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MUMBAI Appeal No. 3/2000 In the matter of: Shri D.A.Gadgil Appellant Vs. SEBI
& Others
Respondent No.1
APPEARANCE Mr.
Pradeep Sancheti
Mr.
P. Colabawala
Shri
S.V.Krishnamohan
Mr.
Vijayakrishnan
ORDER
In the
present appeal, the Appellant has challenged a part of the order captioned
"Order under section 11 and 11B of SEBI Act, 1992, in the case of Shriram
Assets Management Company Limited in respect to transactions in the shares
of Videocon International Limited", dated 1st February, 2000,
issued by Respondent No.2 as Chairman of the Securities & Exchange
Board of India, whereby the Appellant has been rendered ineligible " to
hold any public position in any capital market related public institution
for a further period of 3 years". The prayer in the appeal is to quash
and set aside the impugned order and or in the alternative to direct the
Respondents 1 to 3 to withdraw the order so far as it concerns the Appellant.
Before
adverting to the validity and sustainability of the order under challenge,
it is felt necessary to briefly state the back ground leading to filing
of the present appeal.
The Securities
and Exchange Board of India, Act, 1992 (the Act) provides for the establishment
of a Board, namely the Securities & Exchange Board of India, to protect
the interests of investors in securities and to promote the development
of and to regulate the securities market. Section 3 of the Act provides
for establishment of a multimember Board consisting of a Chairman, three
nominee members, one each from the Ministries of the Central Government
dealing with Finance and Law and from the Reserve Bank. Two other members
are to be appointed by the Central Government. The Chairman and outside
members, according to the Act, shall be persons of ability, integrity and
standing who have shown capacity in dealing with problems relating to securities
market or have special knowledge or experience of law, finance, economics,
accountancy administration or in any other discipline, which in the opinion
of the Central Government, shall be useful to the Board. By virtue of the
source of nomination, nominee members are supposed to have requisite expertise
in the specific fields. Thus it is evident that the purpose of designing
a multimember Board was to have the collective wisdom of experts in deciding
the matters entrusted to the Board. In terms of subsection 3 of section
4, in the absence of the Board carving out any powers exclusively to itself,
the Chairman of the Board can also exercise all the powers of the Board.
The impugned order was issued by Respondent No.2 (R.2) in exercise of the
said power. The circumstances under which the said order was issued have
been detailed in the order itself as follows:
In the
wake of sudden payment crisis in June, 1998 on Bombay Stock Exchange (BSE)
and National Stock Exchange (NSE) and allegations of manipulation in trading
of shares of BPL Limited, Videocon International Ltd (Videocon) and Sterlite
Industries Ltd., etc. Respondent No.1 (R-1) initiated investigations to
reach at the truth to take curative measures, if found necessary. Since
there were media reports suggesting involvement of certain mutual funds
in the bail out operation of brokers of BSE facing payment crisis, investigations
were carried out to find out their role as well. Respondent 4 (R-4) being
the asset Management Company of Shriram Mutual Fund (SMF) was one of the
entities subjected to investigation with reference to certain transactions
involving shares of Videocon in June 1998. Investigation revealed that
in terms of a buy back arrangement, SMF had purchased 1, 20, 600 shares
of Videocon on BSE by way of a cross deal with one Spring Fields Securities
Ltd, stated to be an associate concern of Shriram Group, on 24th
June, 1998, at a contract price of Rs. 84/- per share as against the then
prevailing market rate of Rs. 63/- per share through a broker firm named
Jaysukh Jagjivan. Based on the findings of the investigation, R-1 decided
to pursue the matter by holding an inquiry to consider action under section
11B against R-4. For the purpose, show cause notice was issued to R-4,
being the asset management company responsible for making investment decisions
of SMF, asking to explain its conduct with reference to the said transaction.
