ORDER
N.K. Sodhi, J. (Presiding Officer)
1. Mazda Fabrics and Processors Limited (for short ‘Mazda’) is a company incorporated under the provisions of the Companies Act, 1956. It came out with an Initial Public Offer (IPO) in January 1996. In terms of the circulars issued by the Securities and Exchange Board of India (for short the ‘Board’), the appellant-company which was then a merchant banker entered into a memorandum of understanding with Mazda and acted as the lead manager to the issue. It is alleged that the promoters of Mazda through one Suresh Bafna manipulated the issue and arranged applications from different entities with a view to bail out the issue. Suresh Bafna is alleged to have arranged for the subscription of more than 67.5 per cent of the shares allotted in the public issue and if those applications had not been arranged, the issue would have failed and it would have to be refunded. It is further alleged that the promoters of Mazda had undertaken to buy back the shares from the allottees and pay interest to them for the period of investment. Investigations carried out by the Board revealed that 50 applications had been received for 1000 shares each accompanied by cheques which were in continuous serial numbers from the same account maintained with State,Bank of Indore, Raipur. It is claimed that the continuous cheque numbers for different applications should have alerted the appellant as the lead manager and even the Registrar to the issue (which was a different entity altogether) in scrutinizing the applications accompanying those cheques and since it failed to get alerted, it assisted the promoters of Mazda in fulfilling the subscription level. Another allegation made against the appellant is that as the lead manager to the issue, it failed to ensure that the Registrar to the issue was not making irregular allotments to applicants with a view to bail out the issue. In view of these allegations it was alleged that the appellant as a merchant banker had violated Clauses 1, 2 and 9 of the code of conduct prescribed in Schedule III to the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992 (hereinafter called the ‘Regulations’). The Board was also of the opinion that in view of the aforesaid irregularities/illegalities, the appellant had violated Circular No. 1, dated 1-3-1993 issued to the registered merchant bankers like the appellant. After a lapse of more than 8 years, a notice dated 9-6-2004 was issued to the appellant calling upon it to show cause why action be not taken against it under Sections 11(4)(b), 11B and 11 of the Securities and Exchange Board of India Act, 1992 (for short the ‘Act’). The appellant filed a detailed reply on 20-7-2004 pointing out that its certificate of registration expired on 30-9-2000 and that it had not been renewed thereafter. The Board was informed that since September 2000, the appellant had ceased to be a merchant banker. The allegations made in the show-cause notice were emphatically denied. The Board took almost another four years to complete the enquiry under Section 11B of the Act and on a consideration of the material collected during that enquiry came to the conclusion that the appellant had violated the code of conduct prescribed for merchant bankers and also the circular dated 1-3-1993. By order dated 18-2-2008 the Board has issued directions to the appellant under Section 11B of the Act restraining it from accessing the securities market and also prohibited it from buying, selling or otherwise dealing with the market in any manner whatsoever for a period of one month. It is against this order that the present appeal has been filed.
2. At this stage it would be necessary to refer to the relevant provisions of the Regulations which were then in force in the year 1996 when the irregularities/illegalities are alleged to have been committed by the appellant. Penalty of suspension of registration as a merchant banker could be imposed if a merchant banker violated the provisions of the Act, rules or regulations and the circumstances under which registration could be suspended were specified in Regulation 36. Regulation 37 provided for cases where the penalty of cancellation of registration could be imposed. These provisions read as under:
36. Suspension of registration.- (1) A penalty of suspension of registration of a merchant banker may be imposed where-
(i) the merchant banker violates the provisions of the Act, rules or regulations;
(ii) the merchant banker-
(a) fails to furnish any information relating to his activity as merchant banker as required by the Board;
(b) furnishes wrong or false information;
(c) does not submit periodical returns as required by the Board;
(d) does not cooperate in any enquiry conducted by the Board;
(iii) the merchant banker fails to resolve the complaints of the investors or fails to give a satisfactory reply to the Board in this behalf;
(iv) the merchant banker indulges in manipulating or price rigging or cornering activities;
(v) the merchant banker is guilty of misconduct or improper or unbusiness like or unprofessional conduct which is not in accordance with the Code of Conduct specified in Schedule III;
(vi) the merchant banker fails to maintain the capital adequacy requirement in accordance with the provisions of Regulation 7;
(vii) the merchant banker fails to pay the fees;
(viii) the merchant banker violates the conditions of registration;
(ix) the merchant banker does not carry out his obligations as specified in the regulations.
