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Shell Companies Case: SAT Stays SEBI Order On J Kumar Infra, Prakash Industries

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SAT also directed stock exchanges to revert the status of J Kumar Infrastructure and Prakash Industries.

The Securities Appellate Tribunal has stayed market regulator SEBI’s directions on J Kumar Infraprojects Ltd. and Prakash Industries Ltd. in the ‘shell’ companies matter. The tribunal also directed the stock exchanges to revert the status of these two companies.

These were among the 162 listed entities that the Securities Exchange Board of India had placed in a restricted trade category on the basis that they are shell companies as identified by the Ministry of Company Affairs. As of August 8, the shares of the 162 companies could be traded only once every month under the trade-to-trade category with certain other restrictions, according to a communication SEBI.

SAT has now stayed the order on two of these companies and will hear a third company, Parsvnath Developers on Friday.

In the NSDL case, which SEBI was relying on, the Supreme Court had held that an administrative circular issued by the regulator under Section 11(1) of the SEBI Act, 1992, cannot be the subject matter of appeal under Section 15T before SAT, Sumit Agrawal a securities law partner at Suvan Law Advisors told BloombergQuint. Section 15T lays down the provisions for appeal before SAT.

Agrawal pointed out that in the NSDL case, the apex court had made a distinction between quasi-judicial and administrative orders of SEBI.

A direction or advisory involving civil consequences becomes a quasi-judicial order especially where a direction is referable to quasi-judicial powers under SEBI Act, 1992. Any other interpretation of NSDL judgement could have distorted this well-settled legal principle. – Sumit Agrawal, Securities Law Partner, Suvan Law Advisors

Welcoming SAT’s order, Agarwal said SEBI is, in any case, free to pass the same directions or restrictions if, after inquiry and notice, it comes to a similar conclusion based on evidence, he added.

The tribunal on Thursday heard arguments from counsel of SEBI, J Kumar Infra and Prakash Industries.

Senior Advocate Vikram Nankani arguing on behalf of SEBI said:

  • Supreme Court has held that SEBI’s directions in an administrative capacity cannot be challenged before SAT.
  • Petitioners can’t be allowed to forum shop
  • Petitioners can file a writ petition before high court.
  • SAT is not the appropriate forum for this appeal.
  • SEBI’s directions in this case can be traced to Graded Surveillance Measure circular issued in March. The circular was issued in the regulator’s administrative capacity.
  • Administrative order may breach natural justice but that can’t confer jurisdiction on SAT.

Darius Khambata arguing on behalf of SEBI said:

  • Supreme Court has laid down requirements for a judicial/quasi-judicial order. One of them is – statutory authority is required to act judicially.
  • Refers to sections in the SEBI Act to argue a judicial order is one where SEBI gives reasons in writing after giving an opportunity of hearing.
  • Duty to across reasonably cuts across administrative and quasi-judicial orders.
  • But SEBI does not have the duty to act judicially in every case.
  • Just because something is perverse doesn’t make it a quasi-judicial order.

Janak Dwarkadas arguing on behalf of J Kumar Infraprojects said:

  • SEBI directions will have civil consequences. It is a quasi-judicial order.
  • Supreme Court has held SEBI’s orders with civil consequences must be well reasoned.
  • SEBI’s order is perverse and without application of mind.
  • SEBI gave us a show-cause notice today and heard us. They’ve not been able to pass a final order and have asked for more information.

Parsvnath Developers Ltd. has also appealed SEBI’s order. SAT will hear the company, being represented by Counsel Somasekhar Sundaresan, on Friday.