|Case name||North End Foods Marketing Pvt. Ltd. vs Securities and Exchange Board of India|
|Case number||Appeal No. 80 of 2019|
|Tribunal||Securities Appellate Tribunal|
|Bench||Justice Tarun Agarwala, Presiding Officer and Dr. C. K. G. Nair, Member|
|Decided on||March 12, 2019|
|Relevant Act/Sections||Section 11 and 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”)|
|Author of the case brief||Shubhi Maheshwari|
The appeal arose against an ex-parte interim order dated February 28, 2019 passed by the Whole Time Member (“WTM”) of the Securities and Exchange Board of India (“SEBI”) restraining the appellants and other entities from buying, selling or dealing in the securities market either directly or indirectly or being associated with the securities market, in any manner, whatsoever, pending investigation.
The fact leading to the issuance of the ex-parte interim order was that SEBI received an e-mail from Multi Commodity Exchange of India Ltd. (“MCX”) intimating that certain Group – A entities were holding more than 75% of the total exchange deliverable stock of Mentha Oil. MCX further informed that Group A entities were clubbed in accordance with MCX’s circular with regard to monitoring of position limits as it was found to be receiving funds from the appellant, i.e. North End Foods Marketing Pvt. Ltd. (“NEFM”).
It was observed by SEBI that Group – A entities acquired Mentha Oil through transactions in Mentha Oil futures contracts on the exchange platform as well as by way of off-market transfers. Further Group – A entities acquired off-market transfers from certain Group – B entities, which was in violation of position limits as prescribed by SEBI. Further examination revealed that Group – A and Group – B entities received the funds from one common entity, NEFM.
The investigation revealed that the funds transferred by NEFM to Group – A and Group – B entities were for the purpose of taking positions in Mentha Oil futures contracts and for taking subsequent delivery of Mentha Oil worth Rs. 28.04 crore on the MCX platform. A prima-facie conclusion was drawn that such cornering of dominant and substantial percentage or specified stocks of Mentha Oil was fraudulent within the meaning of the term ‘fraud’ as defined under Regulation 2(1)(c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 (the “PFUTP Regulations”) and was also in violation of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. A prima-facie opinion was formed that concentration of large stocks with a single entity was detrimental to the price discovery and that a single entity was in a position to dictate the Mentha Oil Future Contracts on exchange platform during the lean season.
Whether an ex-parte interim order can be passed in every case under Section 11 and 11B of the SEBI Act without giving an opportunity of hearing to protect the interests of the investors in securities and to regulate the securities market?
ARGUMENTS ON BEHALF OF THE APPELLANTS
NEFM is actively involved in the business of procurement of commodities and warehousing of commodities for which it receives orders from its clients and, in turn, placed orders for such commodities with its agents. These agents procure such commodities and delivered those commodities to the appellant who, in turn, delivered such commodities to its clients.
The appellant is not engaged in funding of loans to entities of Group A or Group B entities. All the trading on the exchange resulted in physical delivery of the commodities. Apart from Mentha Oil, the appellant also traded on Stock Exchange in other commodities such as Castor oil, Guar seeds, Paddy, etc.
The finding that the appellants have dominated the market was based on surmises and conjectures in as much as the Respondent did has not taken into consideration the total volume of trades in the market as compared to the delivery of Mentha Oil taken by the appellants. It was contended that if the total volume of trades is taken into consideration, the delivery even if it is clubbed together as a single entity was minuscule and was less than 2% of the total volume of trade. Such minuscule level cannot be a dominative factor to manipulate the price of Mentha Oil in the open market.
It was contended that had an opportunity been given, the appellants would have explained that there was no nexus between the appellants and that there was no working in unison either to corner the market or to manipulate the price of Mentha Oil. An ex-parte interim order has restrained the appellants not only from trading in Mentha Oil but in all commodities on the exchange platform, in the absence of any alleged violation of trading in any other commodities other than Mentha Oil.
The appellants trade in other perishable commodities and the blanket freezing of their demat accounts will put the appellants to irreparable loss which cannot be compensated in terms of money. The appellant had been doing a legitimate business for several years and had earned a goodwill and by the impugned ex-parte interim order, it had virtually put a death knell on their business and has undoubtedly stopped their business which is otherwise guaranteed under the Constitution.
It was contended that freezing of the mutual funds had no relation with the trading activities and, therefore, the ex-parte order was wholly arbitrary and, in any case, was harsh and punitive and not remedial in nature, which is envisaged under Section 11 of the SEBI Act.
ARGUMENTS ON BEHALF OF THE RESPONDENTS
It was contended on behalf of the Respondents that the market in trading of these commodities are small as compared to the trading in the open physical market, and, therefore, the restraint order was only confined to the trading on the exchange platform and, therefore, it was open for the appellants to continue dealing with the commodities in the open market.
Considering the gravity of the violations and the fraudulent intention under the PFUTP Regulations, SEBI with a view to act diligently has taken immediate preventive measures to prevent manipulation in the future price of Mentha Oil on the exchange platform.
Urgent measures were required against the appellants from indulging in such activities by taking position not only in Mentha Oil contracts but in other commodities as well, as it was done with an intention to dominate futures trading. The learned senior counsel contended that by adopting a balancing act, the impugned order was passed which was reasonable and was done with a view to protect the interest of the investors and integrity of securities market.
A plain reading of Section 11 and 11B shows that SEBI has to protect the interests of the investors in securities and to regulate the securities market by such measures as it thinks fit. SEBI has power to pass interim orders and such interim orders can also be passed ex-parte. Normally, while passing an interim order, the principles of natural justice has to be adhered to, namely, that an opportunity of hearing is required to be given.
Procedural fairness embodying natural justice is to be applied whenever action is taken affecting the rights of the parties. At times, an opportunity of hearing may not be pre-decisional and may necessarily have to be post-decisional especially where the act to be prevented is imminent or where action to be taken brooks no delay. Thus, pre-decisional hearing is not always necessary when ex-parte ad-interim orders are made pending investigation or enquiry unless provided by the statute. In such cases, rules of natural justice would be satisfied, if the affected party is given a post-decisional hearing.
However, it does not mean that in every case, an ex-parte interim order should be passed on the pretext that it was imminent to pass such interim order in order to protect the interest of the investor or the securities market. An interim order, however, temporary it may be, restraining an entity/person from pursuing his profession/trade may have substantial and serious consequences which cannot be compensated in terms of money.
The basis of urgency in passing this ex-parte order was purely on account of presumption and was not based on any piece of evidence. There should be some shred of evidence to come to a prima-facie conclusion that the appellants are indulging in unfair trade practices in cornering the market with a manipulative intent to manipulate the price. Passing a restraint order which virtually puts a stoppage on the appellants right to trade based on a needle of suspicion was held to be harsh and unwarranted.
In the facts and circumstances case, it was held that it was not such an urgent case where the WTM should have exercised its powers. It was further observed that SEBI is empowered to pass an ex-parte interim order only in extreme urgent cases and that such power should be exercised sparingly.
Thus the impugned order was held unsustainable in the eyes of law as it had been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. The operation of the impugned order was stayed and quashed.
SAT ordered SEBI to provide the appellants an opportunity of hearing and thereafter if it finds that an interim order is required to be passed in order to protect the securities market, it would pass such orders in accordance with law.
There should be some shred of evidence to come to a prima-facie conclusion that there has been an indulgence in unfair trade practices in cornering the market with a manipulative intent to manipulate the price. Passing a restraint order which virtually puts a stoppage on the right to trade based on a needle of suspicion is harsh and unwarranted.