R-4 responded to the show cause notice with a written reply and also availed
the opportunity given to make oral submission before R-2 by deputing its
Chairman and Managing Director for the purpose. On completion of the inquiry
R-2 passed the impugned order, the operative portion of which is reproduced
below:
"In view of the above, I am of the view that decision by SAMC to purchase shares of Videocon @ Rs. 84/- when the market price was Rs. 62. 75 was not in the best interest of the unit holders. Further, simultaneous selling of shares by Mutual Fund of fundamentally sound companies in a falling market to pay for the impugned purchase show that schemes of the Mutual Fund were not handled in a prudent, diligent manner which is expected from a fund manager acting professionally. In fact, the way these transactions were done, it was detrimental to the interest of the investors. In the light of these, I hold that SAMC violated the provisions of SEBI Act, 1992 read with Regulation 25 (1) (2) and (16) of SEBI (Mutual Fund) Regulations and Sub Regulations 1&6 of the Code of Conduct as prescribed in Schedule V of these Regulations. Consequent to initiation of proceedings Shri Gadgil has resigned from the office of Managing Director (with effect from November 1998) Since Shri Gadgil has already resigned as Managing Director and Director of Sriram Group, issuing any directions asking him to resign from the office of Managing Director and Director at this state would be infructuous. He was assisted by Mr. Shenoy and Mr.Prakash in these operations and they are still with SAMC. I, therefore, in the interest of fostering investor confidence and for promoting transparency and the integrity in the capital market, direct that Shri Mr.Shenoy and Mr.Prakash should be asked to resign with immediate effect. It is further directed that Shri Gadgil shall not be eligible to hold any public position in any capital market related public institution for a further period of 3 years with immediate effect. I also find that loss has been caused to the unit holders by the decision of SAMC in purchasing 1,20, 600 shares of Videocon International Ltd. I, D.R.Mehta, therefore, in the exercise of the powers given to me under section 11 and 11B of the SEBI Act, read with section 3(4) in the interest of investors and securities market, hereby direct the sponsors to pay, towards the corpus of the concerned schemes of Shriram Mutual Fund, the sum of Rs. 25, 62, 750/- (i.e. difference between the purchase price of Rs. 84/- and market price on the date of purchase of Rs.62.75) with 15% interest per annum, being the loss caused to the unit holders of the Mutual Fund. The sponsors of Shriram Mutual Fund are further directed to implement the directions asking them to pay the loss caused with interest within a month of receipt of this order"
Respondents
1 to 3 (hereinafter referred as the Respondents) have filed a common reply.
In the proceedings they were represented by an officer of R-1. R-4 neither
filed any detailed reply nor chose to be represented in the proceeding,
but sent a letter dated 4th April 2000 to the Tribunal informing
that:
"1. The SAMC had earlier taken the decision not to appeal against the order of Chairman, SEBI under section 11&11B of SEBI Act, 1992 in respect of transactions in the shares of Videocon International Ltd dated 1st February, 2000. We had already complied with the provisions of the said order. In view of para 1 above, it has been now decided by the Board that SAMC has no further interest in the matter and therefore has no comments to make with regard to the appeal filed by Shri D.A.Gadgil".
Main thrust
of the learned Counsel�s argument was that the impugned order was passed
behind the back of the Appellant without following the principles of natural
justice. He had also challenged the powers of the Respondents to issue
penal order under sections 11 and 11B of the Act as well as the factual
accuracy and reliability of the evidence based on which conclusions have
been drawn against the Appellant.
Shri Sancheti
submitted that the Appellant was the Managing Director of Respondent 4,
but resigned from that post even before the inquiry proceedings were initiated
against the said R-4. The fact of his resignation has been admitted by
the Respondents in the impugned order itself. The Respondents themselves
had admitted that only R-4 was served with the show cause notice, that
the Show cause notice could not be served on the Appellant as he had resigned
from the Managing Director�s post with effect from November 1998. R-4 was
represented before R-2 by its present Chairman (Shri R.Narayanan) and Managing
Director (Shri A.Alagappan). He denied the Respondents� version that the
Appellant resigned from the post of Managing Director only after the proceedings
were initiated, pointing out that the proceedings commenced with the issuance
of SCN on 29.6.1999 to R-4, whereas the Appellant had resigned according
to Respondent�s own version with effect from November, 1998. According
to him the impugned order is directed against R-4 and not against the Appellant.
In support of this he cited several paragraphs from the impugned order.
Learned
Counsel submitted that SCN was issued to R-4 and not to the Appellant and
R-4 had made representations on its behalf. Since the scope and reach of
the inquiry was restricted to the conduct of R-4, order also should have
been restricted in its application to R-4 and not to the Appellant. He
alleged that the impugned order against the Appellant is an offshoot of
the prejudice in the mind of the Respondents as could be seen from the
observations made by R-2 in the order itself, that the Respondent was bent
upon inflicting some penalty on the Appellant and that since he had resigned
from the post of Managing Director of R-4 it was not possible to remove
him from the post, �the ineligibility� label was fastened.
According
to the learned Counsel an order depriving the means of lively-hood has
been slapped on the Appellant ignoring the requirements of Articles 14
and 21 of the Constitution, without even following the principles of a
natural justice. The Appellant was not given a reasonable opportunity to
defend and the order had been passed arbitrarily depriving him of his lively-hood
by rendering him ineligible to do any activity in a field where he works.
