Securities Appellate Tribunal
Sterlite Industries (India) Ltd. vs Securities & Exchange Board Of India on 23 May, 2001
ORDER
1. The present appeal is directed against the order dated 19-4-2001 made by the Chairman, Securities and Exchange Board of India. The order prohibits the appellant from accessing the capital market for a period of 2 years and also orders to initiate prosecution proceedings under section 24 read with section 27 of the Securities and Exchange Board of India Act, 1992 ('the Act') for violation of regulations 4(a) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 ('the 1995 Regulations'), against the appellant through its directors, namely, Shri Anil Aggarwal, Shri Tarun Jain and Shri Shashikant.
2. Brief facts leading to the filing of the present appeal are as follows:
The respondent carried out an investigation into the alleged price manipulation in the scrips of certain companies including the appellant especially during April and May 1998. The investigation revealed that a set of persons had cornered a large chunk of shares of the appellant, at Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), resulting in distortion of market equilibrium and creation of artificial market conditions. Based on the findings of the said investigation, the respondent on 20-12-1999 issued show-cause notice to the appellant and its directors/officers, Shri Anil Aggarwal, Shri Shashikant and Shri Tarun Jain. In the said show-cause notice it was alleged that the appellant had violated, regulations 4(a) and 4(d) of the 1995 Regulations, and also the bye-laws of the Bombay Stock Exchange by transacting indirectly in the shares of the appellant. The appellant and Shri Aggarwal, Shri Shashikant and Shri Tarun Jain were asked to show cause as to why (i) directions including a direction prohibiting them from accessing the capital market should not be issued and (ii) prosecution proceedings under section 24 of the Act should not be initiated against them for the above-mentioned violations.
Show-cause notice was adjudicated by the Chairman, SEBI. Based on the conclusion arrived at in the adjudication, he passed the impugned order.
Copy of the appeal has been served on the respondent and the reply is awaited. Pending disposal of the appeal, the appellant has prayed for an interim order staying the impugned order. The relief sought in the appeal is also substantially the same.
At this stage of the proceedings, what is being considered is the appellant's prayer for interim order, it was made known to the parties that the Tribunal would be disposing of the appeal expeditiously, on receipt of the respondent's reply, which is expected in a couple of weeks. However, the appellant desires to have an interim order staying the operation of the impugned order, pending disposal of the appeal. Therefore, at this stage the prayer for interim order was taken up for consideration and decision.
3. Shri C.A. Sundram, the learned senior counsel appearing for the appellant submitted that he was not asking for any interim stay specifically of the respondent's direction prohibiting the appellant from accessing the capital market or the order to initiate prosecution proceedings against the appellant and its directors/officers, that his request is to temporarily stay the impugned order as a whole. He submitted that he was prepared to give any undertaking for the purpose, including an undertaking that the appellant will not access the capital market till the disposal of the appeal, in case the Tribunal requires so.
Shri Sundaram submitted that the appeal proceeding is a continuation of the adjudication. Therefore, during the pendency of the proceeding before the appellate forum, to safeguard the interests of the appellant it is necessary to stay the order passed by the adjudicating authority. In support of the said submission that the appeal is a continuation of the original adjudication, the learned senior counsel cited the Supreme Court in Hasmat Rai v. Raghunath Prasad [1981] 3 SCC 103. He stated that since the Tribunal is empowered to decide the appeal arising out of any order made by the respondent under the Act, it goes without saying that the Tribunal is also empowered to pass interim orders of the like sought for by the appellant. Referring to the Supreme Court decision in ITO v. M.K. Mohammed Kunhi AIR 1969 SC 430 the learned senior counsel stated that power to pass interim orders in an appeal is incidental to the power available to pass final orders, and there was no dearth of power with the Tribunal in this regard.
Shri Sundaram submitted that the impugned order has caused irreparable injury to the appellant as it's reputation world over has been adversely affected and that the appellant would continue to suffer so as long as the impugned order is allowed to continue. He submitted that the appellant is a globally recognized company with lot of national and international business activities. He further submitted that the punishment meted out by the impugned order is unwarranted by the facts of the case and the material on record. According to him the order is draconian, and of extremely serious financial and other consequences adversely affecting the interests of the appellant and its shareholders numbering around 1,50,000.
Shri Sundaram submitted that the impugned order has been passed arbitrarily in total disregard to the rules of natural justice. Although the appellant had specifically asked for a personal hearing, the respondent did not bother to give any such personal hearing. Despite the request of the appellant to permit cross-examination of the witnesses, citing various authorities in support thereof, the respondent denied the opportunity to the appellant to cross-examine the witnesses upon whose statements and evidence the impugned order is so heavily relied. Shri Sundaram further stated that the impugned order has relied on certain facts and materials which were never disclosed to the appellant either at the time of the show-cause notice or during inspection, thereby denying the appellant an opportunity to effectively defend itself. Therefore, the impugned order is untenable and deserve to be stayed urgently.
