2025 (6) TMI 1439 - HC - SEBI

Revocation of the previously passed settlement order - non-speaking and unreasoned order - Breach of principles of natural justice - application of audi alteram partem - Notice issued by SEBI alleging misrepresentation of promoter holding as public holding and non-compliance of Minimum Public Shareholding against Bharat Nidhi Limited (BNL) along with Arth Udyog limited (AUL) as well as few other entities apart from the noticees - violation of Regulation 31(1)(b) of SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015 ( LODR Regulation ) read with SEBI circular no. CIR/CFD/CMD/13/2015 read with regulation 2(za) of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 and Rule 19 A(1) of Securities Contract Regulation Rules 1957 - maxim lex non cogit ad impossibilia . HELD THAT - It cannot be disputed that SEBI continued to entertain the Petitioners and specifically BNL when it kept it informed about the steps taken for ensuring a compliance with the settlement order and at time also expressed as to how it was placed in a difficult situation in the wake of the interim order passed by the High Court when it was unable to move ahead. It is not the case that SEBI arrived at a conclusion that there was the breach of the non-monetary terms of settlement order immediately after three months had lapsed but for almost for fourteen months SEBI continued to entertain BNL and even found the stand of BNL to be a plausible one promoting it to file an affidavit before the Court on 13.03.2023 resonating with the stand of BNL that the buy-back cannot be proceeded in view of the directions passed by the High Court despite the fact that by virtue of voluntary undertaking given to it it should provide exit offer to all its public shareholders for a period of three months. SEBI functions as a Regulator and has a duty to act fairly while conducting proceedings pursuant to initiation of action against the parties. Given the discharge of functions by the Board to protect the interest of investors in securities and while it investigate the transactions in securities being dealt in a manner detrimental to the interest of investors or securities market or initiate an action against any person/entity associated with securities which is alleged to have violated any of the violations of the SEBI Act or Rules made or directions issued by it it is expected to act in a fair manner and shall make no attempt to circumvent the Rule of law. It is trite position of law that principles of natural justice are not merely formalities but they constitute substantive obligations that need to be adhered to by the decision making and adjudicating authorities it so a quasi-judicial authority. The adherence to the principles act as a guarantee against arbitrary action both in terms of procedure and substance and the two well known fundamental principles of natural justice cover a pivotal principal of audi alteram partem meaning that a person affected must be heard before a decision he is visited with an advise. Right from the decision of the Apex Court in the case of A. K. Kraipak Ors. vs. Union of India Ors. 1969 (4) TMI 103 - SUPREME COURT till the recent decision in case of SBI vs. Rajesh Agarwal 2023 (3) TMI 1205 - SUPREME COURT on which strong reliance is placed by the Petitioners it is a well settled norm that a party who is prejudiced by an order intended to be passed is entitled to hearing applying alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. Finally it is held that application of audi alteram partem principle cannot be impliedly excluded under the Master Directors of Frauds and the principles of natural justice demanded that borrowers must be served a notice given an opportunity to explain the conclusion of the forensic audit report and be allowed to be represented by the banks before their account is classified as fraud under the Masters Directors of Fraud. In addition the decision to classify in the borrowers account as fraudulent must be preceded by a reasoned order. A specific direction was issued to read the principle of audi alteram partem into the provisions of Master Directors on Frauds which do not contemplate an opportunity of hearing to the borrower before classifying their account as fraud. The one sentence order revoking the settlement order without offering any explanation or detail to support and particularly having been passed 14 months after settlement order is passed with a heap of correspondence entered into between the parties in our opinion the impugned order of revocation which failed to give any reason for its conclusion by submitting that Regulation 28 contemplate automatic revocation if there is no compliance is not an argument which would persuade us to be accepted. Absence of reason has rendered the impugned order unsustainable when such order is subject to challenge before the higher forum and in this case particularly when BNL was all the while in contact with SEBI and have complied with each of its directions to submit the documents and information from time to time the one line order revoking settlement justly arrived order definitely defeats the principles of natural justice as the reasoning in an order ensure transparency and fairness in decision making and particularly when SEBI a Regulator is expected to act fairly while conducting proceedings or initiating any action against the parties. In the facts before us we find great prejudice caused to the Petitioners and though Mr. Bhatt has vehemently urged before us that principles of natural justice need not be made as a shield as in the present case since the facts are admitted and not denied and specifically that BNL did not comply with the undertaking of providing an exit offer and even today they are not in a position to comply and do not tell the Court or to SEBI as to how they are going to ensure its compliance and rather in their representation they have made it clear that they are unable to comply and therefore giving an opportunity of hearing would have made no difference. Here we disagree as we find that in the peculiar facts of the case when after a gap of more than fourteen months SEBI argued before us that there is a failure to comply with the stipulations in the settlement order while we have noted that SEBI never raised any objection when BNL was appraising it of the steps taken to ensure compliance of the settlement order and when all of a sudden it makes up its mind to revoke the settlement order we are of the firm view that this is a fit case where it ought to have granted an opportunity of hearing to the Petitioners before it embarked upon the journey to revoke the settlement order. In the representation preferred to SEBI BNL was consistently praying for an opportunity of hearing and the argument that since they have breached the undertaking SEBI did not hear them and there is no possibility of them performing now according to us do not excuse SEBI of denying the hearing to the Petitioners and particularly BNL when it accused it of acting in breach of the terms of settlement. Thus we quash and set aside the impugned order passed by SEBI communicated to the Petitioners on 10.11.2023 and remand the proceedings of the settlement applications qua each of the Petitioner to SEBI for reconsideration by affording an opportunity of hearing to the Petitioners within a time bound manner and we expect the order to be passed to be reasoned order.