Learned Counsel submitted that there was no fairness in action and the
fundamental safeguard available to a person to defend himself against any
punitive action has been given goodbye by the Respondents by passing the
impugned order without notice to him. He submitted that the Respondents
had come to certain conclusions based on the statements/submissions given
by certain persons, without affording an opportunity to the Appellant to
rebut those statements/submissions. He urged that since impugned order
is violative articles 14 and 21 of the Constitution the same need be set
aside. As the Act itself provides for giving a fair hearing in precedings
providing less severe penalties like cancellation or suspension of registration
certificate under section 12(3) or imposition of monetary penalty under
Chapter VIA, it is unbelievable that a penalty resulting in deprivation
of means of lively-hood can be imposed without giving the affected person
a reasonable opportunity of being heard. He reiterated his contention that
the order was issued in an arbitrary manner discarding the fundamental
principles of fairness in action by denying a reasonable opportunity to
explain the point of view to the other side. The order is therefore bad
ab initio and cannot be made good at the appellate stage. He submitted
that principles of natural justice require that a person who is to be directly
affected by an administrative action be given prior notice of what is proposed
so as to enable him to make a representation on his behalf to meet effectively
the charges levelled against him. In support of his contention that a penal
action should precede fair action following the principles of natural justice,
learned Counsel cited following decisions of the Supreme Court� Manak Lal,
Advocate V Dr. Prem Chand Singhvi & Ors. (AIR 1957 SC 425); Khemchand
V Union of India (AIR 1958 SC 300); Jagdish Prasad Saxena V The state of
Madhya Bharat (AIR 1961 SC 1070); State of Orissa V Dr.(Miss) Binapani
Dei (AIR 1967 SC 1269); A.K. Kraipak V Union of India (AIR 1970 SC 150);
Maneka Gandhi V Union of India (AIR 1978 SC 597); S.L.Kapoor V Jagmohan
(AIR 1981 SC 136); Swadeshi Cotton Mills V Union of India (AIR 1981 SC
818); Olga Tellis V Bombay Municipal Corporation (AIR 1986 SC 180);Institute
of Chartered Accountants of India V L.K.Ratna (AIR 1987 SC 71); Baldev
Singh V State of Himachal Pradesh (AIR 1987 SC 1239); Gokak Patel V Collector
of Central Excise (AIR 1987 SC 1161); State of Haryana V Ramlakhan (AIR
1988 SC 1301); Dipti Prakash Banerjee V SNB National Centre for Basic Sciences
(AIR 1999 SC 983); V P Ahuja V State of Punjab (AIR 2000 SC 1080).
On the
scope of sections 11 and 11B invoked by the Respondents, learned Counsel
submitted that the operational ambit of the sections is limited and by
no stretch of imagination these sections can be invoked to impose penalties
that too undermining the fundamental rights provided under Article 14 and
21. Explaining the scheme of the Act and the role of the Respondents therein,
he submitted that the legislature had provided penal powers, wherever it
was considered necessary, in the hands of the Respondents. He, in support,
referred to the provisions of section 12(3), Chapter VIA, and section 24
and the safe guards provided therein to protect persons from arbitrariness
in the hands of the Respondents. According to him a direction under section
11 B is not of universal reach but of limited audience, specified in the
section itself and that the Appellant is not a person falling within its
ambit.
Countering
the Respondents� stand that since the Appellant had appeared in an inquiry
proceeding before an adjudicating officer in a matter arising out of the
same set of facts and as such it cannot be said that the Appellant was
unaware of the charges, the learned Counsel submitted that an enquiry under
section 11B and an adjudication proceeding under section 15I are entirely
different in scope and effect. Appearance of the Appellant before an adjudicating
officer in a matter relating toR-4 cannot be considered to be a substitute
for appearance before the Board in an inquiry order under section 11B to
present his own case. Even in the adjudication proceeding, it was R-4 and
not the Appellant who was asked to show cause The fact that he had assisted
R-4 in the adjudication procedure is not a ground to deny him audience
by R-2 in the inquiry under section 11B. Since the consequences of inquiry
before two separate authorities, under sections 11B and 15I being substantially
different, it was necessary to issue separate SCN specifying the charges
and the proposed penalty to the person going to be adversely effected.
To drive home the point, Shri Sancheti cited the Supreme Court�s decision
in S L Kapoor V Jagmohan (AIR 1981 SC 136), in support.
With reference
to the facts of the case, the learned Counsel submitted that there was
nothing in the order to show that the Appellant had committed any omission
or commissions to warrant any penalty. He submitted that the inquiry was
against R-4 questioning its wisdom in a matter relating to transaction
of securities on BSE. In effect the Respondents are questioning the wisdom
of R-4 in deploying the funds at the micro level. According to him SEBI
Regulations on Mutual Funds provide broad framework of the investment portfolio
of a Mutual Fund and it is for the management to act within that framework.
It is not for the Respondents to decide as to which scrip at what price
at what point of time should be purchased or sold. Day to day investment
decisions are left to the asset management company to make in tune with
the broad policy guidelines in vogue. He submitted that fluctuations in
prices of quoted securities are common in stock exchanges and gain or loss
is attendant to the transaction. Learned Counsel stated that there is hardly
any Mutual Fund, which would escape penal action, if the Respondents� proposition
that every transaction should result only in profits were accepted. Investment
decisions are taken on the spot relying on several factors. Short term
and long term gains are also considered. The fact that the shares of Videocon
had crossed Rs. 100/- in September 1999 has been ignored by the Respondent.
