Shankar Sharma v. SEBI

SAT25 Jun 2001

Case brief

AI extract

What is this about?

The SAT disposed of an appeal against an interim order debarring the First Global Group from fresh business. Upholding SEBI's interim suspension as valid under the Act, the Tribunal refrained from deciding the merits pending inquiry but directed SEBI to complete the inquiry and pass final orders with detailed reasons within 10 weeks.

What did the court decide?

Directing Respondent to complete inquiry and pass final orders with detailed reasons within 10 weeks; entertaining appeal disposed of.

What the court decided

AI extract

Outcome

Directing Respondent to complete inquiry and pass final orders with detailed reasons within 10 weeks; entertaining appeal disposed of.

Issue for consideration

Whether SEBI had power under Sections 11 and 11B of the Act to pass an interim order debarring appellants from fresh business pending enquiry. +2 more

A compact analysis

This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.

Shankar Sharma Vs. SEBI — Securities and Capital Markets | SAT (2001)

Shankar Sharma v. SEBI

SAT25 Jun 2001

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Case brief

AI extract

What is this about?

What did the court decide?

Directing Respondent to complete inquiry and pass final orders with detailed reasons within 10 weeks; entertaining appeal disposed of.

What the court decided

AI extract

Outcome

Directing Respondent to complete inquiry and pass final orders with detailed reasons within 10 weeks; entertaining appeal disposed of.

Issue for consideration

Whether SEBI had power under Sections 11 and 11B of the Act to pass an interim order debarring appellants from fresh business pending enquiry. +2 more

A compact analysis

¶13

The sequence of events leading to the filing of the present appeal, briefly are as follows. In the wake of the unexpected price fall in the securities market and apprehending possible attempts by certain entities to manipulate the market, investigations were undertaken by the Respondent with a view to take preventive / corrective steps to protect the interests of the investors and the market. Several entities were subjected to preliminary investigations. The Appellants were one among them. As per the Respondent’s version preliminary investigation revealed that Appellant Nos 3 and 4 indulged in large trading transactions in the scrips of Global Telesystems, HFCL, DSQ Software, Zee Telefilms, Wipro, Satyam Computers, MTNL, SBI, Infosys Technologies and Sterlite Opticals (the select scrips). According to the Respondent, these transactions prima facie appeared to have carried out to artificially depress the prices of the said scrips. Based on its assessment, the Respondent passed an interim order on 18.4.2001 debarring the Appellants from undertaking any fresh business as stock broker or merchant banker or portfolio manager until further orders. Since the order dated 18.4.2001 was made without hearing the Appellants, they were given a post decisional hearing on 30.4.2001. Meanwhile the Appellants filed a Writ Petition No.1129/2001 before the Honourable Bombay High Court challenging the said order of 18.4.2001. The Writ Petition was disposed of by the Honourable High Court vide order dated 4.5.2001, inter alia directing the Respondent to pass a reasoned order within the time frame specified therein. The Appellants on their own agreed not to undertake any fresh business as stock broker or merchant banker or portfolio manager until the Respondent passed the order. While disposing the Writ Petition it was also stated in the order that in view of the self restraint made by the Writ Petitioners, the directions contained in the SEBI’s order dated 18.4.2001 do not survive and for the purpose of enquiry the said order and the SEBI’s affidavit will be treated as a Show Cause Notice. The Appellants made written and oral submissions before the Respondent, denying all the allegations. However, after inquiry the Respondent concluded that the Appellants’ business activities during the relevant period resulted in market manipulation and artificially depressing the prices of certain scrips, impacting the market as a whole during mid February to mid March 2001 and these activities were not in consonance with the right standards of integrity and professionalism of a stock broker and a portfolio manager, that this was also detrimental to the interests of investors and securities market. Based on the conclusion so arrived at, the Respondent made the impugned order on 25.5.2001.

