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2012 Supreme(Del) 2276
DELHI HIGH COURT
Vipin Sanghi, J.
DLF Ltd. - Appellant
Versus
Securities and Exchange Board of India & Ors. - Resopndent
W.P.(C) 8128/2011 & C.M.Nos.18307-08 of 2011
Decided On : 03-01-2012
SEBI has the authority to investigate alleged violations of the SEBI Act and its rules and regulations, and that such investigations are not subject to the principles of natural justice.
Headnote:
The petitioner, DLF Ltd., challenged the order of the Securities and Exchange Board of India (SEBI) directing an investigation into allegations of violations of the SEBI (Disclosure and Investor Protection) Guidelines 2000 and the Companies Act, 1956. The petitioner contended that the procedure adopted by SEBI was flawed, violating the principles of natural justice, and that the investigation would harm its reputation and business. SEBI argued that it had reasonable grounds to believe that the transactions in securities were being dealt with in a manner detrimental to investors or the securities market, and that an intermediary or person associated with the securities market had violated the provisions of the SEBI Act or its rules and regulations.
Fact of the Case:
The petitioner, DLF Ltd., was accused of violating the SEBI (Disclosure and Investor Protection) Guidelines 2000 and the Companies Act, 1956. The allegations included failing to disclose material information in its draft red herring prospectus (DRHP) and engaging in transactions that were detrimental to investors.
Finding of the Court:
The Court held that SEBI had reasonable grounds to believe that the transactions in securities were being dealt with in a manner detrimental to investors or the securities market, and that an intermediary or person associated with the securities market had violated the provisions of the SEBI Act or its rules and regulations. The Court found that the procedure adopted by SEBI was not flawed and did not violate the principles of natural justice. The Court also held that the investigation would not harm the petitioner's reputation or business.
Issues: 1. Whether SEBI had reasonable grounds to believe that the transactions in securities were being dealt with in a manner detrimental to investors or the securities market, and that an intermediary or person associated with the securities market had violated the provisions of the SEBI Act or its rules and regulations? 2. Whether the procedure adopted by SEBI was flawed and violated the principles of natural justice? 3. Whether the investigation would harm the petitioner's reputation or business?
Ratio Decidendi: 1. The Court held that SEBI had reasonable grounds to believe that the transactions in securities were being dealt with in a manner detrimental to investors or the securities market, and that an intermediary or person associated with the securities market had violated the provisions of the SEBI Act or its rules and regulations. The Court noted that the petitioner had failed to disclose material information in its DRHP and had engaged in transactions that were detrimental to investors. 2. The Court held that the procedure adopted by SEBI was not flawed and did not violate the principles of natural justice. The Court noted that the petitioner had been given an opportunity to be heard and that SEBI had considered all of the evidence before making its decision. 3. The Court held that the investigation would not harm the petitioner's reputation or business. The Court noted that the investigation was being conducted in a confidential manner and that the petitioner would have an opportunity to respond to any findings made by SEBI.
Final Decision: The Court dismissed the petition and upheld the order of SEBI directing an investigation into the allegations against the petitioner.
Vipin Sanghi, J.
1. The petitioner assails and seeks the quashing of the order dated 20.10.2011 passed by Sh. Prashant Saran, whole time member of the Securities and Exchange Board of India (SEBI), whereby it has been held in relation to the complaints dated 04.06.2007 and 19.07.2007 made by respondent no.2 against the petitioner, that the SEBI shall investigate into the allegations leveled by the complainant/respondent no.2 in respect of the petitioner DLF Ltd. (DLF) and Sudipti Estates Private Limited (Sudipti), respondent no.3. The said investigation shall focus on the violations, if any, of the provisions of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines 2000 read with the relevant provisions of the Companies Act, 1956. It has been further decided that a formal order would be issued appointing an investigating authority who shall investigate the matter, without being prejudiced by any observations made in the said order, and shall complete the same as expeditiously as possible. If any violations are found in the investigation, the SEBI shall proceed in accordance with law.
2. Respondent no.2 claims to have entered into business transactions with respondent no.3, Sudipti in the year 2006. At that time of point of time, Sudipti was controlled by two promoters, namely, DLF Home Developers Ltd. (DHDL) and DLF Real Estate Developers Ltd. (DREDL), both of whom were wholly owned subsidiaries of DLF - the petitioner. Sudipti was claimed to have been incorporated on 24.03.2006. It was claimed that the aforesaid promoter companies were a part of DLF group, of which the flag ship company is DLF, the petitioner herein.
3. In connection with its proposed public issue, the petitioner herein filed a Draft Red Herring Prospectus (DRHP) with the SEBI on 12.05.2006. In the said DRHP, it was indicated that Sudipti was one of the joint ventures of DLF. However, this DRHP was subsequently withdrawn by the merchant bankers of the petitioner and a fresh DRHP was submitted on 02.01.2007, in which Sudipti was not mentioned as being associated with DLF.
4. Respondent no.2 claimed that the petitioner and Sudipti had ensnarled and cheated him of Rs. 31,09,50,000/- towards sale proceeds of certain lands. A First Information Report (FIR) under Section 420 IPC was got registered at the instance of respondent no.2 against Sudipti and a few others on 26.04.2007 at P.S. Connaught Place, New Delhi.
5. The final DRHP submitted by the petitioner DLF on 25.05.2007, did not mention the name of Sudipti as a joint venture/associate of the petitioner. Thereafter, the public issue of DLF opened, shares were subscribed and the issue closed. Respondent no.2 addressed a letter on 04.06.2007 to SEBI in this regard. It appears that SEBI forwarded this communication on 25.06.2007 to Sudipti and the petitioner DLF for their response. The petitioner DLF, by its letter dated 11.07.2007 denied the allegations and claimed that it had no connection with Sudipti as on that date. It appears, the merchant bankers of the petitioner explained to SEBI that the shares of Sudipti, which were held by DHDL and DREDL, wholly owned subsidiaries of DLF, had been sold in 2006. It was, therefore, claimed that Sudipti ceased to be an associated company of DLF by the time the revised DRHP was filed in January 2007.
6. The aforesaid FIR was investigated by the police and a closure report was filed. Thereafter respondent no.2 claims to have filed a private complaint which is stated to be pending before the concerned criminal Court. It appears respondent no.2 also challenged the filing of the closure report by filing a petition before this Court under Section 482 Cr.P.C.
7. Aggrieved by the inaction of SEBI on its complaints, respondent no.2 preferred W.P(C) 7976/2007 titled Kimsuk Krishna Sinha V. Securities Exchange Board of India & Ors before this Court. In those proceedings, SEBI filed its counter affidavit and defended its position in relation to the complaint of
