Kerala High Court
I. Unnikrishnan vs Union Of India on 12 February, 2021
Author: N.Nagaresh
Bench: N.Nagaresh
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE N.NAGARESH
FRIDAY, THE 12TH DAY OF FEBRUARY 2021 / 23RD MAGHA,1942
WP(C).No.13682 OF 2020(I)
PETITIONER:
I. UNNIKRISHNAN,
AGED 56 YEARS,
MANNATH HOUSE,
MANNATH LANE,
THRISSUR, KERALA-680003.
BY ADVS.
SRI.SHERRY SAMUEL OOMMEN
SRI.SUKUMAR NAINAN OOMMEN
RESPONDENTS:
1 UNION OF INDIA,
REPRESENTED BY THE SECRETARY,
MINISTRY OF CORPORATE AFFAIRS,'A' WING,
SHASTRI BHAWAN,
RAJENDRA PRASAD ROAD,
NEW DELHI-110001.
2 SECURITIES AND EXCHANGE BOARD OF INDIA,
REPRESENTED BY THE CHAIRMAN,
PLOT NO.C4-A,'G' BLOCK,
BANDRA-KURLA COMPLEX,
BANDRA EAST MUMBAI-400051.
3 THE DEPUTY GENERAL MANAGER,
SECURITIES AND EXCHANGE BOARD OF INDIA,
SOUTHERN REGIONAL OFFICE-KOCHI LOCAL OFFICE,
6TH FLOOR, FINANCE TOWERS,
KALOOR, KOCHI-682017.
4 BRD SECURITIES LIMITED,
REPRESENTED BY ITS MANAGING DIRECTOR,
XIII/436, A2, 1ST FLOOR BETHANY COMPLEX,
KUNNAMKULAM,
THRISSUR, KERALA-680503.
WP(C) Nos.13682&22430/2020
:2 :
5 THE REGISTRAR OF COMPANIES ERNAKULAM,
COMPANY LAW BHAWAN,
BMC ROAD,
THRIKKAKARA, KOCHI-682021.
R1 & R5 BY ADV. SHRI.P.VIJAYAKUMAR, ASG OF
INDIA
R2-3 BY ADV. SRI.K.M.JAMALUDHEEN
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 12.02.2021, ALONG WITH WP(C).22430/2020(C), THE COURT
ON THE SAME DAYS DELIVERED THE FOLLOWING:
WP(C) Nos.13682&22430/2020
:3 :
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE N.NAGARESH
FRIDAY, THE 12TH DAY OF FEBRUARY 2021 / 23RD MAGHA,1942
WP(C).No.22430 OF 2020(C)
PETITIONER:
G. ANOOP,
AGED 51 YEARS,
KRISHNA KRIPA, KRISHNA GARDENS,
KUTTUR.P.O, THRISSUR,
KERALA-680013.
BY ADVS.
SRI.SUKUMAR NAINAN OOMMEN
SRI.SHERRY SAMUEL OOMMEN
SMT.NIDHI JACOB
RESPONDENTS:
1 UNION OF INDIA,
REPRESENTED BY ITS SECRETARY,
MINISTRY OF CORPORATE AFFAIRS,
'A'WING, SHASTRI BHAVAN,
RAJENDRA PRASAD ROAD,
NEW DELHI-110001.
2 SECURITIES AND EXCHANGE BOARD OF INDIA,
REPRESENTED BY THE CHAIRMAN, PLOT NO.C4-A,
'G' BLOCK, BANDRA-KURLA COMPLEX,
BANDRA EAST, MUMBAI-400051.
3 THE DEPUTY GENERAL MANAGER,
SECURITIES AND EXCHANGE BOARD OF INDIA,
SOUTHERN REGIONAL OFFICE - KOCHI LOCAL OFFICE,
6TH FLOOR, FINANCE TOWERS,
KALOOR,
KOCHI-682017.
WP(C) Nos.13682&22430/2020
:4 :
4 BRD SECURITIES LIMITED,
REPRESENTED BY ITS MANAGING DIRECTOR,
XIII/436, A2, 1ST FLOOR,
BETHANY COMPLEX, KUNNAMKULAM,
THRISSUR, KERALA-680503.
5 THE REGISTRAR OF COMPANIES ERNAKULAM,
COMPANY LAW BHAVAN, BMC ROAD,
THRIKKAKARA, KOCHI-682021.
