SCOPE OF APPEAL BEFORE SUPREME COURT UNDER SECTION 15Z OF SECURITIES AND EXCHANGE BORD OF INDIA ACT, 1992

[Mr. M. GOVINDARAJAN]

Functions of SEBI

• Section 11 of the Securities and Exchange Board of India Act, 1992 (‘Act’ for short)  enumerates the functions of the Securities and Exchange Board of India (‘SEBI’ for short) and empowers it to take measures for protecting the interests of investors in securities.
• Section 11B empowers SEBI to issue necessary directions.
• Section 11C gives powers to SEBI for initiation of investigations.
• Section 11D gives powers to SEBI to pass an order requiring such person to cease and desist from committing or causing such violation.
• Section 15I gives powers to SEBI to adjudicate for imposing penalty.

Securities Appellate Tribunal

Section 15T of the Act provides that if any person aggrieved against the order of SEBI or the Adjudicating Officer may file an appeal in the prescribed manner before the Securities Appellate Tribunal (‘SAT’ for short).

Appeal before Supreme Court

The power and jurisdiction of the Supreme Court to consider the decisions of the SAT is provided in Section 15Z of the Act.  Section 15Z of the Act provides that any person aggrieved by any decision or order of the SAT may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order.  The Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

In the earlier period the appeal against SAT lies with the High Court.  This power has been shifted to Supreme Court by means of an amendment to Section 15Z.  

Scope of appeal before Supreme Court

The appellate jurisdiction of Supreme Court is curtailed to determining only a question of law.  The phrases such as, ‘question of law’, are open textual expressions, used in statutes to convey a certain meaning which the legislature would not have intended to be read in a pedantic manner.   When words of the Sections allow narrow as well as wide interpretations, courts of law have developed the art and technique of finding the correct meaning by looking at the words in their context.

The scope of appeal before Supreme Court under Section 15Z is well explained in

SECURITIES AND EXCHANGE BOARD OF INDIA VERSUS MEGA CORPORATION LIMITED [2022 (3) TMI 1226 - SUPREME COURT]

In this case the respondent company (‘company’ for short), listed in the Bombay Stock Exchange, in 1996, is engaged in the business of radio taxi service, coupled with trading of shares in a small measure till 2004.  The SEBI noticed the unusual price movement of the scrip of the Company between January 2005 and September 2005.   The Company's shares traded between ₹ 4.25 and ₹ 43.85. This upward spurt resulted in an increase in the average monthly volume of shares to 1,56,22,583 shares.  SEBI directed investigation against the respondent in its ex-parte ad interim order SEBI.  After hearing the objections, the interim orders were confirmed, and a show-cause notice for violation of Regulations 3(a), (b), (c)&(d) and 4(1), 4(2)(k) & 4(2)(r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’ for short)  was issued on 10.10.2007.

The following allegations were made in the show cause notice issued to the respondent-

• The Company made huge profits from undeclared business and sale of scrips and there is uncertainty about the source of income. It is not known whether the Company had amended its Memorandum and Articles for undertaking the activity of trading. The surge in the profits is unusual, and there is no reasonable explanation for the same. This is violative of Regulation 3 of the PFUTP Regulations;
• Between April 2005 and September 2005, the respondent issued public statements in the form of advertisements and other notifications to lure the public in investing in the respondent Company. This activity was undertaken to create an artificial demand knowing fully well that this is not the truth of the matter. This is in violation of Regulation 4(2)(k) and 4(2)(r) of the PFUTP Regulations;
• The respondent manipulated its profits by selling shares through orchestrated deals which were detected in the investigation. The manipulations led to an artificial increase of the scrip to a phenomenal extent sub-serving the fraudulent intention of the Company, and this is again violative of Regulation 3 of the PFUTP Regulations.

The respondent filed reply to the show cause notice.  After hearing the respondent, SEBI held that the respondent has violated the provisions of the Act and the PFUTP Regulations.  SEBI restrained the respondent from accessing the capital market in any manner and its directors from dealing in securities for one year.

Against the order of SEBI, the respondent filed an appeal before the SAT.  SAT allowed the appeal filed by the respondent.  SAT held as below-

• The unusual profits, if any, made during the year 2004-05 by itself cannot constitute any transgression of law.
• The powers of SEBI  are only to ensure that investors are not misled in making investments based on fraud and allurement and that there is nothing unusual about investors being attracted when the Company comes with positive annual reports.
• The extraordinary profits in it cannot be the basis for concluding that the respondent’s accounts are manipulated with a specific objective to mislead the investors.
• The advertisements issued for entering into the business of foreign exchange with the launch of ‘Mega Forex Brand’ and also the announcement relating to tour services based on the agreement with Gems Tours and Travels Private Limited were in the ordinary course of business, and there was sufficient evidence to that effect.
• SEBI could not have relied on the letter of the stockbroker contradicting the stand taken by it without giving an opportunity of cross examination.

