We do not guarantee result in litigation – why…

We do not guarantee result, one way or the other, in litigation. In fact no one can. Why ….. keep reading.

The out come of litigation depends upon a lot many factors like facts, legal position, manner of presenting the case, the efficiency and skill of the advocates, the care taken by the clients in presenting all relevant facts and the understanding capacity, personal beliefs/prejudices and philosophy, integrity and impartiality of Judges. Consider this :

A litigant may win in the trial court, but may loose in the first appeal; may win in appeal but loose in second appeal. Or a litigant may loose at trail and first appellate court but win at the second appellate court. The hierarchy of appeals, revisions and reviews may lead to reversal and further reversal.

If litigating before tribunals (quasi courts), chances are Judges are not trained or experienced. Also there may not be sufficient number of Judges at tribunal (which is common even for Courts in India). Add to that the lack of judicial discipline like a Judge fully aware of the fact that she/he is retiring, still continues to hear matters and may even reserve orders for pronouncing at a later date. And before his last date of retirement may not be able to pronounce the orders which were reserved. In such situation, litigant need to wait for reconstitution of the bench of tribunal and then hearing starts again from the beginning. All this at the cost of the litigant.

This leads to a lot of uncertainty and if any one tells you or promises about certainty of result and if you know what is stated here … you know there is no guarantee of result in litigation.

Also remember that Judges are first human being like us. And, like us, they are bound to be guided by self compass of “good person” and hence biased. To know more on ‘good person’, check Dolly Chugh’s TED Talk – which was named one of the 25 Most Popular TED Talks of 2018.

If you want to know how judges decide the cases, search on internet “Nature of the Judicial Process”.

Whether SFIO needs to complete the investigation within the time specified by the Central Govt.?

The Apex Court held that the period that the Central Govt. may prescribe to complete investigation u/s.212(3) is directory and no fixed period is provided for completion of investigation by SFIO; transfer of investigation by other agencies to SFIO u/s.212(2) of the Companies Act 2013 is irrevocable; when accused is directed to remand by a competent court in exercise of judicial function then the same cannot be challenged by writ of habeas corpus; and about territorial jurisdiction of High Court held that even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of the Companies Act 2013, the High Court ought not to have entertained the writ petition.

Hon’ble Supreme Court in  SFIO vs. Rahul Modi and Another etc. 2019 SCC OnLine SC 423 vide judgement dt. 27/03/2019:

Factual matrix:

a) The investigation into the affairs of Adarsh Group of Companies and LLPs was assigned by the Central Government to SFIO vide Order dated 20.6.2018, per section 212(1)(c) of the Companies Act, 2013. This Order did stipulate in para 6 that the Inspectors should complete their investigation and submit their report to the Central Government within three months.

b) On 20.6.2018 itself, the Director, SFIO appointed investigating officers.

c) The period of three months expired on 19.09.2018. However, the investigation was not over.

d) The proposal to arrest three accused persons was placed by the Investigating Officers before the Director, SFIO and after being satisfied in terms of requirements of Section 212(8) of 2013 Act approval was granted by Director, SFIO on 10.12.2018.

e) After they were arrested on 10.12.2018, the accused were produced before the Judicial Magistrate, Gurugram, Haryana, who by his order dated 11.12.2018 remanded them to custody till 14.12.2018 and also directed that they be produced before the Special Court, Gurugram on 14.12.2018.

f) On 13.12.2018 a proposal seeking extension of time for completing investigation in respect of 57 cases including the present case was preferred by SFIO before the Central Government.

g) On 14.12.2018 the Special Court, Gurugram remanded the accused to custody till 18.12.2018.

h) On the same date i.e. on 14.12.2018 the proposal for extension was accepted by the Central Government in respect of the Group and extension was granted upto 30.06.2019.

i) On 17.12.2018 the Writ Petitions were preferred, inter alia, seeking prayer of writ of habeas corpus, which came up for the first time before the High Court of Delhi on 18.12.2018.

j) On 18.12.2018 itself the accused were further remanded to police custody till 21.12.2018 by the Special Court, Gurugram.

k) On 20.12.2018 Hon’ble High Court at Delhi issued notice returnable on 31.1.2019 and proceeded to consider ad interim relief for immediate release of the accused. It held arrest as illegal detention which cannot be sanctified by subsequent remand orders passed by the concerned Magistrate. And pursuant to said order, the original Writ Petitioners were released on bail. This ad interim relief was challenged by the SFIO before Hon’ble Supreme Court in the present case.

  1. Whether the the date with reference to which the legality of detention can be challenged in a Habeas Corpus proceeding is the date on which the return is filed in such proceedings and not with reference to the initiation of the proceedings?

Held yes, as decided by the Federal Court in Basanta Chandra Ghose vs. King Emperor (1945)7 FCR 81. Similar question was considered in Kanu Sanyal vs. District Magistrate, Darjeeling and Others (1974) 4 SCC 141. The law is thus clear that “in Habeas Corpus proceedings a Court is to have regard to the legality or otherwise of the detention at the time of the return and not with reference to the institution of the proceedings”.

