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