Karnataka High Court
M/S Nel Holdings South Limited vs Securities For Exchange Board Of India on 7 April, 2025
Author: Hemant Chandangoudar
Bench: Hemant Chandangoudar
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WP No. 23518 of 2021
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 7TH DAY OF APRIL, 2025
BEFORE
THE HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
WRIT PETITION NO. 23518 OF 2021 (GM-RES)
BETWEEN:
1. M/S NEL HOLDINGS SOUTH LIMITED
FORMERLY NEL HOLDINGS LIMITED
NO. 110, ANDREWS BUILDING
LEVEL 1, M.G ROAD
BENGALURU 560 001
REPRESENTED BY ITS
GENERAL MANAGER-LEGAL
MR. SWAMY K.B
...PETITIONER
(BY SRI. S S NAGANAND, SENIOR COUNSEL FOR
MS. SUMANA NAGANAND., ADVOCATE)
AND:
1. SECURITIES FOR EXCHANGE BOARD OF INDIA
SEBI BHAVAN, PLOT C4-4
Digitally signed by G BOLOCK
R HEMALATHA BANDRA KURLA COMPLEX
Location: High BANDRA EAST, MUMBAI
Court of
Karnataka BY ITS CHAIRMAN.
2. THE ASSISTANT GENERAL MANAGER
CORPORATE FINANCE INVESTIGATION DEPARTMENT
SECURITIES AND EXCHANGE BOARD OF INDIA
SEBI BHAVAN, PLOR C4-A, G BLOCK
BANDRA KURLA COMPLEX, BANDRA EAST
MUMBAI 400 051.
3. THE DEPUTY GENERAL MANAGER
SECURITIES AND EXCHANGE BOARD OF INDIA
SEBI BHAVAN, PLOR C4-A, G BLOCK
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WP No. 23518 of 2021
BANDRA KURLA COMPLEX, BANDRA EAST
MUMBAI 400 051.
4. THE REGISTRAR OF COMPANIES IN KARNATAKA
E WING 2ND FLOOR
KENDRIYA SADANA
KORAMANGALA
BENGALURU 560 034.
5. SRI. KIRIT K GADA
MAJOR IN AGE
FATHER S NAME NOT KNOWN TO THE PETITIONER
204, BLISS A WING
VASANT OSCAR, LBS ROAD,
MULUND (W), MUMBAI 400 080.
6. SRI HARI M K
MAJOR IN AGE
FATHER'S NAME NOT KNOWN TO THE PETITIONER
10063, PRESTIGE WELLINGTON PARK
JALAHALLI, BENGALURU 560 013.
7. SRI. MUSTAFA MOHAMMEDI KHARAWALA
MAJOR IN AGE
FATHER'S NAME NOT KNOWN TO THE PETITIONER
A 1401, MADHUPURI APTS
GOKHALE ROAD, DAHNUKARWADI
KADIVLI WEST, MUMBAI 400 067.
8. SMT. FATEMA MUSTAFA KHARAWALA
MAJOR IN AGE
W/O SRI MUSTAFA KHARAWALA
A 1401, MMADHUPURI APTS
GOKHALE ROAD,
DAHNUKARWADI
KADIVLI WEST
MUMABI 400 067.
9. SRI. MOHAMEDHUSAIN KHARAWAL
MAJOR IN AGE
FATHER'S NAME NOT KNOWN TO THE PETITIONER
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WP No. 23518 of 2021
A 1401, MADHURPURI APTS
GOKHALE ROAD,
DAHNUKARWADI
KADIVLI WEST
MUMBAI 400 067.
10. SRI. AAMIR MUSTAFA KHARAWALA
MAJOR IN AGE
FATHER'S NAME NOT KNOWN TO THE PETITIOENR
A 1401, MADHUPURI APTS
GOKHALE ROAD,
DAHNUKARWADI
KADIVLI WEST
MUMBAI 400 067.
11. SRI VIMAL KUMAR MAHESHWARI
MAJOR IN AGE
FATHER'S NAME NOT KNOWN TO THE PETITIONER
NEAR KESHAR JI KANWARIYA MANDIR
WARD NO.8, BEER CHHAPAR
RURAL CHURCH, SUJANGARH
RAJASTHAN 331502.
12. SMT. VANDANA THAKER
MAJOR IN AGE
NO.1, ABDUL RASUL AVENUE
KOLKATA-700 026.
13. SRI. NEERAJ SADANI
MAJOR IN AGE
RESIDING AT NO.35
ROWLAND ROAD
KOLKATA-700 020.
14. SRI. NAVEEN J
MAJOR IN AGE
RESIDING AT NO. 65
GODAVARI ROAD, MUNNEKOLALU
MARATHAHALLI POST
BANGALORE-560 037.
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WP No. 23518 of 2021
15. SRI. MANJUNATHA
MAJOR IN AGE
RESIDING AT NO. 565
13TH MAIN, 5TH CROSS
HOTEL LEELA PALACE ROAD
KODIHALLI, BANGALORE-560 008.
16. KRISHNA DWARKA DAS BAGREE
MAJOR IN AGE
NO. 20, MOHINI NIWAS,
VINAYAK NAGAR
NEAR ACHAL RESIDENCY
AHMEDNAGAR-414001.
