Cameo Corporate Services Limited vs Sebi

Order Reserved on: 22.11.2019 Date of Decision : 26.11.2019

Appeal No. 566 of 2019

Cameo Corporate Services Limited Subramanian Building, No. 1, Club House Road, Chennai - 600 002. ..... Appellant Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent

Mr. Somasekhar Sundaresan, Advocate with Mr. Joby Mathew, Mr. Abhishek Venkataraman and Mr. Nikhil Shah, Advocates i/b Joby Mathew & Associates for the Appellant. Mr. Vikram Nankani, Senior Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia and Ms. Akshata Timmapur, Advocates i/b The Law Point for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice Tarun Agarwala, Presiding Officer

1.

The appellant is aggrieved by the ex parte ad interim

order dated October 18, 2019 and confirmatory order dated

November 7, 2019 passed by the Whole Time Member 2

('WTM' for short) of the Securities and Exchange Board of

India ('SEBI' for short) has filed the present appeal.

2. The facts leading to the filing of the present appeal is

that the appellant is the Registrar to the Issue and Transfer

Agent ('RTA' for short) of Indo National Ltd. A complaint

was received by SEBI on May 14, 2019 on the SCORES

platform alleging that the complainant is a legal heir /

beneficiary of Late Sewratan Mundra, who is the

complainant's paternal grandfather, who had expired on May

15, 1975. It was contended that while clearing and sorting out

the old documents, the complainant discovered certain shares

of Indo National Limited held by his grandfather and

accordingly applied to the appellant seeking information on

transferring the said shares in his name. The Company

informed that the said shares had already been transferred to

one Mr. Sewaratan Mundra contending that Mr. Sewaratan

Mundra had applied for duplicate shares and which was duly

provided and thereafter Mr. Sewratan Mundra sold it to one

Mr. Anil Kumar Shivratan Bhootra of Kolkata. It was alleged

that due diligence was not exercised by the appellant in

verifying the genuineness of the request sent by the alleged

Sewratan Mundra in as much as the complainant's 3

grandfather had passed away in the year 1975 and the

question of issuance of duplicate shares after his death does

not arise.

3. Even though the complaint was disposed of by the

company on the SCORES platform, SEBI undertook the

examination of the activities of the appellant with specific

reference to the issue of exercise of due diligence in respect of

issuance of duplicate shares. Based on the examination SEBI

found that there were nine such similar instances of the same

company from the financial year 2014 onwards where

duplicate shares have been issued wherein following

discrepancies was observed:-

"a. The photos in the copy of documents submitted as proof of identity and proof for address for the different claimants found to be identical. b. Transferees were having more than one PAN with different combinations of middle names and surnames.

c. Following modus-operandi was observed in all these cases:

i. a request for change of address was sent by the claimants by providing a copy of PAN stating to be in the name of the original shareholder;

ii. thereafter a request for issue of duplicate share certificates was made;

iii. after receipt of the duplicate share certificates, the said shares were lodged for transfer in the name of the Noticees;

4 iv. then Noticees dematerialized these shares and sold these shares in the market."

4. Further examination and information sought from the

claimant with regard to the appellant as RTA of other

companies, discrepancies were found in six cases, namely that

photocopies of the PAN card provided by the transferee were

fake and that one transferee was having multiple PAN

combination. There was mismatch of photo in the PAN card

and other documents, etc.

5. Based on the aforesaid discrepancies, the WTM prima

facie observed that the appellant did not exercise appropriate

due diligence while processing various requests and prima

facie found violating Clauses 2,3 and 16 of the Schedule III of

the Securities and Exchange Board of India (Registrars to an

Issue and Share Transfer Agents) Regulations, 1993

('Regulations of 1993' for short). Accordingly, the WTM

exercised its powers under Section 11(1), 11(4) and 11B read

with Regulation 19 of the Securities and Exchange Board of

India Act, 1992 ('SEBI Act' for short) and Regulation 22 of

the Regulations of 1993 and issued an ex parte ad interim

order prohibiting the appellant from accepting fresh clients in

respect of its activities till further directions. 5

6. The appellant upon receiving the ex parte ad interim

order immediately applied for revocation of the said order and

submitted a detailed reply to SEBI. The WTM of SEBI after

considering the matter confirmed the ex parte ad interim

order by issuing the following directions:-

"a. confirm the directions issued against the Noticee in the interim order dated October 18, 2019;

b. order SEBI to carry out a special purpose inspection of the Noticee interalia to inspect the books of accounts of the Noticee including but not limited to the due diligence adopted by the Noticee in respect of unclaimed shares, the procedure being followed for issue of duplicate shares, the steps taken by the Noticee with regard to the rectification of the register of members pertaining to wrong transfer of shares etc. The Special purpose inspection is to be conducted by SEBI and a report to be submitted within ninety days from the date of this order. The interim order as mentioned in para 6 a. above shall continue till the expiry of ninety days from the date of this order."