Against the order of SAT, SEBI filed the present appeal before the Supreme Court under Section 15Z of the SEBI Act.  The appellant SEBI submitted the following before the Supreme Court-

• The Tribunal examined the order passed by SEBI in a disjointed manner by taking each incident as a standalone event and gave its finding as if they were separate events.
• In its approach to examine the events as independent episodes, the Tribunal misled itself in coming to the wrong conclusions.
•  The events depicting manipulation are correctly identified, and they are based on the evidence available on record.
• If the right of cross-examination is allowed it would virtually disable SEBI from performing its functions.

The respondent submitted the following before the Supreme Court-

• The appeal has to be dismissed as there is no question of law involved in the case.
• The approach adopted by SEBI in focusing on the sudden spurt in profit of the Company, is itself, wrong approach.  There is no unusual income in the profit of the respondent Company.
• There is no indication of any intention to mislead the public or lure the investors on the statements made therein.
• The findings of the SAT that the advertisements were not in violation of the Regulations are based on the correct facts as evidenced by the material placed before SEBI.
• The principles of natural justice would be violated if an opportunity to cross examine is not granted in a case where a material adverse to the party is taken cognizance by SEBI.

The Supreme Court heard the submissions made by both the parties to the appeal.  The Supreme Court was to consider the following issues to be decided in the present appeal-

1. What is the scope and ambit of statutory appeal to the Supreme Court under Section 15Z of the Act against an order passed by the Securities Appellate Tribunal?
2. Whether the advertisements dated 07.04.2005 and 20.04.2005, are in violation of Regulations 3 (a), (b), (c), (d) read with Regulation 4 (1), (2) (k) and (r) as amounting to misleading and defrauding the investors?
3. Whether the Company has violated Regulations 3(a), (b), (c) and (d) and Regulation 4(1), 4(2)(k) and 4(2) (r) of the SEBI (PFUTP) Regulations, 2003 by manipulating the share prices and accounts?
4. Whether there is a right to cross-examine the author of a document if SEBI seeks to rely on that document which is against the interest of the company?

The scope of appeal under Section 15Z may be formulated as under-

• The Supreme Court will exercise jurisdiction only when there is a question of law arising for consideration from the decision of the Tribunal.
• A question of law may arise when there is an erroneous construction of the legal provisions of the statute or the general principles of law.
• The Supreme Court in exercise of its jurisdiction of Section 15Z may substitute its decision on any question of law that it considers appropriate in such cases.
• The SAT while exercising jurisdiction under Section 15T, apart from acting as an appellate authority on fact, also interprets the Act, Rules and Regulations made there under and systematically evolves a legal regime.
• This freedom to evolve and interpret laws must belong to the Tribunal to subserve the Regulatory regime for clarity and consistency.
• These are policy and functional considerations which the Supreme Court will keep in mind while exercising its jurisdiction under Section 15Z.

Regarding to the second issue the Supreme Court held that as the facts involved in this issue are relating to the merits of the case and, as such, do not qualify as a question of law. The Supreme Court confirmed the finding of the Tribunal and held that there is no occasion for this court to interfere with the decision of the SAT.

The third issue relates to the allegation that the accounts are manipulated for the year 2004-05 to show inflated profits to lure investors into buying shares of the company.  It was alleged that more than 2 crores shares were purchased by certain entities in the physical form in ‘off-market’ deals and then transferred those shares in subsequent ‘off-market’ deals to certain other outside entities connected to the company.  The SAT came to the conclusion that the connectivity could not be established and that the conclusions drawn by the SEBI were insufficient.  The findings are based on the SAT’s inferences drawn from the material available on record. The conclusions drawn by the SAT do not give rise to any question of law warranting interference of this court under Section 15Z of the Act.

In respect of the fourth issue SEBI has, in its investigation, secured a letter from one of the directors of DPS Shares and Stock Brokers Private Limited, the stockbrokers of the company.   This letter contradicts the stand taken by the company in its defence.   SEBI in its investigation secured a letter from a stockbroker stating that their two directors, one Shri Pratik Shah and one Shri Sujal Shah, had handled the transactions in the alleged scrip by opening a current account by using dummy resolutions without the knowledge of Shri Dinesh Masalia, the third director of the stockbroker company. On this basis, it was concluded that the transaction was fictitious. In defence, the Company sought permission to cross-examine the said Shri Dinesh Masalia, but no permission was granted.  The respondent submitted before the SAT that principles of natural justice were violated because an opportunity to cross-examine is not presented.  The Supreme Court observed that the Company and the directors were informed about the letter elicited from Shri Dinesh Masalia.  The Company’s reply to the show-cause notice evidences objections raised by the Company with respect to the stand taken by Shri Dinesh Masalia.  Therefore the Supreme Court held that reasonable opportunities were granted to the respondent.   Since the Supreme Court did not interfere with the findings of SAT, the Supreme Court held that the claim of the respondent for cross examination would pale into significance. This question pertains to academic issue.  The Supreme Court set aside the general observations of SAT that there is a right of cross examination.

Conclusion

In conclusion it can be inferred that the Supreme Court while taking the appeal under Section 15Z of the Act will consider only the question of law and not question of fact.  The SAT is the last fact finding body.  Therefore the appeal against the fact cannot be challenged in the appeal filed before the Supreme Court under SEBI Act.