A prudent investor would buy fundamentally strong scrips in a falling market
and the decision of R-4 to purchase shares of Videocon cannot be faulted
on that account. In posterity, perhaps a decision may prove wrong. That
cannot be helped as price movement in the stock market is not in a structured
manner to be predicted precisely in advance.
Learned
Counsel reiterated the version that 1, 20, 600 shares of Videocon were
purchased on 19.6.1998 and not on 24.6.1998 as alleged by the Respondent.
He pointed out that the statement of persons from the seller party and
broker firm through which purchase was made was not reliable as they had
themselves given conflicting version on different occasions. Citing the
oral submission made by Shri Usgaonkar, Director and Chairman of Spring
Fields Securities Ltd, from whom SMF had purchased 1,20,600 shares, before
the Respondents on 26.12.1998, the learned Counsel pointed out that Shri
Usgaonkar himself had said that the letter dated 23.6.1998 authorising
the broker to sell 1, 20, 000 shares was not signed by anyone from his
organisation. Letter dated 28.8.1999 from the Brokers addressed to R-4
produced at the time of hearing contains a denial from them to the effect
that they had informed Respondents that Videocon shares were actually purchased
on 24.6.1998 and confirmation that the transaction was concluded on 19.6.1998.
But the said broker sang a different song before the Respondents saying
that the actual transaction took place on 24.6.1998. Learned Counsel submitted
the impugned order is based on assumptions and presumptions and hearsay
and not on factually correct information and on that count also the order
need be set aside.
Shri Sanchety,
invited the Tribunal�s attention to the last para of the order and stated
that the order is directed to R-4 with an �ineligibility� label fastened
on the Appellant, little realising or bothering as to how R-4 would implement
such an order against the Appellant.
He further
submitted that not only that the Appellant was served with any SCN before
taking the punitive decision, he was not even provided with a copy of the
adverse order by the Respondents of their own. The Appellant on seeing
the press reports issued by the Respondents had to approach them for a
copy of the order and only on making a written request a copy was made
available to him by R-3 vide letter dated 2.3.2000. This is how the Respondents
viewed a matter of such serious consequence resulting in deprivation of
a person�s lively-hood. He submitted that irreparable damage has already
been done to the Appellant, by issuing such an order by the Respondents.
Learned
Counsel urged that the impugned order cannot sustain as it is patently
illegal and devoid of any merits, and not to remand the matter to the Respondents
that a remand is not possible in view of the fact that there was no valid
inquiry against the Appellant, as the inquiry in the instant case was directed
against R-4.
Shri Krishna
Mohan, learned Representative, appearing for the Respondents admitted that
they had not issued any specific show cause notice to the Appellant in
the inquiry. But this deficiency by itself had not resulted in any prejudice
to the Appellants� case, as he was aware of the ongoing inquiry before
R-2 and could have come and defended his case. In support of the submission
that the Appellant was aware of the charges under inquiry, he had relied
on a communication to them from R-4, therein it has been stated that the
SCN addressed to it was forwarded to the Appellant for his comments and
that the Appellant had helped in preparing the reply filed by R-4 in the
inquiry before the Respondents. It was also stated that the Appellant can
not deny knowledge of the transaction since he was the Managing Director
of R-4 at the relevant point of time, that his resignation subsequently
was only a ploy to escape from the consequences arising out of his action.
Yet another aspect was that the Appellant had appeared before the adjudicating
officer appointed by R-2, in a separate proceeding, arising out of the
same set of facts, in response to a SCN from the adjudicating officer to
R-4. The main thrust of his argument was that even though no SCN was issued
to the
Appellant,
since he knew the charges against R-4 and his role in the impugned transaction
as the Managing Director of R-4 at the relevant time, he should have volunteered
to defend his cause. It cannot be said that he was unaware of the inquiry
proceedings and the matter under inquiry. In the inquiry proceedings all
those concerned, such as sponsors, SMF and R-4 were given opportunity to
present their version and the statements of the seller of shares, broker
through whom the transaction was effected, etc. were also considered. Based
on the evidence, available before the Respondents, it was concluded that
the acts of omission and commission on the part of the persons in charge
of SMF, including the Appellant, had resulted in loss to the SMF and accordingly
the impugned order was made.
He submitted
that procedural deficiency due to non service of SCN on the Appellant can
be cured even at the appellate stage in the light of the Supreme Court
decision in the case of Workman of Fire-stone Tyre and Rubber Co.of India
Pvt.Ltd Vs. Management (1973) 1 SCC 813 and Delhi Cloth and General Mills
Co.Ltd Vs. Lugh Budh Singh (1972) 1SCC 595.According to him evidence can
be produced even in the appeal proceeding also to support the impugned
order and the Appellant will also get opportunity to rebut the Respondent�s
version. By following such a procedure, the procedural deficiency as alleged
can be cured. He also submitted, in case the order is set aside on the
ground that the impugned order was made without following the principles
of natural justice, the matter can be remitted for fresh consideration
instead of dismissing the same. In support of this request, reliance was
placed on the Supreme Court�s decisions in state of Haryana Vs. Jagdishchander
(1995) 2 SCC 567 and Managing Director, ECIL Vs. B.Karunakar AIR 1994 SC
1074.
