9911796707
TMI Blog2006 (7) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Exchange Board of India Act, 1992 (hereinafter referred to as "SEBI Act"). 3. The Securities and Exchange Board of India (hereinafter referred to as "SEBI") passed an order on 27-4-2006. The order runs into 252 pages. Para 1 of the order sets out the background in which the order is required to be passed. Para 2 sets out the modus operandi and in para 2 itself, in para 2.2, it is stated that, "It was found that almost all the dematerialised accounts that were in the names of factitious/benami entities were held through the depository participant Karvy Stock Broking Ltd. (Karvy-DP). Inspection of Karvy-DP by NSDL and CDSL has revealed that the DP has obtained letters from the concerned banks towards proof of identity (POI) and proof of address (POA) for the purpose of opening dematerialised accounts. In terms of SEBI circular ref: MRD/DoP/Dep/Cir-29/2004 dated 24-8-2004, an identity card/document issued by Scheduled Commercial Banks containing the applicant's photo/ address may be accepted as POI and POA. The circular further clarified that "the aforesaid documents are the minimum requirement for opening a BO Account. The Depository Participants (DPs) must verify the copy of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devious practices, if unchecked, would be continued with impunity in future, there is a need for immediate regulatory intervention. In the wake of the interim orders in the case of Yes Bank and IDFC IPOs there has been a spate of public complaints alleging manipulation in IPO's and urging immediate action from SEBI for protecting the retail investors. Also there is a heightened investors' concern on the IPO's as reflected in the tenor of demands made on SEBI, and the same calls for a timely response from SEBI as regulator to restore the confidence of the retail investor. Amidst such public expectations, coupled with due regard to the fact that number of IPO's are in the wait for entry into the securities market, which need to be insulated from the manipulators of the various entities as mentioned in this order by suitably restraining them from participation in the ensuing IPO's which has acquired a sense of urgency and which cannot brook the normal delay of quasi-judicial proceedings for taking a decision, there is an imperative need to pass the present interim order to protect the market particularly the IPO's from being preyed on by predatory manipulators. Further, if the entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interest of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:--" The learned senior counsel for petitioners submitted that in the entire order which is extensive enough running into 252 pages, there is no whisper that, 'an investigation or inquiry was undertaken against the present petitioners'. The learned senior counsel submitted that as no investigation or inquiry is undertaken, there is no question of completion of such investigation or inquiry and that being so, there is no reason to resort to any measures, including that of restraining the petitioners from accessing the securities market and prohibiting the petitioners from buying, selling or dealing in securities. 7. The learned senior counsel for petitioners submitted that sub-section (4) of section 11 was placed on the Statute Book by an Amending Act of 2002 and it came into force on 29-10-2002. He submitted that it is equally important to not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the petitioners have not indulged in any 'prohibited activity', much less an 'illegal activity'. He further submitted that the funds advanced by the petitioners is returned either by cheque or in the form of shares. He submitted that this act of 'return of fund' and act of 'receiving the same' is again not 'prohibited' under any law then where is the question of the petitioners having indulged in an activity which is 'detrimental' either to 'investors' or the 'securities market'. The learned senior counsel in this regard, invited attention of this Court to paras 31 and 32 of the rejoinder affirmed by Shri Rajan Vasudevbhai Dapki petitioner No. 1 on 24-6-2006. Relevant part reads as under : ". . . . .the data referred to above will at the highest only demonstrate that the petitioners may have given finances to certain entities. It is submitted that giving of finances is an activity which is not prohibited by any provisions of the securities laws. Even assuming without admitting that the moneys have been given for financing of IPOs that also is not an activity which is prohibited, by any laws. Even the Banks carry on business of providing finances permitting applications in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations, 1996 and clauses 3, 9, 12, 16, 19, 20 and 22 of the Code of Conduct specified in Regulation 20(a) of SEBI (Depositories and Participants) Regulations, 1996 and the provisions of Depositories Act, 1996 and Provisions of SEBI Disclosure and Investor Protection Guidelines, 2000." The learned senior counsel for petitioners submitted that in the entire order, there is no reference to the role of the petitioners or the act of the petitioners, which constitutes breach or violation of one or more the aforesaid regulations. 11. The learned senior counsel for petitioners submitted that para 16.104 of the order impugned records that, "investigations are being completed. . . . ." He submitted that the order does not specify as to which investigation and as to whether the investigation referred to in para 16.104is against the petitioners and therefore, he submitted that, the order passed against the petitioners be quashed by this Court. 