TMI Blog2015 (8) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... ot being able to avail themselves of services offered by Appellant – Unless necessity or emergency of grave nature was shown by SEBI to take ex parte interim action in form of extreme directions there was no reason to halt business of Appellant especially in light when SEBI has not yet determined whether or not provisions of CIS were attracted to Appellant’s business – Impugned order cannot be sustained in eyes of law –Decided in favour of Appellant. - Appeal No. 254, 255 of 2014 With Misc. Application No. 104, 105 of 2014 - - - Dated:- 17-9-2014 - J.P. Devadhar, Jog Singh and A.S. Lamba, JJ. For The Appellant : Mr. Pradeep Sancheti, Senior Advocate with Mr. Prakash Shah and Mr. Sanjay Agarwal, Advocates For The Respondent : Mr. Shyam Mehta, Senior Advocate with Mr. Mihir Mody, Advocate Per : Jog Singh 1. These two appeals have been filed against an ex parte interim order dated July 31, 2014 passed by Securities and Exchange Board of India (hereinafter referred to as Respondent) under Sections 11(1), 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 (SEBI Act) read with Regulation 65 of the CIS Regulations. The Appeal No. 254 of 2014 has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out hearing Appellant. Moreover, on their own showing, the Respondent has taken a conscious decision to revisit its earlier view on the issue of time sharing business after the judgment of Hon ble Supreme Court in PGF Ltd. (12th March, 2013) and the letter dated 2nd July, 2013 of one Member of Parliament Mr. Patil. It clearly means that the Appellant was carrying on business since 2001 or so under a bonafide belief that the business of time sharing was not covered by CIS. Under these circumstances, if the Appellant had continued the business for another six months or so, no prejudice would have been caused to the case of the Respondent in holding a full and proper enquiry. Therefore, the Impugned Order needs to be interfered with by this Tribunal in appeal. 4. Brief facts leading to the present dispute are that the Appellant is an unlisted public limited company registered under the Companies Act, 1956. Its shares are, thus, not listed on any of the Stock Exchanges. The Appellant is in the time sharing business i.e. selling of rooms for a fixed duration of nights / days depending upon the scheme opted by its customers who are termed as Members. Accordingly, the Appellant owns, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons with vested interests and this matter was put to a rest by both the parties. 8. Finally, on October 21, 2013, the Respondent sent a letter to said Member of Parliament, and surprisingly not to the Appellant, stating that on examining the Appellant s matter in 2010-11, the Respondent had concluded that the company s activities did not attract CIS Regulations. Said MP was also informed that in light of recent complaints received by it, the Respondent was re-examining the matter to determine whether or not the Appellant s activities fall within the ambit of CIS Regulations. On June 26, 2014, having ostensibly completed its re-examination, the Respondent issued a Show Cause Notice (SCN) dated June 26, 2014 accusing the Appellant of carrying on activities in the nature of a CIS without obtaining a certificate from the Respondent as required by the CIS Regulations. The Appellant has filed a Writ Petition (Lod.) No. 2090 of 2014 in the Hon ble Bombay High Court challenging the SCN issued by the Adjudicating Officer of SEBI and the Hon ble Bombay High Court directed the Appellant to file reply to the Show Cause Notice so that SEBI could take final decision on merits after heari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The Appellant puts forth that it is a fact noteworthy that since the day Respondent had concluded that the Appellant is not carrying out any CIS, the Appellant s activities have not undergone any change. Therefore, it is unreasonable to treat the same activities as illegal few years down the line, particularly in view of the fact that the Impugned Order fails to point out any way in which the business of the Appellant has undergone any drastic change. 13. The Appellant submits that no emergent situation has been elucidated in the Impugned Order which would justify the passing of such an adverse order, without ever giving the Appellant an opportunity of being heard. This itself is a blatant breach of the principles of natural justice. Further, the SCN is still pending which requires due application of mind by the Respondent and determination of issues for which the Appellant has been sought to be punished unilaterally. The Appellant submits that no grievance of any of its customers has come to light which would warrant the passing of the Impugned Order allegedly to secure interests of investors. The only change in circumstance is the complaint received from an MP. SEBI cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated April 15, 2014 in the case of SEBI vs. Rose Valley in SLP (C) No. 3725 of 2014. 