Hon’ble Supreme Court also considered its recent decision of division bench in Manubhai Ratilal Patel through Ushaben vs. State of Gujarat and others (2013) 1 SCC 314; in Saurabh Kumar vs. Jailor, Koneila Jail and another (2014) 13 SCC 436 and a bench of three learned judges in State of Maharashtra and Others vs. Tasneem Rizwan Siddiquee (2018) 9 SCC 745 and held that act of directing remand of an accused is thus held to be a judicial function and the challenge to the order of remand is not to be entertained in a habeas corpus petition.

  1. Whether Delhi High Court have territorial Jurisdiction?

Section 435 of the Companies Act 2013 contemplates establishment of Special Courts for the purpose of providing speedy trial of offences under the said Act. Section 436 then provides that “offences specified under sub-section (1) of Section 435 shall be triable only by Special Court established or designated for the area in which the Registered Office of the Company, in relation to which the offence is committed ……”. Soon after the arrest, the accused were produced before the Judicial Magistrate, Gurugram and then before the Special Court, Gurugram. Special Court, Gurugram would be competent to deal with the matter in terms of Section 436.

However, Learned counsel for the writ petitioners, however, contend that since the accused were arrested in Delhi, were kept in custody in Delhi, and the SFIO office being in Delhi, the High Court of Delhi was competent to entertain and consider the writ petitions so preferred by the writ petitioners. Reliance was placed by them on the decision of this Court in Navinchandra N. Majithia v. State of Maharashtra and others (2000) 7 SCC 640.

However, the Apex Court found that the judgement in Navinchandra Majithia, was not dealing with the matter.  And it relied upon Dashrath Rupsingh Radhod vs. State of Maharashtra and another (2014) 9 SCC 129 and found that “It is true that the decision in Dashrath Rupsingh Radhod 15 was in the context of a criminal complaint under Section 138 of the Negotiable Instruments Act and not while dealing with an issue of maintainability of a writ petition under Article 226 of the Constitution. It cannot, therefore, be said that in the present case, the High Court completely lacked jurisdiction to entertain the petition. However, since the challenge was with respect to the detention pursuant to valid remand orders passed by the Judicial Magistrate and the Special Court, Gurugram, in our considered view, the High Court should not have entertained the challenge. If the act of directing remand is fundamentally a judicial function, correctness or validity of such orders could, if at all, be tested in a properly instituted proceedings before the appellate or revisional forum. In the circumstances even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of 2013 Act, the High Court ought not to have entertained the writ petition. “

  1. The period within which an investigation report is contemplated to be submitted to the Central Govt. u/s.212(3) is mandatory or directory? And where the initial Order of arrest itself was invalid then can such illegality be sanctified by subsequent Order of remand?

Under sub-Section (3) where the investigation is so assigned by the Central Government to SFIO, the investigation must be conducted in the manner and in accordance with the procedure provided in the Chapter and a report has to be submitted to the Central Government within such period as may be specified. This provision contemplates submission of a report within the period as may be specified. The subsequent provisions then contemplate various stages of investigation including arrest under sub-Section (8) and that SFIO is to submit an interim report to the Central Government, if it is so directed under sub Section (11). Further, according to sub-Section (12), on completion of the investigation, SFIO is to submit the “investigation report” to the Central Government. This report under sub-Section (12) may lead to further follow up actions. Under sub-Section (13) a copy of the “investigation report” could be obtained by any concerned person by making an application in that behalf to the Court while under sub-Section (14) on receipt of said “investigation report” the Central Government may direct SFIO to initiate prosecution against the Company. And the provisions of Section 43(2) of the Limited Liability Partnership Act, 2008 do not postulate any such period. Hon’ble Apex Court finds that Section 212(3) of 2013 Act by itself does not lay down any fixed period within which the report has to be submitted. Even under sub-Section (12) which is regarding “investigation report”, again there is no stipulation of any period. In fact such a report under sub-Section (12) is to be submitted “on completion of the investigation”. There is no stipulation of any fixed period for completion of investigation which is consistent with normal principles under the general law. For instance, there is no fixed period within which the investigation under Criminal Procedure Code must be completed.

Again, sub-Section (2) of Section 213 of 2013 Act does not speak of any period for which the other Investigating Agencies are to hold their hands, nor does the provision speak of any re-transfer of the relevant documents and records from SFIO back to said Investigating Agencies after any period or occurring of an event (unlike Section 7 of the National Investigation Agency Act, 2008). The idea under sub-Section (2) is complete transfer of investigation. The transfer under sub-Section (2) of Section 213 would not stand revoked or recalled in any contingency.

“It is well settled that while laying down a particular procedure if no negative or adverse consequences are contemplated for non-adherence to such procedure, the relevant provision is normally not taken to be mandatory and is considered to be purely directory. Furthermore, the provision has to be seen in the context in which it occurs in the Statute. There are three basic features which are present in this matter:-

1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.

2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.

3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.”