12. The learned senior counsel submitted that regulation 5 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 also refers to 'investigation'. He submitted that, 'the Board', 'Chairman', ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accounts' which could be attached must be that of a person/s who is/are involved in violation of provisions of the Act, Rules or Regulations. The learned senior counsel for the petitioners submitted that still the SEBI is not empowered to pass order whereby the securities which are not under investigation can be retained, impounded or attached. 14. The learned senior counsel next submitted that the tenor of the order under challenge is clear. Its focus is on two IPOs, one of "Yes Bank" and another of 'IDFC'. The order then proceeds to record the object for which, order is passed. It is recorded in the order, i.e., 'to see that the ensuing IPOs are not manipulated'. He submitted that, that being so, the order of SEBI putting total restriction and prohibiting the petitioners from buying and selling even in the secondary market is certainly beyond "the object" mentioned in the order itself. He submitted that the restriction imposed on the petitioners prohibiting them from dealing in the secondary market is concerned has no nexus with 'the object' for which the order is passed. He submitted that the total ban/restriction/prohibition on selling the shares acquired by the petitioners, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was found that large number of multiple dematerialised accounts with common addresses were opened by a new entities. On noticing the irregularities and widespread abuse, SEBI acted against the entities who were responsible for the irregularities by passing interim order restraining them from participating in all future IPOs and also directing the depositories to effectively freeze their dematerialized accounts. Close on the heels of the order in the case of Yes Bank IPO, SEBI examined the dealings in another major IPO of IDFC wherein the very same players were suspected to have played a major role in cornering the shares. SEBI issued ad interim orders in the case of IDFC also along the similar lines as done in the case of Yes Bank." 17. The learned senior counsel submitted that at various places the order refers to the IPOs. Even in the operative part of the order where 'the object' is reiterated, its relevant part reads as under : "17.1 . . . In the wake of the interim orders in the case of Yes Bank and IDFC IPOs there has been a spate of public complaints alleging manipulation in IPO's and urging immediate action from SEBI for protecting the retail investors. Also there is a he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions here and there amongst the petitioners of all these petitions that, 'the petitioners if could be restrained from participating only in all future IPOs and the securities of the IPOs which are referred to in the order and allowed to deal with the securities which the petitioners are holding prior to the alleged scam and the securities which are no way related to the IPOs referred to in the order. 20. Other learned senior counsels and advocates appearing in the other matters adopted the arguments/submissions made by the learned senior counsel Mr. K.B. Trivedi. Besides, they made some additions in their individual petitions, like learned senior counsel Mr. K.S. Nanavati appearing in Special Civil Application No. 10527 of 2006 and 10524 of 2006; Mr. M.D. Pandya, the learned Senior Counsel appearing in Special Civil Application No. 10529 of 2006; Ms. D.N. Raval, the learned advocate appearing in Special Civil Application Nos. 10528 of 2006 and 9971 of 2006; Mr. Sanjay A. Mehta, the learned advocate appearing for the petitioner in Special Civil Application No. 10516 of 2006; Mr. G.N. Shah, the learned senior advocate appearing in Special Civil Application No. 10756 of 2006. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the petitioners has detrimental effect on the petitioners' ability to sell the securities, even those securities which were acquired prior to 2003. He submitted that the intimation received from NSDL is at Annexure 'C' in Special Civil Application No. 10527 of 2006. 22. The learned senior counsel for the petitioners submitted that the respondent by its order dated 15-12-2005, passed after carrying out investigation in the alleged manipulations of the IPO of Yes Bank Limited, has restrained the persons named in the order from buying, selling and dealing in shares of Yes Bank Limited and other ensuing IPOs. He submitted that unlike the order under challenge in these petitions by order dated 15-12-2005 the persons named in the order are not restrained from trading in the secondary market or buying, selling or dealing in other securities. He submitted that the respondent by order issued in the case of IDFC Limited has restrained the persons named in the order from buying, selling or dealing in shares of IDFC Limited, other future IPOs only. Whereas, in the case of the petitioners, the petitioners are restrained from dealing in any securities as their accounts are frozen. