Supreme court quashes Rs 50,000 cost imposed on Sebi by tribunal

The Supreme Court on Friday quashed the Securities and Appellate Tribunal (SAT) order that imposed a cost of Rs 50,000 on Sebi for passing an ex-parte interim order in a case wherein the market regulator barred a trader from markets for indulging in fraudulent and manipulative trading.

It also expunged the adverse remarks made by the Tribunal that had pulled up Sebi, saying that despite there being ‘no shred of evidence’ to conclude that there was manipulative intent on the part of Sanjay Gupta, a trader, Sebi had let its ex-parte order continue for a year without application of mind. The tribunal was also critical on the inordinate delay in passing final orders after a year.

A Supreme Court Bench led by Justice Arun Mishra said that such adverse remarks were “unwarranted” while disposing of the Sebi’s appeal against the tribunal’s June 4 order that quashed the October 30 order passed by the whole-time member (WTM) of the regulator.

Sebi through Attorney General KV Venugopal and counsel Pratap Venugopal argued that “the wholly erroneous passing of adverse remarks and imposition of costs by the SAT would affect the effective, independent and fearless discharge of official duties imposed on it for protection of investors, thus, warranting intervention by the apex court”.

Sebi submitted that the SAT’s order was “wholly unsustainable” as there was no delay in passing of the interim order post hearing. “The interim order was passed within three months of the last hearing,” it added.

On a preliminary review during the examination period (July 1, 2016 to January 31, 2017), Sebi had observed that there was pump and dump activity (a scheme that attempts to fraudulent boost the price of a stock after which the perpetrators sell their shareholding at inflated prices) in the scrip of Supreme Tex Mart (STML).

Sebi observed that around 39.3 lakh SMSs were sent recommending buy for STML across different dates during the examination period. It was also observed that the trading volume of the STML scrip on the days on which SMSs were sent was significantly high in comparison to its average daily trading volume during the prior period. Furthermore, promoters/directors of the company including Gupta had bought and sold shares during the examination period.

In November 2017, the Sebi’s WTM had issued an interim order barring the company’s directors, including Gupta, from accessing capital markets pending further investigations on charges that it sent out bulk messages to buy its shares. A final order in March 2019 asked the directors and the company to disgorge `18-crore “ill-gotten gains” to investors.

While Sebi held Gupta guilty of prevention of fraudulent and manipulative trade practices, it failed to take into account bank records that Gupta had resigned from SMTL board in 2013 before the alleged lapses occurred.

SAT in its order said that “it was unable to accept the manner and approach of WTM of Sebi in the matter in such a casual manner without considering the evidence on record. Such facts should have been ascertained by the WTM instead of mechanically treating a bank statement as the gospel truth. Also, a casual link should have been established indicating manipulation”.

According to SAT, the final Sebi order was passed “mechanically without any application of mind and without considering relevant documents”.