Referring
to the Respondents� authority to issue the impugned order, the learned
Representative stated that the Respondents were adequately empowered under
section 11 and 11B as those sections empower the Respondents to take appropriate
measures to protect the interests of investors and the impugned order was
issued to protect the interests of investor. The order is well within the
scope and reach of section 11B in as much as the purpose for which the
power has been invoked and the person to whom it has been directed are
covered therein. In support of this submission, reliance was placed on
the Gujarat High Court�s decision in SEBI Vs.Alka Synthetics Ltd (1999)
19 SCL 460 (Guj.) According to him the impugned order is not penal but
remedial in nature. Countering the Appellant�s contention that he was not
amenable to section 11B, being not a person covered under section 12 as
mentioned in section 11B, the learned Representative pointed out that since
the Appellant was the Managing Director of R-4, he was to be considered
as a person covered under section 11B in the light of the Gujarat High
Court�s decision in Karnavati Fincap Vs.SEBI (1996) 23 CLA 113(Guj.)
On the
facts, he claimed that the Respondents had gone by the records and statements
of persons concerned with the transactions. Weighing all aspects of the
case, it was concluded that R- 4 and its Managing Director (the Appellant)
had risked the funds of the SMF for extraneous reasons necessitating issuance
of the impugned order. He narrated the facts as mentioned in the impugned
order.
I have
carefully considered the rival contentions. Shri Sanchety, had strenuously
argued that the impugned order was made without following the well cherished
principles of natural justice. It is an admitted fact that the inquiry
was directed against R-4 with the issuance of SCN dated 29.6.1999 in the
matter relating to purchase of Videocon shares in June 1998. The fact that
the Respondents had not given any opportunity to the Appellant at any point
of time in the inquiry to defend himself has also been admitted. It is
nobody�s case that the Respondent�s order is of no adverse consequence
to the Appellant. The Appellant was the chief executive of an asset management
company of a mutual fund. Even though in the order the scope of the expression
"Public position in any capital market related public institution" for
a period of 3 years has been left open to interpretation, in the ordinary
course, to a layman it means that the Appellant cannot take up any assignment
with any capital market intermediary for 3 years. Undoubtedly it is an
order adversely affecting the Appellant. The consequences of debarring
him from holding any position in a capital market public institution for
3 years will have attendant fallout in his career. It is not that after
three years he comes clean, the stigma may shadow him ever.
Before
dealing with the contentions advanced by both sides on the question of
non compliance or the extent of compliance of the principles of natural
justice, before inflicting the impugned order, it will be useful to briefly
discuss the dominance of that principle in decision making in matters adversely
affecting the interests of others. The principles of natural justice are
known in the jurisprudence of administrative law as the fundamental rules
of justice.
Natural
justice demands that a person who is to be directly affected by an administrative
action be given prior notice of what is proposed so as to enable him to
make proper representation to defend his cause. The aim of the rules of
natural justice is to secure justice. Soul of the rule is fair play in
action. The message of the doctrine is that no one should be condemned
without being heard. The concept has been evolved to uphold the rule of
law. The rule was stated in the following words by Lord Denning M R in
Schmidt V Secretary of State for Home Affairs (1969) 2 Ch.D 149 that "where
a public officer has power to deprive a person of his liberty or his property,
the general principle is that it has not to be done without his being given
an opportunity of being heard and of making representations on his own
behalf". Natural justice is a great humanising principle intended to invest
law with fairness and to secure justice and over the years it has grown
into a widely pervasive rule affecting large areas of administrative action.
Supreme Court had even gone to the extent of treating principles of natural
justice as a part of Article 14 of the Constitution.
Two fundamental
maxims of natural justice are (i) audi alteram partem and (ii) nemo judex
in re sua. For the purpose of the present appeal we are primarily concerned
with the concept of audit alteram partem. This principle is not of recent
origin. It was well recognised even in the ancient world. Seneca, the philosopher,
is said to have referred in Medea that it is unjust to reach decision without
a full hearing In Maneka Gandhi V. Union of India (AIR 1978 SC 597) it
was held that audi alteram partem is a highly effective rule devised by
the Courts to ensure that a statutory authority arrives at a just decision
and it is calculated to act as a healthy check on the misuse of power.
Hence its reach should not be narrowed and its applicability circumscribed.
Earlier it was generally believed that the rules of natural justice apply
only to judicial or quasi-judicial proceeding. In State of Orissa V. Dr.