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, attempt an evaluation of its direct and immediate impact upon the fundamental rights of the citizens affected thereby and the large public interest sought to be ensured in the light of the object sought to be achieved, the necessity to restrict the citizen's freedom, the inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public, the possibility of achieving the object by imposing a less drastic restraint, and in the absence of exceptional situations such as the prevalence of a State of emergency - national or local - or the necessity to maintain essential supplies, or the necessity to stop activities inherently dangerous, the existence of a machinery to satisfy the administrative authority that no case for imposing the restriction is made out or that a less drastic restriction may ensure the object intended to be achieved'." 24. Mr. M.D. Pandya, the learned senior advocate appearing in Special Civil Application No. 10529 of 2006 for the petitioner submitted that by order dated 20-1-2006, SEBI appointed the Chief General Manager to investigate into the affairs relating to buying, selling or dealing in the shares of the IPOs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vit in reply filed by Shri S. Madhusudhanan on behalf of the respondents, in para 7 it is stated that, ". . . . . . During the investigation, it was found that large numbers of multiple dematerialised accounts with common addresses were opened in the name of benami or fictitious entities and/or persons by a few operators who have played major role in cornering the shares meant for retail investors. . . . ." The learned advocate submitted that similarly, in para 10 of the affidavit, 'para 3' of the order is quoted, wherein further actions taken by SEBI consequent to the orders passed are mentioned. In para 11 of the affidavit para 5.4 of the order is referred to. Likewise, in para 12 of the affidavit, para 17.1 of the order is referred to. 26. The learned senior counsel for petitioners submitted that the petitioners of Special Civil Application No. 10529 of 2006 had purchased the shares of three companies on or after the date of listing and the purchase price was higher than the listing price. He submitted that if that is so, then it is not correct to brand the petitioners of Special Civil Application No. 10529 of 2006 as 'financier' and pass an order which has a strangulating ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prejudice' with the authorities have acted in the entire matter. The learned advocate submitted that in fact there is a calculated attempt on the part of the authorities to prejudice the Court by stating that, 'the shares were obtained before the date of listing and were sold soon on listing of these shares at the stock exchange. The learned advocate submitted that to be precise the case of the authorities is not that 'the petitioners and other financiers sold their shares on listing or thereafter and by doing so pocketed the profit'. The order proceeds only on three data, namely, (i) number of shares obtained by the petitioners and other similarly situated persons, (ii) issue price of the shares, and (iii) closing price on the date of listing. The learned advocate submitted that, the important factum of the shares being sold is missing. Still the figures are projected as if such huge profits are pocketed or the gain is forked out of the market. 29. Mr. Sunit Shah, the learned advocate appearing with Mr. G.N. Shah, learned advocate for petitioner in Special Civil Application No. 10576 of 2006 submitted that besides the arguments made by Shri K.B. Trivedi, learned senior counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that it is not only the SEBI but other authorities like RBI and such other institutions, who owe a duty to see that there is no unwarranted manipulation in the market, have undertaken a similar exercise. It is only after a deep rooted investigation, in which a huge scam is unearthed and taking into consideration the same the order is passed. The learned senior counsel submitted that it is argued by the learned senior counsels for the petitioners that there was no investigation directed against any of the petitioners in their individual capacity and therefore, 'condition precedent' is not fulfilled. He submitted that if such narrow meaning is given to the term 'pending investigation and inquiry' then it will render majority of the provisions to be redundant. 32. The learned senior counsel for respondents invited attention of the Court to para 1.1, which reads as under: "1.1 As a part of ongoing surveillance activity by SEBI into the various aspects of working of securities market, SEBI had initiated probe and advised BSE and NSE to look into the dealing in the shares issued through Initial Public Offerings (IPOs) before the shares are listed on the stock exchanges. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at while Karvy-DP had closed 38,409 CDSL demat accounts during the course of verification, 20,399 CDSL dematerialized accounts of Karvy-DP had served as afferent accounts for abusing the IPO process. Thus, it follows that 18,010 suspect demat accounts with Karvy-DP were probably meant to be used in later IPOs." The learned senior counsel for respondents submitted that so far as NSDL is concerned the details about NSDL are given in para 9.11 which reads as under : "9.11 The verification by NSDL regarding genuineness of dematerialized account-holders revealed that there were 56, 216 dematerialized accounts wherein 20 or more account-holders were having common addresses. These 56, 216 demat accounts were held with 105 DPs. The details of the 21 DPs wherein 500 or more account-holders were sharing common addresses is given below:" 34. The learned senior counsel for respondent submitted that it is on the basis of detailed investigation that the SEBI identified the persons/entities who played role in 'afferent accounts', 'master account-holders'/'key operators', and 'financiers'. It is only after having obtained the material