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Zenith Infotech Limited, Rajkumar Saraf, Akash Rajkumar Saraf, Zenith Technologies Pvt. Ltd., VU Technologies Pvt. Ltd., Devita Rajkumar Saraf, Vijayrani Rajkumar Saraf Versus Securities and Exchange Board of India, QVT Fund LP, Quintessence Fund L.P.

Misc. Application No. 30 of 2013 and Appeal No. 59 of 2013 - Dated:- 23-7-2013 - Jog Singh (Member) And A. S. Lamba (Member) For the Appellant : Fredun Devitre, Senior Advocate, Zal Andhyarujina, Nirav Shah and Vivek Shetty, Advocates For the Respondent : Shyam Mehta, Senior Advocate, Mihir Mody, Akhilesh Singh, Advocates, Janak Dwarkadas, Senior Advocate, Navroz Seervai, Senior Advocate, Ankita Singhania, Ranjit Shetty, Sonali Sharma, Rupen Kanawala, Deepak Deshmukh and Tapasvini Shah, Advocate .....

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e year for an amount of USD 33.93 million within 30 days with other connected directions. The said order is stated to have been passed under Section 19 read with 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and Section 12A of the Securities Contracts (Regulation) Act, 1956 (SCR Act). 2. The operative portion of the said order reads as under:- 25. Therefore, in order to protect the interest of investors and the integrity of the securities market, I, in e .....

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till further directions:- S. No. Name PAN No. 1. Devita Rajkumar Saraf (Promoter) AAFPS8848D 2. Vijayrani Rajkumar Saraf (Promoter) AMTPS0851J 3. Zenith Technologies Pvt Ltd (Promoter) AAACZ2074L 4. Vu Technologies P Ltd (Promoter) AACCV1663P 5. Rajkumar Saraf (Promoter and Chairman cum Director) AURPS4374C 6. Akash Rajkumar Saraf (Promoter and Managing Director) AAFPS8849C ii. The board of directors of ZIL is hereby directed to furnish, within 30 days from the date of this order, bank guarantee .....

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ion and SEBI deems it necessary to compensate ZIL. 26. This order is without prejudice to the right of SEBI to take any other action that may be initiated against ZIL and its directors/promoters in accordance with law. The above directions are without prejudice to the rights of FCCB holders to enforce their rights of redemption against ZIL before competent authority, forum or court. 27. The persons/entities against whom this order has been passed may file their reply to SEBI within 21 days from .....

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nior counsel for the appellants who appears with Mr. Zal Andhyarujina and Mr. Anand Desai. Mr. Shyam Mehta, learned senior counsel appears with Mr. Mihir Mody and Mr. Akhilesh Singh for the SEBI. Mr. Janak Dwarkadas, learned senior counsel with Mr. Navroz Seervai, learned senior counsel appearing for the interveners. After hearing the learned counsel for the parties the appeal is admitted. Two weeks' time is granted to the respondent to file their reply-affidavit with an advance copy to the .....

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parties on the question of interim relief. Keeping in view the totality of facts and circumstances of the case and submissions made by the parties, the operation of the impugned ad interim ex parte order dated March 25, 2013 is hereby stayed in so far as para 25(ii) is concerned during the pendency of the present appeal. Para 25(i) of the impugned order shall, however, operate against the appellants (six persons/entities mentioned in the said para 25(i) of the ad interim ex parte impugned order) .....

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ted on the Bombay Stock Exchange Ltd. ("BSE") and the National Stock Exchange Ltd. ("NSE"). ZIL claims to be a leading international company specialising in delivering innovative IT solutions for virtual infrastructures, data storage and backup, and disaster recovery etc. It has about 900 employees in its offices spread across the globe. It had two sets of businesses: firstly; Cloud Computing Business ("CCB") and secondly; Managed Services Division Business ("M .....

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incorporated under the Companies Act, 1956 with its registered office at Andheri (East), Mumbai. Appellant Nos. 2 to 7 together hold 64.89% of ZIL's shareholding. 6. From the pleadings it appears that, in the course of its business operations, ZIL floated Foreign Currency Convertible Bonds ("FCCBs") of USD 33 million (about ₹ 179 crore) in September 2006 and additional USD 50 million (about ₹ 271 crore) in August, 2007. The amount so collected through the FCCBs was due .....

