TMI Blog2017 (9) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... not in a routine manner. In normal, routine cases where investigation reveals some mischief or fraud being conceived or perpetrated in the market, SEBI should resort to adjudicating proceeding by appointing an Adjudicating Officer as per Chapter IV-A of the SEBI Act. But keeping in view the gravity of the matter, SEBI was not unjustified in invoking such extra-ordinary power. Similarly, SEBI has justified the delay of few months in passing the impugned order against the Appellant. Similarly, there is no unnatural or unreasonable delay on the part of the SEBI in passing the impugned order. In this context, a perusal of the original file on which the case of Dr. Vijay Mallya was processed reveals that decision to initiate action against the Appellant was taken at the highest level in SEBI to look into the matter and take action as per law. So it cannot be argued that no investigation or inquiry was pending against the Appellant when the SEBI invoked powers under Sections 11(1), 11(4)(b) and 11B of the SEBI Act.We are inclined to dismiss the appeal with a direction to the appellant to appear before SEBI, in person or through a legally authorized representative, and make his submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hief Financial Officer), Mr. Paramjit Singh Gill (President All India Operations) and Mr. Ainapur S. R. (Divisional Vice President Accounts). The Appellant herein has been prima facie found to have violated Section 12A(c) of the SEBI Act 1992 ( SEBI Act ), Regulation 3(d), Regulation 4(1) along with Regulation 4(2)(e), (f) and (k) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 ( PFUTP Regulations ). By the said impugned order the Appellant has been (i) restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly (ii) restrained from holding position as Director or Key Managerial person of any listed company (iii) directed to file reply to SEBI within 21 days from the date of receipt of the impugned order and also directed to indicate in the reply whether the Appellant wishes to avail the opportunity of personal hearing in the matter. 2. SEBI s prima facie view is that the appellant was instrumental in diverting funds from United Spirits Limited (hereinafter referred to as USL ) to certain United ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner and which may influence the decision of the investors; 4. Briefly stated the facts of the case is that USL is a company incorporated under the Companies Act, 1956 on March 31, 1999 as McDowell Spirits Limited and was later named USL on October 17, 2006. The matter took shape after BSR Co. LLP, statutory auditor of USL at the time, qualified certain transactions in its audit report for the financial year 2013-14. A financial statement or a transaction is said to be qualified when the auditor is unable to conclude that a company s financial statements depict a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of financial statements and accordingly, issues a declaration to that effect in the Audit Report. For auditors, an issue must be material or financially worth considering to make a qualified report. The purpose of issuing a qualified financial statement or transaction is to put the readers of the report on guard and protect the auditor himself, to the extent he has qualified the report, from allegations of professional misconduct or negligence. The qualified transaction in the present matter was the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diverted from USL; Dr. Mallya s resignation from the Board, which he unabashedly refused. The Board also decided that an internal committee be constituted by the MD and CEO Mr. Anand Kripalu, to initiate internal proceedings against employees who were involved in the transactions covered by the PWC-UK Report. 8. Almost a year later, Dr. Vijay Mallya entered into a settlement agreement with Diageo, on February 25, 2016, for USD 75 million in exchange for his resignation from his position as Chairman and nonexecutive director of USL. On the same date, Dr. Mallya and USL agreed to a mutual release in relation to matters arising out of the PWC UK report. The following day, on February 26, 2016, USL made a public announcement to BSE with respect to Dr. Mallya s resignation. 9. Pursuant to this announcement, SEBI decided to investigate the matter of USL and vide letters dated March 09 and May 11, 2016, sought information regarding improper transactions highlighted by USL from the PWC-UK report, action taken by USL pursuant to the report to mitigate the issues, the inaccuracy of financial statements as pointed out by the Statutory Auditors of USL, details of the diversion of fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buying selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly, till further instructions from SEBI. 13. The impugned order has provided the Appellant and the 6 other KMPS mentioned above, an opportunity to file their replies before the SEBI within a period of 21 days from the date of receipt of the order and in the event the Appellant and the said KMPs want an opportunity of personal hearing, the same would be provided to them. However, the appellant has not preferred to submit his reply despite the passage of 21 days from the date he came to know of the order and instead has filed the present appeal prematurely. 14. We have heard the Learned Counsel for both the parties at length and have perused the pleadings and other connected material, including the file on which the case of the applicant is processed by the SEBI before passing the impugned order in question. We have also gone through various rulings cited by the parties before us. 15. The Appellant has impugned order dated 25th January, 2017, passed by the Securities and Exchange Board of India under Sections 11(1), 11(4)(b), 11(B) read with Section 19 of the SEBI Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red upon it by Sections 11(1), 11(4)(b) and 11(B) to pass an ex parte ad interim order against the Appellant without affording any opportunity of hearing. The order is, therefore, violative of the principles of natural justice. It is argued by Shri Khambata that the jurisdictional prerequisite of pendency of an investigation or an enquiry, as contemplated by Sections 11(B) and 11(4) of the SEBI Act has not been met with. There was no investigation or enquiry pending with the SEBI as on the date of the present ex parte impugned order against the Appellant. 