And held that In the absence of any clear stipulation an interpretation that with the expiry of the period, the mandate in favour of SFIO must come to an end, will cause great violence to the scheme of legislation. If such interpretation is accepted, with the transfer of investigation in terms of sub Section (2) of Section 212 the original Investigating Agencies would be denuded of power to investigate and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation. That could never have been the idea. The only construction which is, possible therefore, is that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory.

And further held that therefore it cannot be said that in the instant case the mandate came to an end on 19.09.2018 and the arrest effected on 10.12.2018 under the orders passed by Director, SFIO was in any way illegal or unauthorised by law.

An arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped

The Hon’ble Supreme Court on 10 April 2019 in Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd. (Civil Appeal No. 6361/2019) ruled that when the Supreme Court or the High Court when considers an application under Section 11(4) to 11(6) under Arbitration and Conciliation Act, 1996 (Act or Arbitration Act) and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act, 1899 (Indian Stamp Act) to first impound the agreement or conveyance and see that stamp duty is paid before the agreement can be acted upon.

Thus, held that an arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped.

Facts in brief:

The respondent filed a petition under Section 11 of the Arbitration Act. The Bombay High Court allowed the Section 11 petition and appointed an arbitrator. The appellant challenged the same in the present appeal before the Supreme Court.

Issues before the Court:

The question before the Supreme Court was the effect of an arbitration clause contained in a contract which was not stamped.

This itself involved another question – whether the judgment of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] was still valid or not?

  • In SMS Tea Estate, the issue before the Supreme Court was whether an application under Section 11 of the Act can be rejected on the ground that the arbitration agreement was contained in a lease deed which was not sufficiently stamped.
  • Referring to Sections 33 and 35 of the Indian Stamp Act, the Supreme Court had ruled in that case that unless the stamp duty and penalty due on the instrument is paid, the Court cannot act upon the instrument, which means it cannot act upon the arbitration agreement also which is part of the instrument.

However, Section 11(6A) was introduced in the Arbitration Act by way of 2015 amendment. Hence, the question was whether Section 11 (6A) removed the basis of this judgment, so that the stage at which the instrument is to be impounded is not by the Judge hearing the Section 11 application, but by an arbitrator who is appointed under Section 11.

Decision:

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

SMS Tea Estates has taken account of the mandatory provisions contained in the Indian Stamp Act and held them applicable to judicial authorities, which would include the Supreme Court and the High Court acting under Section 11.

A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty is paid before the agreement, as a whole, can be acted upon.

Further, the Court held that the judgments contained in JMD Ltd. v. Celebrity Fitness India Pvt. Ltd., 2019 SCC OnLine Del 6483, B.D Sharma v. Swastik Infra Estate Pvt. Ltd., 2018 SCC OnLine Del 13279, Sandeep Soni v. Sanjay Roy, 2018 SCC OnLine Del 11169, and N.D Developers Pvt. Ltd. v. Bharathi, 2018 SCC OnLine Kar 2938  have not declared the law correctly, and are consequently, overruled.

Further, the Court also held that the recent Bombay High Court judgment (Full bench decided on 04.04.2019 ) in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors by Full Bench, has incorrectly decided on unstamped instrument.

Transition from High Court to NCLT, compromise, arrangement, winding-up and other matters

The Insolvency and Bankruptcy Code, 2016 (31 of 2016)

 

Key words of Preamble to the Insolvency and Bankruptcy Code, 2016 (IBC):-

  • reorganization and insolvency resolution of- corporate person, partnership firms and individuals

– in a time bound manner

  • for maximization of value of assets
  • to promote entrepreneurship

  • availability of credit

  • balance the interest of all the stakeholders (including alteration in the order of priority of payment of Government dues)

  • to establish an Insolvency and Bankruptcy Board of India (IBB or IBBI)

 

What happened and when:

 

Date What
28/5/2016 IBC notified
05/08/2016 IBB related provisions notified
19/08/2016 Provisions empowering CG notified
29/08/2016 Salary Rules notified
01/10/2016 IBB established with office at New Delhi

Mr. M. S. Sahoo Chairperson

Ex-officio of Ministry of Finance, Ministry of Corporate Affairs, Ministry of Law and Justice and the Reserve Bank of India notified

01/11/2016 Provisions empowering IBB notified.

Also, Schedules to IBC notified – change in Central Excise, Service Tax, SICA

15/11/2016 Regulations for IPA and IP notified

Also, Schedules to IBC notified – change in SARFAESI, LLP Act 2008, Companies Act 2013, Payment and Settlement Systems Act, 2007

21/11/2016 IBBI (IPA) Regulations 2016 notified w.e.f. 21/11/2016
23/11/2016 IBBI (IP) Regulations 2016 notified w.e.f. 29/11/2016
30/11/2016 Ss. 4 to 32 – Provisions relating to Insolvency Resolution Process for Corporate Persons notified w.e.f. 01/12/2016