which is tabulated in the order that the SEBI thought it fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional portion'. Which they could obtain by indulging into a malpractice by subscribing only 6.04 times. He submitted that 'firstly' the petitioners and other similarly situated persons could not have got so many shares in the 'retail portion' without purchasing them from the open market. It was only with an 'ill design', that they could get such a large number of shares. He submitted that it was the in depth study which revealed that it was a calculated act on the part of the chain of persons to get undue gain which otherwise they could not have got. In this regard he invited attention of the Court to para 6.7 which reads as under : "The key operators who cornered the retail portion of Suzlon Energy IPO were Roopalben Nareshbhai Panchal, Dhaval A. Mehta, Purshottam Budhwani, Majojdev Seksaria, Jhaveri Securities Pvt. Ltd., Biren Kantilal Shah, Chandrakant Amratlal Parekh, Pratik Mafatlal Shah and Himani N. Patel. The above key operators have used 21,692 afferent accounts to corner 3,23,023 shares representing 3.74 per cent of the total number of shares allotted to the retail individual investors. Their financiers were Saumil A. Bhavnagari, Jayesh P. Khandwala HUF, Rajan Vasudev Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, 'as the financing itself is not prohibited under any law' the financing made by the petitioners does not attract any action. The learned senior counsel for respondents submitted that similarly it is argued that, 'earning profit is not prohibited by any law', but then the profit earning should be only through the means which are recognised by law. As an individual, the petitioners could have applied only for limited number of shares in the 'retail segment'. To overcome that difficulty, they adopted this dubious method of purchasing large number of shares by making use of fictitious/benami account-holders, through key operators. They got the shares allotted to these fictitious and benami account-holders, who in turn transferred these shares. This mode of earning profit is not recognised by law. The learned senior counsel for respondents submitted that so far the first and foremost argument of the learned senior counsel for the petitioners is concerned that, 'SEBI could not have passed any order under sub-section (4) of section 11, unless there was either an investigation or inquiry was pending' is misconceived. He submitted that the submission made by the learned senior coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this order and, if they so desire, avail themselves of an opportunity of personal hearing . . . ." 38. The learned senior counsel for respondents submitted that none of the petitioners have filed their objections so far. Instead they have approached this Court complaining about the order shows that the petitioners are not interested in hearing. At this juncture, the learned senior counsels appearing for the petitioners submitted that though the petitioners have written letters to SEBI for fixing a date of hearing and before that to supply documents which are relied upon for passing the order against them, but then the allegation is that the SEBI has not extended any co-operation to the petitioners by supplying necessary documents. 39. The learned senior counsel for respondents submitted that the law is clear. Under the law (SEBI Act) the SEBI has power to issue such directions, not only that it has power to issue such directions even by dispensing with the pre-decisional hearing. He submitted that such provisions are placed on the Statute Book with a definite purpose and the purpose is to see that before it is too late for SEBI to take action against any person, who is acting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are being dealt with in a manner detrimental to the investors or the securities market in violation of these regulations, it may, at any time by order in writing, direct any officer to investigate the affairs of such intermediary persons associated with the securities market or any other person and to report thereon to the Board in the manner provided in section 11C of the Act. He submitted that in the present case also the Board having reason to believe that certain transactions are taking place, which are detrimental to the securities market, an investigation was ordered and in the course of that investigation when it come to surface that the role played by the petitioners is detrimental to the investors and the securities market, the order impugned is passed. The learned senior counsel for respondents submitted that regulation 10 provides for enforcement by the Board. Regulation 10 reads, "The Board may, after consideration of the report referred to in regulation 9, if satisfied that there is a violation of these regulations and after giving a reasonable opportunity of hearing to the persons concerned, issue such directions or take such action as mentioned in regulation 11 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5 reads as under : "M/s. Welvet Financial Advisors Ltd. have approached us for lending us money in subscribing for IPO. They have lent me Rs.78 lakhs for the purpose of making margin for retail application to my group. After getting allotment of IDFC, we have transferred 43,000 equity shares of IDFC as per their instruction and balance amount of Rs.64 lakhs returned by cheque payment." This is disclosed by one Shri Dharmesh Mehta in response to a query made about his relationship with M/s. Welvet Financial Advisors Ltd. The learned senior counsel submitted that para 