Kamleshgiri Manusukhgiri Goshwami vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

Four appeals have been filed against a common order dated July 28, 2022 passed by the Adjudicating Officer (“AO” for convenience) of the Securities and Exchange Board of India (“SEBI” for convenience) imposing a penalty of Rs. 5 lakhs each on the appellants for violation of Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations” for convenience).

The facts leading to the filing of the present appeal is, that an investigation was conducted in the scrip of Kanchan International Limited (“Kanchan”/ “Company” for convenience) for the period April 04, 2011 to April 03, 2012 to ascertain as to whether there was any violation of the SEBI Act and its Regulations. In the investigation report it was found that the appellants had traded in the scrip of the Company and created artificial volume by reversing their trades, which led to false and misleading appearing of trading in the market. Accordingly, a show cause notice dated December 31, 2019 was issued to show cause why an inquiry should not be held and penalty should not be imposed under Section 15HA of the SEBI Act for the alleged violation of the PFUTP Regulations.

The appellants raised various grounds challenging the show cause notice and one such ground was the undue delay in the initiation of the proceedings and causing serious prejudice in view of the alleged delay. The AO rejected the contention of the parties holding that there is no undue delay in the initiation of the proceedings nor any prejudice has been caused. The AO also found that the appellants had violated the provisions of the PFUTP Regulations and accordingly imposed a penalty of Rs. 5 lakhs on each of the noticees.

We have heard Shri Vikas Bengani, the learned counsel and Shri Nasir Mohammed, the learned counsel and Ms. Simran Kasat, the learned counsel for the appellants and Shri Akash Rabello, the learned counsel for the respondent.

We find that the trades in question, which are alleged to be violative of Regulations 3 and 4 of the PFUTP Regulations, were carried out in the year 2011-2012. The investigation concluded in the year 2016 and in July 2017 an AO was appointed to conduct the inquiry. Even though the AO was appointed in July 2017 a show cause notice was issued after almost 28 months on December 31, 2019.

Considering the aforesaid, we are of the opinion, that there is an inordinate delay in the initiation of the proceedings as well as in the issuance of the show cause notice. The alleged trades are of the year 2011- 2012. The show cause notice was issued on December 31, 2019 after more than seven years. No explanation has been given as to why the show cause notice could not be issued earlier.

In addition to the aforesaid, we find that even though the AO was appointed in July 2017 he took no steps to issue a show cause notice and initiate proceedings for almost 28 months. No explanation has been given as to why he could not issue the show cause notice earlier.

We also find that no reason has been given by the AO with regard to prejudice being caused to the appellants for this inordinate delay.

In our opinion, the delay in the initiation of the proceedings itself causes prejudice.

This Tribunal in a plethora of cased have quashed the proceedings and the impugned order on the ground of inordinate delay.

In Mr. Rakesh Kathotia vs. SEBI in Appeal No. 7 of 2016 decided by this Tribunal on May 27, 2019 this Tribunal held:-

"23. It is no doubt true that no period of limitation is prescribed in the Act or the Regulations for issuance of a show cause notice or for completion of the adjudication proceedings. The Supreme Court in Government of India vs, Citedal Fine Pharmaceuticals, Madras [(1989)3 SCC 483: AIR SC 1771] held that in the absence of any period of limitation, the authority is required to exercise its powers within a reasonable period. What would be the reasonable period would depend on the facts of each case and that no hard and fast rule can be laid down in this regard as the determination of this question would depend on the facts of each case. This proposition of law has been consistently reiterated by the Supreme Court in Bhavnagar University v. Palitana Sugar Mill (2004) 12 SCC 670, State of Punjab vs. Bhatinda District Coop. Milk P. Union Ltd (2007) 11 SCC 363 and Joint Collector Ranga Reddy Dist. & Anr. vs. D. Narsing Rao & Ors. (2015) 3 SCC 695. The Supreme Court recently in the case of Adjudicating Officer, SEBI vs. Bhavesh Pabari (2019) SCC Online SC 294 held:

"There are judgments which hold that when the period of limitation is not prescribed, such power must be exercised within a reasonable time. What would be reasonable time, would depend upon the facts and circumstances of the case, nature of the default/statute, prejudice caused, whether the third-party rights had been created etc."

Similar view was held in Ashok Shivlal Rupani & Anr. vs. SEBI (Appeal No. 417 of 2018 along with other connected appeals decided on August 22, 2019). Against the order of this Tribunal in the matter of Ashok Shivlal Rupani, SEBI filed Civil Appeal No. 8444-8445 of 2019 before the Supreme Court of India which was dismissed and the order of this Tribunal affirmed by the Supreme Court.

Similar view was again reiterated in the matter of Ashlesh Gunvantbhai Shah vs SEBI (Appeal No. 169 of 2019) and other connected appeals decided on January 31, 2020 (2020 SCC OnLine SAT 30) where on account of inordinate delay in the initiation of the proceedings by issuance of the show cause notice, the penalty order was quashed.

In the light of the aforesaid, we are of the opinion that there has been an inordinate delay in the issuance of the show cause notice. Even though there is no period of limitation prescribed in the Act and the Regulations for issuance of a show cause notice and for completion of the adjudication proceedings, nonetheless, the authorities are required to exercise its powers within a reasonable period. In AO, SEBI vs Bhavesh Pabari, 2019 SCC OnLine SC 294 the Supreme Court held that an authority is required to exercise its powers within a reasonable period.

Similar view was again reiterated by this Tribunal in Reliance Industries Holding Pvt. Ltd. Vs SEBI (2023) SCC OnLine SAT 402.

On account of the delay serious prejudice has been caused to noticee nos. 3 and 4. In HB Stockholdings Ltd. Vs. SEBI 2013 SCC OnLine SAT 56 this Tribunal while dealing with the delay of 11 years in the issuance of a show cause notice held:

“…human memory has a short shelf life. Allowing matters to go on and on for years together serves no purpose, rather it risks loss of evidence such as important documents which may get destroyed while the issue gathers dust…in this backgrounds, the Appellants were compelled to make a feeble attempt to defend their case on the basis of scanty and incomplete materials supplied by the Respondent.”

Similarly, in Libord Finance Ltd. Vs WTM, SEBI 2008 SCC OnLine SAT 46 this Tribunal observed:

“…how could anyone file a proper reply after a lapse of more than eight years. This long delay itself causes grave injustice to the delinquent and results into violation of the principles of natural justice. Such delays defeat the very purpose of the proceedings.”

In view of the aforesaid, without going into the merits of the case we are of the opinion that the impugned order cannot be sustained on account of the inordinate delay.

The impugned order is quashed. All the appeals are allowed with no order as to costs. The misc. applications are disposed of accordingly.