S. 236 Offences under IBC, triable by Special Court under CA 2013 – notified w.e.f. 01/12/2016

S.237 IBC overrides all other laws – notified w.e.f. 01/12/2016

S.231 No injunction notified w.e.f. 01/12/2016

S.239(2)(a) to (f) – CG to make Rules for application to NCLT

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notified w.e.f. 01/12/2016

01/12/2016 Ss. 4 to 32 of IBC notified (except for individuals, partnership firm and voluntary liquidation)

S. 60 transitory – for Court to NCLT for Personal Guarantor

01/12/2016 IB (Application to Adjudicating Authorities) Rules, 2016 notified

For filing applications u/s.7,8,9 of IBC

   

 

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

 

As you might be aware that the Government of India has notified the substantive provisions of the IBC with effect from 01 December 2016. The Government has also issued notifications for repeal of the Sick Industrial Companies (Special Provisions) Act, 1985 (the ‘SICA’). Thus, SICA is repealed with effect from 01st December 2016 and all proceedings, reference, inquiry or appeal before BIFR and AAIFR stands abated with effect from 01st December 2016.

 

Further with effect from 01st December, 2016, all matters relating to winding-up (except voluntary winding-up) of Companies and Limited Liability Partnerships (LLPs) are dealt with by the NCLT. Thus, High Courts (and in some part of the Country District Courts) do not have jurisdiction for dealing with new cases of winding-up on and after 01 December 2016. Cases of Voluntary winding-up to be dealt with by the NCLT on and after 01 April 2017.

 

Further, with effect from 15th December, 2016, cases relating to compromise, arrangement and reconstruction (including merger, amalgamation and demerger), reduction of share capital, variation of shareholder’s rights, recovery of property of company in wrongful possession of employees or ex-employees of Company etc. would be dealt with exclusively by the NCLT.

 

To have birds eye view of the transitory provisions for transfer of cases from High Courts to the NCLT, a tabular presentation is given below:

 

TRANSITORY PROVISIONS

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

National Company Law Tribunal (NCLT).

 

Section 434 (1) (c) of the Companies Act 2013 – as amended by Eleventh Schedule of IBC and further amendment by Order S.O. 3676(E) dated 7th December 2016.

 

Subject Matter Transferred to NCLT Retained with High Court
Winding-up under supervision of Court No. Yes.
Voluntary winding-up (Sec.484 of CA 1956)

(Rule 4)

No.

New cases to be filed with NCLT w.e.f. 01 April, 2017 as per the IBC.

Note that provisions relating to voluntary winding-up under the Companies Act, 2013 are omitted by the IBC.

 

Yes, for cases filed upto 31st March 2017.
Winding-up for inability to pay (Sec. 433(e) of CA 1956)

(Rule 5)

Yes, where petition has not been served on the Respondent.

Such petition to be treated as application u/Ss. 7, 8 or 9 of IBC.

Petitioner to submit additional information, including proposed insolvency professional, within 60 days from date of notification of the Rules on 07 December 2016. Thus, by 05 February, 2017. Failing which petition shall abate.

Yes, where petition has been served on the Respondent
Winding-up by Court

[Sec. 433(a) and (f)]

(Rule 6)

Only those cases where the petition has not been served on the respondent. Yes, where the petition has been served on the respondent.
BIFR u/s.20 of SICA

[S. 434(1)(d) of CA 2013 r/w Rule 5(2)]

w.e.f. 01/12/2016 Sick Industrial Companies (Special Provisions) Repeal Act, 2003 brought to force, including section 4(b) thereof.

No.

 

Proceedings before BIFR and AAIFR abates.

However, reference within 180 days can be made to NCLT as per Companies Act 2013.

Yes, where opinion has been forwarded by BIFR and no appeal is pending and winding up is initiated u/s. 20 of SICA.
Arbitration, Compromise, arrangement and reconstruction

(Second proviso to Section 434(1)(c) of CA 2013 read with Rule 3)

Yes, except those cases reserved for orders for allowing or otherwise, i.e. final disposal (cases heard but orders reserved) w.e.f. 15th December, 2016 Those cases reserved for orders for allowing or otherwise (Cases heard and pronouncement of order is pending or reserved) w.e.f. 15th December, 2016
Reduction of Capital (Sec. 100 of CA 1956 – corresponding Sec. 66 of CA 2013) As above As above
Cancellation or variation of rights of shareholders (Sec. 106 of CA 1956  –corresponding sec. 48(1) of CA 2013) As above As above
To restrain fraudulent persons from managing companies (Sec. 203 of CA 1956) As above As above
For order that affairs of a Company ought to be investigated (Sec. 237 of CA 1956 – corresponding sec. 213 of CA 2013) As above As above
Applications under section 439 for the winding-up of a company, or under section 583 for the winding up of an unregistered company, or under section 584 for the winding-up of a foreign company

(Corresponding Sec.376 of CA 2013)

As above As above
Applications for a declaration under section 542 (XI Schedule) in the course of proceedings under section 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company

(Corresponding Sec.339 of CA 2013)

As above As above
Applications by a creditor or member under section 543 (XI Schedule) in the course of proceedings under section 397 or 398, to enquire into the conduct of any of the persons mentioned in section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(Corresponding Sec.340 of CA 2013)

As above As above
Applications under section 633(2) by an officer of a company for relief.