11.7 is material for understanding the entire design in which the persons like the petitioners acted. Para 11.7 reads thus : "In this context it is seen that in the month, of June 2005, Welvet Financial had directly applied for 60,75,000 shares in the public issue of Yes Bank for Rs. 27 crores and was allotted only 1,39,073 number of shares. It appears that Welvet Financial had applied in the non-institutional (High Networth) category in the IPO of Yes Bank and hence had failed to get allotment of large number of shares in the Yes Bank IPO. In view of the above, apparently, Welvet Financial had approached Dharmesh M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission fails. The learned senior counsel for respondents submitted that in any case, whether the petitioners are investors or not, does not affect 'the jurisdiction, aspect one way or the other. He submitted that even if the petitioners are investors they do fall in the category of "any person associated with the securities market", therefore, even in that capacity the order impugned could have been passed against the petitioners. 43. The learned senior counsel for respondents submitted that so far as the submission made by the learned counsel for the petitioners that, 'no reasons being found in the order impugned, for which a prohibition is imposed on the petitioners to deal with the securities even in the secondary market'. He submitted that the fact that the petitioners are found to be in a role 'manipulating the securities market', is sufficient for prohibiting them from buying and selling even from the secondary market. He submitted that in fact there is no hard and fast boundary line between the so-called, primary market and the secondary market. He submitted that in fact if the submission of the learned senior counsel for the petitioners is accepted then as it is on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raise them in the realtime continuum for getting the necessary insights into what really transpired under the veneer of copious documentation and seeming compliance. The exercise involved wading through enormous mass of details, identifying suspect transactions and entities, linking them to fund flow with specific attribution to the real persons behind it, establishing linkages amongst them for possible collusion as well as control and a host of other related incidentals in a searing search that moves from one lead to another to grapple with the issues in all its ramifications, unravel the decussating strands for getting at the tell-tale. Given the magnitude of the exercise and the constraints attendant thereon, this order seeks to capture the quintessence of the same with reference to scattered findings in a welter of non-descriptness, besides building an internally consistent logic into them to impart perspicacity and clarity. In that view the prima facie conclusions which are only a summary of the details discussed in the various headings and sub-headings of the order need to be read with them, insofar as they are relevant and that alone would enable to size up the issue in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this fact is recorded in para 17.1 of the order, to recapitulate para 17.1 is reproduced : "In view of the grave emergency arising out of the conduct of parties with the added risk that such devious practices; if unchecked, would be continued with impunity in future, there is a need for immediate regulatory intervention. In the wake of the interim orders in the case of Yes Bank and IDFC IPOs there has been a spate of public complaints alleging manipulation in IPO's and urging immediate action from SEBI for protecting the retail investors. Also there is a heightened investors' concern on the IPO's as reflected in the tenor of demands made on SEBI, and the same calls for a timely response from SEBI as regulator to restore the confidence of the retail investor. Amidst such public expectations, coupled with due regard to the fact that number of IPO's are in the wait for entry into the securities market, which need to be insulated from the manipulators of the various entities as mentioned in this order by suitably restraining them from participation in the ensuing IPO's which has acquired a sense of urgency and which cannot brook the normal delay of quasi-judicial proceedings for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "15. The main issue raised in this petition is concerning the limits of powers of the SEBI Board which regulates capital market of the country. The capital market has acquired a status of the system as a part and parcel of the national economy where companies seek to raise funds for different types of transactions in the course of their business and individuals invest their savings. Previously, there was Securities Contracts (Regulation) Act, 1956 to prevent undesirable transactions in securities by regulating business or dealings therein and providing for certain other matters connected therewith. This Act provided for recognised stock exchanges and the control of the Central Government on such recognised stock exchanges. With the passage of time the Government felt more concerned with health growth of the securities market and taking into consideration the relevant factors influencing the growth of the capital market it realised the necessity to pass a comprehensive legislation for setting up a statutory apex board to promote orderly and healthy growth of the securities market. SEBI was constituted vide Resolution dated 12-4-1988 of the Ministry of Finance, Department of Econ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the light of the fact that the SEBI as regulator of securities market is empowered to take all necessary measures to protect the interest of the investors and the capital market, we have no hesitation in holding that the SEBI is fully competent and is empowered by sections 11 and 11B to pass interim order in aid of the final orders. . . . ." [Emphasis supplied] The learned senior counsel for respondent also relied upon paras 22, 27, 28, 31 and 32 of the judgment. 