¶63

Learned Senior Counsel referred to the Respondent’s stand as stated in para 42 of its reply that "SEBI cannot and ought not at this stage deal with the facts alleged by the Appellants in paragraph 5B 9(i) to 5 (B)(ix) of the said Appeal since the inquiry officer would be the proper person to deal with this aspect of the matter. Shri Chinoy submitted that in para 5B.9, of the appeal the Appellants have provided factual details to knock off the allegation that Appellants’ undertaken "substantial short selling and unwinding of previously built up long position" in the select scrips resulting in market manipulation and artificially depressing prices of the said scrips. He pointed out that the Respondent has taken similar evasive stand with reference to paragraphs 5(B) 10 to 5(B) 15 and from 5(B) 17 to 5(B) 22 of the appeal stating that since the Respondent has only arrived at a prima facie conclusion it cannot and ought not at this stage deal with the facts alleged by the Appellants in paragraph 5B 10(1) to 5(B) 15 of the said appeal. Shri Chinoy submitted that in para 5B 10 in the appeal the Appellants have contested the facts, figures and analysis based on which the Respondents stated that the Appellants had indulged in substantial short selling, that the Appellants have demolished the core charge against them in these paras with evidence and the Respondent is skirting the issue, for the obvious reason that it has no material to counter the Appellant’s submission. The learned Senior Counsel pointed out that having passed a penal order, the Respondent is duty bound to defend its order. He stated that the inference in the context is that the Respondent has no material in its possession to prove its case and accordingly the findings need be set aside. Shri Chinoy submitted, if the Respondent’s views are accepted, it would be in effect a negation of the appeal remedy available to the Appellants under the Act. Learned Senior Counsel submitted that the Respondent cannot pass such a drastic order debarring the Appellants from carrying on their business or stigmatize them as market manipulators, without holding any proper enquiry and at the same time decline to justify/defend its action on the ground that it has subsequently appointed an inquiry officer. According to Shri Chinoy if the Respondent chooses to pass orders debarring the Appellants, without holding an inquiry and without waiting for the report of the enquiry officer, it must be liable to defend such action independent of any such enquiry that it may subsequently order. He submitted that the Respondent cannot on the one hand take action against the Appellants which has the effect of totally stopping their business and stigmatizing and damaging the Appellants’ hitherto unblemished reputation without holding an enquiry as required under the rules and regulations and at the same time refuse to deal with facts which establish that the order is vitiated by non application of mind and total absence of relevant material, that to permit such conduct would be totally destructive of the Appellant’s statutory right to impugn the Respondent’s order before the Tribunal, that if the Respondent is not in a position to defend and sustain its order within the settled legal parameters, the same must be set aside. Shri Chinoy submitted that since the Respondent has opted not to putforth any material in defense, the Tribunal has to go by what is before it and decide the appeal.

¶64

Shri Chinoy submitted that the order proceeds on the patently incorrect and unsustainable basis that selling of previously acquired shares (unwinding of long positions and short selling), which is a perfectly legitimate and normal part of trading in securities market, constitutes market manipulation and that if prices of a scrip fall pursuant to such trading, the depression in the price of the scrip would be ‘artificial’. Undertaking genuine trade transactions is part of normal business activity in the stock market and can never constitute market manipulation or be said to artificially raise or depress prices of shares. According to him the charge of market manipulation or artificially raising or depressing prices can only be established if it is shown that the trader has sought to create a false or misleading appearance of trading or has indulged in non genuine trade transactions which are intended to operate only as a device to inflate or depress the prices of securities. According to the learned Senior Counsel, short selling essentially involves selling without actual delivery of the shares, that the Respondent itself has set limits on the value of scrips that can be "carried forward on a card either in the form of carry forward sales or purchase". Shri Chinoy submitted that short selling is a normal trading activity in the securities market, that short selling was permitted by the Respondent and the various exchanges, that the Respondent had infact imposed a temporary ban on short selling on 8.3.2001. Referring to the "Unwinding of previously built up long positions" Shri Chinoy submitted that selling shares which had been previously purchased, is a normal trading activity that nobody could be expected to hold long positions in falling market at loss to itself. He further stated that even if it is assumed that the Appellants transactions had been large enough, that could not result in their trading activity being termed as market manipulation or be said to have artificially depressed the prices of the shares. Shri Chinoy pointed out that sales and purchases by Institutional Investors are always Netsales/Purchases and these are almost always large trades and specifically on 1.3.2001, FIIS had gross sales of over Rs.950 crores, that by applying the logic of the Respondent, even these sales/purchases by institutional investors would constitute market maipulation.