Shri Sundaram pointed out that the respondent's finding in the impugned order that the appellant has contravened regulations 4(a) and 4(d) is based on two stray transactions involving purchase of 3 lakh shares by El Dorado and 6 lakh shares by Madras Aluminum Co. Ltd. (Malco). The learned senior counsel pointed out that it is not even alleged by the respondent that these transactions were effected at the instance of the appellant, that on the contrary the evidence on record shows non-involvement of the appellant in the transactions. According to the learned senior counsel when the traded volume of the appellant's shares in the stock exchange during the relevant settlement period was 13 million shares, by no stretch of imagination, it could be concluded that the purchase of 3 lakh shares had resulted in abnormal price movement in the appellant's shares, the respondent had totally ignored this reality to suit its convenience Shri Sundaram further stated that the shares were purchased at an average price of around Rs. 300 when several days before the purchase, the share had already touched Rs. 320. He also pointed out that such purchase on delivery basis could never have artificially raised the price or induced any person to purchase the shares, as has been alleged.
Shri Sundaram submitted that Malco did not finance purchase of 3 lakh shares on delivery basis purchased by El Dorado, that the loan of Rs. 5 crores given by Malco to Dil Vikas, a registered RBI Satellite Dealer for the Government securities was deposited by Oil Vikas in their separate earmarked satellite account with the RBI from which funds could only be utilised for the RBI transactions and for no other purpose. He said that the said loan had nothing to do with the purchase of these 3 lakh shares, as the loan amount itself was only Rs. 5 crores, while the purchase consideration for 3 lakh shares was over Rs. 9 crores. Shri Sundaram submitted that both the parties for whom the shares were purchased by El Dorado, namely, Crimson and Mr. Khurana, had admitted that they were beneficially entitled to these shares.
4. Referring to the purchase of 6 lakh shares by Malco, the learned senior counsel submitted that the said purchase was effected on the specific request of the authorities from Bombay Stock Exchange to avoid a major payment crisis and thereby to protect the interests of innocent investors. Neither Malco nor the appellant knew the brokers of Damayanti Group allegedly involved in the transactions. The learned senior counsel stated that the respondent had ignored the fact that Malco had instructed El Dorado to find a buyer for the said 6 lakh shares and only if they could not find a buyer, Malco would purchase such shares, which Malco did after one month of the purchase by El Dorado. Shri Sundaram pointed out that the respondent had failed to recognise the fact that Malco is a separate and independent legal entity and felt no need to issue any show-cause notice to Malco, to ascertain the actual position, that this is a serious omission having a direct bearing on the conclusion drawn by the adjudicating authority.
Shri Sundaram submitted that the so-called bail out was done to protect the interests of the stock market and not for any specific benefit of the appellant and that too it was done at the request of the concerned stock exchange. According to him such a transaction made at the request of the stock exchange, cannot be said to be meant to manipulate the prices to attract the provisions of regulation 4. He pointed out that the purchase was made at the then prevailing market price from the open market that such a stray transaction involving a relatively small quantity of shares cannot artificially raise or depress the market. He further stated that yet another factor to be noted is that the parties for whom the shares were purchased had taken delivery of the same. Referring to the scope of regulations 4(a) and (d), the learned senior counsel submitted that the transactions did in no way attract the provisions of the said regulations.
Referring to the respondent's finding that the motive for the alleged price manipulation was relatable to the appellant's plan to acquire shares of INDAL in the context of competition from ALCAN, the learned senior counsel submitted that the said finding is baseless and contrary to the facts. Shri Sundaram submitted that the respondent had ignored the fundamental difference in valuing the shares allotted to the promoters of the appellant and the minimum conversion price for Optionally Convertible Preference Shares (OCPS). The allegation that the reason why the price was rigged was due to the minimum conversion price of OCPS of Rs. 350 is without any substance inasmuch as OCPS were to be converted into equity shares eighteen months after the date of allotment, that such conversion was not mandatory but optional and, therefore, the appellant could have had no intention in rigging the price to Rs. 350 in April, 1998 more so when the entire concept of offer of the said OCPS was mooted, even as per the show-cause notice, only at the end of May 1999 in response to ALCAN's counter offer, that therefore, the alleged rigging of price in April 1998 would in no way be connected with the issue of OCPS which was not even contemplated at that time.