Summary

The core legal questions considered in this matter revolve around the validity and propriety of the Securities and Exchange Board of India's (SEBI) revocation of a previously passed settlement order involving multiple entities, including Bharat Nidhi Limited (BNL) and associated companies and individuals. The principal issues include: (1) Whether SEBI was justified in revoking the settlement order under Regulation 28 of the SEBI (Settlement Proceedings) Regulations, 2018, on grounds of alleged non-compliance; (2) Whether the procedure followed by SEBI in revoking the settlement order adhered to principles of natural justice, including the requirement of a reasoned order and opportunity of hearing; (3) Whether the settlement order was composite and if non-compliance by one party could lead to revocation affecting all; (4) The interpretation of the non-monetary terms of the settlement order, particularly regarding the obligation of BNL to provide an exit offer to its public shareholders; (5) The effect of interim court orders restraining BNL's buy-back offer on its ability to comply with the settlement order; (6) The authority and delegation of powers exercised by SEBI in revoking the settlement order; and (7) The role and rights of minority shareholders in challenging the settlement and revocation orders.

Issue-wise detailed analysis:

1. Justification for Revocation under Regulation 28
The legal framework governing settlement and its revocation is primarily the SEBI (Settlement Proceedings) Regulations, 2018. Regulation 28 permits revocation of a settlement order if the applicant fails to comply with the settlement order or is found to have made untrue disclosures or violated undertakings. SEBI contended that BNL failed to comply with the non-monetary terms of the settlement order, specifically the obligation to provide an exit offer to all public shareholders for a period of three months at the same exit price as offered in 2019. The investigation and correspondence revealed that BNL initiated a buy-back offer limited to 1.067% of shares, constrained by statutory limits under the Companies Act, and sought to provide exit to other shareholders through third-party purchasers for an additional period. However, the buy-back was restrained by interim court orders filed by minority shareholders, and BNL was unable to complete the exit offer as originally envisaged. SEBI argued that despite these efforts, BNL's partial compliance amounted to failure under Regulation 28, justifying revocation. The Petitioners disputed this, asserting that the statutory and judicial impediments rendered full compliance impossible, invoking the legal maxim "lex non cogit ad impossibilia" (the law does not compel the impossible). They contended that BNL took all reasonable steps and kept SEBI informed, which tacitly accepted the compliance approach until the sudden revocation. The Court noted that the settlement order was composite, covering all applicants jointly, and that failure by BNL could affect the entire group. However, the Court found that the breach was not wilful and that BNL's efforts to comply, though incomplete, were substantial and acknowledged by SEBI for over a year.

2. Adherence to Principles of Natural Justice and Procedural Fairness
The impugned revocation order was a brief communication lacking detailed reasons and was passed without affording the Petitioners an opportunity of hearing. The Petitioners relied on settled jurisprudence that administrative actions with civil consequences must comply with the audi alteram partem principle, requiring notice and a reasoned order. The Court referenced authoritative Supreme Court decisions emphasizing that fairness and transparency are integral to regulatory actions, especially those affecting civil rights. SEBI contended that no prejudice was caused as facts were admitted and that the settlement order itself contemplated automatic revocation on non-compliance without hearing. The Court rejected SEBI's contention, holding that even if facts are admitted, the sudden revocation after prolonged acquiescence and extensive correspondence necessitated a reasoned order and hearing. The Court emphasized that the absence of reasons and hearing rendered the revocation order arbitrary and unsustainable. It also held that the authority cannot dispense with natural justice by presuming no prejudice would result from non-hearing, as only a court can determine prejudice.

3. Interpretation of Non-Monetary Terms and Compliance by BNL
The settlement order required BNL to provide an exit offer to public shareholders for three months at the 2019 exit price, without specifying the mode of exit. BNL chose a buy-back mechanism compliant with the Companies Act, which limited buy-back to 25% of paid-up capital and free reserves, effectively restricting buy-back to 1.067% of shares. To comply with the broader exit obligation, BNL arranged for three shareholders to provide exit offers to others post buy-back. This two-step approach was communicated to and tacitly accepted by SEBI. However, minority shareholders obtained interim injunctions restraining the buy-back finalization, which impeded BNL's ability to fully comply. The Court observed that BNL's approach was reasonable and consistent with the settlement order's terms and statutory constraints. SEBI's later revocation based on non-compliance with the exit offer timeframe and extent was therefore questionable, especially given the absence of objections during the extensive period of compliance efforts.

