The Securities and Appellate Tribunal (SAT) has directed SEBI to use its powers to pass an “ ex parte interim order” sparingly and only in “extreme urgent cases.” On Tuesday, SAT set aside SEBI’s March 1 ex parte order against large commodity traders including North End Foods Marketing (NEFM), RK Commodities and 24 others and reprimanded the regulator “for not following the principals of natural justice by giving the parties a chance of hearing.”

An ex parte injunction is mainly a direction, command to restrain, granted after hearing only one party in matters of ‘urgency’, without a notice to the other parties involved. Full hearing is held at a later date.

SAT observed that although SEBI was empowered to take measures “as it deemed fit” for investor protection under Section 11A/11B, “it does not mean that in every case, an ex parte interim order should be passed on the pretext that it was imminent to pass such interim order to protect the interest of the investor or securities market.”

An interim order, however, temporary it may be, restraining an entity/person from pursuing his profession/trade may have substantial and serious consequences which cannot be compensated in terms of money, SAT observed. Legal experts involved with the case told BusinessLine that Section 11A/11B has been the most abused in SEBI as it is open-ended.

Mentha Oil episode

SEBI acted on a complaint by the MCX in 2017 that said three entities were holding 75 per cent of total deliverable stock of mentha oil and indulging in off-market transactions with counter parties. An inquiry showed a single entity NEFM was financing all parties involved. SAT observed that prima facie it was concluded and presumed that NEFM indirectly cornered substantial amount of mentha oil stock for manipulation. The entities contended SEBI’s conclusions in SAT and said they were wrongly connected. Also, MCX had already passed a restraining order against them in 2018.

“There should be shred of evidence for prima facie conclusion of unfair trade practices and manipulative intent. Passing a restraint order which virtually puts a stoppage on right to trade based on needle of suspicion is harsh and unwarranted,” SAT said.

SAT observed there was nothing on record to indicate manipulation in sales done by appellants nor was there prima facie finding that by accumulating large stocks of mentha oil there was market domination.

Sans urgency

SAT asserted that in the present case, there was no urgency for the SEBI whole-time member to exercise its ( ex parte ) powers. “We do not find any extreme urgent situation which warranted SEBI to pass an ex parte interim order. The impugned order is not sustainable as (it was) passed in gross violation of principles of natural justice,” SAT said.

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