Case Note & Summary
The Supreme Court disposed of two statutory appeals filed by the Securities and Exchange Board of India (SEBI) under Section 15Z of the SEBI Act, 1992, challenging orders of the Securities Appellate Tribunal (SAT) dated 27 June 2020 and 23 July 2020. The SAT had set aside an ex-parte interim order dated 15 June 2020 passed by SEBI's Whole Time Member under Section 19 read with Sections 11(1), 11(4)(d), 11(4A), 11(5) and 11B of the SEBI Act and Regulation 10 of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The interim order quantified Rs 3,83,16,230.73 as notional loss sought to be avoided by the respondent, Udayant Malhoutra, the CEO and MD of Dynamatic Technologies Ltd, for selling 51,000 shares on 24 October 2016 while allegedly in possession of unpublished price sensitive information regarding unaudited financial results. The investigation had been pending since 2017, and information was called from the respondent on 28 November 2019. The SAT, relying on its earlier decision in North End Foods Marketing Pvt Ltd v SEBI, held that there was no urgency to pass an ex-parte order, especially during the pandemic, and that SEBI's power to pass such orders must be exercised sparingly. The Supreme Court affirmed the SAT's factual finding that no urgency existed, as the investigation was pending for three years. However, the Court clarified that the SAT's observation in paragraph 9, that no amount towards disgorgement can be directed to be deposited in advance unless adjudicated and quantified, shall not be cited as a precedent. The Court held that SEBI's order must be in accord with Section 11(4) of the SEBI Act. The appeals were disposed of with this clarification.
Headnote
A) Securities Law - Insider Trading - Ex-Parte Interim Orders - Section 11(4), SEBI Act, 1992 - SEBI passed an ex-parte interim order directing deposit of notional loss amount during pandemic for trades done three years ago - SAT set aside order citing lack of urgency - Supreme Court affirmed on facts, holding that since investigation was pending since 2017 and information supplied in 2019, there was no urgency for ex-parte order (Paras 5-6). B) Securities Law - SEBI Powers - Disgorgement Before Adjudication - Section 11(4), SEBI Act, 1992 - SAT observed that no amount towards disgorgement can be directed to be deposited in advance unless adjudicated and quantified - Supreme Court clarified that this observation shall not be cited as precedent, and SEBI's order must be in accord with Section 11(4) (Paras 7-9).
Issue of Consideration
Whether the Securities Appellate Tribunal was correct in setting aside the ex-parte interim order passed by SEBI's Whole Time Member on the ground of lack of urgency, and whether the Tribunal's observations on SEBI's power to order disgorgement before adjudication are correct in law.
Final Decision
The Supreme Court affirmed the SAT's order on facts, holding that there was no urgency to pass an ex-parte interim order. However, the Court clarified that the SAT's observation in paragraph 9 regarding disgorgement before adjudication shall not be cited as a precedent. The appeals were disposed of with this clarification.
Law Points
- SEBI's power to pass ex-parte interim orders must be exercised sparingly and only in extreme urgent matters
- Section 11(4) SEBI Act allows interim measures pending investigation
- Tribunal's interpretation of SEBI's power to order disgorgement before adjudication cannot be cited as precedent