(Corresponding Sec.463 of CA 2013)

As above As above
Applications under section 560(6) to restore a company’s name to the Register of Companies

(Corresponding Sec.248 of CA 2013 – does not contain similar provision)

As above As above
Applications under section 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(No corresponding provision under CA 2013)

As above As above

 

All proceedings transferred from High Court to NCLT, to be dealt with as per the Companies Act, 1956 and the Company (Court) Rules, 1959. [Third proviso to Section 434(1)(c) of the Companies Act 2013].

All proceedings transferred from High Court to NCLT, to be dealt with from the same stage as were before their transfer. [Section 434(1)(c) of the Companies Act 2013].

Real Estate (Regulation and Development) Act, 2016

Real Estate (Regulation and Development) Act, 2016 came into force from May 1, 2016.

Ministry of Housing & Urban Poverty Alleviation, has notified 69 of the total 92 sections of the Act. The remaining 22 Sections are yet to be notified relates to the functions and duties of promoters, rights and duties of allottees, prior registration of real estate projects with Real Estate Regulatory Authorities, recovery of interest on penalties, enforcement of orders, offences, penalties and adjudication, taking cognizance of offences etc.

Rules under the Act have to be formulated by the Central and State Governments within a maximum period of six months i.e by October 31,2016 under Section 84 of the Act.

Real Estate Regulatory Authorities and Real Estate Appellate Tribunals are to be setup within one year, i.e. by 30 April 2017.

Regulatory Authorities, upon their constitution would get three months time to formulate regulations concerning their day-to-day functioning.

Early setting up of Real Estate Regulatory Authorities with whom all real estate projects have to be registered and Appellate Tribunals for adjudication of disputes is the key for providing early relief and protection to the large number of buyers of properties. These Authorities decide on the complaints of buyers and developers in 60 days time.

Until establishment of Real Estate Regulatory Authorities, Governments may designate any of its officer preferably Secretary of the Department dealing with Housing, as the interim Regulatory Authority.

Under the directions of Shri M.Venkaiah Naidu, Minister of Housing & Urban Poverty Alleviation, a Committee chaired by Secretary (HUPA) has already commenced work on formulation of Model Rules under the Act for the benefit of States and Union Territories so that they could come out with Rules in quick time besides ensuring uniformity across the country. The Ministry will also will come out with Model Regulations for Regulatory Authorities to save on time.

What is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practice?

The Supreme Court of India, in its judgement in case of SEBI v. Kishore R. Ajmera delivered on 23 Feb. 2016, dealt with this question.

Facts in brief:
A broker with his sub-broker were allegedly involved in creation of artificial volumes in an illiquid scrip of Malvica Engineering Ltd, who matched volumes for their two related clients. SEBI whole-time member held the broker vicariously liable for conduct of sub-broker and ordered suspension for four months.

Aggrieved Broker filed appeal before Hon’ble Securities Appellate Tribunal (SAT). And SAT by its order dates 05th February 2008 held that in the absence of any direct proof or evidence showing the involvement of the sub-broker in allegedly matching the trades and thereby creating artificial volumes of trading resulting in unnatural inflation of the price of the scrip, the charges are not substantiated. The penalty imposed was accordingly interfered with.

Against this order, SEBI filed appeal before Hon’ble Supreme Court.

The Apex court took up all similar appeals viz. SEBI v. Ess Ess Intermediaries Pvt. Ltd., SEBI v. Rajendra Jayantilal Shah and SEBI v. Rajesh N. Jhaveri where allegations of synchronized trades in Adani Export Ltd. were found and monetary penalties were imposed. And in appeal, SAT had taken the view by order dated 19th June 2013 that the allegations of fraud under the FUTP Regulations, 2003 can be established only on the basis of clear, unambiguous and unimpeachable evidence. The Apex court also took up SEBI v. Networth Stock Broking Ltd.’s appeal, where allegation of circular trading in scrip of G.G. Automotive Gears Ltd. was involved. SEBI held broker liable vide order dated 27th December 2011. In appeal, SAT took the same view as in earlier case.

Applicable legal principle:

The Apex court narrated “It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

Held:

Applying above principle of law to facts of the cases before it, Hon’ble Supreme Court opined that while proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the concerned brokers to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s).

Hon’ble court while agreeing that the screen based trading system keeps the identity of the parties anonymous, however opined that it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. And it observed that direct proof of such meeting of minds elsewhere would rarely be forthcoming. Hence,

the test is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned.

However, Prosecution under Section 24 of the SEBI Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt.

Hon’ble Court also observed

“The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.

The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations.

The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution. Beyond the same, persistent trading would show a deliberate intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in.”