17. SMT. SUREKHA BAGREE
MAJOR IN AGE
NO. 20, MOHINI NIWAS
VINAYAK NAGAR
NEAR ACHAL RESIDENCY
AHMEDNAGAR-414 001.
18. SRI. MANISH BAGREE
MAJOR IN AGE
NO. 20, MOHINI NIWAS
VINAYAK NAGAR
NEAR ACHAL RESIDENCY
AHMEDNAGAR-414 001.
19. SMT. SWATHI BAGREE
MAJOR IN AGE
NO.20, MOHINI NIWAS
VINAYAK NAGAR
NEAR ACHAL RESIDENCY
AHMEDNAGAR-414 001.
20. SAURAV KRISHNA BAGREE
MAJOR IN AGE
NO.20, MOHINI NIWAS
VINAYAK NAGAR
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WP No. 23518 of 2021
NEAR ACHAL RESIDENCY
AHMEDNAGAR-414 001.
RESPONDENTS
(BY SRI. R V S NAIK, SENIOR COUNSEL FOR R1 TO R3;
SRI. K N PHANINDRA, SENIOR COUNSEL FOR
SRI. SHARANJITH SHETTY K, ADVOCATE FOR R5;
SMT. KRUTIKA RAGHAVAN, ADVOCATE FOR R6;
SRI. BHAIRAV K, ADVOCATE FOR R7 TO R10;
SRI. VIKRAM HUILGOL, SENIOR COUNSEL FOR
SRI. LAKSHA KOLLAPPA, ADVOCATE FOR R11;
SRI. UDAYA HOLLA, SENIOR COUNSEL FOR
PROPOSED IMPLEADING APPLICANTS ON IA 3/24)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226
AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO
QUASH THE ORDER DTD.12.10.2021 ISSUED BY THE R-2 (i.e
ANNEXURE-A) AS ARBITRARY ILLEGAL AND WITHOUT
JURISDICTION.
THIS PETITION, COMING ON FOR FURTHER DICTATION,
THIS DAY, ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
ORAL ORDER
The petitioner, a company incorporated under the Company Act challenges the communication issued by the respondent No.2/ Assistant General Manager, Corporate Finance Investigation Dept SEBI - appointing a Forensic Auditor to assist the investigating authority to conduct a forensic audit of the consolidated financial statement of the company for the financial years March, 31, 2018, March 31, 2019, March 31, 2020 and March, 31 2021 with Special focus on impairment of subsidiaries/wholly owned -6- NC: 2025:KHC:15947 WP No. 23518 of 2021 subsidized associate, loan and advances granted to the related parties and other entities etc.
2. A complaint was filed by respondents Nos.5 to 11 who are the shareholders of the petitioner- company with the Registrar of Companies on 8.5.2020 to investigate and specially audit into the affairs of the petitioner's company stating that petitioner's company has made an impairment loss provision of Rs.118.66 Crores for the financial year 2018-19 and other financial irregularities. Based on the complaint filed by the respondents No.5 to 11 with the respondents No.1 to 4 the Executive Director of SEBI vide order dated 28.9.2021 appointed respondent No.2 as investigating authority to investigate into the complaint and submit a report at the earliest. Following the order, the 2nd respondent issued the impugned communication.
3. Mr. S.S. Naganand, learned senior counsel representing the petitioner's counsel argues as follows:
3.1. Firstly, respondent No.1/ Executive Director of SEBI lacks the authority to appoint respondent No.3 as Investigating Authority as the power to appoint the same vests with the Board, as stated under Section 11-C of the Securities and Exchange Board of India Act, 1992 (for short `Act, 1992').-7-
NC: 2025:KHC:15947 WP No. 23518 of 2021 3.2. Secondly, respondent No.1/ Executive Director of SEBI without recording the reasonable grounds to believe that the petitioner has acted detrimental to the interest of his shareholders has appointed respondent No.3/ Deputy General Manager, SEBI to investigate into the affairs of the company for the period specified. Section 11-C of the Act clearly mandates that the power to appoint an Investigating Officer to investigate into the affairs of the company only if there are reasonable grounds to believe that the petitioner to have acted detrimental to the interest of its shareholders.
3.3. Thirdly, the shareholders i.e. respondents No.5 to 11 have withdrawn the allegations made in the complaint, and therefore, in the absence of any substantive evidence to substantiate that the petitioner had acted detrimental to the interest of his shareholders, the conduct of investigation is wholly untenable and arbitrary.
3.4. Fourthly, there is no disclosure of financial impairment of Rs.118.66 crore in the balance sheet placed before the shareholders for the specified period. Therefore, there is no occasion warranting investigation against the petitioner under Section 11C of the Act.
3.5. Fifthly, the first respondent before ordering an investigation has not considered the reply submitted by -8- NC: 2025:KHC:15947 WP No. 23518 of 2021 the petitioner to the show cause notices issued and therefore, the appointment of Investigating Authority is without application of mind and violates the principles of natural justice.
