Brd Securities Ltd vs The Securities And Exchange Board ...
2021 Latest Caselaw 6675 Ker

         IN THE HIGH COURT OF KERALA AT ERNAKULAM

                            PRESENT

              THE HONOURABLE MR.JUSTICE N.NAGARESH

THURSDAY, THE 25TH DAY OF FEBRUARY 2021/6TH PHALGUNA, 1942

                    WP(C).No.4939 OF 2020(N)


PETITIONER:

              BRD SECURITIES LTD.,
              HAVING ITS REGISTERED OFFICE AT
              DOOR NO.XIII/436,
              A 2, I FLOOR,
              BETHANY COMPLEX,
              KUNNAMKULAM,
              THRISSUR-680503,
              REPRESENTED BY ITS MANAGING DIRECTOR
              MR.WILLIAM VERGHESE CHUNGATH CHERU.

              BY ADVS.
              SRI.M.GOPIKRISHNAN NAMBIAR
              SRI.K.JOHN MATHAI
              SRI.JOSON MANAVALAN
              SRI.KURYAN THOMAS
              SRI.PAULOSE C. ABRAHAM

RESPONDENT:

              THE SECURITIES AND EXCHANGE BOARD OF INDIA,
              SEBI BHAVAN I,
              PLOT C4A-G BLOCK,
              BANDRA KURLA COMPLEX,
              MUMBAI-400051,
              REPRESENTED BY ITS CHAIRMAN/WHOLE TIME MEMBER.

              R1 BY ADV. SRI.RAJU JOSEPH (SR.)
              R1 BY ADV. SRI.K.M.JAMALUDHEEN

     THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 25-02-2021, THE COURT ON THE SAME DAY DELIVERED THE
FOLLOWING:
 WP(C) No.4939/2020
                                :2 :