¶67

With reference to the allegation that the Appellants had undertaken substantial short selling in the selected 10 scrips Shri Chinoy referred to the factual position explained in para 5B .10 of the Memorandum of Appeal and stated that the Respondent’s version is contrary to the factual position. Shri Chinoy quoted the observation of the US Court of Appeal in Sullivan & LongInce v. Scattered Corporation (Kentlaw.edu/7 circuit/1995/94-20/5.html) that " A short sale is a sale at a price fixed now for delivery later. A trader sells stock short when he thinks the price of the stock is going to fall, so that when the time for delivery arrives he can buy it at a lower price and pocket the difference". The learned Counsel submitted that the charge that the Appellants had undertaken substantial short selling it is baseless as is evident from the fact that they had undertaken no proprietary short sales at least in two of the scrips i.e. Global Telesystems & HFCL and had in fact held long purchase delivery position in the said scrip, that even in Zee Telefilms the Appellants held no short proprietary position, except for a small position for 2-3 days created by a dealer error, that infact in HFCL the Appellants held proprietary purchase delivery position that the Appellants had also held as to a delivery purchase position of 72,000 shares from mid February and they ultimately suffered a loss of Rs.5.5 crore, that in Global Telesystem the Appellants held proprietary Purchase Delivery Position, the Appellants also had a long position of 12,000 shares in the said company during the period. Shri Chinoy submitted that it would be totally irrational to suggest that a person who is holding long position in a share would try to depress the price thereof as such an action will increase ones own losses. He further submitted that the sales carried out by the Appellants in the said scrips constituted a very small proportion, say far less than 1% of the total sales/volumes of transactions in the said scrips. According to him the Appellants transactions in the remaining seven scrips never exceed 1-2% of the total volume of trading in such shares during this period that in fact on a number of days during this period the Appellants ( on their proprietary account) were net buyers that their pattern of transactions during this period did not depart from their pattern of trading in the past few months.

¶94

While considering the question as to whether the SEBI has authority of law under sections 11 and 11B to order interim suspension, we have to bear in mind that SEBI is invested with statutory powers to regulate securities market with the object of ensuring investors protection, orderly and healthy growth of securities market so as to make SEBI 's control over the capital market to be effective and meaningful. It cannot be gain said that SEBI has to regulate speculative market and in case of speculative market varied situations may arise and looking into the exigencies and requirements, it has been entrusted with the duty and functions to take such measures as it thinks fit. Section 11B is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interests of the investors. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted. It is well settled principle of statutory construction that it is the duty of the Court to further Parliament's aim of providing of a remedy for the mischief against which enactment is directed and the Court should prefer construction which will supress the mischief and advance remedy and avoid evasions for the continuance of the mischief. We may quote the words of Denning, L.J. in Seaford Court Estates, Ltd. V. Asher (1949) 2 All E.R.155, at page 164, namely:- ".............. when a defect appears, a Judge cannot simply fold his hands and blame the draftsmen. He must set to work on the constructive tasks of finding the intention of Parliament, and he must do this, not only from the language of the statute, but also from a consideration of the social conditions which give rise to it, and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give force and life to the intention of the Legislature." We have, therefore, to adopt the construction that gives force and life to the legislative intention rather than the one which would defeat the same and render the protection illusory. In the matter of construction of enabling statute, the principle applicable is that if the legislature enables something to be done, it gives power at the same time, by necessary implication, to do everything which is indispensable for the purpose of carrying out the purpose in view. We thus find that the SEBI has ample authority in law to take the action under sec. 11B as has been taken by it.

¶139

Though there is no doubt about the powers of the Tribunal to examine the facts of the case afresh, evaluate the evidence and test the impugned decision with reference to the applicable law, the question is as to at what appropriate stage such power is exercisable. In all the cases cited by the learned Senior Counsel, the appeal was against final order passed by the authority down below. In the instant case that is not the case. The present appeal is against an interim order passed by the Respondent pending a full fledged enquiry. Ofcourse, Shri Chinoy had argued forcefully to establish that the impugned order is nothing but a final order. However, I am not prepared to accept the said argument for the simple reason that from the tenor of the order itself it is clear that it is an interim order. This is evident from the following extract from the order that " In view of the above, it is stated Mr. Shankar Sharma, Ms. Devina Mehta, First Global Stock Broking Pvt.Ltd., Virudhi Confirment India Pvt.Ltd and First Global Finance P.Ltd be debarred from undertaking any fresh business as stock broker, Merchant banker or Portfolio Manager pending inquiry. It is further directed that an order appointing an enquiry officer to enquire into the violations by First Global group of the provisions of the SEBI Act, Rules and Regulations be passed within a week. The enquiry officer after considering the material available on the basis of investigations conducted so far and the material, which may be further supplemented, will expeditiously complete the proceedings, after following the procedures as laid down in the regulations. On receipt of the enquiry officers’ findings a view will be taken as to whether the entities above named should be permitted or debarred from carrying on activities as stated above" (emphasis supplied). If the order is a final order as stated by the learned Senior Counsel, there was no need to restrain the Appellants from undertaking business pending inquiry and to appoint an inquiry officer. In this context it is relevant to note that the Hon’ble Bombay High Court in Anand Rathi’s case, had considered a similar order passed by the Respondent and treated it as an interim order. I do not see any reason to treat the impugned order differently for the purpose. A look at the background in which SEBI had passed the order under section 11/11B of the Act in Anand Rathi’s case would show the striking comparison of both the cases. Background of the order in Anand Rathi’s case briefly is as follows:

