SEBI can pass ex parte interim orders only in urgent cases: SAT
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SEBI can pass ex parte interim orders only in urgent cases: SAT

Aditya AK

The Securities Appellate Tribunal, Mumbai has significantly held that the Securities and Exchange Board of India (SEBI) can pass ex parte interim orders only in extreme and urgent cases. The Bench headed by Justice Tarun Agarwala further held that the power to issue such orders must be used sparingly.

The SAT was hearing an appeal challenging an ex parte interim order passed against the appellant Cameo Corporate Services Limited, a BPO providing share transfer services. The Whole Time Member (WTM) of the SEBI had passed such an order in October, restraining the appellant from accepting new clients for a period of three months.

SEBI had received a complaint from a person seeking information on transferring shares belonging to his late grandfather. The appellant company had informed the complainant that the deceased had applied for duplicate shares and the same were transferred to another person.

Though the complaint was disposed of by the company, SEBI examined its activities, specifically on the issue of exercise of due diligence in respect of issuance of duplicate shares. Based on the examination, SEBI found that there were nine such similar instances of the same company from the financial year 2014 onwards where duplicate shares have been issued. As per its investigation, SEBI found discrepancies with respect to PAN cards in six instances involving the appellant company.

On the basis of this information, the WTM of SEBI prima facie observed that the appellant did not exercise appropriate due diligence while processing various requests. The company was found to be in violation of Clauses 2, 3 and 16 of Schedule III of the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993. It thus issued an ex parte ad interim order prohibiting the appellant from accepting fresh clients till further directions. 

Upon receiving the ex parte ad interim order, the appellant immediately applied for revocation and submitted a detailed reply to SEBI. The WTM of SEBI, after considering the matter, confirmed the ex parte ad interim order this month. SEBI was also directed to carry out a special purpose inspection of the appellant’s books of accounts as well as the due diligence adopted in respect of unclaimed shares, and the procedure followed for issue of duplicate shares, among others. 

Appearing for the appellant before the SAT, Advocate Somasekhar Sundaresan argued that under the 1993 Regulations, any contravention of the provisions of the SEBI Act, Rules, Regulations etc. would be dealt with in accordance with the provisions of Chapter V of the Intermediaries Regulations of 2008. Regulation 27 provides for suspension, cancellation etc. only after the submission of a report made by the enquiry officer and after the appellant is given an opportunity to be heard. Sundaresan argued no such opportunity was granted in the present case.

Representing SEBI, Senior Advocate Vikram Nankani submitted that the ex parte ad interim order was not passed under Regulation 27 of the Intermediaries Regulations of 2008, but under Section 11(1) and 11(4) of the SEBI Act. He thus contended that SEBI can pass. an ex parte ad interim order under these provisions.

After hearing the parties, SAT Bench noted that apart from the complainant, no other investor had complained of a wrongful transfer of shares involving the appellant company. Further, the discrepancies pointed out by SEBI did not reveal that the appellant made any gain by this wrongful transfer, nor was there any finding of a loss being caused to an investor. In this light, the SAT held that restraining the appellant from accepting fresh clients for a period of three months appears to be harsh and unwarranted.

On the power of the SEBI to pass such orders, the SAT held,

“…the respondent is empowered to pass an ex-parte interim order only in extreme urgent cases and that such power should be exercised sparingly. In the instant case, we do not find that any extreme urgent situation existed which warranted the respondent to pass an ex-parte interim order. We are of the opinion that the impugned order is not sustainable in the eyes of law as it has. been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. The restraint order is in our opinion unjustified.”

Thus, the order insofar as it restrains the appellant from accepting fresh clients has been quashed. The other directions issued by the WTM of SEBI will continue to operate against the appellant, the SAT held.

[Read the order]

SAT-order-on-SEBI-ex-parte-orders.pdf
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