5. The learned senior counsel submitted that the impugned order is heavily based on the conduct of Damayanti group, even though there is no material or evidence to show that Damayanti group had any connections with the appellant. Shri Sundaram, citing extensively from the impugned order stated that there arc patent errors in the order and it is full of infirmities and inconsistencies. He submitted that the respondent has tailored the order to meet with certain preconceived notions, that it makes one believe that the order preceded adjudication. As an illustrative example of reliance on factually incorrect information, he referred to the statement in para 5.5 of the impugned order that during the period from 1-4-1998 to 4-6-1998 while the BSE sensex showed a decline of 11 per cent the price of the appellant's shares rose by 71 per cent; Quoting the published figures, the learned senior counsel stated that in fact during the period the appellant's share price rose only by 1.2 per cent and not 71%. He also stated that, al the relevant time, the earning per share of the appellant was Rs. 371 giving a price to earning multiple ratio of around 8, which was much lower than the prevailing P/E's of other industry majors.
Shri Sundaram submitted that the order is wrong in directing to launch prosecution of the appellant and its officers as none of the ingredients of any offence has been established by any material on record warranting such prosecution. The learned senior counsel submitted that regulation 11 or any other provisions of the Act or the Regulations do not confer any power on the respondent to direct a ban on the appellant accessing the capital market, that the impugned order travels far beyond the material on record and ignores various submissions of the appellant.
The learned senior counsel submitted that if such a perverse order is allowed to hold on as it is, the appellant would suffer irreparable injury. He stated that there is nothing in the order to slick the charges and make the appellant suffer. The order is bad in facts and in law. According to him there is a prima facie case in favour of the appellant, that in no way the respondent would be put to any inconvenience by temporarily staying the order, and that the balance of convenience is also in favour of the appellant. He submitted that taking into consideration the totality of the facts and circumstances of the case, the impugned order need be stayed, for the time being. Shri Sundaram also submitted that since the order has been made without adhering to the rules of natural justice, even remanding the case, at this stage would be justified.
6. Shri R. A. Dada the learned senior counsel appearing for the respondent stated that at this stage the Tribunal should be concerned as to whether an interim order of stay is justified in the facts and circumstances of the case, vis-a-vis, the well accepted guiding principles that whether (a) the appellant has a prima facie case, (b) the balance of convenience is in his favour and (c) he would suffer any irreparable injury if his prayer for stay of the impugned order is disallowed. He stated that a very detailed enquiry into the merits of the case is not required at this stage of the proceeding.
Shri Dada pointed out that the appellant has decided not to seek any interim order specifically staying the direction/order contained in para 10.5 of the order and that the prayer is to stay the impugned order as a whole.
7. The learned senior counsel referring to the appellant's submission that as a result of impugned order, the appellant's reputation has been adversely affected and consequently its business as well, submitted that it cannot be a valid ground to temporarily stay the impugned order. He submitted that an interim stay cannot be granted to protect a remote interest, that there should be a direct nexus with the order and the possible harmful consequences flowing therefrom. According to Shri Dada the appellant has not established any such nexus. Shri Dada submitted that if the impugned order as a whole is stayed at this stage, that would in effect amount to allowing the main appeal itself, which cannot be done at this stage of the proceeding.
8. The learned senior counsel submitted that the first and foremost thing to be considered now is as to whether the appellant has made out a prima facie case in its favour. In this context he referred to the Supreme Court decision in United Commercial Bank v. Bank of India [1981] 2 SCC 766 there in the Court had viewed that the first question that necessarily arise while considering a case for injunction of an order is whether in the facts and circumstances of the case there is a prima facie case, and if so between whom. According to Shri Dada, the appellant has failed to establish that a prima facie case existed in its favour, interpretation of the concerned statutory provisions or analysis of the data in a different way by the appellant, by itself docs not establish a prima facie, case, warranting the Tribunal's intervention at this juncture.