                        JUDGMENT

~~~~~~~~~

Dated this the 25th day of February, 2021

The petitioner, a Non-Banking Finance Company,

has approached this Court challenging Exts.P1, P2 and P3

show-cause notices issued by the Securities and Exchange

Board of India. The petitioner seeks to declare that the

show-cause notices are ultra vires the provisions of the

Companies Act, 1956, the provisions of the Securities and

Exchange Board of India Act, 1992, and violates Article 14

and Article 19(1)(g) of the Constitution of India.

2. The petitioner states that they are a Public Limited

Company registered with the Reserve Bank of India (RBI).

The petitioner is a Non-Banking Finance Company (NBFC).

The Company is holding a Certificate of Registration from the

RBI as a NBFC under Section 45 of the Reserve Bank of India

Act, 1934. The petitioner is subjected to stringent monitoring WP(C) No.4939/2020

by its Auditors and RBI Inspectors. The petitioner has been

regularly filing its compliances and returns with all the

statutory authorities from time to time.

3. To augment its capital base and resources, the

petitioner made private placement of equity shares from time

to time. Such private placements were made to a very few

persons who are associated with the petitioner as

member/staff/borrower. Applications for equity shares were

given to specific persons. The Securities and Exchange

Board of India (SEBI) issued Ext.P8 letter dated 19.10.2017,

seeking information from the petitioner regarding alleged

deemed public issue. The respondent called for information

from the petitioner. The petitioner provided information and

documents to the respondent.

4. Being not satisfied with the explanation provided by

the petitioner, the respondent issued Ext.P1 show-cause

notice dated 05.04.2019. The petitioner gave Ext.P15 reply.

However, the respondent again issued Ext.P2 supplementary

show-cause notice on 12.12.2019. The petitioner submitted WP(C) No.4939/2020

Ext.P17 reply dated 02.01.2020. To the surprise of the

petitioner, the respondent again issued Ext.P3 show-cause

notice.

5. The learned Senior Counsel assisted by the

counsel for the petitioner, would contend that there has been

inordinate delay and laches in proceeding against the

petitioner. The petitioner made its first issue of private

placement in the year 2001. The last issue of private

placement resulting in the show-cause notice, was of the year

2010. The respondent has issued Show Cause Notice after

the expiry of nine years and it related to facts dating back to

19 years. The Apex Court in Government of India v. Citadel

Fine Pharmaceuticals, Madras and others [AIR 1989 SC

1771] has held that in the absence of any period of limitation,

the authority is required to exercise its powers within a

reasonable period of time. The Apex Court has reiterated the

said position in a number of subsequent judgments.

6. The belated initiation of investigation by the

respondent is highly prejudicial to the petitioner. During the WP(C) No.4939/2020

last 20 years, funds emanating from private placements have

been utilised for business. The petitioner has been subjected

to constant inspections by the RBI. The unreasonable delay

in initiation of the investigation would be highly arbitrary,

contended the learned Senior Counsel.

7. The learned Senior Counsel would further argue

that the notice issued to the petitioner is vague. The

respondent has not disclosed the proposed penalty. For

issuing a show-cause notice, the Authority should disclose the

material grounds necessitating action and penalty/action

proposed to be taken. Both the elements are absent in

Exts.P1 to P3. The petitioner has not made any public issues

nor has published any prospectus, advertisement or pamphlet,

while making private placements.

8. Issuance of private placements was promptly

intimated to the competent authority, namely Registrar of

Companies, filing returns. Investigation started after 17 years

and show-cause notices are issued after 18 years. A reading

of the show-cause notices would show that the respondent WP(C) No.4939/2020

has pre-judged the issue, which tendency is condemned by

the Hon'ble Apex Court in the judgment in Oryx Fisheries

Private Limited v. Union of India and others [(2010) 13

SCC 427]. The Investigator has become Adjudicator. The

jurisdictional facts required to invoke Section 67(3) are absent

in this case, and hence the law laid down by the Apex Court in

Arun Kumar and others v. Union of India and others

[(2007) 1 SCC 732], Carona Ltd. v. Parvathy Swaminathan

& Sons [(2007) 8 SCC 559] and Harrisons Malayalam Ltd.

v. State of Kerala [2014 (4) KLT 371], is violated.

9. The show-cause notices were issued based on

certain complaints. In spite of requests, copies of the

complaints were not made available to the petitioner, thereby

offending the settled principles of natural justice. The

proceedings belatedly initiated are hit by limitation and the law

laid down by the Apex Court in Joint Collector Ranga Reddy

District and another v. D. Narsing Rao and others [(2015)

3 SCC 695], Palitana Sugar Mills (P) Ltd. and another v.

State of Gujarat and others [(2004) 12 SCC 672] and State WP(C) No.4939/2020

of Punjab and others v. Bhatinda District Co-operative

Milk Producers Union Ltd. [(2007) 11 SCC 363] are flouted,

contended the Senior Counsel appearing at the instance of

the petitioner.

10. The learned Senior Counsel assisted by the

Standing Counsel for the respondent, on the other hand,

submitted that by Ext.P8 letter dated 19.10.2017, the

petitioner was required to make available certain documents.

The petitioner did not provide all the documents sought for.

Therefore, Ext.P9 letter dated 07.11.2017 was issued seeking

further information. Even Ext.P9 letter did not result in supply

of requisite information. Under the circumstances, the

respondent was forced to issue show-cause notices.

11. A perusal of the resolutions passed by the

Company indicated that the issues announced by the

petitioner were public issues. In spite of the requisition made

by the respondent, required documents were not produced by

the petitioner to show that the issues were merely private

placements. The information sought for by the respondent are WP(C) No.4939/2020

those readily available with the petitioner from their statutorily

maintained records.

12. The learned Senior Counsel pointed out that the

SEBI Act does not contemplate any annual returns, though the

SEBI is the market controller. Therefore, any violation of the

SEBI Act or Rules would come to the knowledge of the

respondent normally only from other sources. Challenge in

the writ petition is against show-cause notices. Though there

is no absolute bar in challenging show-cause notices invoking

Article 226 of the Constitution of India, this Court should