The transactions were notable in that volume of trading in such scrips was usually minimal. The Court opined in the absence of direct substantive evidence, courts can take note of immediate and proximate facts and circumstances surrounding the events on which the charges are founded to reach a reasonable conclusion. As such, the test would be: “what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

On the facts of the case, though voluminous trading of illiquid scrips was not impermissible per se, the Bombay Stock Exchange had cautioned against the same and asked traders to exercise caution in case of high volume of trading. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a it could be reasonably concluded that there was a concerted effort to indulge in synchronized trades, which resulted in large volumes of fictitious trading, culminating in an unnatural rise in hiking the price of the scrips. By the overall conduct of brokers and their transactions could the court infer not only a lack of due care and caution but also a deliberate intention to indulge in trading beyond forbidden limits.

Accordingly orders of SAT were set aside and orders of SEBI were restored.

Hon’ble Supreme Court observed (Obiter Dicta) “The different Regulations including the Regulations that prescribe the procedural course, namely, SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations 2002 and the successor Regulation i.e. SEBI (Intermediaries) Regulations 2008 contain identical and parallel provisions with regard to imposition of penalty resulting in myriad provisions dealing with the same situation. A comprehensive legislation can bring about more clarity and certainty on the norms governing the security/capital market and, therefore, would best serve the interest of strengthening and securing the capital market.”

What can be action by SEBI for not making public announcement, after acquiring shares from capital market?

What can be action by SEBI for not making public announcement, after acquiring shares from capital market?

This is the issue many would have in mind, particularly in minds of promoters who are active in capital markets.

GMR Holdings Pvt Ltd (‘GMR’) is promoter of Parrys Sugar Industries Ltd (‘Parrys), whose shares are listed on stock exchange.

GMR along with person acting in concert (‘PAC’) acquired 2.58% of equity shares of Parrys between 6th May 2009 to 11th May 2009, through bulk deal (i.e. acquisition/sale of more than 0.5% of a target company’s share capital on a normal market segment on a single day per SEBI Circular of 14 January 2004). And from 29 April 2009 to 27 May 2009 it acquired 4.07% shares of Parrys. However no public announcement was made, as required under regulation 11(2) of the SEBI Takeover Regulations, 1997.

SEBI came to know about it from the shareholding pattern filed by several companies, including Parrys and certain observations made by the Bombay Stock Exchange. There upon SEBI conducted an examination of scrip of Parrys. Having found contravention of SEBI Takeover Regulations 1997, SEBI initiated adjudication under section 15H(ii) of the SEBI Act, 1992 by appointing adjudication officer (‘AO’) on 26 March 2014.

AO issued common show cause notice on 08 July 2014 against GMR and PAC for holding inquiry. After seeking several extension of time to reply, noticees filed reply with SEBI on 15 Sep. 2014.

AO granted opportunity of personal hearing to noticees on 14 December 2014, when Authorised Representative (‘AR’) of the noticees made representation before AO.

Broadly AR submitted that acquisition of 4.08% of shares of Parrys were within the limit of creeping acquisition of 5% permissible to it under the second proviso to Regulation 11(2) of the SEBI Takeover Regulations, 1997. And per SEBI Circular no. CFD/DCR/TO/Cir-1/2009 /06/08 dated 06 August 2009 acquirer who holds between 55% and 75% of the shares or voting rights may acquire additional shares/voting rights upto 5% in target company in one or more tranches, without restriction on time frame within which the same can be acquired. This circular, according to AR, permitted to acquire beyond 0.5% on a single day. AR also submitted that acquiring more than 0.5% on a single day was due to inadvertent calculations. And further, AR submitted that just because GMR and its Director were promoter of Parrys, they cannot be treated as PAC.

AO noted that though the acquisition of 4.08% was within the limit of acquisition of 5% under second proviso to Regulation 11(2), it does not exempt acquisition made through bulk deal/ block deal/ negotiated deal or preferential allotment, as stated in the said proviso. AO also did not agree with submission of AR on circular dated 06 August 2009 as the said circular stated “subject to the conditions as specified in this newly inserted proviso …” and observed that the conditions refers to no exemption if acquistion is made through bulk deal / block deal or negotiated deal or preferential allotment. AO also stated that promoter group is a homogenous class and therefore the entire group is considered to have acted together unless proved otherwise and relied upon decision of Hon’ble Securities Appellate Tribunal in the case of Rajesh Toshniwal v. SEBI & Ors dated 01 June 2012.

Finally considering judgement of Hon’ble Supreme Court of India in Swedish Match AB & Anr v SEBI dated 25 August 2004 – (2004) 11 SCC 641, that except in a situation which would bring the case within one or the other ‘exception cause’, the requirement of making public announcement under Regulations 10, 11 and 12 cannot be dispensed with. Thus, AO held that noticees were required to make public announcement in view of acquisition of shares of Parrys in bulk deal.

AO relying on Hon’ble Supreme Court of India’s decision in SEBI v. Shri Ram Mutual Fund (2006) 5 SCC 361 which held that intention of parties for non-compliance of statutory obligation under the SEBI Act and Regulations are not relevant and penalty is attracted as soon as the same are violated. AO imposed penalty of Rs.25 lakhs on noticees collectively.

However the AO despite observing the failure of noticees in making public announcement and loss of exit opportunity to the shareholders at the relevant time, did not mentioned / ordered about making public announcement with interest for the delayed period !