6 THE ASSISTANT GENERAL MANAGER,
SECURITIES AND EXCHANGE BOARD OF INDIA,
SOUTHERN REGIONAL OFFICER-KOCHI LOCAL OFFICE,
6TH FLOOR, FINANCE TOWERS,
KALOOR, KOCHI-682017.
R1, R5 BY SMT.MAHESWARY.G., CGC
R2-3, R6 BY ADV. SRI.K.M.JAMALUDHEEN
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 12.02.2021, ALONG WITH WP(C).13682/2020(I), THE COURT
ON THE SAME DAY DELIVERED THE FOLLOWING:
WP(C) Nos.13682&22430/2020
:5 :
[CR]
N. NAGARESH, J.
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W.P.(C) Nos.13682 & 22430 of 2020
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Dated this the 12th day of February, 2021
JUDGMENT
~~~~~~~~~ Petitioners are Fellow Members of the Institute of Chartered Accountants of India. They were appointed as Debenture Trustees of an incorporated Company. The petitioners are aggrieved by a show-cause notice dated 13.03.2020, issued by the Deputy General Manager of Securities and Exchange Board of India.
2. The parties to the writ petitions are referred to in this judgment in the order they appear in the cause title and the exhibits as they are marked, in W.P.(C) No.13682 of 2020. The 2nd respondent is Securities and Exchange Board of India (hereinafter referred to as 'the SEBI'). The 4 th respondent is WP(C) Nos.13682&22430/2020 :6 : BRD Securities Limited (hereinafter referred to as 'the Company'). The Reserve Bank of India (RBI), in exercise of its powers under Section 45-IA of the Reserve Bank of India Act, 1934, issued Ext.P1 Certificate of Registration to the 4 th respondent-Company to commence/carry on the business of Non Banking Financial Institution, subject to conditions.
3. While the 4th respondent-Company was functioning, the SEBI issued Ext.P2 show-cause notice dated 13.03.2020. Ext.P2 was issued to 14 noticees. Noticees 1 to 12 are the Company and its 11 Directors/former Directors. The 13 th and 14th noticees are the petitioners in W.P.(C) No.22430 of 2020 and W.P.(C) No.13682 of 2020 respectively. In Ext.P2 show-cause notice, the following charges were levelled:-
(1) The Company issued Debentures which are deemed public issues, without complying with the statutory requirements for public issues;
(2) The Company failed to provide the details as to whether the consent of the Debenture holders has been obtained, for extending the tenure of the Debentures;
(3) Details of issuance of Bonds-Noncurrent (Unsecured Subordinate Debt) were not e-filed by the WP(C) Nos.13682&22430/2020 :7 : Company with ROC as required under the Companies Act, 1956/2013.
(4) The Company has not submitted any information to prove that the offer/allotment of Debentures and bonds were not intended to be available for subscription to general publicity compliance of Section 67(3) of the Companies Act, 1956.
(5) The issuance of bonds by the Company during 2014-'15 and 2017-'18 has to be treated as a public issue of securities in view of the RBI Circular and read with Section 42 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The Company has reached the number of 200 subscribers, where subscription per investor is less than ₹1 Crore.
(6) Under Section 73 of the Companies Act, 1956, every Company making public offer shall, before making such an offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange foreign exchanges. No such application was made by the Company.
(7) The Company and its Directors failed to return money to investors as required under Section 73(3) of the Companies Act, 1956.
(8) The Company has not registered the Prospectus with the Registrar of Companies, nor sent abridged prospectus along with application form and thereby violated Section 56(1), Section 56(3) and Section 60 of the Companies Act, 1956.
(9) The Company failed to appoint a registered Debenture Trustee and failed to comply with any of the requirements specified in SEBI ILDS Guidelines. WP(C) Nos.13682&22430/2020 :8 : (10) Unregistered Debenture Trustees were appointed violating Section 12(1) of the SEBI Act, 1992 read with Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993.