15. Judgments at serial nos. (a) to (d) have been cited by the Ld. Senior Counsel for the Appellant Mr. Pradeep Sancheti to bring home the point that discretion / powers conferred by Sections 11(1), 11B and 11(4) ought to be used only in appropriate cases where due to a prevailing emergency, time cannot be wasted even by offering the right of being heard to the affected party against whom such an ex parte interim order can be made. Mr. Sancheti submits that although these judgments are passed by the Hon ble High Court of Bombay in the context of suspension of license of Custom House Agents as per the powers and discretion conferred by the Regulations 20 and 22 of Customs House Agents Licensing Regulations, 2004, the ratio laid down in these judgments is clear that it is only when prompt action is required that such powers of suspension are to be invoked at once. Mr. Sancheti also submits delay of even one to two months in suspending a CHA under Regulation 22 of the said CHAL Regulations, 2004 has been condemned by the High Court and considered fatal and such arbitrary decisions have been consist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex parte interim orders in deserving and emergent cases is concerned. Mr. Sancheti submits that it would be a mockery of the discretion conferred upon SEBI if it were to be invoked in the ordinary and routine cases. It would, therefore, amount to gross misuse of power rather than proper use in a given case. Mr. Sancheti also pointed out that Civil Appeal No. 7134 of 2011 preferred by SEBI before the Hon ble Supreme Court has since been disposed of by order dated 19th August, 2014 by stating that ..the order dated 23rd July 2013, passed by the SAT in the said appeal had been challenged before this Court. By virtue of the said order, the case was remanded to the SEBI for fresh consideration. During the pendency of this appeal, the SEBI decided the case on 11th April, 2014. The order dated 11th April, 2014, passed by the SEBI has now been challenged before the SAT and the SAT is to hear the appeal on 20th August, 2014. In the aforesaid circumstances, we are of the view that this appeal has become infructuous. The appeal is disposed of as having become infructuous. It is clarified that it would also be open to the SAT to pass an appropriate interim order in accordance with law so a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncheti drew our attention to the following paragraphs of the Hon ble Gauhati High Court s stay order, which is admittedly in operation till date:- In the circumstances indicated above, if the SEBI itself happens to conclude tomorrow that the petitioners business does not fall within the ambit of the expression Collective Investment Scheme, as envisaged by Section 11AA(1) of the Securities and Exchange Board of India Act, 1992, the petitioners, because of the embargoes placed on them by the impugned order, would have suffered irreparable loss inasmuch as the SEBI does not undertake to make good the loss or losses, which the petitioner may suffer, if the SEBI concludes, in future, that the business of the petitioners does not fall within the ambit of expression Collective Investment Scheme. What is, however, important to note is that we are prima facie of the view that the submission, made on behalf of the petitioners, that all the four ingredients, which have been mentioned in Section 11AA(1), are required to be satisfied before treating a scheme as Collective Investment Scheme, has considerable force. We are also of the view that the petitioners have prima facie shown t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seek cancellation / modification, etc. of the interim directions, which we have passed above. (emphasis supplied) 19. We shall now deal with the Respondent s submissions in brief. The Respondent submits that no confirmation in the form of an order was given to the Appellant in 2001 to the effect that the Appellant s activities were not in the nature of a CIS. The Appellant is alleged to have relied upon a fabricated document, being letter dated October 21, 2013 addressed by the Respondent to MP Mr. Sanjay Dina Patil. Differences between the original letter and the fabricated document have been brought to the Court s notice. According to Mr. Mehta, it is a case of perjury and hence the appeal should be dismissed on this count alone. 20. The Respondent submits that prior to 2013 it was of the view that time share schemes were not covered by Section 11AA of the SEBI Act and hence did not constitute a CIS. The Respondent came to this conclusion via a macro examination of the activities of the, as opposed to an in-depth micro examination of every scheme of the Appellant individually. However, a development took place in the law related to Section 11AA when the Hon ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. It is also submitted by the Respondent that the financial statement of the Appellant in respect of the year 2012-13 shows that the Appellant has sufficient revenue to meet its operating expenses and that the Impugned Order should not come in the way of its future operations. 24. Mr. Shyam Mehta, Ld. Senior Counsel for the Respondent also produced an order dated July 10, 2013 passed by the Ld. WTM of SEBI under Sections 11(1), 11B and 11(4) of the SEBI Act, 1992 in a similar case of time sharing scheme in the case of Rose Valley to emphasize that the Appellant is not being discriminated against and similarly placed other such companies are also being investigated. 