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TMI Blog2025 (5) TMI 411X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for Sri. Laksha Kollappa, Advocate For R11; Sri. Udaya Holla, Senior Counsel For Proposed Impleading Applicants ON IA 3/24) ORAL ORDER The petitioner, a company incorporated under the Company Act challenges the communication issued by the respondent No.2/ Assistant General Manager, Corporate Finance Investigation Dept SEBI - appointing a Forensic Auditor to assist the investigating authority to conduct a forensic audit of the consolidated financial statement of the company for the financial years March, 31, 2018, March 31, 2019, March 31, 2020 and March, 31 2021 with Special focus on impairment of subsidiaries/wholly owned subsidized associate, loan and advances granted to the related parties and other entities etc. 2. A complaint was filed by respondents Nos.5 to 11 who are the shareholders of the petitioner- company with the Registrar of Companies on 8.5.2020 to investigate and specially audit into the affairs of the petitioner's company stating that petitioner's company has made an impairment loss provision of Rs.118.66 Crores for the financial year 2018-19 and other financial irregularities. Based on the complaint filed by the respondents No.5 to 11 with the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 2 SCC 723, para 5, 7 iii. Amsa India Pvt Ltd. v. Commissioner of Income-Tax, (2017) 393 ITR 1578 - para 3,5 iv. State of Uttar Pradesh and Ors. v. Aryaverth Chawal Udyog and Ors., (2015) 17 SCC 324, para 19 onwards 4. In response, Sri RVS Naik, learned Senior counsel representing the SEBI submitted that in terms of sub- Section 3 of Section 4 and Section 19 of the Act, 1992 and Regulation 5 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities market) Regulations, 2003 (for short 'Regulations, 2003'). The respondent No.1/ Executive Director, SEBI has authority to appoint an Investigating Officer to investigate into the affairs of the company as stated under Section 11C of the Act, 1992. 4.1. Additionally, he argued that in terms of Section 19 of the Act, 1992, the Board has delegated the power to the Executive Director to order an investigation and appoint an investigating Authority under Section 11-C of the Act, 1992. 4.2. He further submitted that the Respondent No.1/ Executive Director, SEBI after perusing the complaint, reply of the petitioner and also the notes prepared by the subordinate officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o warrant an investigation by the respondent No.1 - SEBI, Executive Director? Issue No.(i): 7. Before addressing the issues raised for consideration, it is appropriate to reproduce the relevant provisions of the SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. 7.1. Section 4 - Management of the Board... (3) Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by that Board. 7.2. Section 11 C - Investigation - (1) Where the Board has reasonable ground to believe that- (a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or (b) any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by the Board thereunder, it may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board all powers of, 'general superintendence and direction of the affairs of the Board', and further exercise all powers and do all acts which may be exercised or done by the Board, independent of any general or special order which may be passed under Section 19 of the Act. 8.2. It may therefore be reasonably inferred that the Chairperson of the Board is statutorily empowered to exercise all such powers as may be exercised by the Board, save the limitations placed on such authority in the concerned regulations. A perusal of Regulation 5 of the Regulations, 2003 reveals that where there exists a reasonable ground to believe, the Executive Director is empowered to direct - by an order in writing, any officer (investigating authority), not below the rank of Division Chief to investigate any transactions in securities which are alleged to be carried in manner detrimental to the shareholders. 9. Shri R.V.S. Naik has adduced at Annexures R1 and R2, a general order passed in terms of Section 4(3) of the Act, whereby the Chairperson of the Board has issued the 'General Order' order dated 31.07.2019, in respect of Delegation of Statutory and Financial Powers. The relevant portion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess of delisting the same from BSE also. What is the purpose of delisting shares from BSE also? The intentions of the Management of the NEL Holdings Ltd are very dangerous as they want to give exit route to the existing shareholders at very cheapest rate Rs.0.85 per share for face value of Rs.10/- per share. This is nothing but Loot of the valuable Investments of Shareholders Money. 6. Bad Corporate Governance & mismanagement has resulted in the erosion in the shareholders' Value & net worth of the Company. The share price which was Rs.55/- when the company got listed is Rs. 0.85 paise today 7. There need to be the complete investigation & special Audit of the related party transactions as well as Investment made by the Company in to its subsidiaries & associates concerns for bringing out the real truth of who actually got benefited from that. In view of the our above submissions you are requested to order the Investigation & special Audit of the affairs of the Company at the earliest 12. Following the complaint, the Assistant General Manager/ Respondent No. 2 issued a notice dated 10.2.2021 (Annexure-E) calling upon the petitioner to provide comments with respect to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audited Financial Statement for the FY 2018-19 regarding the impairment provision in question, which reads as follows: "Impairment of non-financial assets The Group assesses, at each reporting dote, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs of disposal and its value in use, Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 4. Further details on the impairment in question can be obtained from the audited account (Annual Report) for the FY 2018-2019, a copy of which has been appended hereto (as Annexure-A) for your convenience. Reference may be had to pages 68 and other notes to account of the said report." 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. Separate Vertical for Shopping Malls and Rental business d. Separate Vertical for Luxury Housing, etcs" 15. It further appears on perusal of the material on record that the respondent No.2 had issued two letters dated 05.04.2021 and 08.09.2021 seeking modus operandi in the functioning of the petitioner's subsidiaries and the loans advanced thereto and, provisions for impairment losses. The respondent No.2 had further asked for financial statements of certain entities, prescribed therein. It appears that the petitioner has not responded to the same. However, the above letters issued by respondent No.2 do not disclose any reference to any inadequacies with respect to the above stated matters in the petitioner's response dated 17.02.2021. 