4. The petitioners challenge Ext.P2 show-cause notice on various grounds. Supervisory powers on Non-Banking Financial Companies in raising deposits, maintenance of accounts etc. is vested in Reserve Bank of India under Chapter 3B of the RBI Act, 1934. The SEBI has issued the impugned show-cause notice on the presumption that it has supervisory powers under Sections 55A, 117B and 67 of the Companies Act, 1956. The SEBI has no such powers. The impugned show-cause notice has been issued only to make a rowing enquiry to find out whether there has been any statutory violation of the Companies Act, 1956. Ext.P2 is therefore liable to be set aside. The Companies Act, 1956 has been repealed by the Companies Act, 2013. Ext.P2 is unsustainable on that ground also. The learned counsel for the petitioners brought the attention of this Court to various provisions in the Reserve Bank of India Act, Banking WP(C) Nos.13682&22430/2020 :9 : Regulation Act, the Companies Act and the SEBI Act and placed reliance on the following judgments of the Apex Court, to contend that the SEBI lacks power and jurisdiction to issue Ext.P2 show-cause notice to the Company:-
(1) Giridhar G. Yadalam v. Commissioner, Wealth Tax and another [(2015) 17 SCC 664], (2) Achal Industries v. State of Karnataka [(2019) 7 SCC 203], (3) Rattan Singh and others v. MD, Moga Transport Company and another [AIR 1959 P & H 196], (4) Toubro Infotech and Industries Limited and another v. SEBI [2004 SAT 46 (Mumbai)], (5) Sahara India Real Estate Corporation Limited and others v. SEBI [(2013) 1 SCC 1], (6) UOI and others v. Madhumilan Syntex Pvt. Ltd. and others [AIR 1988 SC 1236], (7) State of Punjab and others v. Bhatinda District Co- operative Milk Producers Union [(2007) 11 SCC 363], (8) Adjudicating Officer, SEBI v. Bhavesh Pabari [(2019) 5 SCC 90], (9) Astra Zeneca Pharma India Ltd. v. SEBI [2019 SCC Online SAT 356-Mumbai Bench], (10) Ashok Shivlal Rupani and another v. SEBI [2019 SCC Online SAT 169-Mumbai Bench - upheld by SC in SEBI v. Ashok Shivlal Rupani and another [MANU/SCOR/48290/2019], (11) MCP Enterprises and others v. State of Kerala [2020 (1) KHC 127], (12) Calcutta Discount Co. Ltd. v. ITO, Companies District Calcutta and another [AIR 1961 SC 372 - Constitution Bench], (13) East India Commercial Company Ltd., Calcutta and others v. Collector of Customs, Culcutta [AIR 1962 SC 1893], (14) Shrisht Dhawan v. Shaw Brothers [(1992) 1 SCC 534], (15) Naresh Kumar and Co. Pvt. Ltd. v. UOI [2015 (37) STR 451 (Cal)], (16) Jeans Knit Pvt. Ltd. v. Deputy Commissioner IT, Bangalore and others [(2018) 12 SCC 36], (17) India Tobacco Co. Ltd. v. CTO, Bhavanipore and others WP(C) Nos.13682&22430/2020 : 10 : [(1975) 3 SCC 512], (18) State of Kerala and others v. Mar Appraem Kuri Co. Ltd.
and others [(2012) 7 SCC 106-Constitution Bench], (19) Udai Singh Dagar and others v. UOI [(2007) 10 SCC 306], (20) Baiju AA and others v. STO, Works, Contract, SGST Department [2020 (1) KHC 39].
5. The Standing Counsel appearing for SEBI contended that the SEBI has issued only a show-cause notice. The petitioners can very well submit their reply to the show-cause notice and agitate the issues including jurisdiction and limitation before the SEBI. The Hon'ble Apex Court has held on more than one occasion that the High Court exercising jurisdiction under Article 226 of the Constitution of India shall not interfere in any proceedings at the show-cause stage. Therefore, the writ petitions filed by the petitioners against the show-cause notice is unsustainable. The petitioners can place all their objections/opinion before the SEBI. The writ petitions therefore should be dismissed, contended the Standing Counsel for SEBI.
6. Though the learned counsel for the petitioners made extensive arguments based on various judgments of the WP(C) Nos.13682&22430/2020 : 11 : Hon'ble Apex Court, on the incompetence of SEBI to issue a notice in the nature of Ext.P2 for the reason that the Company being an NBFC, the field is governed by the Reserve Bank of India Act and the Companies Act, and the SEBI formed under the Securities and Exchange Board of India Act, 1992, cannot exercise ostensible powers over the Company, I do not deem it necessary to delve on the said issue, since it is for the Company to agitate the said issue. The Company has not challenged before this Court the competency of SEBI to issue Ext.P2 show-cause notice.