25. The major submissions of the Respondent as advanced by the learned Senior Counsel Mr. Shyam Mehta can be summarised hereinafter. Firstly , that it is the prerogative of the Respondent to pass ex parte interim orders at any point of time as may be necessary in any given case by invoking powers under Sections 11, 11(4) and 11B of the SEBI Act, and hence no illegality or irregularity was committed in issuing the present Impugned Order without affording any opportunity of hearing to the affected party, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taking action against Appellant for perjury despite an unconditional apology tendered by the Ld. Counsel for the Appellant, we asked the Respondent to produce the entire file pertaining to the case of the Appellant in the Court. On a minute perusal and comparison of copy of the letter dated October 21, 2013 in question as annexed by the Appellant with the appeal at Page 93 of the paper book with the copy of the original letter available in the Respondent s file, it is seen that the contents of both the copies are identical except for a few typographical errors in the copy annexed by the Appellant at Page 93 by utilising the letterhead of SEBI as appearing on the illegible original copy of the said letter. The idea in getting the letter retyped written by SEBI to the Member of Parliament seems only to place on record a legible and neatly typed copy of the said document. We are, thus, convinced that there was no intention to mislead the Court in any manner. Therefore, we accept the sincere apology tendered by the Ld. Counsel for the Appellant. Similarly, the contention of Respondent that the letter is an internal matter is not tenable. The factum of issuance of letter in question t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court on 12th March, 2013 and/or the intervention of MP Mr. Patil by a letter dated 2nd July 2013 calling upon SEBI to investigate the case of Appellant regarding applicability of CIS to the time sharing business. 31. We have examined Sections 11(1), 11(4) and 11B read with Sections 11AA(1), 11AA(2) of the SEBI Act along with Regulation 65 of the CIS Regulations of 1999, under which the Respondent has passed the Impugned Order to protect the interest of investors. 32. An analysis of the precise legal nature of the discretion conferred by these provisions would reveal that it is not boundaryless. It cannot be resorted to indiscriminately without clearly spelling out the urgency in a given case which is to be determined in each case on its own facts and circumstances. The Appellant who is directly and adversely affected by the ex-parte interim impugned order has atleast a legitimate expectation of being treated reasonably by getting an opportunity of being heard before such findings and directions are issued against him in the peculiar facts and circumstances of the case. Such an unjust action of the Respondent is liable to be struck down simply on the ground of unfairness and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt matter, no such urgency has been brought to our notice. In fact, we feel that by asking the Appellant to stop all its activities, the customers who wish to avail of the schemes of the Appellant by going on holiday or vacation, are being put to loss. 35. Where a decision has to be reached by a body acting judicially, there must be a balance between the need for expedition and the need to give full opportunity to the person against whom charges have been levelled. The necessity of striking a pragmatic balance between the competing requirement of acting urgently and fairly can never be ignored. 36. In Zenith Infotech Ltd. vs. SEBI Ors., this Tribunal has held that although SEBI is empowered to pass ex-parte interim orders, this power is to be exercised sparingly in most deserving cases of extreme urgency. Inter alia it was observed that it is a settled position that if the essentials of natural justice in the sense of granting an opportunity of hearing are ignored in passing an order to the prejudice of a person, the order is a nullity for want of natural justice and no amount of post-decisional hearing can cure the same. It was held that in the facts of the case, the post- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of roll numbers on the front page of the answer sheets only in the space provided therefor on the very front page itself. Instead some of the students wrote roll numbers inside the paper book on all the pages contrary to the clear instructions of the Commission. Therefore, the Commission did not evaluate such answer books without according any opportunity of being heard to the affected candidates. In the circumstances, Hon ble Supreme Court held that competitive exams are required to be conducted by the Commission for public service in strict secrecy to get the best brains and therefore any violation of norms/rules laid down by the Commission for holding the competitive exams had to be viewed seriously. In the facts and circumstances of that case, therefore, the Hon ble Supreme Court held that pre-action opportunity of hearing was not required to be afforded to the candidates by the Commission before deciding to reject the evaluation of such answer sheets. The facts of this case, thus, are entirely different from the present case and do not advance the case of the Respondent. 41. Ajit Kumar Nag vs. General Manager (PJ) Indian Oil Corporation Ltd., Haldia and Others (2005) 7 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court for exclusion of the principles of natural justice either in the case of Tulsi Ram Patel or Ajit Kumar Nag but certain instances have been enumerated in which it may not be reasonably practicable or possible to hold a full fledged regular enquiry before passing order of dismissal which, inter alia, include: activities of terrorising, threatening or intimidating witnesses who might be giving evidence against a civil servant or threatening, intimidating or terrorising disciplinary authority or his family members or creating an atmosphere of violence or general indiscipline and insubordination. This case is also, therefore, totally distinguishable and does not advance the case of the Respondent in any manner. 