ORDER
1. These three appeals filed by the appellants, viz, Shri Anand Rathi, Anand Rathi Securities (P.) Ltd. and Anand Rathi Direct India (P.) Ltd. are directed against the common order made by the respondent on 9-11-2001. By the said order Shri Anand Rathi has been restrained from holding any position of director or trustee of any capital market related institutions/entities for a period of two years from 12-3-2001. In the case of Anand Rathi Securities (P.) Ltd. and Anand Rathi Direct India (P.) Ltd., their certificates of registration granted to do stock broking business have been suspended for a period of 9 months with effect from 12-3-2001. In Shri Rathi’s case order has been issued invoking Sections 11 and 11B of the Securities and Exchange Board of India, Act, 1992 (‘the Act’). In the case of the said two private limited companies, suspension order has been issued in terms of regulation 26 of the Securities and Exchange Board of India (Stock Brokers and sub-Brokers) Regulations, 1992 (‘the 1992 Regulations’). While the direction to Shri Rathi has the approval of all the three members of the Board (which includes the Chairman) who heard the matter the order against the two companies has the approval of only 2 members, as one member, i.e., Chairman did not subscribe to the conclusion arrived at by the other two members. He has viewed that these two companies are not liable for any penalty of suspension under regulation 26. In terms of Section 7(3) of the Act decision of the majority prevails and therefore, the order in force against the two companies is the one made by the two members.
2. All the three appeals were filed in the Tribunal on 20-11-2001 praying for the following relief(s).
(a) the impugned order dated 9-11-2001 be quashed;
(b) for such further and other reliefs as the nature and circumstances of the case may require;
Pending final decision on the appeal the following interim relief(s) have been sought:
(a) the operation of the impugned order dated 9-11-2001 be stayed;
(b) for such further and other reliefs as the nature and circumstances of the case may require;
A copy of each of the appeals was served on the respondent on 21-11-2001. In terms of Rule 14(1) of the Securities Appellate Tribunal (procedure) Rules, 2000, the respondent is required to file its reply within 30 days of the recept of the copy of the appeal. Accordingly the reply is due by 20-12-2001. The respondent has expressed its readiness to file the reply early. There is no statutory requirement of any rejoinder from the appellants. Therefore, on receipt of the reply the main appeal itself can be heard and disposed of in December, 2001 obviating the need for an interim stay order at this juncture. Though Shri Goolam Vahanvati, the learned Advocate General appearing of the respondent expressed his readiness to file the reply and argue the case at a very early date, Shri Aspi Chinoy, the learned senior counsel appearing for the appellants preferred to have an interim order staying the operation of the impugned order during the pendency of the appeal. Shri Chinoy feels that since the order is patently illegal, the appellants should not be made to suffer even for a day as a result thereof. Therefore, the request for interim stay was taken up for disposal. Since the appeal is relatable to a common order and in all the three appeals the parties are also represented by common counsel it was decided to hear the matter and pass a common order.
On 28-2-2001, the Hon’ble Finance Minister presented what was widely seen as an Investor Friendly’ Budget. The general expectation was that the Stock Markets in the country would be encouraged by such a budget, and during 28-2-2001 to 1-3-2001, the Senses rose by 201 points. However, this rising trend did not continue on the next day. On 2-3-2001, the Sensex dropped by 176 points. There was a lot of general concern as to the cause of such a large drop, which was unusual and exceptional especially in the light of a positive budget. The respondent initiated investigation into the matter.
3. It was noticed that Shri Rathi, the then President of the Stock Exchange, Mumbai (BSE),had sought some information at about 1510 hours on 2-3-2001 in respect of the position of some brokers/FIIs in certain scrips from the surveillance department of BSE.
4. In view of the above, the respondent by an ex parte Interim Order, dated 12-3-2001 passed under Sections 11 and 11B of the SEBI Act, restrained Shri Rathi from acting as director-member of BSE and also directed Shri Rathi and his four associate entities (viz., Anand Rathi Securities (P.) Ltd., Rathi Global Finance Ltd., Rathi Capital & Securities (P.) Ltd. and Navaratan Capital Securities Ltd.) not to undertake any fresh business as brokers till further orders were passed by SEBI. Subsequently, on 21-3-2001, a post-decisional hearing was given to Shri Rathi and his associates by the Chairman and the then full time Member Shri J.R. Verma. They decided, in view of the divergent view, complexities and seriousness of the issues involved that Shri Rathi and his associates should be called for a further hearing on 28-3-2001 before the entire SEBI Board.