9. Shri Dada submitted that the two material consequences of the impugned order are that (i) prohibition on the appellant accessing the capital market and (ii) decision to prosecute the appellant and its officers for the alleged contravention of regulations 4(a) and 4(d). Shri Dada stated that since the learned senior counsel for the appellant had agreed even to give an undertaking to the effect that the appellant will not access the capital market during the pendency of the appeal, it is evident that the said prohibition is not a matter of urgent concern to the appellant at this stage. Referring to the threat of prosecution flowing from the impugned order, Shri Dada submitted that the respondent's power to launch prosecution, and the appellant's right to defend its case flow from the specific provisions of the Act, independent of any pending adjudication. In this context Shri Dada cited the provisions of sections 24, 26 and 27 of the Act and submitted that there is built in provision in the law itself to protect the persons facing prosecution under the Act. He referred to the provisions of section 27 and submitted that a person will not be liable to any punishment, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. Referring to sub-section (2) of section 27, the learned senior counsel submitted that the penal consequences will visit only those who are really involved in the commission of the offence. He submitted that an order to launch prosecution should not be constructed as imposition of penalty. A person against whom prosecution has been launched, can prove his innocence in terms of the proviso of the said section 27, that there are also provisions available under the Code of Criminal Procedure, 1898, to protect the interest of such persons. One cannot stifle prosecution. The learned senior counsel further submitted that the adjudication and prosecution are two parallel matters and that there is no bar in launching prosecution, even if there is an adjudication/ appeal pending. In support, he cited the Supreme Court decision in P. Jayappan v. S.K. Perumal, First ITO [1984] 149 ITR 696' that pendency of the reassessment proceeding (adjudication) cannot act as a bar to the institution of the criminal prosecution for offences punishable under the Income-tax Act, 1961, that the institution of the criminal proceedings cannot in the circumstances also amount to an abuse of the process of the Court. Shri Dada referred to the Bombay High Court's decision in ANZ Grindlays Bank v. Directorate of Enforcement [Writ Petition No. 1972 of 1994 dated 7-11-1998] therein the Court had discussed in detail the scope of penalty proceedings and prosecution for offences under the Foreign Exchange Regulations Act, 1973. In the said case the respondent's submission that the enforcement directorate could not invoke section 61 for launching prosecution till the completion of adjudication was held untenable. The Court did not agree with the respondent's plea therein that the impugned provision abrogates prestige or reputation of the official because he/she had to face prosecution.
Shri Dada submitted that adjudication and criminal prosecution are two different courses of action provided in the Act and that there is no prohibition in resorting to both these courses of action simultaneously, In support he extensively cited the observations of the Bombay High Court in Babulal Rajmal Jain v. Enforcement Directorate [Writ petition No. 1828 of 1996 dated 21-9-1996].
10. The learned senior counsel referred to section 41(d) of the Specific Relief Act and stated that an injunction cannot be granted by the Tribunal to restrain the respondent from instituting or prosecuting any proceeding in a criminal matter, in a criminal court. In support he cited High Court decisions in Aristo Printers (P.) Ltd. v. Purbanchal Erade Centre MS. 1992 Gauhati 81 and Sankunni Panikkar v Rama Panikkar AIR 1929 Mad. 346. He stated that in Aristo Printers (P.) Ltd.'s case (supra) the Court had clearly stated that if the provisions of section 41 prohibit the grant of decree or injunction in cases covered thereunder, it must necessarily follow that the Court cannot grant temporary relief of a similar nature.
Shri Dada stated that prosecution by itself is not a penalty or punishment. He submitted that a decision to stay prosecution would amount to prejudging the entire prosecution, which is not with in the purview of an appellate proceeding before the Tribunal.
Shri Dada endorsing the view that an appellate proceeding is an extension of the original proceeding, submitted that appellate authority cannot stay an order of prosecution passed by the competent authority in exercise of the specific power, conferred on it by the statute. He submitted that in the light of the submission made by the appellant that it is willing to abstain from accessing the capital market and in view of the specific legal provisions governing prosecutions for offences under the Act, no interim order at this stage is called for.
11. Referring to the appellant's contention that the impugned order was made without hearing the appellant, the learned senior counsel submitted that the appellant was given more than sufficient opportunities to present its case before the adjudicating authority. But the appellant wanted to misuse the opportunity to delay the proceedings as is clearly demonstrated from the sequence of events narrated in the order and from the appellant's conduct. The learned senior counsel also submitted that, from the conduct of the appellant it was clear that the very purpose of seeking cross-examination of certain persons was only to delay the adjudication proceedings. Shri Dada pointed out that all those witnesses on whose statement the respondent had relied are persons very closely associated with the appellant and as such it would have been possible for the appellant to bring them as its witnesses to prove or disprove their statements before the adjudicating authority. The appellant scrupulously avoid this course of action, as it's intention was not to bring in any proper evidence but to ensure that the adjudication gets delayed.
12. Shri Dada submitted that there is enough evidence to show that the transactions referred to in the impugned order were effected at the instance of the appellant. It is an admitted fact that Malco is an associate of the appellant, and Malco purchased shares at the behest of the appellant. Shri Dada submitted that the appellant has not produced any evidence to show that the share purchases were made on the request of BSE/NSE. Shri Dada pointed out that the very involvement of the appellant in the bailout operation itself goes against the appellant's stand that it was not in any way concerned in price rigging. Shri Dada stated that there was no need for the appellant to pump in huge sum of money to bail out few brokers, who by their own action were facing problems, that defaults and payment crisis are not uncommon in stock exchanges, that the appellant had not bothered on any other such occasions to bail out those in distress, that what was uncommon is that a corporate entity like the appellant showing undue concern and providing funds to a venture not directly relatable to its business activities, that is, to bail out few brokers in distress.
