Mr. G. Anoop vs. Union Of INDIA

Facts

The petitioners, members of the Institute of Chartered Accountants of India, were appointed as Debenture Trustees for BRD Securities Limited (the Company). They are challenging 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 that the Company issued debentures and bonds without complying with statutory requirements, including those related to public issues, obtaining debenture holder consent for tenure extension, e-filing details with the Registrar of Companies, and adhering to Section 67(3) of the Companies Act, 1956. It also alleged failure to apply to stock exchanges, return money to investors, register prospectuses, and appoint registered debenture trustees, as well as the appointment of unregistered debenture trustees violating Section 12(1) of the SEBI Act, 1992, and Regulation 7 of SEBI (Debenture Trustees) Regulations, 1993. The petitioners are specifically accused of acting as debenture trustees without SEBI registration.

Held

The Court held that SEBI has jurisdiction over the securities transactions of an NBFC, including the actions of Debenture Trustees, 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 acted as Debenture Trustees without obtaining the requisite registration from SEBI. The Court noted that the petitioners did not claim to hold registration to act as Debenture Trustees. Furthermore, the Court stated that the proceedings were only at the show-cause stage, and the petitioners had the opportunity to establish their case before the SEBI Board. Citing the Supreme Court judgment in Peerless General Finance and Investment Company Limited v. Reserve Bank of India, the Court held that its function 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.

Key Issues

1. Whether SEBI has the power and jurisdiction to issue the show-cause notice to the Company and its directors, considering the Company is a Non-Banking Financial Company (NBFC) primarily regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934 and Banking Regulation Act, and not the Companies Act, 1956/2013 or SEBI Act, 1992. 2. Whether the petitioners, acting as Debenture Trustees, have violated Section 12(1) of the SEBI Act, 1992, read with Regulation 7 of the SEBI (Debenture Trustees) Regulations, 1993, by acting without SEBI registration. Petitioner's arguments: The petitioners contended that SEBI lacks supervisory powers over NBFCs regarding deposit-raising and account maintenance, which are vested in the RBI. They argued that SEBI's show-cause notice was based on a presumption of supervisory powers under Sections 55A, 117B, and 67 of the Companies Act, 1956, which SEBI does not possess. They also pointed out that the Companies Act, 1956, has been repealed by the Companies Act, 2013, rendering the notice unsustainable. They relied on several Supreme Court and SAT judgments to support their claim that SEBI lacks jurisdiction. Revenue/State's arguments: The SEBI argued that even though the Company is an NBFC, SEBI has a duty to protect investors in securities transactions, including debenture issues. They asserted that as NBFCs are not specifically excluded from the SEBI Act, 1992, SEBI has jurisdiction over their securities transactions and the actions 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.