50. The learned senior counsel next relied upon a decision of Delhi High Court in the matter of M.Z. Khan v. SEBI AIR 1999 Delhi 164. The learned senior counsel submitted that Delhi High Court was pleased to hold that, 'the Board has powers to pass interim orders to effectuate purpose of Act and Regulations'. He submitted that the Court was also pleased to hold that, 'the discretion of the Board cannot be interfered with by the Court sitting in writ jurisdiction even when serious questions were involved'. [emphasis supplied] The learned advocate relied upon paras 17 and 18 of the judgment. The learned counsel submitted that the Court has, in no uncertain terms held that, "18. . . .Though the SEBI is possessed of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 is relevant for our purpose. Para 4 reads as under : "For examining the rival contentions, it would be appropriate to refer to the relevant provisions of sections 11, 11B and section 12. Section 11(1) imposes paramount duty on the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, and for achieving this object, it gives out plenary powers to have resort to such measures as it thinks fit. Section 11(1) not only prescribes duties but confers powers as well, to effectively discharge those duties. Viewed in this way, sub-section (2) which commences with words without prejudice to the generality of the foregoing provisions, "proceed to enumerate matters for which the Board may provide such provision is to be read as illustrative and not exhaustive of the matters of the measures which can be provided for by the Board in furtherance of discharge of its duties referred to in sub-section (1)." [Emphasis supplied] The learned senior counsel next relied upon a judgment of the Hon'ble the Apex Court in the matter of Sumati Dayal v. CIT [1995] Suppl. 2 SCC 453. He submitted that the Hon'ble the Apex Court was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion that the apparent is not the real and that the appellant's claim about her winning in races is contrived and not genuine for the following reasons : (i )The appellant's knowledge of racing is very meagre. (ii)A Jockpot is a stake of five events in a single day and one can believe a regular and experienced punter clearing a Jackpot occasionally but the claim of the appellant to have won a number of Jackpots in three or four seasons not merely at one place but at three different centres, namely, Madras, Bangalore and Hyderabad appears, prima facie, to be wild and contrary to the statistical theories and experience of the frequencies and probabilities. (iii)The appellant's books do not show any drawings on race days or on the immediately preceding days for the purchase of Jackpot combination tickets, which entailed sizable amounts varying generally between Rs. 2,000 and Rs. 3,000. The drawing recorded in the books cannot be correlated to the various racing events at which the appellant made the alleged winnings. (iv)While the appellant's capital account was credited with the gross amounts of race winnings, there were no debits either for expenses and purchase of tickets o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent as well as other material on the record an inference could reasonably be drawn that the winning tickets were purchased by the appellant after the event. We are, therefore, unable to agree with the view of the Chairman in his dissenting opinion. In our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant's claim about the amount being her winnings from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and that the finding that the said amounts are income of the appellant from other sources is not based on evidence." [Emphasis supplied] (p. 457) The learned senior counsel for respondent submitted that in the present case also if totality of the circumstances is taken into consideration it is very clear that 'afferent accounts' in thousands were got opened by fictitious and benami entities and through these accounts 'IPOs' were applied. Soon after the allotment, the shares allotted to these accounts were transferred to 'key operators'. The 'key operators' in turn transferred the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examiners, the random checking was done by the moderators and thereafter further recounting was done at the Board, finally the mark sheets were sent to Pune for feeding into the computer and then to declare the results. It was found that moderators' mark sheets related to 283 examinees, which included 53 respondents, were tampered with. In many cases in more than 2 to 8 subjects, while in few cases in only one subject. As a result of this tampering, 214 examinees who were otherwise to fail passed, whereas remaining 69 examinees improved their ranking, which in some cases 'exceptionally good'. The declaration of their results was withheld, pending 'further inquiry'. The rest of the result was declared on 30-6-1990. The Board appointed seven inquiry officers. Show-cause notices were issued to the students on 30-7-1990 informing them of the nature of tampering, the subjects in which the marks were found tampered with, the marks initially obtained and the marks increased