SECURITIES AND EXCHANGE BOARD OF versus UDAYANT MALHOUTRA on 18 November 2020

1. These statutory appeals have been instituted by the Securitiesand Exchange Board of India[1] under Section 15Z of the Securities andExchange Board of India Act 1992[2]. The appeals arise out of the orderspassed by the Securities Appellate Tribunal[3 ]on 27 June 2020 and 23 JulyE2020. The Tribunal set aside an interim order dated 15 June 2020 passedby the Whole Time Member of SEBI under Section 19 read with Sections11(1), 11(4)(d), 11(4A), 11(5) and 11B of the SEBI Act read withRegulation 10 of the SEBI (Prohibition of Insider Trading) Regulations2015.

2. By the interim order, the Whole Time Member quantified anamount of Rs 3,83,16,230.73, being the notional loss sought to be avoidedon account of trades carried out by the respondent in the scrips ofDynamatic Technologies Ltd over unpublished price sensitive information.The respondent was directed by the Whole Time Member to credit theamount into an Escrow Account.

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3. For the purpose of the present appeals, the facts lie in a narrowcompass. The respondent is the Chief Executive Officer and Managing 1 “SEBI”

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Director of the Company in question. It was alleged that he had sold51,000 shares of the Company on 24 October 2016 having insideknowledge of price sensitive information, namely, the unaudited financialresults of the quarter ending on 30 September 2016. It was alleged thatthe financial results were approved by the Board of Directors on 11November 2016, upon which the price of the scrips of the Companysustained a drastic reduction. The allegation against the respondent wasthat being in possession of price sensitive information and being aconnected person, he had sold the shares and had, thus, made a notionalgain or averted a notional loss. The sales made by the respondent werethe subject matter of an investigation in 2017. It appears from the recordthat the investigating team called for information from the respondent on28 November 2019. The Whole Time Member passed an ex parte orderon 15 June 2020.

4. Before the Tribunal, it was urged by the respondent that therewas no urgency in passing an ex-parte order against the respondent,regarding a trade done about three years ago and that the ex-parte actionof 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 notionalgain made by the respondent. In arriving at its conclusion in the impugnedorder, the Tribunal placed reliance on its earlier decision in North EndFoods Marketing Pvt Ltd v Securities and Exchange Board ofIndia[4]. 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 interimorder especially during the pandemic period. There is no doubtthat SEBI has the power to pass an interim order and that inextreme urgent cases SEBI can pass an ex-parte interim orderbut such powers can only be exercised sparingly and only inextreme urgent matters. In the instant case, we do not find anycase of extreme urgency which warranted the respondent to passan ex-parte interim order only on arriving at the prima-facie casethat the appellant was an insider as defined in the SEBI (Prohibitionof Insider Trading) Regulations, 2015 (‘PIT Regulations’ for short)without considering the balance of convenience or irreparableinjury.”

4 Appeal 80 of 2019 decided on 12 March 2019

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A5. On the facts before it, the Tribunal, in our view, was correct incoming to the conclusion that since the investigation was pending since2017 and information had been supplied on 28 November 2019, therewas no urgency for passing an ex-parte interim order of the nature thatwas issued by the Whole Time Member. It was, in this background, thatthe Tribunal, while affirming the power of SEBI to pass an ex parteBinterim order in appropriate cases, observed that this should be exercised“only in extreme urgent matters”.

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6. On the facts, as they have emerged before this Court, we donot find any reason to take a view at variance with the conclusion of theTribunal on the facts of the case. By way of abundant caution, we clarifyCthat we are affirming the view on the facts which have emerged fromthe record before the Tribunal.

7. Mr Tushar Mehta, learned Solicitor General, however, submittedthat the reason why SEBI has been constrained to file the appeals isbecause of certain observations contained in the impugned order, onDquestion 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 disgorgementcan be directed to be deposited in advance unless it is adjudicatedand quantified unless there is some evidence to show and justifyEthe action taken. An order of the like nature can only be passedduring the pendency of the proceedings and such orders cannotbe passed at the time of initiation of the proceedings.”

8. Section 11(4) of the SEBI Act confers power on SEBI in thefollowing terms:F

“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, byan order, for reasons to be recorded in writing, in the interestsof investors or securities market, take any of the followingmeasures, either pending investigation or inquiry or oncompletion of such investigation or inquiry, namely:—

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SECURITIES AND EXCHANGE BOARD OF INDIA v.UDAYANT MALHOUTRA

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(d) impound and retain the proceeds or securities in respect ofany transaction which is under investigation;”

9. Since we have come to the conclusion that the Tribunal was onthe facts of the case correct in setting aside the ex-parte order of theWhole Time Member on the ground that no urgency has been made outto sustain such an order, it is necessary for this Court to clarify that theinterpretation which has been placed by the Tribunal on the powers ofSEBI, particularly in paragraph 9 of the impugned order, which has beenextracted above, shall not be cited as a precedent in any other case. Theorder passed by the SEBI must necessarily be in accord with Section11(4) of the SEBI Act.

10. With the above clarification, we affirm the view of the Tribunalon the facts as they have emerged. The appeals are accordingly disposedof.

Ankit Gyan

Appeals disposed of.

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