Don’t brand a company ‘shell’ without probe: Court to SEBI

SEBI’s drive against the so-called ‘shell’ companies has drawn judicial flak with the Gauhati HC coming down on the regulator for rushing to pass ex parte orders in the matter. On June 9, 2017, SEBI had asked to exchanges to suspend trading in over 300 suspected ‘shell’ companies. Assam Co, one of the firms in the list, had gone to the court against the move.

While the Serious Fraud Investigation Office (SFIO) had shared a list of suspected firms, the court deliberated over the question whether SEBI was justified in branding Assam Co a ‘shell’ company.

“In the opinion of the court, it was not justified either on part of SFIO or SEBI to treat Assam Co as a shell company straightaway and thereafter initiate investigation to justify such branding. The principles of natural justice require that before such branding, the party should be given a notice and hearing,” the court said in its March 7 order, setting aside SEBI’s directive.

“One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold such findings of guilt,” the court added.

Assam Co produces 11 million kg of tea annually. A ‘shell’ company is usually an inactive company or a vehicle for various financial manoeuvres or kept dormant for future use in some capacity. Many companies branded as ‘shell’ got relief from the court later.

An ex parte injunction is mainly a restrain order issued without notice to the parties involved. Full hearing is held at a later date. Earlier this week, SAT too directed SEBI to use the “ex parte” order sparingly and only in “extreme urgent cases.” 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 of protecting investor interest.”

In the particular matter, SEBI acted on a nearly two-year-old complaint from commodity bourse MCX, which too is empowered to take action on its own as a first level regulator, experts said. Yet, lawyers say the frequency of ex parte orders under the current chairman has fall en sharply.

Emami case

On Wednesday, SAT set aside SEBI’s show-cause notice (SCN) against the chairman of Emami by observing that it was curbing free speech in the market. The SCN alleged fraud and manipulation after the chairman expressed the desire to acquire another company — Amrutanjan — to a news reporter.

“In case, they wanted to acquire the company, Emami would not have talked up the share price of the target company. While dealing with serious issues of fraud, the motive in the absence of any connecting evidence need to be ascertained,” SAT told SEBI.

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