Dr. Udayant Malhoutra vs Sebi

Rs. 2,66,59,215/-plus interest till date totaling

Rs.3,83,16,230.73 in an Escrow Account towards notional loss

allegedly avoided by him by using unpublished price sensitive

information and further directed that the bank accounts / demat

accounts of the appellant shall remain frozen till such time the

amount is not deposited. The WTM further directed the

appellant to show cause as to why an order of disgorgement

should not be passed.

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

the appellant is the Chief Executive Officer and Managing

Director of a listed company known as Dynamatic Technologies

Limited („DTL‟ for short) which is engaged in the

manufacturing of aerospace, automotive and engineered

products. The appellant has been the Managing Director since

1989. The charge leveled against the appellant is, that he had

sold 51,000 shares of the company DTL on October 24, 2016

having inside knowledge of the price sensitive information,

namely, the unaudited financial results of the quarter ending 3

September 30, 2016. It was alleged that the financial results

were approved by the Board of Directors on November 11, 2016

whereupon the price of the scrips of the company drastically

went down. It was alleged that the appellant had inside

information of the price sensitive information and, being a

connected person had sold the shares and thus made a notional

gain or averted a notional loss.

3. In this regard, the sales made by the appellant was

investigated in 2017 and that the investigation team only asked

information from the appellant for the first time on November

28, 2019 and thereafter the WTM passed the impugned exparte

order on June 15, 2020.

4. The contention of the appellant is, that there was no

urgency in passing an ex-parte order with regard to a trade done

by the appellant more than three and half years ago and

especially during the pandemic period. It was urged that the

action of the respondent in freezing the accounts of the

appellant during these time was wholly arbitrary. It was further

urged that an ex-parte order cannot be sustained in as much as

the same is violative of the principles of natural justice. The

appellant contended that the shares were sold on account of a

loan agreement entered by the company with a consortium of 4

banks and that appellant was required to reduce its pledge

holdings for the purpose of disbursement of a loan of

3,69,00,00,000 (Rupees Three Hundred and Sixty Nine Crores

Only). It was urged that had an opportunity of hearing been

given these relevant facts could have been intimated which

could have been considered by the respondent. It was also

contended that the prices of the scrip went down not because of

the disclosure of the financial results of the quarter ending

September 30, 2016 but on account of the fact that the

Government of India announced the demonetisation of its

currency on November 8, 2016 and share prices across the

board had declined which factor, being a relevant factor, was

not taken into consideration.

5. On the other hand, the respondent contended that an ex-

parte interim order cum show cause notice has been issued and

if the respondent files a proper reply, the matter could be

decided in a short period. It was also contended that the reason

for passing an ex-parte interim order was that there may be a

possibility of diversion of the notional gain made by the

appellant during the pendency of the proceedings. It was also

urged that the appellant was an insider and was privy to the

unpublished price sensitive information and therefore the WTM 5

rightly passed the impugned order in order to protect the

investors in the securities market.

6. In this regard we have heard Shri Somasekhar Sundaresan,

the learned counsel for the appellant and Shri Gaurav Joshi, the

learned senior counsel for the respondent.

7. In North End Foods Marketing Pvt. Ltd. vs Securities

and Exchange Board of India in Appeal No. 80 of 2019

decided on March 12, 2019 this Tribunal held as under:-

"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 interim orders, 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 exparte. 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 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 6

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 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.

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."

8. The aforesaid decision is fully applicable in the instant

case and the reasoning given therein are not being repeated. In

the instant case, we find that the trades were executed in

October 2016. The investigation started in 2017 and continued

till 2019 and, during this period, there was no shred of any

evidence to suggest that the appellant was trying to divert the

alleged notional gain.