Debenture Trustee penalised by SEBI

SEBI alleged that United Bank of India holding certificate to act as Debenture Trustee violated following:
1) Regulations 13(a), 13A (b), 14, 15(1)(a) and 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993,
2) Clause 4 & 19 of Code of Conduct read with Regulation 16 and Regulation 21 (1) of SEBI (Debenture Trustee) Regulations, 1993,
3) Regulations 15(2) and 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008,
4) SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007; and
5) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines.

SEBI (Adjudicating Officer) decision dated 10 September 2015.

Facts:

SEBI’s inspection team perused the records and documents of the Debenture Trustee for its various conduct since 1992 onwards. Inspection revealed certain deficiencies. SEBI found reply of the debenture trustee as not satisfactory and hence proceeded with adjudication proceedings.

Alleged violations were:

1) Regulation 13A (b): had lent loans to the issuer company for whom it has acted as Debenture Trustee.

Reply: It was having transactions prior to acting as Debenture Trustee. It continued to act Debenture Trustee though no new assignments were accepted from the borrower. All debentures were repaid. It acted without any ulterior motive.

SEBI did not accept the reply.

 

2) Violation of Regulation 23(4) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 and SEBI Circular No. MIRSD/DPS III/Cir-11/07 dated August 06, 2007.

Debenture Trustees are required to disseminate all information and reports on debt securities, including compliance reports filed by the issuers, to the investors and to the general public by placing them on their website.

Reply: Half Yearly Report on Debenture Trustee activities for the half year ended September, 2013 has been uploaded on its website on regular basis since September 2013 onwards.

SEBI noted that compliance was made from September 2013 onwards but violation for the prior period was found.

 

3) Violation of clause 4 & 19 of code of conduct read with Regulation 16 and 21(1) of SEBI (Debenture Trustee) Regulations, 1993.

Clause 4 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.

Clause 19 of code of conduct of Debenture Trustee Regulations states that a Debenture Trustee shall not make untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI.

Regulation 16 states that every Debenture Trustee shall abide by the Code of Conduct as specified in Schedule III.
Regulation 21 (1) of Debenture Trustee Regulations states that it shall be the duty of every director, officer and employee of the Debenture Trustee who is being inspected, to produce to the inspecting authority such books and other documents in his custody or control and furnish him with the statements and information relating to the Debenture Trustee within such time as the inspecting authority may require.

Reply: Debenture Trustee some relevant data were inadvertently quoted as it last accepted assignment of a listed entity in March 2002, due to very old periodicity. It also contended that difficulties were also faced while fetching data / information from the issuers considering the lapse of time in-between. There was no mala fide intention on its part.

SEBI did not accept the reply.

 

4) Regulation 13(a) of SEBI (Debenture Trustee) Regulations, 1993 – by delaying of entering into the written agreement with issuer company (after the opening of the subscription list for issue of debentures instead of before the opening).

Reply: Debenture Trustee stated that violation if of 2000-2002 and all debentures are repaid by issuer. Contravention is a one time off case. Henceforth will comply all regulations.

SEBI noted the violation.

5) Regulation 14 of SEBI (Debenture Trustee) Regulations, 1993 and Regulation 15(2) of SEBI (Issue and Listing of Debt Securities) Regulations 2008 – by not explicitly incorporating certain clauses in trust deed.

Reply: Issuer have repaid all issues of Debentures with interest on time.

SEBI noted the violation.

 

6) Clause 10.2.3 of the SEBI(Disclosure and Investor Protection) Guidelines – by delaying execution of the trust deed.

Reply: Debenture Trustee contended that all issues repaid by issuer and matter is fifteen years old and hence violation may be condoned.

SEBI noted the violation.

 

7) Regulation 15(1)(i) of SEBI (Debenture Trustee) Regulations, 1993.

Debenture Trustees required to exercise due diligence to ensure compliance of listing agreement by the issuer company and issuer companies did not submit the half yearly communication to the debenture holders and also to the stock exchanges.

Reply: Debenture Trustee had been following up with the Issuer for reports at regular Intervals. However, the Issuer did not bother to reply or provide reports barring on one occasion. In view of the non-cooperation from the Issuer and considering that the issues had been duly redeemed, the non-compliance may be condoned.

SEBI noted the reply.

 

8) Regulations 15(1)(a) of SEBI (Debenture Trustee) Regulations, 1993 – requires debenture trustees to call for periodic reports from body corporate, which it failed to obtain.

Reply: All the periodical reports from the issuer could not be obtained despite follow-up with the issuer from time to time. Evidence furnished.

SEBI noted the reply.

 

SEBI found that in first six out of aforesaid eight allegations, the Debenture Trustee has violated the legal requirements. And hence found Debenture Trustee liable for monetary penalty. Penalty of Rs. 2 lakh was levied.