7. The petitioners before this Court are Debenture Trustees appointed by the Company. A Debenture Trustee is a Trustee under a Trust Deed appointed for securing any issue of debentures of a body corporate. When a Debenture Trust Deed is executed, a security is created by mortgaging property of the incorporated company in favour of Debenture Trustee for the benefit of debenture holders. Creation of security is by the company. However, the Debenture holders are the beneficiaries.
WP(C) Nos.13682&22430/2020 : 12 :
8. A Debenture Trustee holds the secured property mortgaed by the issuer of securities, for the benefit of Debenture holders. In the event of default by the issuer of securities, the Debenture Trustee will have the power and authority to bring the secured property to sale and the proceeds of sale will have to be applied to redeem the Debentures. Though a Debenture Trustee has the characteristics of an agent of the Company insofar as holding of its property, the duties and functions required to be discharged by a Debenture Trustee make the Trustee an independent entity functioning for the benefit of Debenture holders. The statutory recognition given to Debenture Trustees by the Rules and Regulations framed under the Securities and Exchange Board of India Act, 1992, makes Debenture Trustees statutorily recognised bodies, independent of the Company, as long as they function as Debenture Trustee of the Company.
9. In Ext.P2, the charge against the petitioners- Debenture Trustees, is as follows:-
WP(C) Nos.13682&22430/2020 : 13 : "It is alleged that the noticees 13 and 14 acted as debenture trustees in public issue of NCDs without SEBI registration thereby violating Sec.12(1) of SEBI Act, 1992 read with Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993.
In this connection Noticees 13 and 14 are called upon to show cause as to why appropriate directions should not be issued against you, including but not limited to, restraining you all from accessing the capital market for a period as deemed appropriate."
Therefore, the issue concerning the petitioners in these writ petitions is whether by acting as Debenture Trustees of the Company without having registration as required under Section 12 of the Securities and Exchange Board of India Act, 1992 read with Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993, they have violated law. Section 12(1) of the SEBI Act, 1992 is as follows:-
"12. Registration of stock brokers, sub-brokers, share transfer agents, etc. (1) No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act:
WP(C) Nos.13682&22430/2020 : 14 : Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within the said period of three months, till the disposal of such application:
Provided further that any certificate of registration, obtained immediately before the commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been obtained from the Board in accordance with the regulations providing for such registration."
10. Therefore, no Debenture Trustee can deal in securities except under, and in accordance with, the conditions of registration obtained from the SEBI, in accordance with the SEBI (Debenture Trustees) Regulations, 1993. Regulation 7 of the said Regulations, 1993 mandates that no person shall be entitled to act as a Debenture Trustee unless he is either - (a) a Scheduled Bank carrying on commercial activity; or (b) a public financial institution within the meaning of Section 4A of the Companies Act, 1956; or (c) WP(C) Nos.13682&22430/2020 : 15 : an insurance company; or (d) body corporate.
11. The petitioners, who are allegedly acting as Debenture Trustees, are members of Institute of Chartered Accountants of India. The petitioners have no case that they are holding registration to act as Debenture Trustees. Therefore, there is prima facie violation of Section 12(1) of SEBI Act, 1992.
12. The petitioners have a case that the Company being a NBFC, is regulated by, apart from the Companies Act, by RBI Act and Regulations only and is not amenable to the jurisdictional authority of SEBI and hence Ext.P2 show-cause notice is ultravires. This Court is unable to accept the said proposition. Even though the Company is an NBFC, as far as regulation of issue of Debentures and Non-current Bonds is concerned, it is the bounden duty of SEBI to protect the interest of investors in securities. As long as NBFCs are not specifically excluded from the purview of SEBI Act, 1992, the Board will have jurisdiction over securities transactions of an NBFC, including the Debenture Trustees. WP(C) Nos.13682&22430/2020 : 16 :
13. Furthermore, the proceedings of SEBI are only at the show-cause stage. The petitioners have the opportunity to establish their case before the Board. As rightly pointed out by the Standing Counsel for the SEBI relying on the judgment of the Hon'ble Apex Court in Peerless General Finance and Investment Company Limited v. Reserve Bank of India [(1992) 2 SCC 343], the function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority.
In the circumstances, this Court does not find any reason to interfere with Ext.P2 proceedings initiated by the SEBI at this stage. The writ petitions therefore fail and are dismissed.