18. In fact, these are some of the fundamental jurisdictional issues argued by Shri Khambata at length by relying upon at least 4 to 5 judgments of this Tribunal itself. Both the arguments pertaining to jurisdictional prerequisite and the violation of principles of natural justice pertain to the interpretation of Section 11(1), 11(4) and 11(B) of the SEBI Act read with the object of the SEBI Act and its broad scheme to protect the investors interest and regulate the capital market. In support of his submissions, Shri Khambata has cited following rulings : 1. Nandkumar 2. Dilip S. Pendse Vs. SEBI [2009 (90 SCL 302 (SAT)]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercised sparingly in most deserving cases of extreme urgency. 20. The Learned Counsel for the Appellant submits that SEBI has passed the impugned order having adverse consequence on the Appellant behind his back, without giving an opportunity of hearing or inquiring and informing the Appellant that such legal action is imminent. It is further submitted that the appellant was no longer related to USL after his resignation on February 25, 2016 and he was not even made aware of the actions undertaken by USL in regard to the matter and various communications between USL and SEBI. As such, it is submitted that this is clear violation of the principles of natural justice. 21. It is submitted that while Sections 11 and 11 B of the SEBI Act empower SEBI to undertake measures and issue directions to protect the interest of investor and promote the development of the securities market, the directions contained in the impugned order is not in furtherance of protecting the interests of investors and promoting the development of the securities market. 22. In this connection, it is emphatically argued by Shri Khambata that SEBI cannot pass ad interim ex-parte order without initiating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e day to day management of the USL and was never connected with the preparation of final results of the company. The various violations of the FUTP regulations, particularly, enshrined in Regulation 3(d); 4(i); 4(2)(e); 4(2)(f) and 4(2)(k), etc. have been erroneously placed on the appellant instead of on the other persons who were actually responsible for the day to day management of USL, including those responsible for preparation of the books of accounts. 25. Elaborating further, it is submitted by the Appellant that alleged violations are not in the nature of fraud under Section 12(A)(c) of the SEBI Act, 1992 and the various FUTP Regulations pressed into service by SEBI against Shri Mallya. The appellant submits that there has, in fact, been no dealing or issue of securities and, therefore, there cannot possibly be a fraud in connection with such dealings or issue of securities. The appellant submits that Section 12 A(c) of the SEBI Act and Regulation 3(d) of the PFUTP Regulations deal with fraud or deceit in connection with the issue, dealing in securities and any violation would be established when such violation is in connection with the issue or dealing in securities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation and enquiry but said private reports cannot be the sole basis for passing such an ex-parte order of drastic nature. The contention is that the two reports of the Auditors are not authentic and are motivated and have been given under the influence of Diageo, the Appellant s competitor. 28. Lastly, Shri Khambata submits that the expression in connection with securities has been unnecessarily pressed into service for passing the restraint order against the Appellant in question. Shri Khambata has also explained the concept of KMPs to contend that the Appellant cannot be restrained to be a Director or a KMP in the facts and circumstances of the case. 29. Shri Rafique Dada, Learned Senior Counsel appearing for SEBI submits that there was some substantial material before the SEBI on the basis of which ex-parte ad interim order was passed against the Appellant. Shri Dada submits that SEBI has also taken the help of information and material available with the two Stock Exchanges, namely BSE and NSE, regarding the Appellant as well as various connected entities. SEBI has minutely gone through the statutory auditor s report, report by PWC-UK and also report by the E Y. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers conferred under 11, 11(b), 11(4) of the SEBI Act should have been invoked for passing the ad interim order and that it has led to violation of the natural justice inasmuch as no opportunity of hearing was afforded to the Appellant before passing the impugned order. We have looked into the various judgments cited by Shri Khambata in this regard. It is true that Section 11, 11(b) and 11(4) do confer wide discretion on SEBI to pass ad interim orders in order to protect the investors interest and for a healthy and orderly growth of the capital market. It is also equally true that by way of various judicial pronouncements this Tribunal has consistently held that the power conferred under 11, 11B and 11(4), particularly after introduction of Section 11(4), SEBI do empower it to issue ad interim ex-parte orders to achieve the twin objective enshrined in the SEBI Act, i.e, the protection of investors interest and orderly growth of capital market. If market abuses likely to occur, SEBI shall invoke such powers subject to the satisfaction of the Board/Members of SEBI. This discretion is a vital discretion conferred upon SEBI to be used sparingly and not in a routine manner. In norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support from USL. Once this is in place, UBHL can return funds to USL with the appropriate accounting entries. ( d) Vide email dated 13.07.2012, Mr. Ashok Capoor informed the Appellant that it was not possible for USL to support UB Group Companies to meet any of their needs and, in fact, USL needed support from UB Group Companies in those circumstances. In response, the Appellant, vide an email dated 08.07.2012 stated that I know the USL position exactly. It is my final call. If you cannot accept my instructions, you are free to decide further steps.... but let me repeat, my call is final and an instruction. SEBI contends that the above material is sufficient to form a prima facie conclusion that the Appellant acted in fraudulent manner towards the public shareholders/investors in USL. It is submitted by SEBI that a final view in the matter can only be taken once the explanation is received. 33. Lastly, we may mention that the ex-parte impugned order has been passed on prima-facie view and the appellant, instead of rushing to the Tribunal, should have defended himself before SEBI by availing of the opportunity granted to him . It is pertinent to note that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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