37. Cancellation of registration.- A penalty of cancellation of registration of a merchant banker may be imposed where-
(i) the merchant banker indulges in deliberate manipulation or price rigging or cornering activities affecting the securities market and the investors interest;
(ii) the financial position of the merchant banker deteriorates to such an extent that the Board is of the opinion that his continuance as merchant banker is not in the interest of investors;
(iii) the merchant banker is guilty of fraud, or is convicted of a criminal offence;
(iv) in case of repeated defaults of the nature mentioned in Regulation 36 provided that the Board furnishes reasons for cancellation in writing.
Regulation 38 provided that no order of penalty of suspension or cancellation, as the case may be, could be imposed except after holding an enquiry in accordance with the procedure specified in Regulation 39 and this regulation laid down the manner of holding enquiry before imposing the penalty of suspension or cancellation. It would be pertinent to mention that Regulations 36 to 39 along with some others have been omitted from the Regulations with effect from 27-9-2002 and enquiries against the delinquent merchant bankers could thereafter be conducted in accordance with the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (for short Enquiry Regulations). It would also be relevant to refer to the provisions of Section 11B of the Act under which action has been taken against the appellant for violating the code of conduct prescribed by the Regulations. It reads as under:
11B. Power to issue directions.- Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interest of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions,-
(a) to any person or class of persons referred to in Section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in Section 11A, as may be appropriate in the interests of investors in securities and the securities market.
A reading of the aforesaid provisions would make it clear that in the year 1996 when the appellant is alleged to have committed the aforementioned irregularities, the Regulations provided that the only penalty that could be imposed on a delinquent was either suspension of its certificate of registration as a merchant banker or its cancellation. It would follow that in the case of either of these penalties being imposed, the delinquent entity could carry on other activities in the market except business as a merchant banker. For instance, if a merchant banker was also a registered stock broker and if penalty of suspension or cancellation of its certificate of registration as a merchant banker were to be imposed, it could continue its activities as a stock broker. It is a matter of common knowledge that persons get themselves registered as market intermediaries for carrying on different activities for which they obtain different registration certificates. In other words, the same entity could wear different hats and quite often it does. Section 11B of the Act, on the other hand, entitles the Board to issue directions to any intermediary of the securities market or any other person associated therewith if it thinks it is necessary in the interests of the investors or orderly development of securities market or to prevent the affairs of any intermediary or any other person referred to in Section 12 from being conducted in a manner detrimental to the interests of investors or securities market or to secure the proper management of any such intermediary. In other words, whatever be the directions issued under Section 11B, these have to be in the interest of the investors or in the interest of the securities market or for its orderly development. Every direction issued under Section 11B shall have to be tested on this touchstone. If action were to be taken against a delinquent merchant banker prior to 27-9-2002, the Board had to hold an enquiry in terms of Regulation 39 and after that date an enquiry is required to be held in terms of the Enquiry Regulations and, if found guilty, any appropriate penalty could be imposed. Obviously, the object of imposing penalty is to punish the wrongdoer. If the nature of the misconduct is such which is likely to affect adversely the securities market or the interest of the investors in general, it is open to the Board to issue under Section 11B such directions as may be necessary to protect the integrity of the market or the interests of the investors including a direction to restrain the delinquent from accessing the capital market. When such directions are issued, the object is not to punish the delinquent but to protect and safeguard the market and the interest of the investors which is the primary duty cast on the Board under the Act. The directions may result in penal consequences to the entity to whom those are issued but that would be only incidental. The purpose or the basis of the order or the directions would nevertheless be to protect the securities