Sd/-
N. NAGARESH, JUDGE aks/05.02.2021 WP(C) Nos.13682&22430/2020 : 17 : APPENDIX OF WP(C) 13682/2020 PETITIONER'S EXHIBITS:
EXHIBIT P1 COPY OF THE CERTIFICATE OF REGISTRATION ISSUED BY THE RBI.
EXHIBIT P2 COPY OF THE SHOW-CAUSE NOTICE DATED 13.03.2020 ISSUED BY THE 3RD RESPONDENT.
EXHIBIT P3 COPY OF THE CIRCULAR DATED 27.06.2013 ISSUED BY RBI.
EXHIBIT P4 COPY OF THE CIRCULAR DATED 02.07.2013 ISSUED BY RBI.
EXHIBIT P5 COPY OF THE CIRCULAR DATED 20.02.2015 ISSUED BY RBI.
EXHIBIT P6 TRUE COPY OF MEMORANDUM OF SATISFACTION OF MORTGAGE UNDER SEC.
140, COMPANIES ACT, 1956 DATED
29.5.2008
EXHIBIT P7 TRUE COPY OF MEMORANDUM OF
SATISFACTION OF MORTGAGE UNDER SECTION 140, COMPANIES ACT, 1956 DATED 1.8.2008 EXHIBIT P8 TRUE COPY OF MEMORANDUM OF SATISFACTION OF MORTGAGE UNDER SECTION 140, COMPANIES ACT, 1956 DATED 15.12.2008 EXHIBIT P9 TRUE COPY OF MEMORANDUM OF SATISFACTION OF MORTGAGE UNDER SECTION 140, COMPANIES ACT, 1956 DATED 19- 5.2009 WP(C) Nos.13682&22430/2020 : 18 : EXHIBIT P10 TRUE COPY OF MEMORANDUM OF SATISFACTION OF MORTGAGE UNDER SECTION 140, COMPANIES ACT, 1956 DATED 3.6.2009 EXHIBIT P11 TRUE COPY OF MEMORANDUM OF SATISFACTION OF MORTGAGE UNDER SECTION 140, COMPANIES ACT, 1956 DATED 25.3.2010 WP(C) Nos.13682&22430/2020 : 19 : APPENDIX OF WP(C) 22430/2020 PETITIONER'S EXHIBITS:
EXHIBIT P1 A TRUE COPY OF THE CERTIFICATE OF REGISTRATION ISSUED TO THE 4TH RESPONDENT BY THE RBI.
EXHIBIT P2 DETAILS OF THE NCDS ISSUED FROM 2007 TO 2013.
EXHIBIT P3 TRUE COPY OF THE SHOW CAUSE NOTICE DATED 13.03.2020 ISSUED BY THE 3RD RESPONDENT.
EXHIBIT P4 TRUE COPY OF PETITIONER'S PRELIMINARY
REPLY DATED 28.03.2020 SEEKING
EXTENSION OF TIME TO FILE A DETAILED
REPLY.
EXHIBIT P5 TRUE COPY OF THE PETITIONER'S LETTER
DATED 27.06.2020 SEEKING FURTHER
EXTENSION.
EXHIBIT P6 TRUE COPY OF REMINDER LETTER DATED
20.08.2020 SENT BY THE 3RD RESPONDENT.
EXHIBIT P7 TRUE COPY OF THE PETITIONER'S LETTER DATED 23.08.2020 INTIMATING THE STATUS OF PENDING WP(C)NO.13682/2020.
EXHIBIT P8 TRUE COPY OF THE PETITIONER'S LETTER DATED 29.08.2020 SEEKING INFORMATION. EXHIBIT P9 TRUE COPY OF NOTICE DATED 03.09.2020 ISSUED BY THE 6TH RESPONDENT.
EXHIBIT P10 TRUE COPY OF THE PETITIONER'S REPLY DATED 30.09.2020 SEEKING A PERSONAL HEARING.
EXHIBIT P11 TRUE COPY OF THE CIRCULAR DATED 27.06.2013 ISSUED BY RBI WP(C) Nos.13682&22430/2020 : 20 : EXHIBIT P12 TRUE COPY OF THE CIRCULAR DATED 02.07.2013 ISSUED BY THE RBI.
EXHIBIT P13 TRUE COPY OF CIRCULAR DATED 20.02.2015 ISSUED BY THE RBI.
SR