Case: Securities &amp; Exchange Board of India Vs. Ajay Agarwal

2. The factual background in which the present appeal arises is noted as under3. The respondent was appointed the Joint Managing Director of Trident Steel Limited (hereafter referred to as "the said Company) on or about 20th May 1993. The Board initiated certain preliminary investigations about the affairs relating to public issues by the said Company on the basis of a complaint received from a member of Bombay Stock Exchange (for short B.S.E.). The public issue of the said Company was of 52 lacs shares of Rs.10 each at a premium of Rs.3.50 per share aggregating to Rs.7 crore 2 lacs. The Lead Managers to the issue were Bank of Baroda and Apple Industries Limited. Such issues opened on 26th November, 1993 and closed on December 1993 and one of the Directors of the Company appeared to be the chief promoter of the same4. The complaint was to the effect that there was misstatement in the prospectus filed by the company at the time of the public issue with regard to alleged non-disclosure of pledge of 7 lac 50 thousand shares held in the company by directors of the company to avail of working capital from Bank of Baroda. The second aspect of the complaint was that the Directors of the company had also given a non-disposal undertaking to Bank of Baroda in respect of the same shares and that the prospectus does not mention the same. The further complaint is that the 2000 investors complained regarding non-receipt of dividend and the such complaint was filed before the Investor Service Cell, B.S.E. The company while replying to the investors stated that it had not declared any dividend during the preceding year in respect of which complaint has been made. Therefore, prima facie, a case of misstating the facts in the prospectus and misguiding the investors was made out. It appears that the company had deliberately not dispatched share certificates to investors based in Jalgaon and failed to produce the share transfer records and proof of records of the applicants in Jalgaon5. In the course of investigation it appeared that the Directors of the company had pledged their personal holding of 7 lac 50 thousand shares with the Bank of Baroda and its Director, namely, Mr. A.A. Kazi and Dowell Leasing and Financing Limited had given non-disposal undertaking to Bank of Baroda. This was not disclosed in the prospectus of the company. This appears to be, prima facie, a case of violation of SEBI guidelines for disclosure for investor protection. Thus an important aspect of the capital structure of the company had not been disclosed in the prospectus as a result of which the investors were misguided. In view of such complaint having been received investigation was undertaken. Ultimately, a show cause notice dated 22.12.99 was issued to the respondent asking it to show cause why directions under Section 11-B of the Act restraining the company and its Directors from accessing the capital market for a suitable period will not be issued. A reply was demanded within 15 days from the receipt of the show cause notice6. Pursuant to such show cause notice the respondent gave his reply on 1.3.2000 and 10.7.2002. Thereafter, an opportunity of personal hearing was granted to the respondent on 14.5.2002 and the same was adjourned to 5.7.2002 and on that date the Board made its submissions. Ultimately, on 31st March, 2004 Chairman of the Board passed an order, the concluding portion whereof is as under:"Therefore, in exercise of the powers conferred upon me by virtue of Section 4(3) read with Section 11 and Section 11B of SEBI Act, I hereby direct that Shri Ajay Agarwal be restrained from associating with any corporate body in accessing the securities market and also be prohibited from buying, selling or dealing in securities for a period of five years. This direction shall come into force with immediate effect"7. Against the said order an appeal being Appeal No.85 of 2004 was filed before the Tribunal8. Before the Appellate Forum the only point argued is that Section 11-B of the Act came by way of amendment to the said Act with effect from 25th January, 1995 whereas the public issue in respect of which the impugned order was passed was of November 1993 and the prospectus was of October 1993. Both public issue and prospectus were prior to 1995. The shares were listed with effect from 15.2.1994. Therefore, it was urged on behalf of the appellant that the alleged misconduct if any was for a period of time when Section 11-B was not on the statute book. Thus, the question arose whether any direction can be issued under Section 11-B for the alleged misconduct said to have been committed prior to introduction of Section 11-B. The Appellate Tribunal was of the view that the provision of Section 11-B cannot be invoked in respect of the alleged misconduct which took place at a point of time when Section 11-B was not on the statute book. While passing the said order the Appellate Forum recorded that the respondent before the said Forum, the appellant herein, wants to withdraw the impugned order9. In fact, against the said recording a review was filed for reviewing the contents of paragraphs 13 and 14 of the order passed by the Appellate Tribunal.