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the country where the FCCBs in question have been issued. It is emphatically submitted that FCCBs, therefore, do not fall under the provisions of the SEBI Act, 1992 or other securities laws in India. In this context, the Appellants submit that on their default to redeem the monies in question, the interveners and some other parties have already approached the Hon'ble High Court and Learned Small Causes Court, Mumbai in appropriate proceedings against the Appellants. It is, therefore, contend .....

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s that atleast a substantial part of the FCCBs would be converted into shares of the issuing Company by the FCCB holders. But, due to the global economic crash in the year 2008 recessionary trends across the whole world were witnessed and the same is a matter of record. Due to this phenomenon, most of the FCCB holders decided not to convert their FCCBs into shares and instead sought repayment/redemption of the FCCBs on maturity and due to economic crash in 2008, increase in cost of USD vis-&aacu .....

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of Directors of ZIL might deem fit for an amount not exceeding ₹ 1000 crore. A special resolution to this effect was passed at the EGM under Section 293(1)(d) and other connected provisions of the Companies Act, 1956 and the FEMA Act. The Appellants submit that at the time of maturity of the FCCBs, there was a sharp decline in the share price because of adverse market conditions caused mainly due to the phenomenal increase in the rate of USD value vis-á-vis Indian Rupee (for one US .....

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iness of ZIL. Summit is stated to be a growth equity investor providing private equity and venture capital to rapidly growing companies. ZIL informed the BSE and NSE on September 26, 2011 that it had spun-off the MSD Business to Zenith Monitoring Services Pvt. Ltd. ("Zenith Monitoring"), which would be a subsidiary of Zenith RMM. The name of Zenith RMM was changed to CMS. Zenith Monitoring was formed with a paid up capital of ₹ 1,00,000/-, the initial shareholders of which were A .....

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t is contended by the Appellants that the bondholders and trustees have always been aware of the fact that ZIL was in the process of mobilising funds for the purpose of, inter alia, redemption of FCCBs. In fact, the Appellants also seem to have made an attempt to negotiate amicably with the investors/bondholders for extension of time to redeem the FCCBs in question. In the process, the cutoff date i.e. September 21, 2011 meant for the maturity of the 2011 FCCBs lapsed and the trustees issued a n .....

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ons for extension of time with the investors etc. for repayment failed in early October 2011 and as such Appellant No. 1 informed the BSE on October 13, 2011 of its default on FCCBs which were due on September 21, 2011. 9 The Appellants submit that on October 14, 2011 certain shareholders, claiming to be FCCB holders, filed Suit No. 2034 of 2011 before the Learned City Civil Court at Dindoshi to stop the sale of the MSD Business and understandably they also approached various regulators includin .....

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herefore, they are precluded from raising a parallel dispute before any other forum. It is specifically contended by the Appellants that the rights and interests of the FCCB holders have already been duly protected by the Hon'ble High Court particularly by its order dated October 9, 2012 passed in Suit No. 2865 of 2011 on the Notice of Motion moved by the Plaintiff (trustee, The Bank of New York Mellon, London Branch). The relevant portion of the said order of the Hon'ble High Court is r .....

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maturity date of repayment/redemption of the 2011 bonds came in August/September 2011, defendant No. 1 did not make any payment. In view of the default, the plaintiff issued notice of demand as contemplated by the agreements and also addressed notices in October 2011 to defendant No. 1 being Notice of Acceleration and declaring the 2012 Bonds as due and payable". I am also prima facie satisfied that the Defendant Nos. 1, 5 and 6, despite representing their shareholders, Stock Exchange and t .....

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e Defendant, with intent to obstruct or delay the execution of any decree that may be passed against him, (a) is about to dispose of the whole or any part of his property, or (b) is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court, the Court may direct the Defendant, within a time to be fixed by it, either to furnish security, in such sum as may be specified in the order, to produce and place at the disposal of the Court, when required, .....

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y specified or such portion thereof as appears sufficient to satisfy and decree which may be passed in the suit. Sub-Rule (2) of Rule 6 of Order 38 provides that where the defendant shows such cause or furnishes the required security, and the property specified or any portion of it has been attached, the Court shall order the attachment to be withdrawn or make such other order as it thinks fit. The said sub-Rule (2) of Rule 6 of Order 38 is by the Bombay amendment substituted as follows: (2) Whe .....