Shri Dada submitted that the appellant has not made out any case warranting Tribunal's intervention at this stage.
I have very carefully considered the submissions made by the learned senior counsel for the parties and also the material before me. There are several contentious issues in the appeal which need detailed consideration, facts and the governing legal provisions have been questioned. However, for the lime being I do not intend to go in very detail to the issues which are considered not directly relevant to decide the limited question before me -- i.e., the need for intervention through an interim stay order.
I have no doubt as to whether the Tribunal is empowered to make an interim order in an appeal before it. Legal position is very clear on this point. But the question is whether in the facts and circumstances of the present case an order temporarily staying the impugned order is necessary. Shri Sundaram, the learned senior counsel had made clear that his request is not confined to stay of any specific aspect of the order, but stay of the impugned order as a whole.
No doubt granting an interim order in favour of the appellant pending disposal of the appeal is discretionary, but to my mind the discretion has to be exercised on sound judicial principles. In case it is established that the party has a prima facie case, that the balance of convenience is in his favour, i.e., whether it would cause greater inconvenience to him if the interim order in his favour is not made than the convenience which the opposite party would be put to if the interim order is made and that whether the party would suffer irreparable injury, then only an interim stay order can be made.
13. The purpose and the effect of an interim order has been clearly enunciated in the following words by the Madhya Pradesh High Court in Durg Transport Co. (P.) Ltd v. Regional Transport Authority, AIR 1965 MP 142, that "a stay order or an ad interim injunction is issued to maintain and preserve the status quo existing at the time of initiating the proceedings. The real point which has to be decided when an application for stay or for a temporary injunction is made, is not how the question ought to be investigated; but it is whether the matter should not be preserved instates quo until the question can be finally disposed of".
The learned senior counsel for the appellant had stated that the appellant is ready, in case the Tribunal requires so, to give an undertaking to the effect that it will not access the capital market till such time the appeal is decided. He had also made it clear that the appellant is unconcerned at this stage about the threatened prosecution under the Act. Thus, in effect the learned senior counsel's request is to stay the 'conviction' part of the order and not particularly the 'Sentence' part. According to the appellant the conviction part is adversely affecting its reputation and goodwill and thereby its business as well.
14. Launching prosecution in terms of section 24 of the Act for contravention of the statutory provisions is a totally independent course of action left to the discretion of the respondent. In the instant case, it is seen from the impugned order that the respondent has ordered to initiate prosecution proceedings under section 24 of the SEBI Act for violation of clauses (a) and (d) of the 1995 Regulations. I do not think it is necessary, at this stage for the Tribunal to examine as to whether a prima facie case of violation of the said regulation has been made out in the impugned order to justify launching of prosecution against the appellant. Since prosecution being entirely independent of the adjudication and the prosecuting authority and defendants would be getting enough opportunity to prove or disprove their case in the proceedings in the Court, I do not consider it necessary to go into the sustainability of the impugned order, vis-a-vis, decision to launch prosecution. Even if it is held for argument sake that the impugned order is untenable, still nothing stops the respondent from launching prosecution against the appellants, in view of the statutory provisions discussed above. Further, by the appellant's own submission prohibition on the appellant accessing the capital market, is not a matter, of urgent concern to it for the moment. If the two spin off effects are not required to be contained now through an interim order, I do not find any imminent action emanating from the impugned order endangering the interests of the appellant warranting emergent intervention by the Tribunal through an interim order. I do not think that with a view to contain the so-called adverse effect of the impugned order on the reputation and goodwill of the appellant, an interim order staying the order would be justified, at this stage. In fact Shri Dada had agreed to for an earlier hearing of the main appeal itself in the first week of July's 2001, to enable the appeal to be disposed of early.
15. In my view the appellant has not made out a prima facie case in its favour. In the light of the facts and circumstances of the case, I am also of the view that the balance of convenience is also not in its favour. I do not foresee any irreparable injury to the appellant by not temporarily staying the order as sought for.
For the reasons stated above, I am of the view that in the present appeal, passing an interim order as prayed for by the appellant would not be justified. Therefore, the appellant's request for interim order is rejected.
16. The appeal, taking into consideration the convenience of the parties, is posted for final disposal on 2-7-2001 at 11.00 AM.