¶140

On 28.2.2001 Union Budget was presented. The Budget was widely seen as " an investor friendly budget" and the general expectation was that the stock markets in the country would respond positively, that in fact between 28.2.2001 and 1.3.2001 sensex rose by 201 points. But on 2.3.2001 strangely, the sensex dropped by 176 points. In the wake of such a drastic and unexpected fall in the market and apprehending possible attempts to manipulate the market, investigations were undertaken by the Respondent. Several stories were out attributing the cause to several factors and characters. Some news papers carried reports alleging that Shri Anand Rathi, who was the President of the Bombay Stock Exchange, had illegally obtained some price/market sensitive information from the surveillance department of the exchange in the presence of certain other brokers. Investigation by SEBI revealed that Shri Rathi had obtained information in respect of certain specific scrips and brokers from the exchange’s surveillance department. In the aftermath, Shri Rathi resigned from the post of President (on 7.3.2001). Chairman, SEBI in exercise of powers under section 11 read with section 11B of the Act passed an order inter alia directing that Shri Rathi and his concerns not to undertake any fresh business as a broker until further orders .Though the order was passed without hearing Shri Rathi subsequently on 21.3.2001 he was given a post decisional hearing. The said order was challenged by Shri Rathi in a writ petition in the Hon’ble Bombay High Court. However, Shri Rathi was heard by SEBI during the pendency of the Writ Petition and thereafter on 30.3.2001, the Board passed an order confirming the earlier order dated 12.3.2001. In the said writ petition the Hon’ble High Court had examined in detail, the nature of the order, its sustainability, the Respondent’s powers to issue such an order, etc. in detail. The writ petition was dismissed inter alia directing SEBI to complete the inquiry ordered by it, within the time frame stipulated by the Court. But the order debarring Shri Rathi and others undertaking fresh business was left untouched pending the inquiry.

¶147

It is seen from the order that since April, 2001, the Appellants have been deprived of carrying on their business activities., The impugned order passed on 25.5.2001 states that the ban on the Appellants undertaking fresh business would continue pending inquiry, meaning thereby that if the inquiry is prolonged the ban on the Appellants taking fresh business also would continue. It may not be fair and proper to allow the inquiry to continue indefinitely and thereby subject the Appellants to undue hardship. But at the same time, it will be also unfair to deny reasonable time to the Respondent to complete such a complicated inquiry. According to the information furnished by the Respondent an enquiry officer has been appointed on 31.5.2001. A Show Cause Notice has been served on the Appellants on 18.7.2001. It is felt that in all fairness the inquiry be completed as expeditiously as possible. Shri Kapadia on a query from the Tribunal had stated the Respondent’s readiness to conclude the inquiry early. Taking into consideration all the relevant aspects involved, it is felt that the inquiry and final order therein, need be expedited. In this context the Respondent is directed to complete the inquiry and pass final orders with detailed reasons within 10 weeks from today. It should not be a problem as the enquiry officer was appointed as far back as on 31.5.2001. In case the Respondent fails to complete the inquiry and pass final orders within the stipulated time, the order restraining the Appellants undertaking fresh business as Stock Brokers or Merchant Bankers or Portfolio Managers would cease to operate from the date of expiry of the said time limit, enabling the Appellants to undertake fresh business as Stock Brokers, Merchant Bankers and Portfolio Managers. The Appellants are directed to extend full co-operation in the inquiry, so as to enable the Respondent to complete the process within the time stipulated above. All contentions of the parties are expressly kept open. Respondent shall decide the matter without being influenced in any manner by the observations made in this order.

Shankar Sharma v. SEBI

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Shankar Sharma v. SEBI

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Parties & counsel

Case details

Similar cases

Statutes considered

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