In support, reliance is placed upon the following:
i. Mohindhr Singh Gill and Anr. v. Chief Election Commissioner, New Delhi, (1978) 1 SCC 495- para 52 ii. Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd, (2010) 2 SCC 723, para 5, 7 iii. Amsa India Pvt Ltd. v. Commissioner of Income-Tax, (2017) 393 ITR 1578 - para 3,5 iv. State of Uttar Pradesh and Ors. v. Aryaverth Chawal Udyog and Ors., (2015) 17 SCC 324, para 19 onwards
4. In response, Sri RVS Naik, learned Senior counsel representing the SEBI submitted that in terms of sub- Section 3 of Section 4 and Section 19 of the Act, 1992 and Regulation 5 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities market) Regulations, 2003 (for short `Regulations, 2003'). The respondent No.1/ Executive Director, SEBI has authority to appoint an Investigating Officer to investigate into the affairs of the company as stated under Section 11C of the Act, 1992.
4.1. Additionally, he argued that in terms of Section 19 of the Act, 1992, the Board has delegated the power to the Executive Director to order an investigation and -9- NC: 2025:KHC:15947 WP No. 23518 of 2021 appoint an investigating Authority under Section 11-C of the Act, 1992.
4.2. He further submitted that the Respondent No.1/ Executive Director, SEBI after perusing the complaint, reply of the petitioner and also the notes prepared by the subordinate officer has come to a conclusion that the petitioner has acted in a manner detrimental to the interest of his shareholders and has rightly appointed the respondent No.3/ Deputy General Manager as Investigating Authority, and the same cannot be said to be the authority and arbitrary.
In support, reliance is placed upon the following:
(Standard of judicial review limited to relevancy of reasons and not adequacy of reasons) i. DLF Limited v. Securities and Exchange Board of India and Ors., 2012 SCC OnLine Del 5765.
ii. Multibagger Securities Research & Advisory Pvt. Ltd. v. Securities and Exchange Board of India and Ors, 2022 SCC OnLine P&H 4243 (Interpretation of Section 4(3) of SEBI Act, 1992) iii. Sudhir Gupta v. State and Anr, 2013 SCC OnLine Del 3280 (Judicial Review over SEBI's regulatory domain) iv. Vishal Tiwari v. Union of India and Ors. (2024) 4 SCC 115 (SEBI is not bound to furnish its opinion in its entirety and documents relied upon for formation of opinion to the noticee) v. Kavi Arora v. Securities and Exchange Board of India and Ors, 2022 SCC OnLine SC 1217
5. The learned Senior Counsel K N Phanindra representing respondents No.5 to 11 submitted that the
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NC: 2025:KHC:15947 WP No. 23518 of 2021 petitioner entity has satisfactorily explained all the issues raised in relation to advancing loans to its related parties, impairment loss provision for its subsidiaries and losses incurred by the petitioner on account of default in repayment of loans by the subsidiaries and associates and perusal of the records and policies of the company, it is satisfied that the interest of the shareholders are protected and the impairment loss was placed before the shareholders and approved in terms of Section 188 of the Companies Act. Thereafter, the said respondents have withdrawn the complaint against the petitioner and therefore, warrants no investigation against the petitioner entity.
6. After considering the arguments of the learned Senior Counsels for the parties, the issues that arise for consideration are as follows:
6.1. Whether the appointment of respondent No.3/ Deputy General Manager, as the Investigating Authority under Section 11-C of the Act, 1992 by the respondent No. 1 - Executive Director, SEBI is vitiated for lack of authority?
6.2. Whether there existed reasonable grounds of belief that the petitioner entity acted in a manner detrimental to the interest of the shareholders to warrant
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NC: 2025:KHC:15947 WP No. 23518 of 2021 an investigation by the respondent No.1 - SEBI, Executive Director?
Issue No.(i):
7. Before addressing the issues raised for consideration, it is appropriate to reproduce the relevant provisions of the SEBI Act, 1992, and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
7.1. Section 4 - Management of the Board... (3) Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by that Board.
7.2. Section 11 C - Investigation - (1) Where the Board has reasonable ground to believe that--
(a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or
(b) any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by the Board thereunder, it may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board ...
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NC: 2025:KHC:15947 WP No. 23518 of 2021 7.3. Section 19 Delegation. - The Board may, by general or special order in writing delegate to any member, officer of the Board or any other person subject to such conditions, if any, as may be specified in the order, such of its powers and functions under this Act (except the powers under section 29) as it may deem necessary.
7.4. Regulation 5 of SEBI (PFUTP) Regulations, 2003. - Power of the Board to order investigation. Where the Board, the Chairman, the member, or the Executive Director (hereinafter referred to as "appointing authority") has reasonable ground to believe that -
a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market in violation of these regulations;
b) any intermediary or any person associated with the securities market has violated any of the provisions of the Act or the rules or the regulations, it may, at any time by order in writing, direct any person (hereinafter referred to as the "Investigating Authority") specified in the order to investigate the affairs of such intermediary or persons associated with the securities market or any other person and to report thereon to the Board in the manner provided in section 11C of the Act.
8. A cumulative reading of the aforesaid provisions indicates that the if the Board - as established under Section 3 and managed under Section 4 of the Act, 1992, has reasonable grounds to believe that transactions of securities in the market are dealt with in a manner detrimental to interest of shareholders, the Board is
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NC: 2025:KHC:15947 WP No. 23518 of 2021 empowered under Section 11-C of the Act to appoint any person as the investigating authority, to investigate into affairs of persons associated with the securities market, and thereafter to report them to the Board.