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rty has already been disposed of, as held by the learned single Judge of the Calcutta High Court in Premraj v. Md. Maneck Gazi (supra) which decision is approved by the Hon'ble Supreme Court in Raman Tech. & Process Engg.Co. and another (supra), the conduct of the Defendants immediately before the filing of the suit can be taken into consideration by this Court to draw an inference as to whether the Defendant is about to dispose of the property and if so with what intention. Even if an o .....

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d bank balances and the amounts received by them from their sundry creditors from time to time to enable them to carry on their business which would include payment of wages to 1000 workmen. Attaching the Bank balances of approximately ₹ 28 crores and the amount to be received from sundry creditors is bound to stop the day to day business of the Company affecting the lives of 1000 workmen and their family members. This will not be in the interest of anyone including the Plaintiff. Even oth .....

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n between 198 Crores and ₹ 239.8 Crores and by M/s. Ernst & Young Pvt. Ltd. in their second report between 152 crores and ₹ 211 crores, is accepted. (ii) The undertaking given by Defendant Nos. 1, 5 and 6 that they will maintain status quo in respect of their fixed assets valued at ₹ 163.4 crores more particularly described in Exhibit-B to the affidavit dated 10th May, 2012, is accepted. (iii) The undertaking given by the Defendant Nos. 1, 5 and 6 that they shall maintain s .....

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claim the Equity Stake in Continuum Managed Services amounting to ₹ 39.86 crores and/or ₹ 32.27 crores held in joint escrow account. (vi) The undertaking given on behalf of Defendant Nos. 1, 5 and 6 that in the event of its subsidiaries returning any loans aggregating to ₹ 50 crores, the same shall not be utilized by the Defendant Nos. 1, 5 and 6 and in any event they shall make their subsidiaries return an amount of ₹ 25 crores within a period of six months from the dat .....

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pellants contend that the impugned order of Ld. WTM, SEBI dated March 25, 2013, is without jurisdiction, void ab initio and illegal particularly because the same issue as dealt with in the impugned order is also the subject matter of the proceedings before the Hon'ble High Court and the rights and interests of the affected parties in the matter of redemption of the FCCBs in question are duly protected by the above said order dated October 9, 2012. The Appellants also submitted during the cou .....

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Unfair Trade Practices relating to Securities Market) Regulations, 2003 and is also opposed to various provisions of the SEBI Act, 1992, the SCR Act, 1956 as well as the SEBI (Prohibition of Insider Trading) Regulations, 1992. The Respondent No. 1 has drawn our attention towards findings arrived at by the Ld. WTM in the impugned order dated March 25, 2013 particularly in paragraphs 15, 16, 18, 19 and 20 which can be summarised as below:- i) The amount received from the sale of the MSD division .....

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l repayment of FCCBs. They tried to hide the information about the default in connection with the repayment of FCCBs until intervention by the Stock Exchanges on October 13, 2011. They also did not make disclosure with regard to the Suit and the Winding-up of Petition filed against Appellant No 1. Similarly, the Stock Exchanges were not informed that USD 13 Million were transferred to two, promoters related entities in Dubai. iv) The Appellants did not disclose the price sensitive information as .....

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pellant No. 1 sold its MSD Business for an amount of USD 48 Million but the said amount was not utilized by Appellant No. 1 to redeem the FCCBs in question. Due to this default, a Suit and Winding-up Petition have been filed against Appellant No. 1 by the FCCB holders. Moreover, the price of the scrip of Appellant No. 1 fell from ₹ 190/- on September 23, 2011 to ₹ 45/- on November 30, 2011. The Appellant No. 1, thus, misrepresented to the Exchanges by their letter dated October 13, 2 .....

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and will issue simultaneously the interest warrants and cheques for redemption money of redeemable shares or of debentures and bonds, which shall be payable at par at such centres as may be agreed to between the Exchange and the Company and which shall be collected at par, with collection charges, if any, being borne by the Company, in any bank in the country at centres other than the centres agreed to between the Exchange and the Company, so as to reach the holders of shares, debentures or bon .....

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the definition and concept of "securities" as used in the SEBI Act, 1992 as well as SCR Act, 1956. Regarding the timely information required to be given to the stock exchange by the Appellants, the Respondent No. 1 has drawn our attention towards Clause 36 of the Listing Agreement which requires a company to inform the stock exchanges of all events which are likely to have a bearing on its performance/operations as well as price sensitive information. These include litigation/disputes .....