5. Accordingly the Board, held the hearing on 28-3-2001 and after the hearing passed an order dated 30-3-2001 confirming the above referred Interim Order dated 12-3-2001. However, Prof. J.R. Verma disagreed with the majority view of the Board on the issue of suspension. Subsequently, on the basis of preliminary investigation report, the said order was further reviewed and confirmed by the Board vide its order dated 23-4-2001.
6. Aggrieved by the orders dated 12-3-2001 and 23-4-2001, Shri Rathi filed a Writ Petition No. 628 of 2001 before the Hon’ble High Court, Mumbai. The Hon’ble Court Mumbai vide its order dated 2-5-2001 dismissed the petition as not maintainable under Article 226 of the e Constitution and rejected the contentions of the petition and ordered SEBI to complete the enquiry within 4 months from 2-5-2001. Subsequently on SEBI’s request the time frame for issuing the order was enlarged by the Hon’ble High court.
The respondent passed the impugned order on 9-11-2001. The said order
is under challenge in the present appeals.
7. Shri Chinoy submitted that even though serious charges were levelled
against the appellants ultimately nothing did survive except the violation
of certain circular and inspite of the same harsh penalty was levied on
the appellants. In this context he referred to the statement of charge’
issued by the respondent and in particular to the following charges:
“(1) Shri Rathi has misused his position as a Board Member and President
of Bombay Stock Exchange (BSE) by seeking non public, confidential and
price sensitive information from the surveillance department; (2) Shri
Rathi sought to obtain confidential and price sensitive information directly
from BSE’s surveillance department in order to pass the same to trading
concerns (either belonging to him or his relatives) for utilisation of the
same in a manner beneficial to them; (3) based on the information
procured by Shri Rathi, his associated broking firms have done substantial
sales trades in certain scrips on 2-3-2001 and in the forenoon session of
5-3-2001. According to show cause notice (SCN) Shri Anand Rathi and the
entities referred to in the notice violated:
(a) Code of Conduct for Stock Brokers as stipulated in Schedule II and
regulation 5 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992;
(b) Regulation 3 of the SEBI (Insider Trading) Regulations, 1992; and
(c) Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Markets) Regulations, 1995.”
8. The learned senior counsel submitted that the only charge which
according to the investigating office survived scrutiny was that Shri
Rathi had asked for information form the surveillance department and
by seeking such information he had interfered with the functioning of
surveillance department and violated SEBI’s circular dated 8-8-1995,
6-12-1995 and 25-5-2000. He has not found the appellant guilty of any
violation of any of the provisions of the Act, Rules or Regulations. Shri
Chinoy submitted that with reference to the said charge Shri Rathi was
asked to show cause as to why the penalty as recommended by the
Inquiry Officer should not be imposed on him. In this context he referred
to the Inquiry Officer’s recommendation that “it would be fit and proper
in the interest of securities market that Shri Rathi be restrained under
Sections 11 and 11B of SEBI Act, 1992 from being associated with any of
the capital market related institutions/entities for a period of 2 (two)
years”. The respondent accepted the said recommendation to impose
penalty. Shri Chinoy submitted that thus it is clear that the respondent has
invoked Sections 11 and 11B to impose penalty on Shri Rathi.
The learned senior counsel submitted that apart from the charge that Shri
Rathi had asked for information from the surveillance department, there
is no finding that the information so collected was made use of by him or
any of his associates.
With reference to the suspension order passed against the two companies
(Appellants in appeal 53 and 54 of 2001) Shri Chinoy submitted that there
is not even a whisper of any wrong doing by these two companies, but the
companies have been penalised only on the ground that these two
companies are associated companies of Shri Rathi in as much as he is a
director and shareholder in these companies.
9. Shri Chinoy submitted that Shri Rathi, as President of BSE was duty
bound and specifically authorised to act as such in the given circum
-stances, i.e. to exercise all power and to meet all obligations under the
rules and bye-laws of the exchange. He referred to bye-laws 4,6,60 and
73(a) and also Rule 118, 148 and 152 of BSE to show that the President was
entitled to collect information from the surveillance department. He
further stated that on several occasions the Finance Ministry’s officers
and SEBI Chairman had called for information from his which were only
in the possession of the surveillance department and he had furnished the
information called for, that collecting information by him from the
surveillance department for the purpose in the past was not considered
objectionable by the authorities, but now they view it differently. Shri
Chinoy submitted that in his capacity as the President of the exchange in
the context of an unjustifiable market upheaval witnessed on 2-3-2001
the President was certainly entitled to call for the information from the
surveillance department which functions under the Governing Board of
the exchange. Shri Chinoy further submitted that Shri Rathi had not done
any thing clandestinely, that the telephone call was made in the presence
of other people, that the call was put through by his Secretary, that the call
was first directed to the ED, as he was not available to the GM, and that
when he was also not available to an official of the surveillance department
not personally known to him. Further Shri Rathi knew that his conver-
sation with the officer was being recorded as the recording system was
introduced by Shri Rathi himself. According to Shri Chinoy Shri Rathi’s
action was bona fide and it was in the context of discharging his duties as
the President of the exchange.