Court's reasoning:
49. Therefore, the entire basis of the order of the Appellate Tribunal that provision of Section 11- B cannot be applied retrospectively has been passed on an erroneous basis, as discussed herein above50. Provisions of Section 11-B being procedural in nature can be applied retrospectively18. It is clear from the aforesaid discussion that the ratio in Govinddass case does not apply to this case in as much as no tax liability has been created under the order of the Board21. Therefore, restrain order passed on the respondent strictly speaking was not under Section11B ofthe said Act. However, the provisions of Section 11(4)(B) of the said Act also came by way of amendment in 2002. It should, however, be noted that by the time the Board passed the order on 31st March 2004 all the amendments were on the statuteEven if the amendments to the said Act are allowed to operate prospectively by the time the order was passed by the Board, it was empowered by the aforesaid amendments to do so23. Therefore, without giving any retrospective operation to those provisions, the impugned order can be passed by the Board in as much as the amendments in questions empowered the Board to pass such an order when it passed the order. So, the question that survives is whether the Board could pass the order in respect of allegations which surfaced prior to the coming into effect of those amendments in 1995 and 200225. In this connection it may be noticed that Section11B ofthe Act was invoked even at the show cause stage. Therefore, it cannot be said that any provision has been invoked in the midst of any pending proceeding initiated by the Board. The respondent was, thus, put on notice that the Board is invoking its power under Section11Bwhich was available to it under the law on the date of issuance of show cause notice26. In the premises, it cannot be said that any new provision has been invoked in connection with any pending proceeding. Nor can it be contended by the respondent that there was any unfairness in the proceeding. Respondent was given adequate notice of the charges in the show cause notice. He was given an opportunity to reply to the show cause notice and, thereafter, a fair opportunity of hearing was given before the order was passed by the Board. The entire gamut of a fair procedure was thus observed27. This Court also finds that there is no challenge to the amended provision of the law. Even if the law applies prospectively, the Board cannot be prevented from acting in terms of the law which exists on the day the Board passed its order38. Following the aforesaid ratio, this Court cannot hold that protection under Article 20(1) of the Constitution in respect oft facto laws is available to the respondent in this case48. As noted above, there is no challenge to those provisions which came by way of amendment. In the absence of any challenge to those provisions, it cannot be said that even though Board is statutorily empowered to exercise functions in accordance with the amended law, its power to act under the law, as amended, will stand frozen in respect of any violation which might have taken place prior to the enactment of those provisions. It is nobodys case that Board has exercised those powers in respect of a proceeding which was initiated prior to the enactment of those provisions. In fact Board has issued the show cause notice in terms of Section11Band considered the reply of the respondent. In such a situation, there has no infraction in the procedure49. Therefore, the entire basis of the order of the Appellate Tribunal that provision of Section 11B cannot be applied retrospectively has been passed on an erroneous basis, as discussed herein above50. Provisions of Section11Bbeing procedural in nature can be applied retrospectively51. The appellate Tribunal made a manifest error by not appreciating that Section11Bis procedural in nature. It is a time honoured principle if the law affects matters of procedure, then prima facie it applies to all actions, pending as well as future. See K.Eapan Chako v. The Provident Investment Company (P.) Ltd.,[AIR 1976 SC 2610 ] wherein Chief Justice A.N. Ray laid down those principles52. Maxwell in his "Interpretation of Statutes" also indicated that no one has a vested right in any course of procedure. A persons right of either prosecution or defence is conditioned by the manner prescribed for the time being by the law and if by the Act of Parliament, the mode of proceeding is altered, and then no one has any other right than to proceed under the alternate mode. [Maxwell Interpretation of Statutes, 11th Edition, p.216]53. These principles, enunciated by Maxwell, have been quoted with approval by the Supreme Court in its Constitution Bench judgment in Union of India v. Sukumar Pyne [AIR 1966 SC 1206 at p.1209]54. For the reasons discussed above, this Court is constrained to quash the order of the Appellate Tribunal and upholds the order of the Chairman of the Board.