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rate Disclosure Practices for Prevention of Insider Trading forming part of Schedule II of the SEBI (PIT) Regulations. 14. The finding in the impugned order regarding diversion of funds for the purposes other than the one for which the authority was taken by Appellant No. 1 from its shareholders is sought to be justified by the Respondents explaining the provisions of Section 12A of the SEBI Act, 1992 and Regulations 3 of the SEBI (PFUTP) Regulations, 2003 both of which are reproduced hereinbelo .....

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lations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or th .....

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to be listed on a recognised stock exchange in contravention of the regulations made under this Act. Regulation 3 of SEBI (PFUTP) Regulations, 2003 Prohibition of certain dealings in securities No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in .....

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ognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 15. On the basis of the above said provisions, Respondent No. 1 contends that the companies cannot engage in any act, practice or course of business which would tantamount to fraud "in connection with" the issue or dealing in securities which are listed or proposed to be listed. The Respondents also rely upon the case of Hon'ble Supreme Court reported in 2004 (5) .....

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ards Sections 15Y, 20A and 21 of the SEBI Act read with Section 22E of the SCR Act. A judgment of the Hon'ble Bombay High Court in case of Kesha Appliances P. Ltd. and Ors. v. Royal Holdings Services Ltd. and Ors., 2006 (1) Bom CR 545 is pointed out. It is also suggested by the learned senior counsel for Respondent No. 1 that by the impugned order, the Ld. WTM has not sought to secure the redemption amount claimed by the FCCB holders but has merely directed the Appellants to provide a bank g .....

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e above violations so as to prevent further loss of shareholders' value due to stripping of the asset and erosion of value in ZIL and also to preclude reoccurrence of such defaults/violations. It is also noteworthy that the conduct of ZIL and its promoters/directors may raise concerns about the integrity of the securities market and may tarnish the image and reputation of the Indian securities market amongst foreign investors which is bad for development of the markets. 24. Given the vital f .....

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governance and ethical behavior prescribed in securities laws and do not resort to fraudulent activities. In this case, the conduct of the promoters/directors, as brought out above has been violative of this basic premise. Therefore, in view of the aforesaid prima facie findings, it is felt necessary to intervene in this matter to safeguard the interest of the retail shareholders of ZIL and protect the integrity of the securities market. I am convinced that this is also a case where, pending in .....

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case an urgent preventive and remedial action needs to be taken by way of ad interim ex-parte order. 18. It is also pointed out by Respondent No. 1 that in paragraph 27 of the impugned order the Ld. WTM has granted time to the Appellants to file reply/replies within three weeks and that there is sufficient compliance with the principles of natural justice and, therefore, the Appellants should have approached SEBI instead of preferring the present appeal before this Tribunal. 19. The case of the .....

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of the EGM on January 29, 2011. In the said EGM shareholders passed a resolution for the sale of the business and/or divisions including the subsidiaries of Appellant No. 1, mainly to redeem the FCCBs. After the sale of the MSD Business, Appellant no. 1 did not make the repayment of the FCCBs in question. The shareholders, therefore, filed a suit before the City Civil Court, Dindoshi, Mumbai against Appellant No. 1, Zenith RMM and Summit (Suit No. 2034 of 2011) stating that Appellant No. 1 acted .....

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ourt along with a Winding-up Petition against the Appellant No. 1 being Company Petition No. 28 of 2012. The trustees also filed Notices of Motion No. 3520 of 2011 and No. 3527 of 2011 for attachment before judgment and for other ad-interim reliefs. The Notices of Motion were heard and disposed of by the Hon'ble High Court by its order dated October 9, 2012 which recorded the undertakings of Appellant Nos. 1 to 3 as under:- 1. Shall not dispose of, sell, transfer, alienate or create any thir .....

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aggregating to INR 50 crores, the same shall not be utilized by the Company, Rajkumar Saraf and Akash Saraf; and 6. Shall within a period of 6 months from the date of the said order (i.e. by April 9, 2013) make its subsidiaries return an amount of INR 25 crores and such amount shall be invested in a fixed deposit of a nationalized bank and shall not be utilized by the Company, Rajkumar Saraf and Akash Saraf. 21. The Respondent Nos. 2 & 3 further submitted that the objective of selling the M .....