interfere in the matter sparingly. The law in this regard is

settled by the judgment of the Apex Court in Whirlpool

Corporation v. Registrar of Trade Marks, Mumbai and

others (AIR 1999 SC 22).

13. Though the transactions in question related to the

year 2001 to 2010, the SEBI has acted as soon as it has

received information. The Senior Counsel urged that the

offence involved is a continuing offence, in view of the law laid

down by the Apex Court in State of Bihar v. Deokaran WP(C) No.4939/2020

Nenshi and another [(1972) 2 SCC 890] and Adjudicating

Officer, Securities and Exchange Board of India v.

Bhavesh Pabari [2019) 5 SCC 90]. The learned Senior

Counsel emphatically denied the allegation that the SEBI has

pre-judged the issue. Taking the court to the statements

made in show-cause notices, the learned Senior Counsel

pointed out that jurisdictional facts exist justifying initiation of

the proceedings. The writ petition filed at show-cause stage is

therefore without any merit and it is liable to be dismissed,

contended the Senior Counsel.

14. I have heard the learned Senior Counsel appearing

for the petitioner and the learned Senior Counsel assisted by

Advocate Sri. Jamaluddin, Standing Counsel for the

respondent.

15. From the pleadings, it has come out that in the

Awareness Programme conducted by the SEBI during the

year 2017, a few investors reported that the petitioner

Company has been mobilising funds from the public and have

issued bonus shares. It was alleged that the petitioner WP(C) No.4939/2020

subsequently stopped buying back the shares. From a

preliminary enquiry made by the SEBI, it was noticed that the

petitioner-Company has passed resolutions authorising issue

of equity shares to any person including existing members of

the Company in any manner the board may deem fit. The

language of the resolution indicated that what was intended by

the Company was not strictly private placement. It was under

the said circumstances that the SEBI issued notices to the

petitioner-Company. Though the information sought for were

expected to be maintained by the petitioner in their statutory

records and registers, such information was not made

available to the SEBI. It was under such circumstances that

the SEBI has issued the show-cause notices impugned in the

writ petition.

16. True, the information sought for by the SEBI related

back to the year 2001. However, the required information are

those which are required by the petitioner to be statutorily

maintained. Therefore, the delay in issuing these Show

Cause Notices, cannot cause prejudice to the petitioner. WP(C) No.4939/2020

17. As regards reasons for the delay in initiation of the

proceedings, it is to be noted that under Section 11(2)(f) of the

SEBI Act, 1992, promoting investor education is one of the

functions of the Board. In one of such meetings of investors,

allegations were raised against the petitioner. The SEBI made

their own enquiry and noted that the annual reports of the

Company indicated authorising issue of shares to any person

including existing members of the Company in any manner the

Board may deem fit. The language of the resolutions indeed

gives rise to a suspicion or indication that the Company

proposed to issue shares to the public. It is for the said

reason that the SEBI sought explanation from the petitioner.

18. The petitioner, instead of cooperating with the

SEBI, providing requisite information, has approached this

Court challenging the show-cause notices. The allegation

against the petitioner and the information sought for by the

SEBI would indicate that what was sought for by SEBI are

information a Company is expected to maintain. Going

through the show-cause notices impugned in the writ petition, WP(C) No.4939/2020

it cannot be said that jurisdictional facts necessary to initiate

proceedings do not exist. Prima facie, the delay in initiation of

the proceedings will not cause prejudice to the petitioner, in

the nature of the information sought for by SEBI. Even if the

petitioner is incapacitated to provide any information required

by the SEBI, the petitioner can very well give reasoned

explanation for the same to the SEBI.

19. The issue is presently only at a show-cause stage.

It will be thoroughly inappropriate for this Court to interfere

with the statutory proceedings at this stage. In the

circumstances, I find no reason to interfere with the

proceedings initiated by the SEBI as per Exts.P1 to P3.

The writ petition therefore lacks merit and it is

consequently dismissed.

Sd/-

N. NAGARESH, JUDGE

aks/23.02.2021 WP(C) No.4939/2020

APPENDIX PETITIONER'S EXHIBITS:

EXHIBIT P1 A TRUE COPY OF THE SHOW CAUSE NOTICE DATED 05.04.2019 ISSUED BY THE RESPONDENT.

EXHIBIT P2 A TRUE COPY OF THE SHOW CAUSE NOTICE DATED 12.12.2019 ISSUED BY THE RESPONDENT.

EXHIBIT P3 A TRUE COPY OF THE SHOW CAUSE NOTICE DATED 14.01.2020 ISSUED BY THE RESPONDENT.

EXHIBIT P4 A TRUE COPY OF THE CERTIFICATE OF INCORPORATION DATED 09.03.1993 ISSUED BY THE MINISTRY OF CORPORATE AFFAIRS, GOVT. OF INDIA, TO THE PETITIONER.

EXHIBIT P5 A TRUE COPY OF THE CERTIFICATE OF REGISTRATION ISSUED BY RBI UNDER SECTION 45 OF THE RBI ACT, 1934 TO THE PETITIONER DATED 29.5.2017.

EXHIBIT P6 A TRUE COPY SAMPLE OF THE PRIVATE PLACEMENT APPLICATION FORM.

EXHIBIT P7           TRUE   COPIES   OF   THE   RETURNS   OF
                     ALLOTMENTS FILED WITH THE ROC.

EXHIBIT P8           A TRUE COPY OF THE LETTER DATED
                     19.10.2017 ISSUED BY THE RESPONDENT.

EXHIBIT P9           A TRUE COPY OF THE LETTER DATED
                     7.11.2017 ISSUED BY THE RESPONDENT.

EXHIBIT P10          A TRUE COPY OF THE LETTER ISSUED BY
                     THE PETITIONER DATED 6.11.2017.

EXHIBIT P11          A TRUE COPY OF THE LETTER ISSUED BY
                     THE    PETITIONER   DATED 17.11.2017
                     (WITHOUT ENCLOSURES).
 WP(C) No.4939/2020



EXHIBIT P12          A TRUE COPY OF THE LETTER ISSUED BY
                     THE PETITIONER DATED 27.11.2017.

EXHIBIT P13          A TRUE COPY OF THE LETTER ISSUED BY
                     THE PETITIONER DATED 16.12.2017 ALONG

WITH SUMMARY OF DEBENTURE OUTSTANDING.

EXHIBIT P14 A TRUE COPY OF THE RBI GUIDELINES DATED 27.6.2013.

EXHIBIT P15 A TRUE COPY OF THE REPLY OF THE PETITIONER DATED 09.05.2019.

EXHIBIT P16 A TRUE COPY OF LETTER DATED 26.10.2019 FROM THE PETITIONER TO THE RESPONDENT.

EXHIBIT P17 A TRUE COPY OF LETTER DATED 02.01.2010 FROM THE PETITIONER TO THE RESPONDENT.

EXHIBIT P18 A TRUE COPY OF THE EMAIL DATED 17.7.2020 ISSUED BY THE RESPONDENT

EXHIBIT P19 A TRUE COPY OF THE EMAIL DATED 20.7.2020 SENT BY THE PETITIONER

EXHIBIT P20 A TRUE COPY OF THE EMAIL DATED 20.7.2020 ISSUED BY THE RESPONDENT

EXHIBIT P21 A TRUE COPY OF THE EMAIL DATED 24.7.2020 SENT BY THE PETITONER

SR