8.1 Section 19 of the Act, 1992 empowers the Board to further delegate to any member, officer of the Board, or any other person, all such powers except the power to make Rules as stipulated under Section 29 of the Act, including the power conferred on the Board under Section 11-C of the Act, to order investigation into market securities. Additionally, sub-section (3) of Section 4 of the Act, 1992, reserves with the Chairperson of the Board all powers of, 'general superintendence and direction of the affairs of the Board', and further exercise all powers and do all acts which may be exercised or done by the Board, independent of any general or special order which may be passed under Section 19 of the Act.
8.2. It may therefore be reasonably inferred that the Chairperson of the Board is statutorily empowered to exercise all such powers as may be exercised by the Board, save the limitations placed on such authority in the concerned regulations. A perusal of Regulation 5 of the Regulations, 2003 reveals that where there exists a reasonable ground to believe, the Executive Director is empowered to direct - by an order in writing, any officer
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NC: 2025:KHC:15947 WP No. 23518 of 2021 (investigating authority), not below the rank of Division Chief to investigate any transactions in securities which are alleged to be carried in manner detrimental to the shareholders.
9. Shri R.V.S. Naik has adduced at Annexures R1 and R2, a general order passed in terms of Section 4(3) of the Act, whereby the Chairperson of the Board has issued the 'General Order' order dated 31.07.2019, in respect of Delegation of Statutory and Financial Powers. The relevant portion of the order, at entry No. 1 of Chapter 17 of the Investigation Department, under Section II - Delegation of Powers with respect to Investigation, reads thus:
Sl. No. Nature of Delegation Delagatee
1. Ordering investigation and ED appointing investigating authority under Section 11C of the Act.
10. Therefore, upon conjoint reading of the delegation order dated 31.07.2019 passed in terms of Section 4(3) of the Act, 1992, and Regulation 5 of the SEBI (PFUTP) Regulations, 2003, it is understood that the respondentNo.1/ Executive Director, SEBI, is a lawful
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NC: 2025:KHC:15947 WP No. 23518 of 2021 authority under the statute to order an investigation, under Section 11-C of the Act, 1992. Hence, the order of appointment of respondent No.3/ Deputy General Manager as investigating authority, as in the instant case, is not bad in law for want of jurisdiction.
Issue No.(ii):
11. The allegations made in the complaint dated, 27.04.2020 (Annexure D), as filed by respondents No.5 to 11/ Shareholders are as follows:
We the shareholders of above refereed Company would like to ask you for the Investigation & Special Audit of the Affairs of the NEL Holdings Ltd having its Regd. Office at Level 7, Nitesh Timesquare, 8, M.G. Road, Bengaluru -560001 on account of followings Grounds:
1. The Company has been guilty of diverting the funds through its subsidiaries & Associate Companies & there by causing the greatest loss to the interest of the shareholders of NEL Holdings Ltd.
2. The Company has in the past has advanced money to the subsidiaries & associates Companies on account of certain business transactions & which resulted in the huge losses which in turn has caused big value erosion to the shareholders of NEL Holdings Ltd.
3. The Company has made Impairment Loss provision of Rs.118.66 Crs for the investments made in the four of its subsidiaries & Associates Concerns in the F.Y. 2018-19.
This is clearly indicative of the mismanagement & dubious related party transactions carried out by the Management of the NEL Holdings Ltd for their own benefits at the cost of shareholders interest.
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4. Since Inception the Company has been continuously declaring only Losses in the annual financial statements. This raises the doubts in the minds of Shareholders about the worst type of corporate governance practices followed by the Company.
5. The Management has got shares delisted from the NSE & now they are in the process of delisting the same from BSE also. What is the purpose of delisting shares from BSE also? The intentions of the Management of the NEL Holdings Ltd are very dangerous as they want to give exit route to the existing shareholders at very cheapest rate Rs.0.85 per share for face value of Rs.10/- per share. This is nothing but Loot of the valuable Investments of Shareholders Money.
6. Bad Corporate Governance & mismanagement has resulted in the erosion in the shareholders' Value & net worth of the Company. The share price which was Rs.55/- when the company got listed is Rs. 0.85 paise today
7. There need to be the complete investigation & special Audit of the related party transactions as well as Investment made by the Company in to its subsidiaries & associates concerns for bringing out the real truth of who actually got benefited from that.
In view of the our above submissions you are requested to order the Investigation & special Audit of the affairs of the Company at the earliest
12. Following the complaint, the Assistant General Manager/ Respondent No. 2 issued a notice dated 10.2.2021 (Annexure-E) calling upon the petitioner to provide comments with respect to the allegations made in the complaint. The letter reads thus:
Sir/Madam, This has reference to a complaint received by SEBI against your company which, inter-alia, alleges as under:
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NC: 2025:KHC:15947 WP No. 23518 of 2021 The company has made impairment loss provision of Rs 118.66 crores for the investments made in the four of its subsidiaries & Associate concerns in the FY 2018-19. This is clearly indicative of the mismanagement & dubious related party transactions carried out by the management of the NEL Holdings Ltd for their own benefits at the cost of shareholders interest.
You are advised to provide the following comments/clarifications with respect to the aforesaid allegation:
a) The reasons for making impairment loss provision of Rs 118.66 crores in the FY 2018-19, for the investments made in the four of your subsidiaries & associate concerns.
b) Details of investments made in such subsidiaries & associate concerns, along with the date and year of investment in them.
c) Nature of business/sector in which these subsidiaries & associate concerns are operating.
d) Details of the board meeting along with the agenda notes and minutes of the meeting, in which the decision was taken to make the instant impairment loss provision.