(Miss) Bina Pani Die (AIR 1967 SC 1269) the reach of the rule was clarified
by the Supreme Court by holding that even an administrative order or decision
in matters involving civil consequences has to be made consistently with
the rules of natural justice. In A.K. Kraipak V Union of India (AIR 1970
SC 150) the Supreme Court further clarified the position in the following
words:
"If the purpose of these rules of natural justice is to prevent miscarriage of justice one fails to see why those rules should be made inapplicable to administrative inquiries. Often times it is not easy to draw the line that demarcates administrative inquiries from quasi-judicial enquiries�.. Arriving at a just decision is the aim of both quasi judicial enquiries as well as administrative enquiries. An unjust decision in an administrative enquiry may have far reaching effect than a decision in a quasi judicial enquiry".
Supreme
Court in D.K.Yadav V. JMA Industrial Ltd (1993) 3 SCC 259 had observed
that "it is fundamental rule of law that no decision must be taken which
will affect the right of any person without first being informed of the
case and giving him /her an opportunity of putting forward his/her case.
An order involving consequences must be made consistently with the rules
of natural justice. In Mohinder Singh V Chief Election Commissioner, (1978)
1 SCC 405, the Constitution Bench held that �civil consequences� covers
infraction of not merely property or personal right but of civil liberties,
material deprivations and non-pecuniary damages. In its comprehensive connotation
everything that affects a citizen in his civil life inflicts a civil consequence��
In State of Orissa V Miss Bina Pani Dei (AIR 1967 SC 1269) this Court held
that even an administrative order which involves civil consequences must
be made consistently with the rules of natural justice. The person concerned
must be informed of the case, the evidence in support thereof supplied
and must be given a fair opportunity to meet the case before an adverse
decision is taken".
The Apex
Court in Yadav�s case had further observed that "the law must therefore
be now taken to be well settled that procedure prescribed for depriving
a person of lively-hood must meet the challenge of Article 14 and such
law would be liable to be tested on the anvil of Article 14 and the procedure
prescribed by a statute or statutory rule or rules or orders affecting
the civil rights or result in civil consequences would have to answer the
requirement of Article 14. So it must be right, just and fair and not arbitrary
fanciful or oppressive. There can be no distinction between a quasi-judicial
function and an administrative function for the purpose of principles of
natural justice. The aim of both administrative inquiry as well as the
quasi judicial inquiry is to arrive at a just decision and if a rule of
natural justice is calculated to secure justice or to put it negatively
to prevent miscarriage of justice, it is difficult to see why it should
be applicable only to quasi judicial inquiry and not to administrative
inquiry. It must logically apply to both". Having said so the Court further
stated that "fair play in action requires that the procedure adopted must
be just fair and reasonable. The manner of exercise of the power and its
impact on the rights of the person affected would be in conformity with
the principles of natural justice. Article 21 clubs life with liberty,
dignity of person with means of lively-hood without which the glorious
content of dignity of person would be reduced to animal existence. When
it is interpreted that the colour and content of procedure established
by law must be in conformity with the minimum fairness and procedural justice,
it would relieve legislative callousness despising opportunity of being
heard and fair opportunities of defense. Article 14 has a pervasive processual
potency and versatile quality, equalitarian in its soul and allergic to
discriminatory dictates. Equality is the antithesis of arbitrariness. It
is, thereby, conclusively held by this court that the principles of natural
justice are part of Article 14 and the procedure presented by law must
be just fair and reasonable� It is thus well settled that right to life
enshrined under Article 21of the Constitution would include right to lively-hood.
The order of termination of the service of an employee/workman visits with
civil consequences of jeopardising not only his/her lively-hood but also
career and lively-hood of dependents. Therefore, before taking any action
putting an end to the tenure of an employee/workman fair play requires
that a reasonable opportunity to putforth his case is given and domestic
inquiry conducted complying with the principles of natural justice".
Issuance
of show cause notice to the person concerned is normally the starting point
of any inquiry proceeding. Notice envisages communication of charges to
the concerned person and calling upon him to show cause why action proposed
therein be taken. If no sufficient cause shown the charge will stick and
consequences will follow. Otherwise the proposal will be dropped. So instrument
of show cause notice is of considerable importance in the process.
There
is no scope for presuming that a notice, in the light of the facts in a
given case may not be of any practical use even to the person against whom
the decision is being taken, and dispensing with the requirement of issuing
show cause notice. Following observation by the Supreme Court in Olga Tellis
V Bombay Municipal Corporation (AIR 1986 SC 180) explains the position.
"The proposition that notice need not be given of a proposed action because, there can possibly be no answer to it, is contrary to the well recognised understanding of the real import of the rule of hearing. That proposition over looks that justice must not only be done but must manifestly be seen to be done and confuses one for the other. The appearance of injustice is the denial of justice. It is the dialogue with the person likely to be affected by the proposed action, which meets the requirement that justice must also be seen to be done. Procedural safe guards have their historical origins in the notion that conditions of personal freedom can be preserved only when there is some institutional check on arbitrary action on the part of public authorities".
