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Tribunal on SEBI's ex-parte interim orders

Finsec Law Advisors

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In its decision dated March 12, 2019, the Securities Appellate Tribunal (“SAT”) quashed an ex-parte interim order passed by a whole time member (“WTM”) of SEBI against the appellants which restrained them from dealing in the securities market, and held that such power is to be exercised sparingly only in extremely urgent cases.

MCX Ltd. had intimated SEBI that three entities were holding more than 75% of total exchange deliverable stock of Mentha Oil. On investigation, SEBI found that these entities acquired Mentha Oil through futures contracts and off-market transfers. The deliveries taken by these entities were found to be in violation of limits prescribed by SEBI by way of its circulars. It was further found that these entities received funds from one of the appellants, North End Foods Marketing Pvt. Ltd. (“NEFM”) for this purpose, and NEFM was the beneficial owner of the Mentha Oil stock.

On a basis of an apprehension that a single entity could dominate the prices of futures contracts, WTM passed an order under section 11(1), 11(4), 11B and Section 19 of SEBI Act 1992, prohibiting the appellants from dealing in or being associated with the securities market in any manner. This was done with a view to prevent the appellants from indulging in such activities in violation of the prescribed position limits.

SAT found that the impugned order was unwarranted and there was no real urgency as the futures contracts had already been executed. Further, it was held that in the absence of any evidence supporting a prima-facie conclusion of involvement of appellants in unfair trade practices, such an order was in violation of principles of natural justice.

This decision of SAT, while reiterating the power of WTM of SEBI to pass ex-parte interim orders, held that such orders must be supported by some shred of evidence and urgency. It rightly observed that such power is given to regulatory authorities to immediately curb the mischief and restore faith of investors in the securities market, and should be used sparingly in extremely urgent cases.