Your reply should reach us latest by February 17, 2021.
13. In response, the petitioner submitted a reply to respondent No.2 on 17.2.2021 (Annexure F) stating as follows:
(a) Reasons for making impairment loss provision of Rs 118.66 crores in the FY 2018-19, for the investments made in the four of your subsidiaries & associate concerns:
1. Impairment provision of Rs. 118.6 Cr has been made in NEL Holdings Limited Standalone Audited Financials for the FY 2018-19 for investment in shares of wholly owned subsidiary companies as per INA-AS 36 provision as net worth of those wholly owned subsidiaries reflected negative as on 31.03.2019.
2. Further, in accordance with Section 188 of the Companies Act, 2013 and Regulation 23(5) of the SEBI (LODR) Regulations, 2015, the aforementioned impairment provision, which finds mention in the Consolidated Audited
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NC: 2025:KHC:15947 WP No. 23518 of 2021 Financials of NEL Holdings were placed before the shareholders meeting dated 27.09.2019 and approved. The audited Standalone and Consolidated Results were also published within time as per SEBI (LODR) Regulations, 2015.
3. I wish to bring to your attention the notes made in NEL Holdings South Limited's Audited Financial Statement for the FY 2018-19 regarding the impairment provision in question, which reads as follows:
"Impairment of non-financial assets The Group assesses, at each reporting dote, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less costs of disposal and its value in use, Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
4. Further details on the impairment in question can be obtained from the audited account (Annual Report) for the FY 2018-2019, a copy of which has been appended hereto (as Annexure-A) for your convenience. Reference may be had to pages 68 and other notes to account of the said report."
14. After receiving the reply, the respondent No.2/ Assistant General Manager issued another notice dated 10.3.2021 (Annexure-K), seeking details of the loans, advances given by the company for the financial year
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NC: 2025:KHC:15947 WP No. 23518 of 2021 2017-18 and 2018-19. Subsequently, the petitioner issued a reply dated 30.3.2021, at Annexure L. Please find below the detailed response to the queries raised by you vide the captioned email.
a) Basis of calculation along with detailed calculation of the impairment loss of Rs 118.6 crores, charged by the company in its financial statements for the year ended 2018-19. Also provide the copies of the valuation reports, if any, on the basis of which such impairment was done.
As informed earlier, the Impairment provision of Rs. 118.6 made in NEL Holdings Limited Standalone Audited Financials for the FY 2018-19 for investment in shares of wholly owned subsidiary companies was done as per INA-AS 36 provision as the net worth of these wholly owned subsidiaries as on 31.03.2019 were reflected negative and as such the value of investments in these subsidiaries amounting to Rs. 118.6 Crores as on 31.03.2019 has been impaired.
As the impairment was done based on the provisions of INA-AS 36, valuation reports for the same were not necessary and hence not obtained.
b) Please provide the details of the loans/advances given by your company to its related parties, in the following format, for the FY 2017-18 and 2018-19:
The details as provided by the finance team on the loans/advances given by the Company to its related parties for the FY 2017-18 and 2018-19 in the specified format is attached.
We would further like to confirm that pursuant to the provisions of Regulation 23(9) of SEBI (LODR), 2015, the Company has been intimating all the related parties transactions on consolidated basis for every half year and ensuring the due compliance of the same.
Further by nature of the real estate business, the Company and its management were required to create a "Special Purpose Vehicle"/"Subsidiaries" for ring fencing the
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NC: 2025:KHC:15947 WP No. 23518 of 2021 corresponding lenders to its projects from other lenders in its specific projects.
As we know the reasons for creating "Special Purpose Vehicle" as wholly owned Subsidiaries was to create separate verticals in businesses, which includes:
a. Separate Vertical for Facility Management Services b. Separate Vertical for Mid Segment Housing c. Separate Vertical for Shopping Malls and Rental business d. Separate Vertical for Luxury Housing, etcs"
15. It further appears on perusal of the material on record that the respondent No.2 had issued two letters dated 05.04.2021 and 08.09.2021 seeking modus operandi in the functioning of the petitioner's subsidiaries and the loans advanced thereto and, provisions for impairment losses. The respondent No.2 had further asked for financial statements of certain entities, prescribed therein. It appears that the petitioner has not responded to the same. However, the above letters issued by respondent No.2 do not disclose any reference to any inadequacies with respect to the above stated matters in the petitioner's response dated 17.02.2021.
16. The SEBI further relies on a memo dated 30.10.2024 annexing the copy of the note sheet prepared in relation to the allegations made in the complaint filed against the petitioner, the observations made on the complaint, and the proposal of the Assistant General
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NC: 2025:KHC:15947 WP No. 23518 of 2021 Manager to order an investigation and appoint an Investigating authority.
17. A review of the internal notings dated 28.9.2021 indicates that there is no reference to the notice issued to the petitioner by respondent No. 2, the replies submitted by the petitioner in the months of February and March of the year 2021, and it is further observed that the internal notings are not countersigned by the competent Authority
- Executive Director, except for the initials `EDC'.