market and the interest of the investors. In other words, the order or the directions under Section 11B have to be regulatory in nature and not punitive. If the Board wishes to punish the delinquent merchant banker for any of its misdeeds, it should proceed against it either under the Regulations or under the Enquiry Regulations, as the case may be, and impose any appropriate penalty in accordance with law and it should not resort to proceedings under Section 11B unless a regulatory order also needs to be passed. The Board cannot punish a delinquent merchant banker by taking recourse to Section 11B. Section 11B is meant for a different purpose. The directions under Section 11B could be more far reaching than the mere penalty which could be imposed under the Regulations or under the Enquiry Regulations, as the case may be. If proceedings under the Enquiry Regulations or the Regulations had been initiated and the appellant had been found guilty, then one of the penalties referred to in those Regulations could be imposed and the maximum that could happen was cancellation of its certificate of registration as a merchant banker (though the facts of this case do not warrant such action). In that event it could continue with its activities other than the business as a merchant banker. The sweeping direction issued under Section 11B restrains the appellant from accessing the capital market altogether for one month. The result is that the appellant cannot carry on any of its activities in the market for which it may be holding valid certificate(s) of registration. We do not think that the Board was right in initiating proceedings against the appellant under Section 11B of the Act. It should have proceeded under the Regulations. It did not do so because it slept over the matter for over eight years and by the time it decided to issue a show-cause notice in June 2004, regulations 36 to 39 had been deleted. It could still proceed under the Enquiry Regulations but in its wisdom it chose to proceed under Section 11B. Under the Enquiry Regulations too, the maximum penalty was cancellation of its certificate of registration as a merchant banker but under Section 11B, a much harsher penalty has been imposed. This could not be done. We cannot, therefore, uphold the impugned order.
3. There is yet another reason why the impugned order deserves to be set aside. The appellant before us was a registered merchant banker in the year 1996. Its certificate of registration expired on 30-9-2000 and it was never renewed and it is common case of the parties that the appellant has not carried on business as a merchant banker thereafter. It is, thus, clear that the appellant ceased to be a merchant banker after 30-9-2000 and, therefore, it could not be a threat to the securities market any more. Where was then a need to issue directions to it restraining it from accessing the securities market. As already observed, Section 11B is an enabling provision entitling the Board to issue directions to an intermediary or any other person with a view to protect the interest of the investors or to protect the integrity of the market or to ensure its orderly development. The object of issuing directions can only be to regulate the market and not to punish the delinquent intermediary. There are ample provisions under which an erring intermediary could be punished. Since there was no threat to the market and yet the appellant has been debarred from accessing the securities market, we are satisfied that the impugned order has been passed with the object of punishing it for its alleged violation of the code of conduct and also for its alleged violation of the aforesaid circular. The provisions of Section 11B could not be used for this purpose.
4. Before concluding, we cannot resist observing that there has been an inordinate delay in initiating action against the appellant. It is alleged to have committed the irregularities in the earlier part of the year 1996 and the show-cause notice was admittedly issued in June 2004. How could any one file a proper reply after a lapse of more than eight years. This long delay itself causes grave injustice to the delinquent and results in the violation of the principles of natural justice. Such delays defeat the very purpose of the proceedings.
5. What is contended by the learned Counsel for the Board is that investigations commenced only in May 2002 and were going on till the year 2003. This is no explanation for the delay. Why could they not commence earlier. Again when investigations continue for years together, the very purpose of issuing the directions under Section 11B may be lost as in the instant case. In view of the inordinate delay in initiating action against the appellant and that too, when its certificate of registration had already expired, the impugned order cannot be sustained.
6. For the reasons recorded above, we allow the appeal and set aside the impugned order leaving the parties to bear their own costs.