Shri Chinoy submitted that the alleged violation of the requirement of
mere circular cannot warrant imposition of any harsh penalty as has
been done in the case, that the principles laid down by the Hon’ble
Supreme Court in Hindustan Steel Ltd. v. State of Orissa AIR 1970 SC 253
have been totally ignored by the respondent while imposing the penalty.
Shri Chinoy submitted that the alleged breach of three circular cannot
by any standard be considered as an action deliberately in defiance of law
or guilty of conduct contumacious or dishonest or conscious disregard
to the obligation cast on Shri Rathi to warrant penalty as laid down by the
Apex Court. He also stated that in R.K. Agarwal v. SEBI [2001] 31 SCL 279
(Mum.-Sat.),that inspite of the fact Shri R.K. Agarwal, former President
of Uttar Pradesh Stock Exchange, was found by SEBI to have interfered
with the surveillance department, he was only restrained from “holding
any public position in future as member of the Governing Board of the
office bearer of the exchange as well as any capital market related public
institutions” for 2 years. Shri Chinoy submitted that for having called for
certain information during the discharge of his duties, Shri Rathi has been
awarded as very heavy penalty. Shri Chinoy referred to the decision of this
Tribunal in Sterlite Industries India Ltd. v. SEBI [2001] 34 SCL (Mum.-
Sat.) and stated that Section 11B cannot be used for imposition of penalty
and that the direction restraining Shri Rathi from holding any position of
director or trustee in capital market related institution/entity for 2 years
is nothing but a penalty. Such a direction is contrary to the law settled in
Sterlite Industries India Ltd., case (supra) and an order passed in total
regard to the settled law cannot be allowed to be in position for any reason.
Shri Chinoy submitted that action of a person who is a director of a
company, if not relatable to his position in the company as a director, is
not binding on the company, that for the omissions and commissions
personal to the directors, the companies in which he holds directorship
cannot be held responsible that in the instant case there is no finding of
any violation by the appellant companies and still their certificate of
registration has been suspended only for the reason that those two
companies are associated with Shri Rathi. According to Shri Chinoy,
action based on Shri Rathi’s conduct in his capacity as the President of the
exchange, against the two companies is untenable and patently illegal.
Shri Chinoy submitted that a person cannot be punished on the basis of
surmises and conjectures. Reasonable evidence is a must to hold the
person guilty. There is no evidence to support the finding and consequential
penal action against the appellants. Shri Chinoy submitted that the
punishment meted out to the appellants is not warranted in law and it is
also not on admitted facts and as such cannot be allowed to remain
operative unchecked.
Shri Chinoy submitted that it is a fit case to grant interim stay as there is
a strong case that the penalty imposed is against the settled law, that the
balance of convenience is also in favour of the appellants. He also stated
that the appellants as a result of the illegal order made by the respondent
are put to considerable hardship and unless the order at the earliest is
stayed the appellants would continue to suffer irreparable injury to
which they are now subjected to.
10. Shri Goolam Vahanvati, the learned Advocate General, appearing for
the respondent submitted that the respondent would be filing its reply
within 15 days and thereafter the main appeal itself can be heard on any
date convenient to the Tribunal and that as the appeal itself can be
expeditiously disposed off, it may not be necessary to pass an interim
order at this stage, Shri Vahanvati submitted that in any case the
appellants have not established any prima facie case in their favour for
interim stay of the operation of the impugned order.
11. The learned Advocate General briefly explained the market scenario
on the day the Union Budget 2001, was presented and the days following.
He also explained the background of the appeal and submitted that the
appeals raise several complex legal issues requiring detailed consideration.
He stated that the issues involved are not that simple as is being projected
by the appellants. The question as to whether the respondents order is
punitive in nature, the consequences of the finding against Shri Rathi
would visit the companies which he owned and controlled etc. are matters
to be considered in detail. Further the conduct of Shri Rathi as President
of BSE, seeking price sensitive information from the surveillance
department cannot be simply viewed as an innocent actin without
examining his business interest, the context in which he sought the
information, the nature of information he sought and the time he chose
to collect such information etc. He further submitted that the fact that
Shri Rathi owns broking outfits is also a factor to be taken note of while
deciding Shri Rathi’s conduct in this regard.
