Bombay High Court rules Sebi's first arrest illegal

Release of first prisoner ordered by Bombay High Court; market regulator told to reconsider the matter

The Bombay High Court has set aside a Securities and Exchange Board of India (Sebi) order to arrest Vinod Hingorani, the first person to be jailed by the capital markets regulator.

The court has quashed the Sebi order and ordered Hingorani’s release, saying the procedure followed during the arrest wasn’t appropriate. The order, dated March 10, has asked the regulator to reconsider the case, in accordance with the law. It also asked Hingorani not to leave the country and told the police not to return his passport.

Hingorani, chairman of two companies that issued misleading advertisements to investors, had defaulted on penalties of Rs 1.64 crore. A subsequent price rise in the stock was used to unload stake by entities related to Rajkumar Basantani, promoter of the company and Hingorani’s brother-in-law.
 

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HC FREES SEBI’S FIRST PRISONER

• HC quashes the Sebi order on Vinod Hingorani's arrest
• Notes officer must record reason for arrest
• Arrest can only be ordered if default is wilful
• HC order says procedure not followed when ordering arrest
• Asks Sebi to relook into matter, releases Hingorani
• The court asks Hingorani to not leave the country and asks police to not return his passport
• Sebi says arrest was done only after exploring all other recovery options
• Imprisonment only if defaulter deliberately conceals assets to avoid payment
• The court clarifies the current order doesn’t dispute Sebi’s power to order arrests

The court said the circumstances of the case allowed for the writ petition to be heard, despite the fact that the Securities Appellate Tribunal was the natural recourse against Sebi decisions.

“The petitioner…has made an allegation of infringement of fundamental rights,” the order said. It added an arrest was possible only if the defaulter didn’t pay despite having the means to do so or if a person had transferred his property to avoid paying the penalty. The officer concerned has to record the reasons for doing so in writing.

The court said neither reason was seen in the officer’s records. “Bare perusal of the impugned order reveals the petitioner was detained and arrested for non-payment of dues and not giving a proposal of payment…Ordering arrest and detention for not giving a proposal of repayment is sheer abuse of power,” it added.

“This is the first test of Sebi’s new powers. The court has clearly specified the reasons for overturning the regulator’s decision and Sebi should reconsider whether the same order or a different one can be passed, after examining the matter,” said JN Gupta, former Sebi executive director and founder and managing director of corporate governance firm Stakeholders Empowerment Services.

“I have always maintained the power of arrest should be used in rare cases and that, too, judiciously, as it has the effect of taking away a person’s liberty. Though the high court has not gone into the power of Sebi yet, its power to arrest for non-payment of penalty is based on an age-old tax law. Capacity to pay but unwillingness or avoidance to pay by selling assets could fall into that rare category,” said Vaneesa Agrawal, lawyer and former legal officer, Sebi.

“Sebi always had powers to initiate criminal prosecution against offenders, under provisions of section 24 of the Sebi Act, and seek imprisonment through the court process. Recently, it was vested with powers to order civil imprisonment on its own. Such power is, however, subject to various checks and balances and is to be exercised with great caution, else such civil imprisonments ordered by Sebi might be struck down by the appellate court,” said Tejesh Chitlangi, partner at IC Legal.

A Sebi spokesperson said the court hadn’t quashed the recovery proceedings. “It appears from the order that the court has not quashed the recovery proceedings nor held that Sebi has no power to arrest defaulters…. On issuing a show-cause notice for arrest, no cause was established by the defaulter, nor did he plead that he had no means to pay the dues, except stating he was not liable to pay the dues to Sebi, as the violations were by Rajkumar Basantani,” said the spokesperson.

“Sebi has always been exercising its powers given by the statute diligently. In the matter of recovery proceedings, arrests of defaulters are resorted to after exploring all other possibilities of recovery…only in appropriate cases in which Sebi believes the defaulter directly or indirectly has sufficient sources to pay the dues but deliberately does not reveal those and does not pay the dues,” the spokesperson added.