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58 where it has been held that a notice which does not fairly disclose the purpose of the meeting is a tricky notice and is invalid. It is submitted that the Ld. WTM has rightly noted in the impugned order that actions of the Appellants have been detrimental to interests of the securities market, and that the Appellants' conduct has led to the erosion of the value of the shareholding of Appellant No. 1. The proceedings initiated by SEBI against the Appellants are not for enforcement of the r .....

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arly, paragraph 24 of the impugned order further records that vital function of SEBI is protecting investors and safeguarding integrity of securities market vested in SEBI and commensurate powers given to it under securities laws. Next, Hon'ble Supreme Court in N. Narayanan vs. Adjudicating Officer, SEBI, has enunciated principles in relation to conduct of entities operating in the securities market and the role of SEBI as the market regulator. In paragraph 30 it is stated that any manipulat .....

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ct as an auditor and an overseer to ensure that no market abuse takes place. The Hon'ble Supreme court states that SEBI has a duty to send out a message to foreign investors that market security is the motto of the securities market in India. In fact, the principles enunciated in the Sahara Case have further been approved by the Supreme Court in the Narayanan's case. It is stated that the submissions of the Appellants that the findings of Sahara Case and Narayanan's Case are after th .....

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3 submit that a matter can be said to be sub-judice in a particular forum only when the forum in which proceedings are pending has the jurisdiction to grant the relief as prayed for in the subsequent proceeding. Whereas in the Suit filed in the Hon'ble Bombay High Court the trustees' are seeking a monetary decree for recovery of amounts due to the bondholders, the action initiated by SEBI is in discharge of its statutory duties. A Civil Court is not only not capable of granting such a r .....

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This is meant to restore the faith of investors in the company whose share value has dropped from ₹ 190/- per share in the year 2011 to ₹ 12/- in the year 2013. In the facts and circumstances of the present case where default in payment of FCCB bondholders is admitted and there appears to be diversion of funds to companies controlled by promoters which are located outside India, i.e., Dubai and Singapore, particularly without there being any urgency for the same and contrary to the m .....

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an order; and secondly does not in any manner divest SEBI of its power to protect the interests of the shareholders of Appellant No. 1 who are not the plaintiffs in the Civil Suit. The impugned order is infact an order which is in the interests of the minority public shareholders who due to small holdings would not have the wherewithal to approach the Civil Court. 24. The relevant provisions of law under which the ad-interim ex-parte order is stated to have been passed are reproduced hereinbelow .....

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ities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Section 11(4) Without prejudice 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 interests 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:- (a) suspend th .....

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roval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of an .....

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, in respect of any listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermedi .....

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ermediary or person, it may issue such directions, - (a) to any person or class of persons referred to in section 12, or associated with the securities market; or (b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market. SCR Act, 1956: Power to Issue directions. Section 12A. If, after making or causing to be made an inquiry, the Securities and Exchange Board of India is satisfied that it is nece .....

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in clause (b), it may issue such directions, - (i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or class of persons associated with the securities market; or (ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange, as may be appropriate in the interests of investors in securities and the securities market." 25. We have heard learned senior counsel for all parties appearing before us .....

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as defined in the SEBI Act, 1992 read with relevant provisions of the SCR Act, 1956. The first limb of the argument on jurisdiction as advanced by the Appellants is that the entire matter is sub judice before the Hon'ble High Court in two Suits and more than 40 hearings have already taken place in the two matters. A detailed interim order has also been passed by the Hon'ble Bombay High Court on October 9, 2012 in Suit No. 2865 of 2011 duly protecting the interests of the bond holders in .....

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ch have been gravely prejudicial to the interests and defence of the Appellants and the same have been passed without affording any opportunity of hearing to the Appellants. The post decisional opportunity of hearing sought to be granted to the Appellants by filing a reply within three weeks is nothing but an empty formality. 27. We have given our thoughtful consideration to the matter and the submissions made by Mr. Fredun Devitre, learned senior counsel for the Appellants, Mr. Shyam Mehta, lea .....

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be passed. We hasten to add that Respondent No. 1 is empowered to pass ex-parte ad-interim orders in urgent cases but this power is to be exercised sparingly in most deserving cases of extreme urgency. In the case in hand, on its own showing, we note that Respondent No. 1 had knowledge of the matter from the very beginning. Paragraph 8 of the impugned order itself makes it abundantly clear that the share price of ZIL fell from ₹ 190/- on September 23, 2011 to ₹ 45/- on November 30, 2 .....

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