CompAT set aside CCI order as informant not questioned rules of APFCC

Competition Commission of India (CCI) had imposed a penalty of Rs.12.89 lacs on Andhra Pradesh Film Chamber of Commerce (APFCC) for restricting exhibition of film produced by particular producer, for forcing its member to abide by its unfair rules and dictates.
Rules 4(ii)(j) and 52(a)(ii) read with Rule 52(b) framed by APFCC were found by CCI in violation of Section 3 of the Competition Act 2002 as they limit and restrict the producers for three years from the date of obtaining Censor Certificate to distribute movies to TV channels and electronic media to telecast.

Competition Appellate Tribunal (CompAT), in want of material evidence, set aside an order by the CCI.
CompAT was of the view that the exercise undertaken by the DG to go into the validity of Rules 4(ii)(j) and 52(a) and (b) was per se without jurisdiction because the informant had not questioned the rules on the ground that the same are anti-competitive and thus ultra vires the provisions of the Competition Act.

Further, according to CompAT, there was no evidence produced by the informant to prove that APFCC had prevented or obstructed the release of film ‘Mausam’ on the scheduled date. CompAT observed that CCI which was expected to objectively and independently analyse the facts and evidence collected by the DG during the course of investigation abdicated its duty and mechanically approved the findings recorded by the DG. It set aside the CCI order as it was found to be based on assumptions and not on evidences.

Andhra Pradesh Film Chamber of Commerce v. Cinergy Independent Film Service, [2015] Comp AT 719, decided on 14th October 2015

Supreme Court on creeping acquisition under Takeover Code

The judgement of the Hon’ble Supreme Court in Kosha Investments Ltd (delivered on 18 September 2015 summarised below) is of importance for several reasons, like:

  1. Wrong deed can creep up any time (in this case after 3 years by SEBI); and
  2. For SEBI takeover regulations, netting off in creeping acquisition is not allowed.

The appellant, Kosha Investments Ltd., acquired shares of another company Snowcem India Ltd. (hereinafter referred to as ‘SIL’) from one of the original promoters of SIL and thus itself became one of the promoters. An investigation by SEBI covered the period June 1999 to August 1999 when there was an initial upward movement in the price of shares of SIL and also substantial increase in the volume of their trade. As a result of such investigation the appellant faced charges in another proceeding under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and was also served with a show cause notice dated 14.11.2002 for alleged breach of provisions of Regulation 44 and 45(6) of the SEBI Takeover Regulations of 1997 read with provisions of Section 11 and 11B of the SEBI Act.

The proposed action under SEBI Takeover Regulations of 1997 was based upon report of investigation showing that appellant had consistently bought and sold shares of SIL prior to June 1999 and also after August 1999.

The plea of pledge raised by the appellant was found without any substance and only an attempt to conceal subsequent purchase. Hence, SEBI came to a conclusion that the appellant was already holding between 15% to 75% shares of the target company SIL and it could acquire additional shares of this company through creeping acquisition mode, that is, without public announcement only upto 5% of its paid up capital during the period of 12 months ending on 31st March 2000. However, by acquiring 11,36,700 shares of SIL during June 1999 to August 1999 it acquired shares constituting more than 5% of the paid up capital of SIL. For making such acquisition, the appellant was liable to make public announcement as required by Regulation 11(1) of the Regulations of 1997.

Since the appellant failed to do so, the Whole Time Member of SEBI held it guilty and on 27th January 2004 directed the appellant to make open offer and pay interest @15% p.a. from October 28, 1999 till the date of actual payment of consideration.

In appeal before Securities Appellate Tribunal (SAT) it was argued that KIL had not acquired 5% or more than 5% shares or voting rights in respect of shares of SIL at any point of time in the period of 12 months. He submitted that out of 11,36,700 shares which were purchased during June, 1999 to August, 1999 during the same period KIL also sold number of shares of SIL. And determining the shareholding of a person without netting off would give a distorted picture. And therefore the provisions of Takeover Code did not trigger. However, SAT disagreed.

In appeal from SAT, before Supreme Court also it was contended that SEBI failed to consider that the appellant was not only a promoter having more than 15% shares of SIL but it was also in the business of sale and purchase of shares which was being done simultaneously and hence exceeding the limit of 5% at any one point of time was immaterial unless on a net accounting it could be found that such ceiling of 5% had been violated by appellant on account of its retaining more than 5% shares of SIL at the end of a financial year.

Hon’ble Supreme Court observed “If the plea of appellant will be accepted then an acquirer can keep on violating Regulation 11(1) with impunity on as many occasions as he/it wants and avoid letting the public have the required knowledge through public announcements by simply making subsequent sale or transfer to another entity so as to reduce the so-called net acquisition in a financial year to within 5%. This interpretation will defeat the purpose of Regulation 11(1) and shall also render Regulation 14(1) otiose.”

The concept of permitting creeping acquisitions by permitting not more than 5% of the shares or voting rights in a company limits the period for such acquisition to a financial year ending by 31st March. But such concept does not dilute the requirement of making a public announcement within the time mentioned in Regulation 14(1) if the acquisition even if only once made and divested, is of more than 5% of shares or voting rights in the target company.

Appeal before Supreme Court of KIL failed and directed to pay Rs.50,000/- towards cost to SEBI.