18. Subsequently, respondent No.1 - Executive Director, SEBI has issued an order directing an investigation under Section 11-C of the Act, 1992 to appoint respondent No.3/ Deputy General Manager to investigate into the above-referred allegations, in terms of the aforementioned delegation order dated 31.07.2019, as passed by the chairperson of the Board under Section 4(3) of the Act, 1992. A review of the same does not indicate any reference to the replies of the petitioner or the observations made in the internal file notings, and does not reveal, in any manner, the purported reasonable grounds that the petitioner entity had transacted in securities, in a manner detrimental to the interest of the shareholders, so as to warrant an investigation, under Section 11-C of the Act, 1992.
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19. Therefore, the impugned communication issued by the respondent No.2/ Assistant General Manager, SEBI lacks authority, in absence of reasonable grounds to believe, as statutorily prescribed under Section 11-C the Act of 1992 and Regulation 5 of SEBI (PFUTP) Regulations, 2003.
20. The shareholders who had filed the complaint with the respondent have withdrawn the allegations made on 8.5.2020, and therefore in the absence of any material to substantiate that the petitioner's company had acted in a manner detrimental to the interest of its shareholders, the conducting of investigation against the petitioner under Section 11-C of the Act, 1992 is not legally sustainable. Thus, where there is no disclosure of financial impairment of Rs.118.66 Crores in the balance sheet placed before the share holders for the financial year 2021-22, 2022-2023 and 2023-24, there cannot be any occasion warranting investigation suo motu, against the petitioner under Section 11-C of the SEBI Act.
21. However, before proceeding to pronounce the order it is apposite that the authorities adduced by the parties herein be dealt with. The learned counsel for the petitioner relies on the decision of the Hon'ble Supreme Court in the case of Mohindhr Singh Gill and Anr. v. Chief Election Commissioner, New Delhi, (1978) 1
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NC: 2025:KHC:15947 WP No. 23518 of 2021 SCC 495 to emphasise that the rule of audi alteram partem has two facets - 'notice of the case to be met' and 'opportunity to explain'. The three Judge Bench of the Apex Court has further observed that any administrative decision which infringes upon the rights without "apprising the affected and appraising the representations" cannot be considered to be fair.
21.2. The Bench further observed that the validity of administrative orders must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of an affidavit. It further reiterated the observations made in its earlier decision of Commr. of Police v. Gordhandas Bhanji, 1951 SCC 1088, wherein the Court had opined that public orders must be construed objectively with reference to the language used in the order itself.
22. In Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd, (2010) 2 SCC 723, the Apex Court dealt with the issue of reassessment under Section 147 of IT Act, Direct Tax Laws (Amendment) Act, 1987 in relation to the income tax payable upon change of opinion by the assessing officer, wherein the Court opined 'reason to believe' to mean an inference drawn upon an analysis of certain tangible material, where reasons have a "live link with the formation of the belief". The Court further
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NC: 2025:KHC:15947 WP No. 23518 of 2021 emphasised that a mere change of opinion based on the same set of facts or material on record would not amount to reason to believe.
23. In Amsa India Pvt Ltd. v. Commissioner of Income-Tax, (2017) 393 ITR 1578, the High Court of Delhi reiterated the ratio enunciated above, and further emphasised the import of a proximate link between the fresh tangible material in possession and the purported conclusion of escapement of income from tax, so as to warrant a reassessment, in terms of reason to believe.
24. In State of Uttar Pradesh and Ors. v. Aryaverth Chawal Udyog and Ors., (2015) 17 SCC 324, the three judge Bench of the Apex Court dealt with the issue of reassessment of trade tax as payable under the Central Sales Tax Act, 1956 and further affirmed that initiation of reassessment proceedings on the basis of change in opinion is not sustainable in law.
24.1. The Court in Aryaverth referred to its earlier decision in the case of CST v. Bhagwan Industries (P) Ltd. (1973) 3 SCC 265, wherein it was observed that while the existence of belief could be challenged, the sufficiency thereof could not be challenged. It was further opined that at the stage of issuance of notice, Courts were to limit the test of judicial review to the existence of a prima facie inference that some turnover had escaped assessment.
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NC: 2025:KHC:15947 WP No. 23518 of 2021 24.2. Further reliance was placed on its earlier decision in the case of Phool Chand Bajrang Lal v. ITO (1993) 4 SCC 77, which was subsequently affirmed in the case of Aslam Mohammed Merchant v. Competent Authority (2008) 14 SCC, wherein the Court (in Phool Chand) had observed that Courts may look into the conclusion arrived at by the Income Tax Officer, and may examine whether there was any material available on the record from which the requisite belief could be formed by any competent authority and further, whether that material had any rational connection or a live link for the formation of the requisite belief to warrant reassessment.
24.3. In conclusion, the Apex Court in Aryaverth observed that reason to believe cannot be to the subjective satisfaction of the competent authority, but is to be construed to be an objective view based on the disclosed information in any particular case, and on firm and concrete facts. The same cannot be arbitrary, irrational, vague, distant or irrelevant.
25. Similarly, perusal of the material on record does not disclose any application of mind by the investigating authority towards the substance of the allegations in the complaint, or the replies of the petitioner to the aforementioned notices issued by the Assistant General Manager. A mere reproduction of the allegations, or a
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NC: 2025:KHC:15947 WP No. 23518 of 2021 summary thereof would not amount to an objective assessment of the things as they stood, much less, when the allegations, as referred to in the preceding paragraphs, were withdrawn by the complainants. As such, the precedents relied upon by the learned counsel for the petitioner are applicable to the case at hand.