4. Effect of Interim Court Orders on Compliance
The interim orders passed by the Bombay High Court at the instance of minority shareholders restrained BNL from finalizing the buy-back offer, effectively preventing completion of the exit offer within the stipulated period. SEBI's affidavit before the High Court acknowledged this restraint and indicated that BNL was unable to proceed with the buy-back due to the court order. The Court recognized that these judicial orders created a legal impossibility for BNL to comply fully within the prescribed timeframe, reinforcing the Petitioners' argument invoking the doctrine of impossibility of performance. The Court found that SEBI's revocation disregarded this crucial context.

5. Composite Nature of Settlement and Impact on Petitioners
The settlement order was passed jointly against eight entities and one individual, following a show cause notice alleging concerted violations. SEBI contended that the settlement was composite and non-compliance by one party justified revocation affecting all. The Petitioners argued that the settlement terms and compliance were severable, particularly since only BNL had non-monetary obligations. The Court acknowledged the composite nature of the settlement but also noted that the enforcement proceedings and show cause notices were interlinked. The Court did not find it unreasonable that non-compliance by one party could impact the group, but emphasized that such a broad consequence required careful and fair adjudication, which was absent in the revocation order.

6. Authority and Delegation of Powers
SEBI's revocation order was signed by a Deputy General Manager, raising questions about the authority to pass such an order. SEBI relied on Section 19 of the SEBI Act, 1992, which permits delegation of powers, and the SEBI Delegation of Powers Order. The Court accepted that the power to revoke settlement orders was delegated to the panel of Whole Time Members and their delegates, and thus the authority exercised was valid. This point did not warrant interference.

7. Role of Minority Shareholders and Transparency
Minority shareholders, represented by the Ashok Shah and Pina Shah groups, had persistently challenged BNL's compliance with securities laws, alleging misrepresentation of promoter holdings and breach of minimum public shareholding norms. They filed writ petitions and sought disclosure of SEBI's internal documents relating to the settlement. The Court directed SEBI to furnish these documents, emphasizing the importance of transparency and investor protection. The Petitioners alleged SEBI revoked the settlement order as a reaction to this disclosure direction, but SEBI denied this. The Court did not find evidence to support claims of mala fide revocation but underscored the need for SEBI to act fairly and transparently.

Conclusions
The Court concluded that SEBI's revocation of the settlement order was premature and unjustified on the ground of non-compliance, given BNL's substantial efforts to comply and the legal impediments it faced. The revocation order was non-speaking, lacked reasons, and was passed without affording an opportunity of hearing, violating principles of natural justice. The Court held that such administrative actions with civil consequences require reasoned orders and fair procedures. The composite nature of the settlement justified collective consequences, but only if fair process was followed. The Court accepted the doctrine of impossibility of performance as applicable in this context. The authority exercised by SEBI was valid, but the manner of exercise was flawed. The Court therefore quashed and set aside the revocation order and remanded the matter to SEBI for reconsideration, directing SEBI to afford the Petitioners a fair hearing and pass a reasoned order within four months.

Significant holdings include the following verbatim excerpts:

"The principles of natural justice are not merely formalities but they constitute substantive obligations that need to be adhered to by the decision making and adjudicating authorities... The well known fundamental principles of natural justice cover a pivotal principal of audi alteram partem, meaning that a person affected must be heard before a decision he is visited with an adverse."

"The absence of reason has rendered the impugned order unsustainable, when such order is subject to challenge before the higher forum... the one line order revoking settlement, justly arrived, order definitely defeats the principles of natural justice."

"The law does not compel a man to do what he cannot possibly perform."

"The decision making authority itself cannot dispense with the requirement of natural justice on the ground that affording such opportunity will not make any difference... The opportunity of hearing will serve the purpose or not has to be considered at a later stage and such things cannot be presumed by the authority."

"In the present case, SEBI continued to entertain the Petitioners and specifically BNL, when it kept it informed about the steps taken for ensuring a compliance with the settlement order and at time also expressed, as to how it was placed in a difficult situation in the wake of the interim order passed by the High Court when it was unable to move ahead... What made SEBI suddenly adopt a 'U' turn and alleged failure of compliance of the directions as not fathomable."

"We quash and set aside the impugned order passed by SEBI, communicated to the Petitioners on 10.11.2023 and remand the proceedings of the settlement applications qua each of the Petitioner to SEBI for reconsideration, by affording an opportunity of hearing to the Petitioners within a time bound manner and we expect the order to be passed, to be reasoned order."