after tampering. The show-cause notice also indicated 'the proposed punishment', if in the inquiry it would be found that marks were tampered with the knowledge or connivance or at the instance of the candidates or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in October 1990 as well as March 1991 examination. A notification was published accordingly. The students approached the High Court by filing writ petition which was allowed. The Board approached the Hon'ble Supreme Court by filing appeal, which was allowed. In doing so, the Hon'ble Apex Court was pleased to hold that, "(i )denial of lawyer's assistance to minors is not violative of the principles of natural justice. (ii)the absence of opportunity to the parents or guardians does not vitiate the legality or validity of the inquiry conducted or decision of the committee, (iii)the inquiry report containing only conclusions of fabrication of moderator's mark sheets without any reasons in support, is not illegal and violative of principles of natural justice, (iv)where facts are not in dispute, non-recording of reasons in support of the conclusions arrived at in the report is not violative of principles of natural justice, (v)strict rules of the Evidence Act and standard of proof envisaged therein do not apply to departmental proceedings or domestic Tribunal. It is open to the authorities to receive and place on record all the necessary, relevant, cogent and acceptable materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned counsels for the petitioners that, 'there is absence of reasons in the order' stands answered by para 22 of this judgment. He relied upon para 22, which reads as under : "From this perspective, the question is whether omission to record reasons vitiates the impugned order or is in violation of the principles of natural justice. The omnipresence and omniscience (sic.) of the principle of natural justice acts as deterrence to arrive at arbitrary decision in flagrant infraction of fair play. But the applicability of the principles of natural justice is not a rule of thumb or a strait-jacket formula as an abstract proposition of law. It depends on the facts of the case, nature of the inquiry and the effect of the order/decision on the rights of the person and attendant circumstances. . . [Emphasis supplied] (p. 738) The learned senior counsel for respondent submitted that the Hon'ble Apex Court was pleased to focus its attention to the 'controversy' and formulated the questions, recorded in para 25, which reads as under : "The crucial question, therefore, is whether the conclusions reached by the authorities that the examinees, their parents or guardians were parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions made by the learned senior counsel, Mr. Nanavati, that the order is under section 11B of the SEBI Act and that can be passed only after according an opportunity of hearing, submitted that the order is as well under section 11(4) of the SEBI Act. He submitted that in view of the submission already made hereinabove, the issue shall not detain the Court as it is mentioned in para 17.1 of the order as under : ". . .Therefore, with a view to protect the interest of investors and securities market from further such acts, in exercise of the powers delegated to me by the SEBI Board in terms of section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11, 11B and 11(4)(b) thereof and section 19 of Depositories Act, 1996, pending inquiry and passing of final order, I hereby issue the following directions, by way of ad interim, ex parte order." The learned senior counsel for the respondent while answering the contentions that the 'order is disproportionate', placed reliance on a decision of the Hon'ble Apex Court in the matter of NCT of Delhi v. Sanjeev Alias Bittoo [2005] 5 SCC 181. He submitted that it is held by the Hon'ble Apex Court that 'the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o find out if the administrator has left out relevant factors or taken into account irrelevant factors. The decision of the administrator must have been within the four corners of the law, and not one which no sensible person could have reasonably arrived at, having regard to the above principles, and must have been a bona fide one. The decision could be one of many choices open to the authority but it was for that authority to decide upon the choice and not for the court to substitute its view." The learned senior counsel for respondent also invited attention of the Court to 'irrationality' explained by Lord Diplock, quoted from para 20 of the judgment. Lord Diplock explained "irrationality" as follows (All ER p. 951 a-b) : "By 'irrationality' I mean what can by now be succinctly referred to as 'Wednesbury unreasonableness'. It applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it." The learned senior counsel invited attention of the Court to para 21 of the judgment, which reads as under : "In other words, to characterise a deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic questions' raised by the petitioners in all these petitions are not answered by the learned senior counsel for the respondents. He submitted that, 'the SEBI, which has power to pass order has passed the same without complying with the conditions precedent for passing such order'. Mr. Trivedi reiterated that there is no investigation or inquiry pending against the petitioners and if that is so, the order could not have been passed against the petitioners. The learned senior counsel, Mr.Trivedi submitted that the order appointing inquiry officer dated 20-1-2006 does not refer to any of the petitioner or