Since Monday, trading has been halted in these two companies, along with 329 others, after they were moved to so-called Stage VI of graded surveillance measures - where trading is allowed only once a month - for being "suspected shell companies".
Sebi's action to abruptly halt trading in these companies has faced widespread criticism as it virtually froze the investments of millions of investors.
Citing the move as a knee-jerk action, the appellate tribunal said, "It is apparent that Sebi passed the impugned order without any investigation. In the facts of these two appeals, we are prima facie of the opinion that the impugned communication issued by Sebi on the basis that the appellants are ‘suspected shell companies’ deserves to be stayed.” J Kumar Infraprojects and Prakash Industries had moved SAT on Wednesday, challenging Sebi's decision to classify them as "shell companies". Trading is expected to resume in the two companies on Friday as the tribunal has directed the BSE and the National Stock Exchange (NSE) to reverse Sebi's decision. SAT will resume hearing in the matter on September 4.
J Kumar Infraprojects and Prakash Industries also appeared before Sebi for a personal hearing on Thursday, where the regulator asked the companies to furnish some information.
During the hearing, SAT questioned Sebi on the urgency in issuing the impugned communication without even investigating the credentials and fundamentals of the companies.
Senior advocate Darius Khambata, representing Sebi, said the regulator had merely implemented the directions of the Ministry of Corporate Affairs, and it had carried out no independent investigation.
Khambata further said Sebi directives against the shell companies were administrative in nature and could not be challenged before SAT. He said the appeal by the two companies was not “maintainable”, and added that the appellant can file a writ petition in a civil court, instead.
On the other hand, J Kumar's counsel Janak Dwarkadas said the Sebi order was ex-facie, arbitrary, unreasonable and whimsical, and was issued without application of mind. He said Sebi could not have issued the communication without giving an opportunity of hearing to the appellants. He argued that in the present case, it was neither alleged that there was any abnormal price rise nor the financial health and fundamentals of the company had been looked into by Sebi before issuing the impugned communication. Agreed on the contention of companies’ counsels, SAT said Sebi was required to take action in accordance with the prescribed act and the regulations.
On Wednesday, Sebi initiated a probe into the 331 companies by directing stock exchanges to check the credentials and fundamentals of the firms. Sebi has also asked exchanges to furnish information on tax returns, bank balance, status of loan defaults and business model of these companies.
Sources said some of the companies had already started submitting the required documents to exchanges. The regulator is expected to lift the ban on these companies on a case-by-case basis after verifying their credentials.
“Since the delay in disposal of the representation is causing serious prejudice to the appellants, we proceed to consider the plea of the appellants for grant of interim relief,” SAT noted.