust named JK Paper Welfare Trust was formed by the petitioner.

On an earlier date in the year 2018, petitioner sought clarification regarding the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. SEBI informed that the Regulations 2014 apply to the petitioner.

Petitioner sought relaxation from the applicability of Regulations under Regulation 29 of the Regulations of 2014, the SEBI empowered to grant relaxation for the strict compliance of the Regulations.

Securities Appellate Tribunal held that the SEBI had to give reasons in the order rejecting exemption application and hence tribunal directed the SEBI to pass a reasoned order within the set time limit.

Since the request for a personal hearing was refused, the Petitioner has approached this Court with a prayer that SEBI be directed to give an opportunity of hearing to the Petitioner in respect to its exemption application.

Counsel for the petitioner, Senior Advocate, Janak Dwarkadas and Rafique Dada, Senior Advocate for respondents — SEBI.

High Court’s decision

Relying upon Regulation 29, petitioner sought exemption from the strict compliance of Regulations 1(3), 1(4), 3(1), 26(2) and 31(2)(b)(i) and (ii).

Regulation 3 specifies the manner of implementation of the schemes.

Regulation 26 mandates certain conditions regarding the position of shares of the company.

Regulation 31 specifies certain compliances.

Regulation 29: Power to relax strict enforcement of the regulations

(1) The Board may suo motu or on an application made by a company, for reasons recorded in writing, grant relaxation from strict compliance with any of these regulations subject to such conditions as the Board deems fit to impose in the interests of investors in securities and the securities market.

(2) A company making an application under sub-regulation (1), shall pay a non-refundable fee of rupees one lakh by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by way of a banker’s cheque or demand draft payable at Mumbai in favour of the Board.”

The Petitioner’s first contention is that the Appellate Tribunal in its order dated 11 August 2020 held that the power under Regulation 29 is a quasi-judicial power and since it is a finding rendered in the litigation between the parties the same is binding on SEBI.

High Court rejected the above contention of the petitioner.

The second contention of the petitioner was that irrespective of the finding of the Tribunal, this Court should hold that the power under Regulation 29 is quasi-judicial power and therefore, a personal hearing is mandated.

Bench stated that the power to grant relaxation under Regulation 29 is a discretion to be exercised by the SEBI, and the conditions to be imposed are in the interest of the investors.

Refusal to grant an exception under Regulation 29 is not the origin of liability. Grant of exemption is a matter of exception from the general rule contained under the Regulations. In view of the said, the second contention was also rejected.

Next limb argument of the Petitioner was that, on looking at the consequences that would follow, whatever may be the nature of Regulation 29, in requirement of fairness, transparency and principles of natural justice, personal hearing be read into these provisions.

In Supreme Court’s decision of Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I, (2008) 14 SCC 151, it was observed that the requirement of giving reasonable opportunity of being heard is generally read into the provisions of a statute, particularly when the order has adverse civil consequences and this principle will hold good irrespective of whether the power conferred on the statutory body or the tribunal is administrative or quasi-judicial.

In the above-cited case, the Supreme Court observed that reading of requirement of personal hearing in a statute when there are consequences cannot be applied as a rule. It was also stated that no general rule of universal application can be laid down to the applicability of principle audi alteram partem in addition to the provision.

Regulations of 2014 are a code in itself. They regulate eployee stock option schemes in the larger interest of the onvestors.

Court stated that,

If SEBI finds that exemption need not be granted, it will give reasons for the same which can be tested in appeal. If the conditions are arbitrarily imposed or that the exercise is perverse, the validity can be challenged.

Petitioner’s argument which proceeds on the footing that the principles of natural justice in all circumstances include personal hearing which is not a correct position of law.

Power in question is a discretionary power and the use of this discretion can be challenged in appeal within the well-settled parameters. Full transparency is maintained by permitting written submissions providing reasons and the right to appeal.

The apprehension expressed by the SEBI that by reading duty to give personal hearing in this Regulation would have adverse ramifications on its working cannot be said to be unwarranted.

Functioning of SEBI will be hampered if the exercise of its every power is preceded by mandatory personal hearing, whether the regulation provider for it or not.

[JK Paper Ltd. v. SEBI,  2020 SCC OnLine Bom 1378, decided on 06-10-2020]