An authority
is now required to act judicially whenever its actions are likely to result
in any disadvantage to a person. "Disadvantage" as the Supreme Court stated
in Bhagwan V. Ramchand (AIR 1965 SC 1767) " may result from taking away
of a right or a privilege or adverse effect on an interest". If it appears
that an authority or a body has been given power to determine questions
affecting the right of citizens, the very nature of power would inevitably
impose a limitation that the power should be exercised in conformity with
the principles of natural justice.
The Respondents�
contention that even though SCN was not issued to the Appellant, he was
aware of the charges because of his participation in another inquiry proceeding
under section 15I of the Act, before an officer of the Respondents and
that he being the Managing Director of R-4 at the relevant point of time,
could have appeared before R-2 of his own, appear to me only a defense
for the sake of defense. It is well-settled law that the person against
whom action is being taken need be informed of the specific charges and
also the consequence attendant thereto. No one can be expected to defend
his cause unless he is called for to do so. The fundamental rule is that,
if a person may be subjected to pains or penalty or be exposed to prosecution
or proceedings or deprived of remedies or redress or in some such way adversely
affected by investigation and report then he should be told the case against
him and be offered fair opportunity of answering it. This mandate is on
the authority vested with the authority empowered to proceed against the
person and pass orders adversely affecting the other person. No one can
be expected, of his own, to find out whether, there are any charges against
him, being looked into by any authorities and volunteer to putforth evidence
to absolve him! In this context the observation made by the Supreme Court
in S.L. Kapoor V Jagmohan (AIR 1981 SC 136) in the context of deciding
an SLP challenging the order of the Lt. Governor superseding the New Delhi
Municipal Committee, is considered relevant. The Court had held that NDMC
was never put on notice of any action proposed to be taken under section
238 of the Punjab Municipal Act and no opportunity was given to the Municipal
Committee to explain any fact or circumstance on the basis of which that
action was proposed. If there was any correspondence between the New Delhi
Municipal Committee and any other authority about the subject matter or
any of the allegations, if information was given and gathered it was for
entirely different purpose. The Court made it clear that "the requirements
of natural justice are met only if opportunity to represent is given in
view of proposed action. The demands of natural justice are not met even
if the very person proceeded against has furnished the information on which
the action is based, if it is furnished in a casual way or for some other
purpose. The person proceeded against must know that he is being required
to meet the allegations which might lead to a certain action being taken
against him. If that is made known, the requirements are met". It is therefore
impossible to uphold the Respondents� proposition stated above and endorse
their view that the principles of natural justice have been complied with
in the instant case.
Yet another
argument put forth by the Respondents to salvage the situation was that
even assuming that a fair and reasonable opportunity was not given to the
Appellant at the inquiry stage, the same can be provided at the appellate
stage and thereby the deficiency can be cured. I have gone through the
two decisions of the Supreme Court in FireStone Rubber Co. Worker�s case
and Delhi Cloth and General Mills Company Ltd., cited by the Respondents.
Both these cases relate to the references under section 11A of the Industrial
Dispute Act, 1947. In fact the Court had discussed the Delhi Cloth Mills
case while deciding FireStone Rubber Company Workers appeal. These decisions
are of little help to the Respondents. The facts are clearly distinguishable.
The scheme of the adjudication under Industrial Disputes Act and under
the SEBI Act are not identical to draw parallel inferences. In fact there
are several cases and authorities contrary to the Respondent�s proposition
on this point. I will cite one such case, which on factual matrix is somewhat
comparable to the present case as in both the cases the issue at stake
was the professional reputation of the parties, affected by the decision.
It is the case of the Institute of Chartered Accountants of India Vs. L.K.
Ratna & others (1986) 4 SCC 534 decided by the Supreme Court. The Court
while examining the relevance of following the principles of natural justice
in the disciplinary proceedings under section 21 of the Chartered Accountants
Act, 1949, had made the following observations, which I consider is relevant
in the context. In the context of the submission by the Appellant�s Counsel
that provision of an appeal under section 22A of the Chartered Accountants
Act is a complete safe guard against any insufficiency in the original
proceeding before the Council, the Court observed:
"Learned counsel apparently has in mind the view taken in some cases that an appeal provides an adequate remedy for a defect in procedure during the original proceeding. Some of those cases as mentioned in Sir William Wade�s erudite and classic work on "Administrative Law" 5th edn. But as that learned author observes (at p.487), "in principle there ought to be an observance of natural justice equally at both stages", and if natural justice is violated at the first stage, the right of appeal is not so much a true right of appeal as a corrected initial hearing: instead of fair trial followed by appeal, the procedure is reduced to unfair trial followed by fair trial.
