Sucheta Dalal :SAT reprimands SEBI on its investigation process
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » SEBI » SAT reprimands SEBI on its investigation process
                       Previous           Next

SAT reprimands SEBI on its investigation process  

Nov 20, 2007

Asks it to pay one lakh rupees as costs to appellant


By Sucheta Dalal


In a serious indictment of the Securities and Exchange Board of India’s (SEBI) investigation process, the Securities Appellate Tribunal (SAT) set aside a SEBI order imposing a penalty of Rs one crore on Top Cassettes Limited and ordered the regulator to pay Rs one lakh as costs to the company (Appeal No.156 of 2006).

The SAT order by Justice N.K.Sodhi says, “We are extremely unhappy with the manner in which the matter has been dealt with and are satisfied that the investigating officer, the Board and even the adjudicating officer did not apply their mind and acted arbitrarily through out. Facts giving rise to this appeal may now be noticed”.

The case involves alleged price rigging by Top Telemedia Limited (formerly Top Cassettes Ltd) and its associates. The SAT order dated 11th September 2007 has still not been posted on the SEBI website.

The extraordinary chronology of events that forms a part of the order is especially significant because Top Cassettes is a tiny, inconsequential company and one among hundreds that are being investigated by the regulator for ramping their share price during the dotcom bubble of 1999. However, SEBI’s inept investigation veers away from the alleged fraud of price rigging and SEBI ended up initiating adjudication proceedings for failure to provide information and refusing to respond to summons. The Rs one crore penalty that was finally imposed on the company is for failing to respond to SEBI summons rather than for alleged market manipulation. 

The cavalier manner in which the case has been handled gives rise to considerable alarm about the manner in which the regulator conducts its investigation and adjudication proceedings, which are all hidden behind walls of secrecy and several layers of internal committees. It is also a pointer to why several major investigations have been bungled by the regulator.  It is important to remember that the facts narrated below are part of the SAT order and not mere allegations or contentions.


The case: Some time in 2004, SEBI started investigating alleged price rigging in the Top Telemedia Limited (formerly Top Cassettes Ltd.) shares by one Prakash Fortran Softech Ltd., way back in the October-December 1999 period. On 10th September 2004, SEBI asked Top Cassettes to appear before it on 17th September along with information and data that it had listed in its letter.

The company claims that it did receive the summons and SEBI was also unable to produce any evidence that they were ever served. So on 17th September it issued a letter to Top Cassettes with a copy of the summons dated 10th September asking for data such as the shareholding pattern of Top Cassettes, its relationship with Prakash Fotran Softech, trading transactions of the promoters and directors etc pertaining to six months from July to December 1999.

On receiving this letter, Top Cassettes replied to SEBI on 22nd September 2004, seeking “reasonable time of 20-30 days to collect and produce the information” since the data sought by SEBI was five years old. SEBI received the letter on 23rd of September and rejected the request for more time. SAT observes that the “request was obviously reasonable, but the investigating officer was most unreasonable, to say the least, in declining the same. There was no pressing hurry for him to proceed with the investigation and it was only the first request that the appellant had made”. SAT further says we cannot lose sight of the fact that the alleged rigging occurred in 1999 and the investigation was only ordered in 2004.


On 24th September 2004, the investigating officer wrote to Top Cassettes asking the company to appear before SEBI on 27th September with all the relevant information. In effect, the company was given less than three days to produce five-year old information.

SEBI hand-delivered the letter, but it was returned with a note from the security guard that the company’s office was closed for the past two years. The letter was then resent to the company’s Ahmedabad address by registered post. Postal stamps on the letter and the acknowledgement show that this letter was received in Ahmedabad only on 30th September, this was three days 27th September hearing date. SAT says, “here again the investigating officer was most unreasonable in allowing only three days time to the appellant… without even bothering to verify whether the letter had reached the appellant (Top Cassettes) in time”.

Since the company obviously could not appear for a hearing on the given date, the SEBI officer went ahead submitted his investigation report. This was placed before an internal committee of Divisional Chiefs on 11th October 2004.

Meanwhile, on 21st October, Top Cassettes submitted a detailed reply providing all the information that SEBI had sought. It also said that it did not need a personal hearing and requested SEBI to condone the delay in filing its reply. The company also said that since all it had to say was in the written statement, it should be exempted from the hearing. SEBI apparently received this reply on 2nd December 2004. In this context, SAT notes that the investigation officer acted most arbitrarily and, “It is thus clear that the appellant was not afforded any opportunity by the investigating officer to comply with the summons”.

