A Whole Time Member of the Securities and Exchange Board of India (SEBI) has recently passed an “Ex Parte Ad Interim Order” against three employees of Incap Financial Services Limited (IFSL), a listed company in India, in exercise of powers under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 (Act) for alleged prima facie violations of the provisions of the Act and the SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003.

Brief Facts

India Infoline Limited filed a complaint with SEBI regarding circulation of a text message from a certain individual advising recipients to invest in IFSL for booking profits as IFSL is about to declare dividend.  The circulation of the text message led to an increase in price and volume of equity shares of IFSL. All of these events took place in early 2011.

On investigating the matter, it was observed that prior to circulation of the text message the three employees had bought shares in huge quantities. Post the circulation they immediately disposed-off the shares bought by them, thereby taking advantage of the price rise.

In view of these facts, the Whole Time Member passed an Ex-Parte Ad Interim Order on 20 October 2015 against the three employees:

  1. impounding the alleged gains (INR 5,87,12,087/-) made by the three employees;
  2. directing banks and depositories to not allow any debits in the accounts held by three employees without SEBI’s permission;
  3. restricting the three employees from disposing off or alienating any of their assets/ properties/ securities till they deposit the impounded amount in an escrow account; and
  4. providing SEBI with a list of assets/ properties held by them within 7 days of the order.

Comment

The Whole Time Member has justified passing of the Ex Parte interim order by stating that it may be possible for the three employees to divert the unlawful losses, as alleged, due to “initiation of investigation and quasi-judicial proceedings”. This, as per the Whole Time Member, would result in defeating the effective implementation of the directions and in his judgment would result in irreparable injury to interests of the investors.

Other than the above, the Whole Time Member has not provided any justification for SEBI’s exercise of such powers which seem to have been conferred on it for use in exceptional circumstances. SEBI has considered this as an apt case to implement the provisions that provide for an exception to the general rule of natural justice. Surprisingly, such use of power has been done for a violation that goes back to January 2011.

Moreover, Section 11(4) of the Act does not contemplate a blanket ban on individuals from disposing off their assets/ properties in general. Also, the process of attaching accounts involves seeking of an order from a judicial magistrate. Whether or not due processes have been followed is not clear from this Order. Perhaps all of these would get clarified should the parties approach the Securities Appellate Tribunal by way of an appeal.