The Securities and Appellate Tribunal (SAT), Mumbai has held that the Securities and Exchange Board of India (SEBI) can pass ex parte interim orders only in extreme and urgent cases. An ex parte order is when there is no notice or any opportunity to be heard by the other party during the first court appearance. The Tribunal has held that the power to issue such orders must be used very sparingly.
While hearing an appeal challenging an ex parte interim order passed against the appellant, the Whole Time Member (WTM) of the SEBI had passed an ex parte order in October, restraining the appellant from accepting new clients for a period of three months. The WTM also observed that the appellant was in violation of Clauses 2,3 and 16 of Schedule III of the Securities and exchange Board of India (Registrar to an Issue and Share Transfer Agents) Regulations, 1993. SEBI also found discrepancies with respect to PAN cards in six different instances involving the appellant company and also found activities related to duplicate shares being issued. The WTM thus issued an ex parte ad interim order prohibiting the appellant from accepting further clients. The appellant applied for revocation with a detailed reply but the WTM confirmed the said order this month. This order was justified on the basis that it was passed under Section 11(1) and 11(4) of the SEBI Act under which SEBI has the right to pass such orders.
The SAT Bench noted that no other investor had complained of a wrongful transfer of shares involving the appellant company. On further investigation, it was found out that the appellant had not made any gain by this wrongful transfer nor was there any finding of a loss to the investor. The SAT thus held that restraining the appellant from accepting fresh clients for a period of three months was harsh and unwarranted. The SAT held that, ““…the respondent is empowered to pass an ex-parte interim order only in extreme urgent cases and that such power should be exercised sparingly. In the instant case, we do not find that any extreme urgent situation existed which warranted the respondent to pass an ex-parte interim order. We are of the opinion that the impugned order is not sustainable in the eyes of law as it has. been passed in gross violation of the principles of natural justice as embodied in Article 14 of the Constitution of India. The restraint order is in our opinion unjustified.”
Thus, the order which restrained the appellant from accepting new clients was set aside but the other directions issued by the WTM would continue to operate.
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