7. In view of the aforesaid, the present appeal has been

filed.

8. We have heard Shri Somasekhar Sundaresan, the

learned counsel for the appellant and Shri Vikram Nankani,

the learned senior counsel for the respondent.

9. The learned counsel for the appellant contended that

under Regulation 22 of the Regulations of 1993 if the RTA, 6

the appellant, fails to comply with any conditions subject to

which registration has been granted or contravenes any of the

provisions of the Act, Rules, Regulations or By laws of the

Stock Exchange the said RTA shall be dealt with in the

manner provided under Chapter V of the Securities and

Exchange Board of India (Intermediaries) Regulations, 2008

('Intermediaries Regulations of 2008' for short). For facility,

Regulation 22 of the Regulation of 1993 is extracted

hereunder:-

"22. Liability for action in case of default.─ A registrar to an issue or share transfer agent who-

(a) fails to comply with any conditions subject to which registration has been granted;

(b) contravenes any of the provisions of the Act, rules or regulations;

(c) contravenes the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the rules made thereunder;

(d) contravenes the provisions of the Depositories Act, 1996 or the rules made thereunder;

(e) contravenes the rules, regulations or bye-

laws of the stock exchange, shall be dealt with in the manner provided under chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008."

10. Regulation 23 and Regulation 27 of the Intermediaries

Regulations of 2008 being relevant are also extracted

hereunder:-

7

"Cancellation or suspension of registration and

other actions.

23. Where any person who has been granted a certificate of registration under the Act or regulations made thereunder, -

(a) fails to comply with any conditions subject to which a certificate of registration has been granted to him;

(b) contravenes any of the provisions of the securities laws or directions, instructions or circulars issued thereunder;

the Board may, without prejudice to any action under the securities laws or directions, instructions or circulars issued thereunder, by order take such action in the manner provided under these regulations.

"Action in case of default.

27. After considering the representations, if any, of the noticee, the facts and circumstances of the case and applicable provisions of law or directions, instructions or circulars administered by the Board the designated authority shall submit a report, where the facts so warrant, recommending, -

(i) suspension of certificate of registration for a specified period;

(ii) cancellation of certificate of registration;

(iii) prohibiting the noticee to take up any new assignment or contract or launch a new scheme for the period specified in the order;

(iv) debarring a principal officer of the noticee from being employed or associated with any registered intermediary or other registered person for the period specified in the order;

8 (v) debarring a branch or an office of the noticee from carrying out activities for the specified period;

(vi) warning the noticee."

11. In the light of the aforesaid provisions, it was urged that

Regulations of 1993 clearly provides that any contravention

of the provisions of the Act, Rules, Regulations etc. RTA

would be dealt in accordance with the provisions of Chapter

V of the Intermediaries Regulations of 2008 which provides a

procedure for cancellation or suspension of the registration

and other actions. It was contended that Regulation 27

provides for suspension, cancellation and, other action that

can be taken but the same can only be taken after submission

of a report made by the enquiry officer and after giving an

opportunity of hearing. It was contended that in the instant

case no opportunity was provided before passing an ex parte

ad interim order and in any case the confirmatory order could

not have been passed until the enquiry report was submitted

which in the instant case has not been done. It was thus

contended that the direction restraining the appellant from

accepting fresh clients in respect of its activities was wholly

arbitrary and, in any case, harsh which did not commensurate

with the misconduct, if any, committed by the appellant. 9

12. On the other hand, the learned senior counsel

Shri Vikram Nankani appearing on behalf of respondent SEBI

contended that an ex parte ad interim order issued by the

WTM of SEBI has not been passed under Regulation 27 of

the Intermediaries Regulations of 2008 and that the power has

been exercised under Section 11(1) and 11(4) of the SEBI

Act. It was further contended that Regulation 23 of the

Intermediaries Regulations of 2008 makes it apparently clear

that in addition to the powers conferred under Regulation 27

SEBI could also exercise the powers under the Securities

Laws, namely, Section 11 and 11B of the SEBI Act. The

learned senior counsel for respondent SEBI thus contended

that an ex parte ad interim order can be issued under Section

11 and 11B of the SEBI Act and, as and when the enquiry is

completed, SEBI may take appropriate action, if any, under

Regulation 27 of the Intermediaries Regulations of 2008. It

was contended that discrepancies committed by the appellant

are so glaring that appropriate action was taken which does

not suffer from any error of law.