44. In the case of Maharshi Dayanand University , the Respondent Surjeet Kaur before the Hon ble Supreme Court had appeared in the University exam by pursuing two degrees of M.A. as well as B.Ed simultaneously contrary to the rules of examination. Thereafter, she obtained an order finally from the National Dispute Redressal Commission, New Delhi, directing the University to issue B.Ed degree to the Respondent in contravention of the University ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged its mind thereafter and started investigating a couple of such schemes including the Rose Valley matter. SEBI may be within its right to change its stand on the interpretation of law after a lapse of more than a decade and such a change may not hold to be illegal and bad only on the ground of the principle of estoppel. We will, therefore, repel the contention of the Appellant on this count. But the crucial point to be considered is whether SEBI is entitled to change its stand by taking a somersault and suddenly pass an adverse order with serious civil consequences without affording an opportunity of being heard to the affected person. 47. As held hereinabove, the answer to this has to be in the negative. SEBI may not be bound by estoppel in a given case to change its stand due to changed circumstances or change in policy or law. But Respondent cannot do the same without following principles of natural justice unless necessity or emergency of a grave nature is shown by SEBI to justly take ex parte interim action in the form of extreme directions under sections 11(1), 11(4), 11B of SEBI Act to halt the business of Appellant in question. No such urgency or dire need has been b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIS, SEBI ought not to put embargoes on the company. The operation of SEBI directions was suspended and the company was left free to operate its bank accounts. 49. In the case in hand also, therefore, considering the situation that no material has been brought on record to show that SEBI has any justification to interfere with the Appellant s time share business, especially in light of the fact that SEBI has not yet conclusively determined whether or not the provisions of CIS are attracted to the Appellant s business, we are of the view that the impugned order cannot be sustained particularly when SEBI has itself issued SCN dated June 26, 2014 to the Appellant under Rule 4 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 read with Section 15I of the SEBI Act, 1992. 50. The SCN dated June 26, 2014, in a nutshell, mentions / alleges that an examination of the affairs of the Appellant was undertaken by the Respondent for possible violation of the provisions of the SEBI Act, 1992 read with connected Rules and Regulations. On the basis of such an examination, the Respondent has leveled an allegation that the Appellant is carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have carefully considered the submissions of the Ld. Senior Counsel for the parties on this count. A simple perusal of the entire SCN dated June 26, 2014 points out that there is not even a whisper of non-submission of any relevant information / documents of the Appellant. Paragraph 3 of the SCN in question mentions in clear terms that information / documents sought by SEBI by letter dated September 17, 2013 have been furnished by the Appellant vide letters dated October 01, 2013; October 13, 2013; December 03, 2013, April 02, 2014 and April 14, 2014. 54. Therefore, the records reveal that the Appellant has submitted almost all the information / documents, though in a phased manner, to the Respondent and has, thus, been co-operating with the Respondent in this regard. We fail to understand how the delayed delivery of a list of subscribers / members to SEBI would prove such a big hurdle as to prevent SEBI from taking a final view on the nature of the time share business of the Appellant. If its prima facie view that the time share business was not a CIS could be formed on the basis of details so supplied, there was no reason for SEBI to abruptly order the Appellant to discontinue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecade, the Whole Time Member of SEBI could not have changed that stand by way of an ex parte decision based on his prima facie view, especially when prima facie view of Gauhati High Court to the effect that time sharing business is not covered under CIS, is holding the field since August, 2013. It is relevant to note that the Apex Court while disposing of the appeal filed by SEBI has not interfered with the prima facie view of the Gauhati High Court on ground that the matter is listed for final hearing before the Gauhati High Court. Admittedly, the prima facie view of the Gauhati High Court continues to be in force till date. Neither the Whole Time Member in the impugned order has referred to the order passed by Gauhati High Court, nor counsel for SEBI was aware of the order passed by the Gauhati High Court against which SEBI had filed an appeal before the Apex court. In fact, the order of the Gauhati High Court as also order of the Apex Court on the appeal filed by SEBI against the decision of the Gauhati High Court were brought to our notice by the counsel for Appellant. In these circumstances, since the prima facie view of the Whole Time Member of SEBI being contrary to the prim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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