SEBI IS HAVING POWER TO INVESTIGATE ON COMPLAINTS FROM INVESTOR EVEN AFTER THE CLOSURE OF THE PUBLIC ISSUE

[Mr. M. GOVINDARAJAN]

Part III of the Companies Act, 1956 deals with the issue of prospectus and allotment and other matters related to issue of shares or debentures.  After the formation of Securities and Exchange Board of India Sec.55 A of the Companies Act confers the powers of the administrating the provisions of Sections 55 to 58, 59to 81 (including sections 68A, 77A and 80A), 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and transfer of securities and non payment of dividend in case of listed companies, those public companies which intend to get their securities listed on any recognized stock exchange in India.

Sec. 62 of the Companies Act deals with the civil liability for mis-statements in prospectus. Sec. 63 of the Companies Act deals with the criminal liability for mis-statements in prospectus. Any company going for public issue of shares or debentures is to file red herring prospectus before SEBI which will verify the contents of the prospectus. If there is any complaint on mis-statement in the prospectus it is to be filed with SEBI within 21 days from the date of the prospectus.

The issue taken for discussion in this article whether any complaint regard to mis-statement in the prospectus can be filed after the closure of the issue and it can be entertained by SEBI with reference to decided case law  in 'Kimsuk Krishna Sinha V. SEBI' - (2010) 155 Comp cas 295 (DEL)

In this case the petitioner entered into business transactions with respondent No.2 in the year 2006. The said company was controlled by two wholly owned subsidiaries of respondent No. 3 company. The respondent No.3 filed a draft red herring prospectus with SEBI during May 2006. In the prospectus it was indicated that respondent No.2 was one of the joint ventures of respondent No.3. However the prospectus was withdrawn.   A fresh prospectus was submitted on January, 2007 in which respondent No.2 was not mentioned as being associated with respondent No.3 as the shares held by the subsidiaries of respondent No.3 in respondent No.2 were sold in the year 2006. Even in the final red herring prospectus submitted by respondent No.3 on May, 2007, the name of respondent No.2 did not figure.

Being aggrieved by this the petitioner filed a complaint against respondent No.2 and 3 on the ground that the companies had cheated him. A first information report was registered and upon the investigation the police filed a closure report. The petitioner filed a private complaint which was pending before the concerned criminal court and also, challenged the filing of the closure report.

In this writ petition the petitioner is seeking direction to respondent No.1, i,e. SEBI to investigate the affairs of respondents No.3 and 4, the petitioner contended that the SEBI (Disclosure and Investor Protection) Guidelines, 2000 required disclosure of 'outstanding litigation involving the issuer company'; that by the date of the red herring prospectus, a first information stood registered against respondent No.2 which was a constituent of respondents No.3 and 4 and that the sale of the entire shareholding by the subsidiaries in respondent No.2 was a sham transaction hurriedly executed only to avoid the disclosure of the pending litigation involving respondent No.2 in the red herring prospectus.

SEBI contended the following:

The petitioner was not an investor in the securities market and therefore, did not have the locus standi to file the petition;

There was no provision under SEBI Act, 1992 for any complaint to be entertained concerning the mis-statement made in the prospectus;

Respondent No.2 was not a listed company and was not amenable to the 1992 Act or guidelines;

The petitioner had not filed any complaint within 21 days from the date of the prospectus as required;

The Court after hearing both sides observed that the purpose of inserting Section 55A in the 1956 Act was to empower the SEBI to take both corrective and preventive action. This is because as a regulatory body, the SEBI gets to see the draft prospectus preceding a public issue by a company even before the public gets to see the red herring prospectus. The Court held that SEBI is enabled and empowered to examine the draft red herring prospectus and insist on complete and truthful disclosure of all relevant facts therein. The very purpose of having an independent regulatory authority and vesting it statutory powers of inquiry, is to enable it to take prompt action in matters relating to issue and transfer of shares. Further SEBI is expected to be the sentinel, read the fine print of prospectus keeping the investors' interests in view.   It has both a preventive and corrective role to perform. Therefore it is not possible to place a narrow interpretation on the words 'issue and transfer of securities' occurring in Section 55A of the Companies Act, 1956. Given the object and purpose of the provisions, it should be broadly construed.

The Court further held that SEBI had received the petitioner's complaint one day after the closure of the public issue, it was not prevented from taking action thereafter if on an enquiry into the complaint it was revealed that there had been a misstatement in the prospectus. The Board was not relieved of its statutory duty to conduct an enquiry into the complaint merely on the ground that the public issue was closed. Enough powers are vested in it under SEBI Act 1992 for this purpose. SEBI is accountable to the investor public and accessible and responsible to complaints, the Board was slow in reacting to the petitioner's complaints.  Its subsequent failure to initiate further steps to investigate the transaction in question was also not consistent with its statutory obligation.

The transfer of shares to and by entities on the same day which had the effect of relieving respondent No.3 of any connection with respondent No.2 was a matter required investigation. The Court directed SEBI to undertake investigations into the complaints made by the petitioners and also the averments made in the affidavit and additional affidavits filed by the petitioner.