Why Sebi Lost In SAT Against Zee Group's Punit Goenka
SAT presiding officer Tarun Agarwala has put the spotlight on Sebi chief Madhabi Puri Buch in setting aside the regulator's order against Zee Entertainment (ZEEL) promoter Punit Goenka. In June this year, Sebi had accused Goenka and his father Subhash Chandra Goel of siphoning funds to the tune of Rs 200 crore from ZEEL and barred them from holding directorial or key managerial positions in any listed company or its subsidiaries. Key observations that became a deciding factor for SAT in rejecting Sebi's case include the Sebi chief's 'import of fresh reasoning' in her order, which Justice Agarwala said were 'alien' to the interim order (passed in June).
Further, SAT said that although Sebi chairperson had directed the investigations into the matter to be completed in eight months, no reason was given for the long time period 'when only bank transactions were to be looked into.'
SAT also observed that Sebi wholetime member (WTM) Ashwini Bhati, who had passed the interim order, and Buch differed in their reasoning for passing the ad-interim order. Bhatia was of the view, 'the ex-parte (emergency order) directions were necessary to obviate the possibility of further diversion of funds.' Whereas in her order, the chairperson 'considered the urgency on the ground that a fair and transparent investigation would not be possible if the appellant (Goenka) remained a Managing Director as he may impede and obstruct the investigation.'
"In our opinion, the reasoning given in the ex-parte ad interim order as well as in the impugned order passed by the chairperson (Buch) are bereft of any merit. Till date, no evidence has come forward of any further diversion of funds," Justice Agarwala said in his order.
Senior Supreme Court lawyer Abhishek Manu Sanghvi, who is also a Member of Parliament from the Congress Party, and senior Advocate Somasekhar Sundaresan were arguing on behalf of Goenka.
How the case hearing landed with the Sebi chief
It is a rare instance where the Sebi chief has had to pass a confirmatory order after an interim order was passed by the WTM. In the normal course, the WTM who had passed the interim order also passes the confirmatory order. It was SAT that left no other option but for Buch to herself hear the matter.
After WTM Bhatia had passed his interim order barring Goenka in June, SAT directed that another WTM who wasn’t part of the earlier proceedings hear the matter further. The reasoning was that Bhatia was the same WTM who had passed yet another order in April against an entity linked to the Zee group promoters. Also, Bhatia was in a committee that rejected Goenka and Chandra's settlement plea. Hence, SAT wanted to ensure that Bhatia was not influenced by his bias from the settlement proceedings when he further heard a plea by Goenka and Chandra in the funds siphoning matter. In June when SAT directed Sebi to get someone else to hear the case, the only WTM Ananta Baruah was to retire in July. That left only Buch to hear the matter.
Sebi's ex-parte order: A 'Carte Blanche'
Sebi has often been exposed by the courts for the absence of checks and balances in passing ex-parte orders, where WTMs issue directives sans any formal hearings. Courts have asked Sebi to use its powers to issue ex-parte orders sparingly.
"We find that the reasoning given by the chairperson regarding the urgency in issuing an interim direction pending investigation is erroneous. The chairperson's finding that the urgency in the issuance of the interim directions is not to be assessed from the viewpoint of the transaction but rather the egregious nature of the transaction which displays the total disregard to the accountability of the Managing Director is, in our opinion, an incorrect approach," the SAT judge said.
SAT says that If the reasoning adopted by the chairperson is to be accepted, "it would give a license and a carte blanche to pass urgent ex-parte ad interim order for the alleged egregious nature of the transactions”.
In SAT's view, "the approach was not only untenable but constituted a strange and perverse attempt to justify its unsustainable passing of the urgent ex-parte interim order. If the reasoning adopted by the Chairperson is to be accepted it would give a license and a carte blanche to pass urgent ex-parte ad interim order for the alleged egregious nature of the transactions. In our opinion, with regard to the five transactions there was no urgency in passing the ex-parte ad interim order," SAT said.
Questioned the 8-months for investigations
SAT observed that five transactions were taken into consideration in the ad interim order, on the basis of which a presumption was drawn of round-tripping of funds from ZEEL to ZEEL, thereby causing loss to the shareholders and causing benefits to the associate companies and its promoters. The charge was that Rs. 200 crore was paid by ZEEL to seven entities and the ad interim order confined it to Rs. 143.90 crore, which came back to ZEEL. There was no finding of round-tripping of the balance amount of Rs. 66.10 crore, SAT observed.
"Further, the restrictions are continuing since June 2023 by the impugned order. The Chairperson has directed that the investigation should be completed within eight months and under the garb of temporary restraint the appellant is expected to disassociate from ZEEL and its subsidiaries as well as with the merged entity for ten months or more after which proceedings may be initiated by issuance of a show cause notice. Thus, the directions so issued during the pendency of the investigation are harsh and clearly punitive," SAT said.
