Delhi High Court Dismisses PIL Against Vanishing Companies: ‘Interest of Investors is Protected under Statutory Law’

Delhi High Court Dismisses PIL Against Vanishing Companies: ‘Interest of Investors is Protected under Statutory Law’

The Delhi High Court while disposing of a Public Interest Litigation (PIL) pertaining to the issue of delisting of securities without protecting the investors and praying for appropriate action against those who dupe such investors, observed that the statutory provisions appropriately provide for a robust mechanism to safeguard the interests of investors.

The division judges bench comprising of Chief Justice Satish Chandra Sharma and Justice Tushar Rao Gedela affirmed that there is a transparent legal mechanism in place to deal with the process of delisting of securities, including a remedy to an investor aggrieved by such delisting, under the Securities Contract (Regulations) Act, 1956 (for short SCRA).

The factual matrix of the case was that the Petitioner had a public interest litigation stating that he was espousing the cause millions of investors who are being duped by the unscrupulous promoters of the companies as the promoters of the companies vanish after siphoning off the hard-earned money of the investors.

The petitioner sought a direction to the Securities and Exchange Board of India (‘SEBI’) to direct Bombay Stock Exchange (‘BSE’) to make more stringent and effective alternative penal provisions against promoters and management of the errant listed companies. It was contended that a large number of companies had been suspended from continued listing by and that many of them had been de-listed without ensuring any protection to investors. The petitioner pleaded that an appropriate mechanism be put in place to take action against those who were duping the investors.

Opposing to the contentions forwarded by the petitioner, the SEBI vehemently asserted that an action had already been initiated against the vanishing companies. It was submitted that the Centre had set up a co-ordination and monitoring Committee which had arrived at a certain criterion for identifying a company as a vanishing company. The Union had also set up certain regional task forces for undertaking verification of compliance of criteria at the operational level.

The bench having heard the parties at length and on perusal of the records, disposed the matter with the consent of the parties at admission stage itself.

The bench on perusal of the provisions of the SEBI Act, 1992 stated that, “statutory provisions of law make it very clear that it is the duty of the SEBI to protect the interest of the investor in securities and to promote the development of, and to regulate the securities market by such measures as it thinks fit. Meaning thereby, the SEBI is empowered to take all such measures in the interest of investors and such measures may include regulating the business in stock exchange, registering and regulating the working of stock brokers, performing such functions and exercising such powers under the Provisions SCRA, as may be delegated by the Central Government.”

The bench asserted that SCRA confers ample power to any recognized stock exchange which is considered to be the first level regulatory for providing conditions for listing of securities with stock exchange and provides provisions for delisting of the securities and the mechanism to protect the interest of investors. The aggrieved investor can certainly prefer an Appeal before the Securities Appellate Tribunal (SAT) in case he is aggrieved in the matter of delisting of the security.

The bench further elucidated that under Rule 19 of the Securities Contract (Regulation) Rules, 1957 (‘Rules of 1957’) it provides for a requirement with respect to the delisting of securities on recognized stock exchange which empowers the stock exchange to suspend or withdraw admission to the dealings in the securities of a company for breach of or non-compliance of any of the conditions of admission to dealings or any other reason, to be recorded in writing.

“It is pertinent to note that Section 23(2) of the SCRA gives a special power to SEBI to penalize any person who contravenes the Provisions inter alia Section 21 or Section 21A or Section 22, and a punishment up to 10 years or a fine which may extend up to Rs. 25 crores can be inflicted,” added the bench.

Thus, in conclusion the Court held that the statutory provisions governing the field provides transparent mechanism of delisting the securities, adequate participation and/ or representation of public shareholders in the process of delisting was in place, and remedies were also available to the aggrieved investor in the matter of delisting.

In view of the above, the Court disposed the PIL.