7

9. We find that the only reason directing the appellant to

deposit the alleged notional gain / loss in an Escrow Account is

based on the finding given in paragraph 22 of the impugned

order, namely, that "it is possible that the entity may divert the

notional gain" and that if an interim order is not passed it would

defeat the effective implementation of the disgorgement, if any,

to be passed on merits after adjudication. In our opinion, the

reasoning given by the WTM justifying its action to pass an ex-

parte interim order is patently erroneous and cannot be

sustained. On one hand, we find that only a show cause notice

has been issued and the matter has not been adjudicated on

merits but the appellant, on the other hand, has been directed to

deposit the possible disgorgement amount in advance. We are of

the opinion that no amount towards disgorgement can be

directed to be deposited in advance unless it is adjudicated and

quantified unless there is some evidence to show and justify the

action taken. An order of the like nature can only be passed

during the pendency of the proceedings and such orders cannot

be passed at the time of initiation of the proceedings. Further, no

order of the like nature can be passed without recording its

satisfaction and cannot be based on the basis of possibility. 8

10. In this regard, we may refer to the provisions of Order 38

Rule 5 to 13 of the Code of Civil Procedure, 1908 which lays

down the parameters for attachment before judgment. The said

principles are fully applicable in the instant case. The object of

attachment before judgment is to prevent any attempt on the

part of the appellant to defeat the realization of the final order

on disgorgement that may be passed against the appellant. But

this principle applies only when it is found that the appellant is

about to dispose of the property in question. Further, this

principle can only be applied when there is evidence to show

that the appellant has acted, or is about to act with the intent to

obstruct or delay the adjudication of the proceedings that may

be passed against him. We are of the opinion that there is no

finding that the appellant will remove the property or will

dispose of all the property or that he would obstruct the

proceedings or that he would delay the proceedings pursuant to

the show cause notice. In the absence of any such finding, the

ex-parte interim order cannot be sustained especially when the

trades were of 2016 and from 2016 till the date of the impugned

order there is no evidence to show that the appellant was trying

to divert the alleged notional gain/loss 9

11. As held in North End Foods Marketing Pvt. Ltd. (supra)

there is no real urgency in the matter to pass an ex-parte interim

order especially during the pandemic period. There is no doubt

that SEBI has the power to pass an interim order and that in

extreme urgent cases SEBI can pass an ex-parte interim order

but such powers can only be exercised sparingly and only in

extreme urgent matters. In the instant case, we do not find any

case of extreme urgency which warranted the respondent to pass

an ex-parte interim order only on arriving at the prima-facie

case that the appellant was an insider as defined in the SEBI

(Prohibition of Insider Trading) Regulations, 2015 („PIT

Regulations‟ for short) without considering the balance of

convenience or irreparable injury.

12. In the light of the aforesaid, the impugned order cannot be

sustained and the same is quashed at the admission stage itself

without calling for a counter affidavit except the show cause

notice. The appeal is allowed. The Misc. Application No. 154 of

2020 and Misc. Application No. 155 of 2020 are accordingly

disposed off. We further direct that the appellant to file a reply

to the show cause notice within four weeks from today. The

respondent will decide the matter finally after giving an

opportunity of hearing to the appellant either through physical 10

hearing or through video conference within six months

thereafter. During the interim period, in order to safeguard the

interests of the respondent and more particularly the interest of

the investors in the securities market and also to protect the

integrity of the securities market, we direct the appellant to give

an undertaking to the respondent within four weeks from today

that he will not alienate 50% of his total shareholdings of the

company DTL held as on date, as stated by the learned counsel

for the appellant. In the circumstances of the case parties shall

bear their own costs.

13. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be

issued by the registry. In these circumstances, this order will be

digitally signed by the Presiding Officer on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

Digitally signed by TARUN AGARWAL

Sd/-

TARUN Justice Tarun Agarwala DN: c=IN, st=Uttar Pradesh, 2.5.4.20=a0e08b2d80e9d23c 2c2aa3e16780d684adad6bc9 e810de2d7b0c28efd35557c9 Presiding Officer AGAR , postalCode=211001, street=B/A,NYAYA MARG ALLAHABAD, serialNumber=095f8b286bb

WAL 0b1cd07ff676611f4f5e79997 27d404aa38ca422f9d3529bd b8a3, o=Personal, cn=TARUN Sd/- AGARWAL Date: 2020.06.28 13:31:36 +05'30' Dr. C.K.G. Nair Member 11

Sd/- Justice M.T. Joshi Judicial Member 27.06.2020 msb