SAT view affirmed by SC in Appeals filed by SEBI

SAT view affirmed by SC in Appeals filed by SEBI

The CEO and MD of Dynamatix Technologies Ltd. allegedly sold 51,000 shares of the Company in 2016 having inside knowledge of price-sensitive information, namely, the unaudited financial results of the quarter ending 30 September, 2016.

In this matter, the statutory appeals were instituted by the Securities and Exchange Board of India (SEBI) under Section 15Z of the Securities and Exchange Board of India (SEBI) Act 1992. The appeals arose out of the orders passed by the Securities Appellate Tribunal (SAT) whereby an interim order passed by 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 with Regulation 10 of the SEBI (Prohibition of Insider Trading) Regulations2015, was set aside.

By the interim order, the Whole Time Member quantified an amount ofRs3,83,16,230.73, 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 over unpublished price sensitive information.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 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 in the year 2016 having inside knowledge of price-sensitive information, namely, the unaudited financial results of the quarter ending 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 appeared 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

It was submitted by the respondent before the Tribunal, that there was no urgency in passing an ex-parte order against the respondent, regarding a trade done about three years ago and that the ex-parte action of the appellant in requiring a deposit during the pandemic was arbitrary.

Opposing this, the appellant had 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.

The Apex Court opined that in arriving at its conclusion in the impugned order, the Tribunal placed reliance on its earlier decision in North End Foods Marketing Pvt. Ltd. vs the Securities and Exchange Board of India (SEBI)and stated that as held in North End Foods Marketing Pvt. Ltd. (supra), there was no real urgency in the matter to pass an ex-parte interim order specially 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 extremely urgent matters.

In the instant case, no case of extreme urgency was found out which warranted the respondent topass 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 ) without considering the balance of convenience or irreparable injury.

It was observed by the Apex Court that the Tribunal, 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 inappropriate cases, observed that this should be exercised "only in extreme urgent matters".

The Hon'ble SC found no reason to take a view at variance with the conclusion of the Tribunal on thefacts of the case. By way of abundant caution, it was clarified that the Court was affirming the view on the facts which emerged from the record beforethe Tribunal.

Since the Court came 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 grounds that no urgency has been made out to sustain such an order, it was clarified that the interpretation which had been placed by the Tribunal on the powers of SEBI, particularly in paragraph 9 of the impugned order, should 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. With these clarifications, the appeals were accordingly disposed of.