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SAT interprets the powers of SEBI to issue directions of restraint 

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The Securities Appellate Tribunal in an recent judgement in respect of a Venture Capital Fund (VCF) has interpreted the difference between a Show Cause Notice (SCN) issued under Section 11B and an SCN issued under Section 11(4) of the SEBI Act, 1992.

Briefly the facts of the case are that a SEBI registered VCF had launched a close ended scheme with the purpose of investing in real estate spaces in India. SEBI in the SCN alleged that the VCF did not wind up and consequently re-pay its investors within the stipulated time provided in its Private Placement Memorandum. Additionally, the VCF also did not redress the investor grievances. Accordingly, a SCN was issued under Section 11B to the Investment Manager, Trustee Company and the directors of the VCF.

In the impugned order of SEBI, the appellants were directed to wind up the scheme of the Fund and provide an exit to the investors / unit holders. Further, some of the appellants were restrained from accessing the securities market and from associating themselves directly or indirectly with any registered intermediaries, etc. for a period of one year.

In appeal, the appellants argued that SEBI had travelled beyond the scope of the SCN since under Section 11B a direction to restrain from the securities market could not be issued. The SAT agreed with this view and held that Section 11 has wider powers while Section 11B is merely an enabling provision which cannot prevail over Section 11.

Further, Section 11B starts with “save as otherwise…S11” and Section 11(4) starts with “without prejudice to provisions of…11B” meaning thereby that power under Section 11 is excluded while exercising power under Section 11B and SEBI has a choice to act in the first instance under Section 11(1), (2), (2-A) and (3) or under 11B and save its rights under 11(4) to be availed at a later stage.

In conclusion, the SAT partly allowed the appeal by holding that the restraining order was without jurisdiction and beyond the show cause notice. Such directions could not be issued since the show cause notice did not spell out such allegations.

The order of SAT is enclosed below for the reference of the Readers.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

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