(This post has been contributed by Amit Agrawal, a legal practitioner practicing before Rajasthan High Court, Jaipur and an alumnus of National Law School of India University, Bangalore)In the SEBI-Sahara controversy, SEBI has previously issued an ad-interim order on November 24, 2010 (discussed previously on this Blog) against Sahara entities and their promoters and directors.
The securities regulator had arrived at a prima facie finding that certain specific companies belonging to Sahara group were “rampantly tapping huge amount of money by not disclosing the source of funds by circumventing the applicable framework of law” under the guise of private placement.
The order of SEBI was challenged before the Lucknow bench of the Allahabad High Court which gave its detailed stay order on December 13, 2010 which can be accessed through JUDIS (Misc. Bench No. - 11702 of 2010).
Whilst much of the space in the order has been devoted to whether the case is fit to be entertained under the writ jurisdiction, the conclusion to stay the SEBI order seems to have been reached based on the following findings:
- Prima facie, SEBI has no jurisdiction in the matter as entities concerned are neither listed nor intend to get listed.With respect, it is humbly submitted that the argument regarding the effect of Section 67(3) of the Companies Act, 1956 discussed in sufficient detail in para 14-16 of the SEBI order, being at the centre of the controversy, was not duly deliberated without which the prima facie finding may run the risk of being branded as a mere superfluous finding.
- Central Government is already seized of the matter;
- Order was passed by SEBI in violation of principles of natural justice; sweeping orders affecting civil rights should not have been passed in utter disregard of principles of natural justice;
- Balance of convenience lies in the favour of Sahara as the ‘issue’ has not been closed and irreparable damage will be caused in case SEBI order stays in force.
Further, whether central government is seized of the matter or not should have been considered to be wholly irrelevant to the challenge at hand i.e. whether the regulatory body which had passed the impugned order prima facie had the jurisdiction in the matter or not.
Also, there is no universal rule that an order can never be passed without providing a hearing. Post decisional hearings are held to be valid substitute for pre-decisional hearings from time to time, especially in cases where the statute itself expressly authorises that the hearing need not be granted prior to issuing the interim order.
Section 11 (4) of the SEBI Act states that “.....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....”
The second proviso to section 11(4) also states that “Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned.”
The above position has been endorsed by the Supreme Court in a number of its judgements including in the Maneka Gandhi judgement given in the context of Passports Act, 1967. Judgements of the Supreme Court in the matter of Liberty Oil Mills (1984)3 SCC 465 and Swadeshi Cotton Mills (1981)1 SCC 664, subsequently followed in many other judgements, support the view that where a statute contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. Also, it may be noted that in this case merely an interim order was passed by SEBI and the concerned persons were asked to file the objections, if any, within thirty days from the date of the order. An opportunity of personal hearing was also accorded.
Recently, the Tayal group of companies had challenged before the Rajasthan High Court an ad-interim order passed by SEBI by which restrictions were imposed on accessing the securities market and dealing in securities, for the alleged violations of the provisions of the Takeover Regulations and the provisions of FUTP Regulations. It was contended that the order of the SEBI was without jurisdiction and also that Section 11 (4) and 11B are unconstitutional as they permit imposition of penalties without providing procedural safeguards and also amount to violation of Article 19(1)(g). The challenge so made was dismissed by the court and it was inter-alia held that “Interim orders are passed by the Court, Tribunal and Quasi Judicial Authority in given facts and circumstances of the case showing urgency or emergent situation. This cannot be said to be elimination of the principles of natural justice .....”. Copy of the judgement is available here.
In view of the above, the order of SEBI could possibly have been sustained as not being in contravention of the principles of natural justice, even at this interim stage in the court.
As regards the question of imposing wide civil penalties in complete disregard to the principles of natural justice, it may be noted that the judgements from which the support is sought to be derived do not really deviate from the principle that in case the statute expressly authorises or by necessary implication excludes the prior hearing, granting of hearing subsequent to the passing of the order would be sufficient compliance with the principles of natural justice.
The last point on the balance of convenience and irreparable damage too appears to be in the favour of continuing with the prohibition imposed by SEBI though this point is integrally tied to the finding on prima facie case having been made out. Not much discussion exists in the order on this point.
Any business exigency related reason which may possibly have been advanced, it is humbly submitted ,could not possibly have weighed more than the reasoning of SEBI that “...it would be an indefensible failure on the part of SEBI, if it were to allow investors to be imperiled, given the massive scale of fund mobilization as brought out above, prima facie, completely outside the applicable regulatory framework. Taking into account the gravity of this case, I am of the considered opinion that pending the outcome of investigations in the matter, immediate action is called for, in the interest of the investors to prevent these companies from raising further capital from public, which is prima facie in violation of the relevant provisions of the Act and SEBI Act and the relevant regulations made thereunder, as found above in this Order....”
More was the necessity to put on hold the drive of raising funds till the time mist regarding the unlawful methods being deployed in the process was cleared.
Also, it appears that the court, while granting the stay, lost of sight of the principle that the judicial forums should be rather slow to interfere in the matters where an expert body has taken a decision (that too of interim nature) unless the compelling reasons demand interference.
- Amit Agrawal