Full Judgment Text
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal Nos 2981-2982 of 2020
Securities and Exchange Board of India .... Appellant(s)
Versus
Udayant Malhoutra ....Respondent(s)
J U D G M E N T
1 These statutory appeals have been instituted by the Securities and
1
Exchange Board of India under Section 15Z of the Securities and
2
Exchange Board of India Act 1992 . The appeals arise out of the orders
3
passed by the Securities Appellate Tribunal on 27 June 2020 and 23 July
2020. The Tribunal set aside an interim order dated 15 June 2020 passed
by the Whole Time Member of SEBI under Section 19 read with Sections
11(1), 11(4)(d), 11(4A), 11(5) and 11B of the SEBI Act read with
Regulation 10 of the SEBI (Prohibition of Insider Trading) Regulations
2015.
Signature Not Verified
Digitally signed by
Sanjay Kumar
Date: 2020.11.25
16:57:57 IST
Reason:
1 “SEBI”
2 “SEBI Act”
3 “Tribunal”
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2 By the interim order, the Whole Time Member quantified an amount of
Rs 3,83,16,230.73, being the notional loss sought to be avoided on
account of trades carried out by the respondent in the scrips of Dynamatic
Technologies Ltd over unpublished price sensitive information. The
respondent was directed by the Whole Time Member to credit the amount
into an Escrow Account.
3 For the purpose of the present appeals, the facts lie in a narrow compass.
The respondent is the Chief Executive Officer and Managing Director of
the Company in question. It was alleged that he had sold 51,000 shares of
the Company on 24 October 2016 having inside knowledge of price
sensitive information, namely, the unaudited financial results of the quarter
ending on 30 September 2016. It was alleged that the financial results
were approved by the Board of Directors on 11 November 2016, upon
which the price of the scrips of the Company sustained a drastic reduction.
The allegation against the respondent was that being in possession of
price sensitive information and being a connected person, he had sold the
shares and had, thus, made a notional gain or averted a notional loss.
The sales made by the respondent were the subject matter of an
investigation in 2017. It appears from the record that the investigating team
called for information from the respondent on 28 November 2019. The
Whole Time Member passed an ex parte order on 15 June 2020.
4 Before the Tribunal, it was urged by the respondent that there was no
urgency in passing an ex-parte order against the respondent, regarding a
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trade done about three years ago and that the ex-parte action of the
appellant in requiring a deposit during the pandemic is arbitrary. Opposing
this, the appellant alleged that the reason for passing an ex-parte order
was that there was a possibility of a diversion of the notional gain made by
the respondent. In arriving at its conclusion in the impugned order, the
Tribunal placed reliance on its earlier decision in North End Foods
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Marketing Pvt Ltd v Securities and Exchange Board of India . In
paragraph 11 of the decision, the Tribunal held as follows:
“11. As held in North End Foods Marketing Pvt. Ltd. (supra) there is
no real urgency in the matter to pass an ex-parte interim order
especially during the pandemic period. There is no doubt that
SEBI has the power to pass an interim order and that in
extreme urgent cases SEBI can pass an ex-parte interim order
but such powers can only be exercised sparingly and only in
extreme urgent matters. In the instant case, we do not find any
case of extreme urgency which warranted the respondent to
pass an ex-parte interim order only on arriving at the prima-
facie case that the appellant was an insider as defined in the
SEBI (Prohibition of Insider Trading) Regulations, 2015 ('PIT
Regulations' for short) without considering the balance of
convenience or irreparable injury.”
5 On the facts before it, the Tribunal, in our view, was correct in coming to
the conclusion that since the investigation was pending since 2017 and
information had been supplied on 28 November 2019, there was no
urgency for passing an ex-parte interim order of the nature that was issued
by the Whole Time Member. It was, in this background, that the Tribunal,
while affirming the power of SEBI to pass an ex parte interim order in
appropriate cases, observed that this should be exercised “only in extreme
urgent matters”.
4 Appeal 80 of 2019 decided on 12 March 2019
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6 On the facts, as they have emerged before this Court, we do not find any
reason to take a view at variance with the conclusion of the Tribunal on the
facts of the case. By way of abundant caution, we clarify that we are
affirming the view on the facts which have emerged from the record before
the Tribunal.
7 Mr Tushar Mehta, learned Solicitor General, however, submitted that the
reason why SEBI has been constrained to file the appeals is because of
certain observations contained in the impugned order, on question of law
bearing on the statutory powers of SEBI. In particular, the attention of the
Court was drawn to the following paragraph:
“9. ...We are of the opinion that no amount towards disgorgement
can be directed to be deposited in advance unless it is
adjudicated and quantified unless there is some evidence to
show and justify the action taken. An order of the like nature
can only be passed during the pendency of the proceedings
and such orders cannot be passed at the time of initiation of
the proceedings.”
8 Section 11(4) of the SEBI Act confers power on SEBI in the following
terms:
“11. Functions of Board:
*
(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) *
(b) *
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(c) *
(d) impound and retain the proceeds or securities in respect of any
transaction which is under investigation;”
9 Since we have come to the conclusion that the Tribunal was on the facts of
the case correct in setting aside the ex-parte order of the Whole Time
Member on the ground that no urgency has been made out to sustain such
an order, it is necessary for this Court to clarify that the interpretation which
has been placed by the Tribunal on the powers of SEBI, particularly in
paragraph 9 of the impugned order, which has been extracted above, shall
not be cited as a precedent in any other case. The order passed by the
SEBI must necessarily be in accord with Section 11(4) of the SEBI Act.
10 With the above clarification, we affirm the view of the Tribunal on the facts
as they have emerged. The appeals are accordingly disposed of.
…………...…...….......………………........J.
[Dr Dhananjaya Y Chandrachud]
…..…..…....…........……………….…........J.
[Indu Malhotra]
…..…..…....…........……………….…........J.
[Indira Banerjee]
New Delhi;
November 18, 2020
-S-
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