13. Having heard the learned counsel for the parties and

having perused the ex parte ad interim order and the

confirmatory order we find that except in the case of the 10

complainant where there is a prima facie case of a person

impersonating the grandfather of the complainant all other

discrepancies either relate to mismatching of photographs or

signatures or that the PAN card being fake and not been

verified from the Income Tax website / NSDL and

accordingly a prima facie case of lack of basic due diligence

was made out against the appellant. What is noticeable is that

apart from the complainant's case no other investor has come

forward to make a complaint relating to the wrongful transfer

of the share certificates illegally to a third party. The

discrepancies pointed out by SEBI do not reveal that the

appellant made any gain by this wrongful transfer nor there is

any finding of a loss being caused to an investor. Thus,

exercising the powers under Section 11 and 11B restraining

the appellant from accepting fresh clients for a period of three

months for failing to exercise due diligence appears to be

harsh and unwarranted in the facts and circumstances of the

given case.

14. In Appeal No. 80 of 2019 and other connected appeals,

North End Foods Marketing Pvt. Ltd. vs SEBI decided on

March 12, 2019 this Tribunal held:-

11

"13. Having heard the learned senior counsel at length, we find that it is no more res integra that SEBI has power to pass ex parte ad interim order, pending investigation, which power flows from Section 11 and 11B of the SEBI Act. 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 and such measures may be for any or all of the matters provided in sub-section 2 of Section 11 of the Act. SEBI has power to pass interim orders and such interim orders can also be passed ex parte. Interim orders are passed in order to prevent further possible mischief of tampering with the securities market. If during a preliminary enquiry, it is found prima facie, that the person is indulging in manipulation of the securities market, it would be obligatory for SEBI to pass an interim order or for that matter an ex parte ad interim order in order to safeguard the interests of the investors and to maintain the integrity of the market. 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.

14. However, it does not mean that in every case, an ex parte ad 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.

12 15. Thus, ex-parte interim order may be made when there is an urgency. As held in Liberty Oil Mills & Ors. vs. Union of India & 18 Ors. [AIR (1984) SC 1271] decided on May 1, 1984, the urgency must be infused by a host of circumstances, viz. large scale misuse and attempts to monopolise or corner the market. In the said decision, the Supreme Court further held that the regulatory agency must move quickly in order to curb further mischief and to take action immediately in order to instill and restore confidence in the capital market.

16. The aforesaid principle of law is squarely applicable in

the instant case. In our opinion, the impugned order is harsh

and unwarranted. We are of the opinion that there was no real

urgency in passing an ex parte ad interim restraint order

which virtually amounts to passing a final order especially

when a detailed enquiry has been ordered.

17. In our opinion, the respondent is empowered to pass an

ex-parte interim order only in extreme urgent cases and that

such power should be exercised sparingly. In the instant case,

we do not find that any extreme urgent situation existed

which warranted the respondent to pass an ex-parte interim

order. We are of the opinion that the impugned order is not

sustainable in the eyes of law as it has been passed in gross

violation of the principles of natural justice as embodied in 13 Article 14 of the Constitution of India. The restraint order is

in our opinion unjustified.

18. At this stage, we can stay the operation of the impugned

order to a limited extent. We, however, find that no useful

purpose would be served in keeping the appeals pending and

directing the respondent to file a reply. Thus, we are deciding

the appeal itself, without calling for a reply at the admission

stage itself.

19. In view of the aforesaid, the impugned order insofar as

it restrains the appellant from accepting fresh clients is

quashed. Other directions issued by the WTM of SEBI will

continue to operate against the appellant. The appeal is partly

allowed. In the circumstances of the case, there shall be no

orders as to costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 26.11.2019 Prepared and compared by:msb