Securities Appellate Tribunal Comes Down Heavily On SEBI Twice In A Month
Referee displays the Red Card at a football match (Photographer: Graham Barclay/Bloomberg News)  

Securities Appellate Tribunal Comes Down Heavily On SEBI Twice In A Month

Two recent orders passed by the market regulator have prompted the Securities Appellate Tribunal to impose costs on the regulator, on grounds that the orders were ‘unjustified’ and based on ‘insufficient evidence’. Experts say the this imposition of penalty will improve the quality of Securities and Exchange Board of India’s orders.

Case Of Insufficient Evidence

In 2017, SEBI passed an ex-parte interim order against promoter-shareholder Sanjay Gupta of Supreme Tex Mart Ltd. A year later, this was confirmed by SEBI whole-time member, prohibiting Gupta from accessing the capital markets and disseminating messages or news in any form related to the securities market.

SEBI had conducted a preliminary examination in the scrips of Supreme Tex Mart in relation to bulk Short Messages Services which recommended trading in the company’s stocks. The entities sending these messages received payment from the company’s account.

During the period when the text messages were being sent, the scrip’s price increased and Gupta offloaded his stake at a higher price, SEBI had noted. It said Gupta was involved in making representations through these messages, and enticing investors to deal in the company’s shares. The whole-time member concluded Gupta had played a fraud and indulged in price manipulation in violation of the SEBI regulations.

On appeal, SAT overturned SEBI’s order, pointing out that despite overwhelming evidence to the contrary, the whole-time member upheld its earlier ruling.

The appellant tribunal noted that Gupta had been linked to the fraudulent transactions since he was allegedly a joint holder in the company’s bank account. The bank’s statement that the company’s account was not a joint account, that Gupta had resigned as director in 2013, and hadn’t isued any cheque on behalf of the company was ignored by the whole-time member, SAT pointed out.

No steps have been taken by the whole-time member to find out who are the authorised signatories who can transaction behalf of STML. No steps have been taken by the whole-time member to find out as to whether a joint account with a company can be opened in a bank or not. No steps were taken by the whole-time member to check the bank account opening form or the resolution of the Board of Directors to satisfy itself as to what kind of an account was opened by STML. 

The whole-time member should have prima facie established there was a causal linkage between Gupta and the manipulative increase in the price of the shares of the company through bulk SMSes, the appellate tribunal said.

Whole-time member has conveniently overlooked evidences which on the face of it is glaring and couldn’t be overlooked in a casual manner, SAT said.

“In our opinion, apart from the delay in disposal of the matter, the ex-parte order was confirmed mechanically without any application of mind and without considering the relevant documents. In our opinion, there was no shred of evidence to come to a prima-facie conclusion that the appellant was indulging in unfair trade practices with a manipulative intent to manipulate the price.”

SAT also expressed disdain that the matter was not disposed expeditiously. On this basis, the appellate tribunal imposed a Rs 50,000 penalty on SEBI to be paid to Gupta.

Senior Counsel Kevic Setalvad arguing on behalf of SEBI, made an appeal for waiver of the costs contending that such imposition of costs “would send a ripple down the throat of the respondent”. But SAT concluded that in the given circumstances of the case, cost is justified.

Case Of Unjustified Penalty

In the second case, the appellate tribunal reprimanded SEBI for unjustly penalising a former compliance officer of BGIL Films & Technologies Ltd.

The market regulator had imposed a penalty of Rs 50,000 on the company’s former compliance officer Pooja Mahna for alleged non-compliance in making disclosures under insider trading regulations.

SAT examined the evidence on record which showed Mahna wasn’t involved in the relevant board meeting for which the disclosure was required and was serving her notice period pursuant to resignation. The question of imposition of penalty for non-compliance doesn’t arise, SAT said.

“The imposition is wholly unjustified and cannot be sustained especially when it has also come on record that the chairman of the company had confirmed that the appellant was not involved in the board meeting”

The appellate tribunal went on to quash SEBI’s order. This is an important measure of accountability, independent counsel Somasekhar Sundaresan told BloombergQuint.

In the past, SAT has imposed costs, and it led to a sharp increase in quality of SEBI’s work. These developments must be seen in constructive light and embraced for improvement in processes.
Somasekhar Sundaresan, Independent Counsel 

SAT has reprimanded SEBI several times over procedural lapses, like not adhering to principles of natural justice etc, Vyapak Desai, partner at Nishith Desai Associates said. In fact, Desai added, a majority of SEBI rulings are overturned by SAT—what’s critical to note in these cases are the circumstances. Many former employees and directors who have resigned from a company get tied to litigation; hopefully these judgments will deter SEBI from pursuing such claims, he said.

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