petitioners, similarly the order dated 20-1-2006 also, nowhere refers to any of the petitioners. He submitted that the opening part of the order reads as under : "The Securities and Exchange Board of India (the Board) is satisfied that in the interest of investors and public interest to investigate into the affairs relating to buying, selling or dealing in the shares of Initial Public Offerings (IPOs) came during the period 2003-2005, more particularly to ascertain whether any provision of the SEBI Act, 1992, the Depositories Act, 1996 and the following Rules, Regulations and Guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the period of one month from the date of the order. NSDL is also asked to report whether Know Your Client (KYC) norm is duly complied with or not and to take appropriate actions against suspected account-holders on verification. Vide para 17.13 directions against the 'depositories' are also issued 57. This Court after considering the rival contentions/submissions, provisions of law and the decisions of the Hon'ble Apex Court is of the opinion that, 'the Statute by which the Board (SEBI) has come into existence, i.e., Securities and Exchange Board of India Act, 1992 is enacted with a definite purpose, and the purpose is to 'protect interest of investors' in securities, and 'to promote the development of, and to regulate, the securities market and the matters connected therewith or incidental thereto'. This Court is convinced that the Act confers powers on the Board to carry out the functions prescribed in Chapter IV. Section 11 in particular enumerates the functions of the Board. Not to lose sight of any word let it be repeated and reiterated by reproducing the same : ". . .it shall be the duty of the Board to protect the interests of investors in securities and to promote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is good enough to resort to the measures contemplated in clauses (a) to (e) of sub-section (4) of section 11 of the SEBI Act, it can do so against such person. Therefore, order dated 20-1-2006, in its opening para mentions as under : "The Securities and Exchange Board of India (the Board) is satisfied that in the interest of investors and public interest to investigate into the affairs relating to buying, selling or dealing in the shares of Initial Public Offerings (IPOs) came during the period 2003-2005. . .". [Emphasis supplied] This shows that it is 'the transaction' which is under investigation. The scheme of the Act is very clear. It is not against the 'person' only that an investigation or inquiry can be undertaken. The SEBI can inquire and investigate into a 'transaction'. In the present case also it was on the basis of huge uproar with regard to IPOs which were issued during 2003-2005 that the SEBI was required to undertake the whole exercise. It is in this regard that order dated 20-1-2006 was issued appointing an inquiry officer. It is this inquiry officer who submitted his report with an in-depth study, which is also reflected from the volume of the order which runs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsubscribed. This shows that the petitioners could corner the shares in 'retail segment' by subscribing 6.04 times only. They were otherwise required to subscribe in 'institutional segment'. In that event they would have been required to subscribe 40.27 times. This makes a big difference. The learned senior counsel for SEBI has already submitted that this is only an illustrative case. The entire order is based on material which is found during investigation undertaken by the SEBI. He has assured this Court that the SEBI is open to revise, review, modify and even in case of necessity to recall the order, if the person against whom the order is passed approaches the SEBI and satisfies it about one's bona fides. During the course of arguments one of the learned senior counsels for the petitioners had submitted that in some other case the SEBI has revised its order, therefore, on the same line the SEBI be directed to reconsider the cases of petitioners also and that will serve the ends of justice. In response to this, the learned senior counsel for the SEBI had submitted that the SEBI had revised the order after the person concerned had approached the SEBI and explained his conduct a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the respondent himself or through its agent from implementing the impugned order dated 27-4-2006 and annexed at Annexure 'A' insofar as it applied to the petitioner." The learned senior counsel for respondent submitted that after obtaining the ad interim relief the petitioners in Special Civil Application No. 9971 of 2006 have sold off all saleable securities. He submitted that the SEBI immediately filed Civil Application No. 7139 of 2006 praying for vacating of ad interim relief granted in favour of the opponent-original petitioner vide order dated 4-5-2006. 63. The learned senior counsel for the SEBI submitted that as the application was filed under article 226(3), the order of ad interim relief stood vacated, but then during the period for which the ad interim relief remained operative the petitioners have sold off all saleable securities. He submitted that the consequential orders be passed for 'restitution of the gain' received by the petitioners by virtue of order granting ad interim relief. 64. As this judgment and order is common in a group of petitions, no order is passed on this prayer. It will be open for the SEBI to file a separate application placing all relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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