Friday, December 24, 2010

Allahabad High Court Stay in the SEBI-Sahara Case

(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.

- 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.
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.

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

6 comments:

Somasekhar Sundaresan said...

I have a divergent view. Merely because the power to pass ex parte orders exists, it is not correct to use such powers as a rule, with according a prior hearing as an exception.

For example, it is now next to impossible to see the Bombay High Court to pass ex parte orders, since the culture of the court is do its best to hear parties before passing orders. Of course, if there were a grave emergency necessitating intervention, the court would step in. That is the hallmark of a mature forum.

Unfortunately, SEBI has made the passing of ex parte orders the norm with a prior hearing being an exception. Sections 11 and 11B of the SEBI Act, 1992 clothe SEBI with powers, but the usage of such a power regardless of the need for an emergent intervention is not the correct use of powers. Indeed, a court has to weigh this factor while granting an injunction in a challenge to SEBI's usage of such power - particularly if the use of such power has serious civil consequences.

Moreover, while intervening as a measure of interim relief, for forming a prima facie view, a court does not have to fully resolve all matters of merit. That is an exercise meant for the final hearing. When considering the grant of an interim relief, the court has to only look for whether there is a prima facie case (can be perceived as "superfluous" but indeed it is only a prima facie consideration that has to be given), whether grave and irreparable harm would be caused but for the intervention sought, and whether the balance of convenience would be in favour of granting a stay or in denying a stay.

As a general matter, it is time SEBI developed internal norms on when it should intervene on an ex parte basis, without granting a hearing to the parties that would be affected by the order sought to be passed. Usage of the power to pass ex parte orders should be used in the rarest of rare cases, where SEBI can demonstrate that failure to intervene would cause grave harm and injury to the securities market, and that the balance of convenience is in favour of intervention rather than refraining from intervention. Of course, SEBI too has to make out a prima facie case.

Vijay said...

I would agree with Somasekhar on the principles applicable for granting ex-parte orders. But the same in my humble opinion would not be applicable to the Sahara case. In fact in this case SEBI had sought for vital information which was not provided by SAHARA group of companies. Evasive reply was given on the manner in which debentures are being issued and the number of investors who have subscribed to such debentures. If SEBI's jurisdiction in dealing with the matter itself was in doubt the same should have been put forth categorically before SEBI by Sahara. That does not seem to be the case here.

In the present case by granting stay on the operation of order of SEBI, Sahara is empowered to issue debentures and keep on collecting public money which itself is against investor/public interest. The Court by staying the order has not weighed the balance of convenience properly which clearly exists in favour of SEBI as investor and public interest is paramount. This is also because the debentures issued by SAHARA would further perpetrate the non-compliance and create a bigger scam.

The matter could have been decided on the grounds of jurisdiction which is the only contention available to SAHARA. If SEBI has jurisdiction is the conclusion to which HC is to arrive at, then interests of public stand protected by order of SEBI.

Somasekhar Sundaresan said...

@ Vijay,

Your assumption is that the SEBI Order is a good one on merits, a decision that the High Court could only come to eventually after hearing all parties to the case. Interlocutory relief is about considering what would cause greater prejudice and harm. Look at it from the Court's perspective: If Sahara were to be held to be right, banning them from doing something they have been doing for ages would cause terrible injustice and hardship to them. If Sahara were to be held to be wrong, it could be prospectively stopped from persisting with its activities. When faced with a situation of having to decide on an interim measure, courts cannot assume that one of the two parties is right on merits. The Court can only consider if there is a prima facie case made out before it. The apparent lack of jurisdiction is another strong ground for grant of interim relief. The balance of convenience, of course, if also a very important factor, which in this case seems to have weighed in Sahara's favour.

What the court would eventually decide is a matter it would deal with after a detailed hearing. Criticism of its position is of course welcome, but judging merits beforehand, in judging the court's action, is unfair.

V. Umakanth said...

This news report indicates that SEBI has preferred an appeal to the Supreme Court against the judgement of the Allahabad High Court (http://www.moneycontrol.com/news/business/sebi-moves-scsahara-group-matter_510020.html).

Anonymous said...

"Normally, the Supreme Court does not interfere with the discretion exercised by the High Court to pass an interim order in a pending matter" - Also noted explicitly in (2010)8 SCC 110. It appears that in this case too Supreme Court has refused to interfere with the stay order granted by the Allahabad High Court. See report at http://www.lawetalnews.com/NewsDetail.asp?newsid=3204

Anonymous said...

Order of the Supreme Court:

Since the impugned order is an ad-interim order and as the matter is listed for peremptory hearing on 12th January, 2011, we see no reason to interfere at this stage. However, in view of the stakes involved including protection of the investors), we are directing the High Court to proceed with the hearing of the case on day-to-day basis from 12th January, 2011, without adjourning the case. We are directing SEBI and ROC to file its counter affidavit by 7th January, 2011, and copy be furnished immediately to Respondent No.1 herein.

We quote hereinbelow paragraph 32 of the impugned order of the High Court:


"As an interim measure, the operation of the impugned order contained in Annexure No.1 to the writ petition is stayed with liberty to SEBI to proceed with the inquiry but no final decision shall be taken. However, the Registrar of Companies/Central Government is directed to proceed with the controversy at their end, investigate in the interest to shareholders and submit a status report by the next date of listing. The petitioners shall provide all necessary required information to the Registrar of Companies in terms of notice dated 21st September, 2010 and 14th October, 2010 expeditiously say within three weeks.
In case Registrar arrives to the conclusion that it is a case of public company then, shall proceed in accordance to law and also inform the SEBI."

From the said paragraph, we find that the High Court has given liberty to SEBI to proceed with the inquiry. At the same time, the High Court has directed Respondent No.1 to give the names of the investors to ROC in terms of the notice dated 21st September, 2010 and 14th October, 2010. We make it clear that SEBI would also be entitled to call for any information which it deems fit, including the names of the investors who have invested in OFCD in the course of the inquiry. Mr. Sorabjee, learned senior counsel appearing for Respondent No.1, very fairly states that they agree to give information that SEBI will call upon them to furnish in the inquiry. However, it shall be given without prejudice to the rights and contentions in the pending matter.

Before concluding, we make it clear that we express no opinion on the merits of the case. We request the High Court to expeditiously hear and
decide the case.

The special leave petition is disposed of accordingly.