I. Unnikrishnan vs. Union Of INDIA

Facts

The petitioners, Chartered Accountants and members of the Institute of Chartered Accountants of India, acted as Debenture Trustees for BRD Securities Limited (the Company). They are aggrieved by a show-cause notice dated March 13, 2020, issued by the Deputy General Manager of the Securities and Exchange Board of India (SEBI). The notice alleged several violations by the Company, including issuing debentures without complying with public issue requirements, failing to obtain debenture holders' consent for tenure extension, not e-filing bond issuance details with the Registrar of Companies, and not registering the prospectus. The petitioners were specifically charged with acting as debenture trustees in a public issue of Non-Convertible Debentures (NCDs) without SEBI registration, violating Section 12(1) of the SEBI Act, 1992, and Regulation 7 of the SEBI (Debenture Trustees) Regulations, 1993. The petitioners challenged the show-cause notice, arguing that SEBI lacked the supervisory powers over Non-Banking Financial Companies (NBFCs) in such matters, which they contended were vested with the Reserve Bank of India (RBI). They also noted that the Companies Act, 1956, had been repealed by the Companies Act, 2013.

Held

The Court held that SEBI has the jurisdiction to issue the show-cause notice. It reasoned that while the Company is an NBFC regulated by the RBI Act, SEBI's duty to protect investors in securities extends to the securities transactions of an NBFC, including the actions of Debenture Trustees, as long as NBFCs are not specifically excluded from the purview of the SEBI Act, 1992. The Court found a prima facie violation of Section 12(1) of the SEBI Act, 1992, and Regulation 7 of the SEBI (Debenture Trustees) Regulations, 1993, by the petitioners, who are Chartered Accountants and acted as Debenture Trustees without SEBI registration. The Court noted that the petitioners did not claim to hold the required registration. Furthermore, the Court emphasized that the proceedings were only at the show-cause stage, and the petitioners had the opportunity to establish their case before SEBI. Citing the Supreme Court in Peerless General Finance and Investment Company Limited v. Reserve Bank of India, the Court stated its role is to ensure lawful authority is not abused, not to usurp the task entrusted to the authority. Therefore, the Court found no reason to interfere with the show-cause notice at this stage. The writ petitions were dismissed.

Key Issues

1. Whether SEBI possesses the necessary power and jurisdiction to issue a show-cause notice to the petitioners, who acted as Debenture Trustees for an NBFC, concerning alleged violations of the Companies Act, 1956, and SEBI regulations, or if such supervisory powers are exclusively vested with the Reserve Bank of India under the RBI Act, 1934. 2. Whether the petitioners, by acting as Debenture Trustees for the Company without obtaining registration from SEBI as required by Section 12(1) of the SEBI Act, 1992, read with Regulation 7 of the SEBI (Debenture Trustees) Regulations, 1993, have committed a violation of law. Petitioner's Arguments: The petitioners contended that SEBI lacks the power and jurisdiction to issue the impugned show-cause notice because the supervisory powers over NBFCs regarding deposit-raising and account maintenance are vested with the RBI. They argued that the show-cause notice was issued on the erroneous presumption that SEBI has supervisory powers under Sections 55A, 117B, and 67 of the Companies Act, 1956, and that it was merely an attempt to conduct a "rowing enquiry." They also pointed out that the Companies Act, 1956, had been repealed. They relied on several Supreme Court and SAT judgments to support their claim of SEBI's lack of jurisdiction. Revenue/State's Arguments: The Standing Counsel for SEBI argued that even though the Company is an NBFC, SEBI has a duty to protect investors in securities, and as NBFCs are not specifically excluded from the SEBI Act, 1992, SEBI has jurisdiction over their securities transactions, including those of Debenture Trustees. They also highlighted that the proceedings were at the show-cause stage, and the petitioners had an opportunity to present their case before the Board.