SAT raps Sebi for 'blind' support to adjudicating officers

Sebi has got a rap on the knuckles from Securities Appellate Tribunal (SAT), which has termed the regulator's conduct as "disgraceful" in "blindly supporting" certain penalty orders passed by its adjudicating officers.
Remanding the case back to the market regulator for "fresh decision on merits and in accordance with law", SAT said it hopes the adjudicating officers of Sebi would ensure that "the fresh order to be passed is in the interest of the securities market".
The sharp criticism by the three-member SAT bench, headed by the Tribunal's Presiding Officer Justice J P Devadhar, has been made in an order disposing of appeals filed by certain Krishna Enterprises and Rajesh Service Centre against an order passed by a Sebi Adjudicating Officer in November, 2013.

The two appellants were fined Rs 10 lakh each for allegedly "aiding and abetting Edserv Softsystems Ltd (ESL) in siphoning off its IPO proceeds and thereby cause loss to the investors who were already the shareholders of ESL or who applied and were allotted shares under the IPO".
SAT, however, said in its order dated April 20 that the "impugned order records that it is not established that the appellants were the actual beneficiary of the siphoned off amount.
"However, penalty is imposed on ground that the appellants in collusion, acted as channel to transfer the siphoned off IPO proceeds to other layers."

Setting aside the penalty imposed on the two entities and remanding the matter back to Sebi for a fresh hearing, SAT said there was "nothing on record to suggest that ESL has been held to be guilty of siphoning off the IPO proceeds, because, it is only if ESL is held guilty of siphoning off IPO proceeds, the question of considering the question as to whether the appellants had colluded with ESL arises".

The two appellants contended that they had received the amount from ESL for establishing Heal Laboratories/Head Office and supply of computers/accessories. They also contended that "the amount received by them from ESL was utilised for the purpose for which it was received and therefore, the allegation that the appellants acted as a channel for ESL to siphon off its IPO proceeds is devoid of any merit".

After hearing the appellants, SAT brought to the notice of the Sebi counsel that the impugned order was in conflict with various other orders passed by the Adjudicating Offers of Sebi under the same section of the Sebi (Securities and Exchange Board of India) Act.
In view of conflicting orders passed by the AOs of Sebi, the Tribunal then asked the Sebi counsel to "take instructions and accordingly adjourned the matter".
"In other words, Sebi is arguing before us that the orders
passed by the AOs of Sebi even if they are mutually contradictory must be upheld by this Tribunal," it added.

The Tribunal said it was "surprised by the attitude adopted by Sebi" as it was its duty to ensure that the orders passed by the AOs promote the development of the securities market and are in the interests of the securities market.
"If the orders passed by the AO are not in public interest, then under Section... Sebi is empowered to review the orders passed by the AO.
"Passing conflicting orders would not promote the development of the securities market and would not be in the interests of the securities market. Therefore, by defending the conflicting orders passed by the AOs, Sebi is neither promoting the development of the securities market nor acting in the interests of the securities market," the Tribunal said in its six-page strongly-worded order.

"The conduct of Sebi in supporting the orders passed by its AOs which are mutually contradictory in nature and give leverage to the AOs to impose penalty as it suits them, clearly shows that it is blindly supporting the orders inspite of the fact that the said orders are detrimental to the interests of the securities market," it added.
In its order on the case, SAT noted that Sebi has submitted that there are several orders passed by the AOs wherein violation of these sections have been read together and accordingly penalty has been imposed on the footing that both violations constitute as one offence.

"Thus, it is conceded by Sebi that the order impugned in these appeals (Krishna Enterprises and Rajesh Services Centre), wherein the AO has considered the violation of Section 12A(b)&(c) and violation of regulation 3(c)&(d) as two independent offences and accordingly imposed two independent penalties, is in conflict with other," the SAT order said.
In the November 2013 order, Sebi's Adjudicating Officer had observed that the "loss was caused mainly by the ESL along with layers, and it is not established that Krishna Enterprises and Rajesh Services Centre were the actual beneficiary of said siphoned amount".
"They were the channels only who, in collusion, passed on the said amount to other layers. However, it cannot be ignored that such act/practice as adopted by them is serious in nature which has the cascading adverse effect towards the investors/shareholders," the AO had said.

"Hence, a considerable penalty needs to be imposed upon the Noticees..." he had added.
The order had also noted that the probe did not indicate the quantum of any direct or indirect unfair gain made by the two entities nor the default of the two companies is shown to have been of repetitive in nature.