With a view to show that the conduct of Shri Rathi asking for information
from the surveillance department was for the purpose of managing the
affairs of the exchange of which he was the President at that time or was
it to benefit him as dealer in securities, the learned Advocate General
referred to the verbatim transcript of the recorded telephone conversa-
tion Shri Rathi had with Shri Arun Dhanwade of the surveillance depart-
ment on 2-3-2001 and stated that it is evident from the conversation that
the information was sought not for the purpose of exchange manage-
ment. The learned Advocate General submitted that Shri Rathi Asking for
information from the surveillance department was against the accepted
norms required to be followed by the President of the exchange. The
argument that the call was put by his Secretary and there were others in
the room a that point of time, etc. are not of any support of the appellant.
The learned Advocate General submitted that the question as to whether
the information received from the surveillance department was made
use of or not is the issue here. The question is whether Shri Rathi was
entitled to call for price sensitive information from the surveillance
department, that the fact that Shri Rathi had asked for information from
the surveillance department remains undisputed. The learned Advocate
General submitted that conduct of Shri Rathi in this regard was not
befitting to the high position he was holding in the exchange, that his
conduct as a whole should be taken into consideration and not in any
segmented way, while dealing with the entities which are under his
control and management, that therefore, in the light of the clear finding
against Shri Rathi, the order passed against the two appellant companies
is to be sustained.
12. The learned Advocate General submitted that Shri R.K. Agarwal’s
case relied on by appellants and Shri Rathi’s case are not comparable
as the facts and circumstances relating to these two cases are not
identical. The learned Advocate General submitted that the order prohibits
Shri Rathi from holding any position of director/trustee of any capital
market related institutions/entities, that the prohibition on participa-
tion in the management of any capital market related institutions/
entities. Shri Rathi has not been debarred from dealing in securities that
he is at liberty to deal in securities and, therefore, the order cannot in any
way to construed as punitive.
The learned Advocate General further submitted that the appellants’
prayer for interim relief and the substantive relief sought in the appeal are
substantially the same and that the present appeal is not wherein such
an order in the nature of interim relief would be justified. He also
submitted that since the respondent is ready and willing to co-operate to
get the appeal disposed off expeditiously, any order unsettling the status
quo would be unjustified and the balance of convenience is in allowing
the order to operate undisturbed till the disposal of the appeal.
13. I have very carefully considered the submissions made by the learned
counsel for the parties. No doubt, the appeals involve complex legal
issues. Shri Chinoy’s main argument is that the order is patently illegal and
wrong as it is against the settled legal position in Sterlite Industries India
Ltd.’s case (supra) and that this itself is a ground to grant interm stay.
Against this, the learned Advocate General had argued that the order
restrained Shri Rathi only form holding any position, that too restricted
to director or trustee, in any capital market related institutions/entities,
and the order does not in any way restrain Shri Rathi from dealing in
securities, to be construed as punitive, that restraint on holding the post
of a director or trustee of a capital market entity on proven misconduct
by itself is not a punitive measure. It is felt that it is a matter which requires
detailed considerations as to whether the restraint on Shri Rathi holding
directorship, etc., in capital market related entities is punitive or not and
whether the order is within the ambit of Sections 11 and 11B? Yet another
legal issue which requires to be considered in detail is the question of the
reach of penal consequences on a company for the omissions and
commissions of its directors unrelated to the position they hold in the
company. The answer to this question would decide the sustainability of
the order against the two appellant companies.
14. Shri Chinoy had strongly argued to establish that there is a prima facie
case in favour of the appellants and the balance of convenience is also in
their favour and that in the absence of an order staying the operation of
the impugned order pending disposal of the appeal, the appellants would
suffer irreparable injury. I have given due weightage to his submissions
as also to the learned Advocate General’s submission. In the light of the
facts and circumstances of the case I am not in a position to accept Shri
Chinoy’s version. Shri Chinoy’s main argument that the order issued
under Sections 11 and 11B in the case of Shri Rathi is punitive in nature
has been strongly contested by the learned Advocate General. The matter
requires to be examined in detail and at this stage it is not possible to reach
on any firm conclusion in this regard. Decision on the point is very crucial.
In my view the appellants have not made out any prima facie case in their
favour now, warranting interference by this Tribunal with an interim
order to stay the operation of the impugned order pending disposal of the
appeal. Since no prima facie case has been established to my satisfaction
I am not inclined to make any interim order in these appeals at this
juncture, as prayed for.
15. The Tribunal is anxious to dispose of the main appeal expeditiously.
Since the learned Advocate General has stated that respondent would be
filing its reply within 15 days from today and that the counsel for the
parties have agreed to argue the appeal on 19-12-2001, I do not foresee
any problem in deciding the appeals expeditiously.
16. Taking into consideration the convenience of the counsel for the
parties as communicated to the Tribunal, the appeals are posted for
disposal on 19-12-2001 at 11.00 AM.