Based on the investigation report, SEBI decided to start adjudication proceedings against the company on 17th January 2005 for its failure to appear before the regulator in response to summons issued in 2004. While the proceedings were initiated in January, an adjudication officer was appointed only on 7th July 2005. He took several months to act and issued a notice to Top Cassettes on 22nd November 2005. This sent to the company by registered post but was returned with the remark “left”. A second notice was issued on 24th February 2006 at the company’s Pune address, but it could also not be served. Finally, on 25th April 2006 SEBI pasted a copy of the show cause notice on the company’s premises at Ahmedabad.

Top Cassettes apparently got to know about this notice and on 7th June 2006 sent a messenger to meet SEBI’s adjudication officer and request for a copy of the show cause notice. Surprisingly, the officer refused. Instead he sent it again by registered post to the address mentioned on the company’s letterhead. That letter was also returned undelivered.

So the adjudication officer now concluded his inquiry and held that the company was liable to be penalized for failing to respond to SEBI summons. The order dated 30th August 2006 said, “…I am fully satisfied that this case deserves severe penalty since it is a matter of fraud involving crores of rupees”. He went on to prescribe the maximum penalty prescribed under the relevant section, which is Rs one lakh per day for 700 days – only on the count of not responding to the SEBI summons. However, it was limited to the cap of Rs one crore on such penalty under SEBI rules.

SAT observed that since Top Cassettes had not only been denied a proper opportunity to appear before SEBI, “the impugned order was per se illegal”. It also found SEBI “equally arbitrary” in initiating adjudication proceedings in 2005. It said, the adjudication officer was required to apply his mind and form an opinion based on the investigation report after the entity charged with delinquency has been issued a show-cause notice and allowed to respond. Only then must he decided the need for adjudication or otherwise –the proceedings cannot commence as a matter of course.  In fact SAT has outlined in detail the procedure that SEBI officials must follow in order to ensure that people are given an opportunity to defend themselves.

What had happened instead was that SEBI’s adjudication officer had hastily pushed the matter up to a committee of Divisional Chiefs, who in turn pushed it up to the Executive Director, who pushed it up to the Whole time Member without examining the various notices issued by SEBI. As SAT says, “the whole time member then put his initials on 17th January 2005 in token of having approved the proposed action” and started adjudication proceedings.

SAT points out that the office note pertaining to this case was in the form of an unsigned Executive Summary. It also makes no mention of Top Cassettes’ request for 20 to 30 days of time to comply with the summons, which the investigation officer turned down. Or the fact that the investigation officer granted only three days of additional time to the company for producing the records and this notice had not even reached the company before the appointed day. The reply that was later filed by Top Cassettes was also not put up to the whole time member. SAT notes that neither the investigation officer nor the adjudication officer bothered to check their records to find out if the company had been served proper notice.

SAT says, “since these material facts were never put up before the whole time member when he approved adjudication proceedings, we are satisfied that there was total non-application of mind on the part of the Board…”. Consequently, SAT said, “we have no hesitation in holding that the initiation of adjudication proceedings was improper and the same stands vitiated”.

The irony is that SEBI’s refusal to grant more time to the company contrasts sharply with its only leisurely progress on the investigation. SAT notes that adjudication proceedings against Top Cassettes were launched on 17th January 2005, but the adjudication officer was appointed only on 7th July 2005 and he served his first show cause notice on 22nd November 2005.  Yet, the company’s request for 20 to 30 days to produce records was turned down and it was given a mere three days to appear before the investigation officer.

SAT also wonders why the adjudication officer refused to hand over a copy of the show cause notice to the company’s authorized messenger and insisted on sending it by post.

SAT also points out that Top Cassettes had strongly contested all the charges made by SEBI about having supplied wrong records and concealed facts. In fact, it has charged SEBI’s investigation officer with recording “incorrect findings”. SAT however ignored this aspect on the grounds that SEBI had, at no stage, informed the company about “incomplete, inadequate or false” responses. It concludes: “This, in fact, is a case where the appellant has committed no default and the question of levying any penalty does not arise”.

Finally, SAT says, “We cannot resist mentioning that the adjudicating officer has sued somewhat intemperate language while recording his findings…. It would have been better if he had used proper language as befits a quasi judicial authority”.

The handling of this simply cases conjures alarming images of the manner in which the regulator conducts other investigations.

Email: [email protected]

-- Sucheta Dalal