26. The learned counsel for the respondents relied upon a catena of decisions emphasising the limited scope of judicial review in matters within the realm of SEBI.
26.1. The High Court of Delhi in DLF Limited v. Securities and Exchange Board of India and Ors., 2012 SCC OnLine Del 5765 has observed in a case dealing with a challenge to conduct of investigation under Section 11-C on grounds of non-grant of the opportunity of hearing, et al, as follows: -
(i) Firstly, since exercise of power by the investigating authority under Section 11-C of the Act is merely inquisitorial and not an adjudicatory decision leading to prejudicial outcomes - as under Section 151 of the Act, 1992, an opportunity of hearing may be dispensed with, in light of the fact that wordings of Section 11-C of the SEBI Act, 1992 entrusts the Board with authority to undertake speedy measures to tackle, prima facie, unlawful transactions in securities market, on the basis of reasonable grounds of - conduct of transactions in a
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NC: 2025:KHC:15947 WP No. 23518 of 2021 manner detrimental to shareholders, or conduct of persons associated with securities market is violative of governing laws;
(ii) Secondly, that the decisions of the Board have to be always based on relevant considerations and exercised in good faith. Moreover, it observed, the standards of judicial review employed must be limited to a scrutiny of the decision making process and must not be reviewed on merits.
26.1.2. There is simply no quarrel with the above ratio. However, the case at hand is factually distinguishable, inasmuch as, the petitioner entity was given an opportunity of hearing twice, as evidenced by its letters dated 17.2.2021 (at Annexure F) and 30.3.2021 (at Annexure L). The impugned letters of appointment of investigative authority and forensic auditors were issued in the month of September, 2021. Therefore, it remains undisputed that the now withdrawn allegations in the complaint, as they stood then, did not warrant, in the eyes of the respondent-authority, any speedy measures to prevent purportedly detrimental transactions. However, where opportunity was afforded to the petitioner entity and the petitioner had replied to the notices issued by respondent No. 2/ Assistant General Manager, SEBI, it is a reasonable expectation that the formation of belief
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NC: 2025:KHC:15947 WP No. 23518 of 2021 warranting an investigation under section 11-C of the Act be arrived at after considering the manifestly relevant replies dated 17.02.2021, and 30.03.2021 issued by the subject entity of such investigation, and the auditors report on standalone financial results of the petitioner's entity pursuant to Regulation 33 of SEBI (LODR) Regulations, 2015.
26.1.3 Moreover, it has been reiterated by the Apex Court in the cases of Ganga Saran and Sons (Pvt) Ltd., Calcutta v. Income Tax Officer, (1981) 3 SCC 143 and S Narayanappa v. Commissioner of Income Tax, (1967) 1 SCR 590, that issues of jurisdiction and existence of rational nexus between the reasons and the belief formed thereupon must be held in good faith, and cannot be merely a pretence.
26.1.4. Therefore, where the internal notings of the respondent - Executive Director, dated 28.9.2021, do not disclose any reason or the deductive belief therefrom, to warrant an investigation under Section 11-C of the Act, 1992 into the withdrawn allegations, the respondent - authority cannot be permitted to exercise any powers to order investigation, suo motu. Any such exercise clearly amounts to excess of statutory authority. Furthermore, a careful scrutiny of the above case-law reveals, more particularly, at paragraphs No. 47 and 48 thereof that the
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NC: 2025:KHC:15947 WP No. 23518 of 2021 impugned order therein was passed consequent to recording of submissions of both parties, and on grounds of failure to make statutorily prescribed disclosures, et al. To the contrary, a bare perusal of the internal notings dated 28.9.2021 does not disclose any evidence of even a passing reference to the replies of the petitioner, or the fact that there existed compelling circumstances to initiate investigation in to complaint, despite it having been withdrawn by the complainants on 08.05.2020.
Hence, the above ratio is inapplicable to the facts of the matter at hand.
26.2. Placing reliance upon the above ratio as regards to notice of hearing, the High Court of Punjab and Haryana in Multibagger Securities Research & Advisory Pvt. Ltd. v. Securities and Exchange Board of India and Ors, 2022 SCC OnLine P&H 4243, rejected the prayer to quash summons directing appearance of the petitioners therein before the investigative authority, and opined that the Board is statutorily empowered to conduct an investigation and that is was empowered to seek information from those against whom such allegations were made.
26.2.1. The instant review is a challenge to the existence of reasons and the belief to warrant an investigation under Section 11-C, and not a scrutiny of
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NC: 2025:KHC:15947 WP No. 23518 of 2021 adequacy of reasons. Besides, the petitioner herein challenges non-consideration of its replies to the notices issued by the respondent No. 2, prior to the passing of the impugned order. As such, the case-law is not applicable to the facts at hand.
26.3. The learned counsel for the respondents has further placed reliance upon the decision of the High Court of Delhi on the case of Sudhir Gupta v. State and Anr, 2013 SCC OnLine Del 3280, wherein the High Court has opined that the Chairman of the Board is entrusted with the power of general superintendence, in terms of sub- section (3) of Section 4 of SEBI, Act, 1992, including the authority to initiate prosecution, without any authorisation from the Board.