16. The SEBI further relies on a memo dated 30.10.2024 annexing the copy of the note sheet prepared in relation to the allegations made in the complaint filed against the petitioner, the observations made on the complaint, and the proposal of the Assistant General Manager to order an investigation and appoint an Investigating authority. 17. A review of the internal notings dated 28.9.2021 indicates that there is no reference to the notice iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 SCC 495 to emphasise that the rule of audi alteram partem has two facets - 'notice of the case to be met' and 'opportunity to explain'. The three Judge Bench of the Apex Court has further observed that any administrative decision which infringes upon the rights without "apprising the affected and appraising the representations" cannot be considered to be fair. 21.2. The Bench further observed that the validity of administrative orders must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of an affidavit. It further reiterated the observations made in its earlier decision of Commr. of Police v. Gordhandas Bhanji, 1951 SCC 1088, wherein the Court had opined that public orders must be construed objectively with reference to the language used in the order itself. 22. In Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd, (2010) 2 SCC 723, the Apex Court dealt with the issue of reassessment under Section 147 of IT Act, Direct Tax Laws (Amendment) Act, 1987 in relation to the income tax payable upon change of opinion by the assessing officer, wherein the Court opined 'reason to believe' to mean an inference drawn upon an analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitrary, irrational, vague, distant or irrelevant. 25. Similarly, perusal of the material on record does not disclose any application of mind by the investigating authority towards the substance of the allegations in the complaint, or the replies of the petitioner to the aforementioned notices issued by the Assistant General Manager. A mere reproduction of the allegations, or a summary thereof would not amount to an objective assessment of the things as they stood, much less, when the allegations, as referred to in the preceding paragraphs, were withdrawn by the complainants. As such, the precedents relied upon by the learned counsel for the petitioner are applicable to the case at hand. 26. The learned counsel for the respondents relied upon a catena of decisions emphasising the limited scope of judicial review in matters within the realm of SEBI. 26.1. The High Court of Delhi in DLF Limited v. Securities and Exchange Board of India and Ors., 2012 SCC OnLine Del 5765 has observed in a case dealing with a challenge to conduct of investigation under Section 11-C on grounds of non-grant of the opportunity of hearing, et al, as follows: - (i) Firstly, since exercise of power b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction and existence of rational nexus between the reasons and the belief formed thereupon must be held in good faith, and cannot be merely a pretence. 26.1.4. Therefore, where the internal notings of the respondent - Executive Director, dated 28.9.2021, do not disclose any reason or the deductive belief therefrom, to warrant an investigation under Section 11-C of the Act, 1992 into the withdrawn allegations, the respondent - authority cannot be permitted to exercise any powers to order investigation, suo motu. Any such exercise clearly amounts to excess of statutory authority. Furthermore, a careful scrutiny of the above case-law reveals, more particularly, at paragraphs No. 47 and 48 thereof that the impugned order therein was passed consequent to recording of submissions of both parties, and on grounds of failure to make statutorily prescribed disclosures, et al. To the contrary, a bare perusal of the internal notings dated 28.9.2021 does not disclose any evidence of even a passing reference to the replies of the petitioner, or the fact that there existed compelling circumstances to initiate investigation in to complaint, despite it having been withdrawn by the complainants on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review; (c) When technical questions arise - particularly in the domain of economic or financial matters - and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be interfered with;" 26.4.1. There is no quarrel with the above ratio, but the same does not enure to the benefit of the respondent- authorities, as the challenge herein questions the existence of reasons to believe to order investigation under section 11-C of the Act, 1992 and not the adequacy of the reasons. This review, therefore, is within the permissible extent, on the grounds that the impugned orders are opposed to the statutory provisions contained in Section 11-C of the Act, 1992. 26.5. Lastly, the learned senior counsel for the respondents produced the decision of the Apex Court in Kavi Arora v. Securities and Exchange Board o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e existence of reasonable grounds is sine qua non for directing an investigation under Section 11-C of the Act. Thus, where a review of the material on record indicates that the competent appointing authority has merely reiterated the allegations made in a subsequently withdrawn complaint, and further contains no reference to notices and replies of the petitioner entity to the same, or the compelling circumstances warranting an investigation suo motu into the subsequently withdrawn allegations levelled by the shareholders, the respondent No. 1 cannot be said to have passed an order directing investigation under Section 11-C, upon due application of mind. The said assessment is further bolstered upon perusal of the material on record where the internal notings of the respondent-SEBI, which ordinarily ought to contain the reasons and belief necessitating an investigation under section 11-C of the Act, 1992, remain unapproved by the competent authority i.e. the Executive Director. 27.1. It is a well-settled law that all state action must be reasonable and free from arbitrariness. Thus, where it appears from the perusal of the material on record that respondent No. 1/ Executive Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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