SEBI Acted Against Shell Companies ‘Without Any Investigation’: SAT Order
No investigation, no urgency says SAT of SEBI’s shell companies order.
The Securities Appellate Tribunal granted relief to two companies, J Kumar Infraprojects Ltd. and Prakash Industries Ltd., by ordering SEBI to lift trading restrictions on their shares.
SAT’s order states that the Ministry of Corporate Affairs’ June 9 letter to market regulator Securities and Exchange Board of India merely required it to investigate and determine if 331 companies identified by the MCA were “shell companies”.
As rightly contended by counsel for appellants, letter addressed by MCA on 09.06.2017 merely required SEBI to investigate as to whether the 331 companies named therein which were suspected to be shell companies, were in fact shell companies and whether the said companies had any credentials/ fundamentals and if so SEBI was required to take action in accordance with SEBI Act and the regulations framed thereunder.SAT Order
The tribunal found that SEBI did not conduct any investigation before taking action against the suspected shell companies and ordering the stock exchanges to suspend trading of their shares on a daily basis.
SAT’s order points to the two-month gap between the MCA order to SEBI and SEBI’s action against the shell companies, and suggests there was no urgency to justify the lack of investigation.
Even if the letter of MCA dated 09.06.2017 was considered by SEBI to be a direction given for implementation without investigation, very fact that SEBI took nearly two months to comply with the directions given by the MCA clearly shows that there was no urgency in issuing the impugned communication without even investigating the credentials/ fundamentals of those companies.SAT Order
As a result, SAT stayed SEBI’s August 7 directive ordering trading restrictions on the shares of J Kumar Infraprojects and Prakash Industries, two of the 162 listed companies on MCA’s list of 331. The tribunal also ordered the stock exchanges to immediately reverse the trading restrictions imposed on the two companies.
SAT’s order also clarifies why SEBI’s directive was not an administrative order but a quasi-judicial one.
When the two companies approached SAT for relief from the SEBI imposed restrictions the regulator argued that as its directive was an administrative one SAT had no jurisdiction over it. But SAT disagreed. On grounds that SEBI had given a specific direction in respect of only 331 companies and not issued a general direction in the interests of investors or securities market.
Since the impugned communication which is approved by the Whole Time Member of SEBI seeks to suspend the trading in the securities of the appellants, on day to day basis the impugned communication is in effect referable to a quasi-judicial order passed under Section 11(4) of SEBI Act and not an administrative order passed under Section 11(1) of the SEBI Act.SAT Order
Soon after SAT’s order, the Bombay Stock Exchange and National Stock Exchange issued circulars saying the shares of J Kumar Infraprojects and Prakash Industries will be available for trading with effect from August 11.