26.3.1. There is no quarrel with the above case-law and the authority of the Executive Director to order investigation and appoint investigating authority is established above, in Issue No. (i).
26.4. In the case of Vishal Tiwari v. Union of India and Ors. (Adani Group Investigation) (2024) 4 SCC 115, the Apex Court referred to its earlier decisions in Prakash Gupta v. SEBI, (2021) 17 SCC 451 and IFB Agro Industries Ltd. v. SICGIL India Ltd., (2023) 4 SCC 209, and observed the following:
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NC: 2025:KHC:15947 WP No. 23518 of 2021 "(a) Courts do not and cannot act as appellate authorities examining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy which they are entitled to formulate;
(b) The scope of judicial review, when examining a policy framed by a specialised regulator, is to scrutinise whether it : (i) violates the fundamental rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review;
(c) When technical questions arise -- particularly in the domain of economic or financial matters -- and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be interfered with;"
26.4.1. There is no quarrel with the above ratio, but the same does not enure to the benefit of the respondent- authorities, as the challenge herein questions the existence of reasons to believe to order investigation under section 11-C of the Act, 1992 and not the adequacy of the reasons. This review, therefore, is within the permissible extent, on the grounds that the impugned orders are opposed to the statutory provisions contained in Section 11-C of the Act, 1992.
26.5. Lastly, the learned senior counsel for the respondents produced the decision of the Apex Court in Kavi Arora v. Securities and Exchange Board of India and Ors, 2022 SCC OnLine SC 1217, wherein it
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NC: 2025:KHC:15947 WP No. 23518 of 2021 was observed that SEBI is not bound to furnish its opinion in its entirety and documents relied upon for formation of opinion to the noticee.
26.5.1. A scrutiny of the case-law reveals that the the petitioner therein had approached the Apex Court seeking a direction to SEBI to furnish the documents relied upon by the Board in issuing the Show Cause Notice under Section 15HA of the SEBI Act and Rule 3 of the Adjudication Rules as to why appropriate directions for imposing penalty should not be passed against the petitioner.
26.5.2. The facts of the matter at hand deals with the stage of commencement of investigation and therefore, precedes the stage of imposition of penalty, and hence, the above case-law is distinguishable on facts from the case at hand. Moreover, further scrutiny of the case- law reveals that the aforementioned ratio was laid down in the context of the specific submissions of SEBI therein, and the ratio laid down in the case of Natwar Singh v. Directorate of Enforcement and Anr. (2010) 13 SCC 255, inasmuch as that documents which are not relied upon in the inquiry by the Authority need not be supplied to the subject of such inquiry.
26.5.3. The Apex Court in Kavi Arora further observed that where such such non-disclosed material had
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NC: 2025:KHC:15947 WP No. 23518 of 2021 been found to have been relied upon by Authority in the passing of an adverse order, and where such noticee were to demonstrate the prejudice caused by such non- disclosure, liberty would nevertheless, be reserved with such prejudiced noticee to seek remedy under the law, by approaching the appropriate forum.
26.5.4. Hence, the above case-law does not enure to the benefit of the respondent-SEBI in light of the fact that a bare perusal of the internal notings does not reveal any application of mind by the Executive Director, of having taken into consideration the relevant material, such as the replies of the petitioner to the notices issued by respondent No. 2/ Assistant General Manager, SEBI, or the compelling circumstances warranting an investigation suo motu despite withdrawal of the complaint. As such, the above case-law is not applicable to the case at hand as this review does not challenge the adequacy of the purported reasons behind the passing of an order under Section11-C, but of the very existence thereof.
27. In conclusion, it is observed that the existence of reasonable grounds is sine qua non for directing an investigation under Section 11-C of the Act. Thus, where a review of the material on record indicates that the competent appointing authority has merely reiterated the allegations made in a subsequently withdrawn complaint,
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NC: 2025:KHC:15947 WP No. 23518 of 2021 and further contains no reference to notices and replies of the petitioner entity to the same, or the compelling circumstances warranting an investigation suo motu into the subsequently withdrawn allegations levelled by the shareholders, the respondent No. 1 cannot be said to have passed an order directing investigation under Section 11- C, upon due application of mind. The said assessment is further bolstered upon perusal of the material on record where the internal notings of the respondent-SEBI, which ordinarily ought to contain the reasons and belief necessitating an investigation under section 11-C of the Act, 1992, remain unapproved by the competent authority i.e. the Executive Director.
27.1. It is a well-settled law that all state action must be reasonable and free from arbitrariness. Thus, where it appears from the perusal of the material on record that respondent No. 1/ Executive Director, SEBI did not possess any relevant reasons to believe, the passing of an order directing investigation under Section 11-C of the Act read with Regulation 5 of the SEBI (PFUTP) Regulations, 2003, cannot be sustainable.
Accordingly, I order the following:
ORDER i. The instant petition is allowed.
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NC: 2025:KHC:15947 WP No. 23518 of 2021 ii. The impugned order bearing No. SEBI/HO/CFID/ CFID2/P/OW/2021/28191/1, dated 12.10.2021 issued by the respondent No. 2 (at Annexure A) is hereby quashed.
Sd/-
(HEMANT CHANDANGOUDAR) JUDGE BKM List No.: 1 Sl No.: 2