If one
accepts the contention that a defect of natural justice in the trial body
can be cured by the presence of natural justice in the appellate body,
this has the result of depriving the member of his right of appeal from
the expelling body. If the rules and the law combine to give the member
the right to a fair trial and the right of appeal, why should he be told
that he ought to be satisfied with an unjust trial and a fair appeal? Even
if the appeal is treated as a hearing de novo, the member is being stripped
of his right to appeal to another body from the effective decision to expel
him. I cannot think that natural justice is satisfied by a process whereby
an unfair trial, though not resulting in a valid expulsion, will nevertheless
have the effect of depriving the member of his right of appeal when a valid
decision to expel him is subsequently made. Such a deprivation would be
a powerful result to be achieved by what in law is a mere nullity; and
it is no mere triviality that might be justified on the ground that natural
justice does not mean perfect justice. As a general rule, at all events,
I hold that a failure of natural justice in the trial body cannot be cured
by a sufficiency of natural justice in an appellate body.
The view
taken by Megarry, J. was followed by the Ontario High Court in Canada in
Re Cardinal and Board of Commissioners of Police of City of Cornwall. The
Supreme Court of New Zealand was similarly inclined in Wisland v. Medical
Practitioners Disciplinary Committee, and so was the Court of Appeal of
New Zealand in Reid v. Rowley
But perhaps
another way of looking at the matter lies in examining the consequences
of the initial order as soon as it is passed. There are cases where an
order may cause serious injury as soon as it is made an injury not capable
of being entirely erased when the error is corrected on subsequent appeal.
For instance, as in the present case, where a member of a highly respected
and publicly trusted profession is found guilty of misconduct and suffers
penalty, the damage to his professional reputation can be immediate and
far-reaching. "Not all the King�s horses and all the King�s men" can ever
salvage the situation completely, notwithstanding the widest scope provided
to an appeal. To many a man, his professional reputation is his most valuable
possession. It affects his standing and dignity among his fellow members
in the profession, and guarantees the esteem of his clientele. It is often
the carefully garnered fruit of a long period of scrupulous, conscientious
and diligent industry. It is the portrait of his professional honour. In
a world said to be notorious for its blasé attitude towards the
noble values of an earlier generation, a man�s professional reputation
is still his most sensitive pride. In such a case, after the blow suffered
by the initial decision, it is difficult to contemplate complete restitution
through an appellate decision. Such a case is unlike an action for money
or recovery of property, where the execution of the trial decree may be
stayed pending appeal, or a successful appeal may result in refund of the
money or restitution of the property, with appropriate compensation by
way of interest or mesne profits for the period of deprivation. And, therefore,
it seems to us, there is manifest need to ensure that there is no breach
of fundamental procedure in the original proceeding, and to avoid treating
an appeal as an overall substitute for the original proceeding".
In the
light of the authorities discussed above, the argument that the deficiency
of not issuing the SCN in the inquiry stage can be cured at the appellate
stage stands defeated.
In view
of the legal position explained above, I do not consider it necessary to
discuss the ratio in each of the cases cited by the Appellant, as all those
decisions converge to the same point that audi alteram partem is the justice
of the law.
The impugned
order under consideration has been undisputedly made without affording
an opportunity of being heard to the Appellant, and that order does affect
the Appellant adversely. To me it appears that the impugned order is unreasonable
in the sense that it is manifestly arbitrary and as such unsustainable.
As the impugned order has failed to muster sufficient strength even to
cross the threshold, no further inquiry by the Tribunal in the matter is
considered necessary. Therefore it is felt that the other points putforth
by the learned Counsel for the Appellant need not be examined at present,
except one that the appeal cannot be remanded. The Appellant�s contention
is that since there was no show cause notice to him, there was no inquiry
against him and since there was no inquiry against him the matter cannot
be remanded. It is an admitted fact that the Appellant was the Managing
Director ofR-4 at the relevant time and that the subject matter of the
inquiry against R-4 is a transaction involving the top management of R-4,
including the Appellant. The impugned order against the Appellant is an
off shoot of that inquiry. I do not find any logic in the argument that
the inquiry against R-4 had nothing to do with the conduct of the Appellant
and others responsible for making investment decisions. The impugned portion
of the order is relatable to the conduct of the Appellant in a matter,
which is already subjected to an inquiry, it will be in order to examine
the Appellants conduct by the Respondents, if they so desire. Since the
Appellant�s grievance in the appeal being that the impugned order was passed
without following the basic principles of natural justice, why he should
resist a fair inquiry wherein he is given an opportunity to defend his
case on merits? In the light of the facts and circumstances of the case
I do not see any legal hitch in remanding the matter.
In the
light of the above discussion, I am of the view that the impugned part
of the order need be set aside. Accordingly I do so and remand the matter
for de novo consideration by the Respondents after affording the Appellant
a fair and reasonable opportunity of being heard.
Thus, the appeal is allowed, by way of remand. (C.ACHUTHAN)
Place:
Mumbai
PRESIDING OFFICER Date: August 11, 2000 |
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