The Supreme Court, in a recent judgment in National Securities Depository Ltd vs Securities

Exchange Board of India, has held that “administrative orders such as circulars issued under
the Securities Exchange Board of India (SEBI) Act are obviously outside the appellate
jurisdiction of the Securities Appellate tribunal”. The court observed that action taken by Sebi in
its administrative and legislative capacity cannot be appealed at the Securities Appellate Tribunal
(SAT) i.e., the scope of power of SAT is reduced. SAT will have jurisdiction only in case of
quasi-judicial orders.
Sebi had issued an administrative circular in 2005 under the caption “review of dematerialisation
charges” to protect the interests of investors in securities and to promote the development of
securities market. National Securities Depository Ltd (NSDL) appealed against the circular in
SAT, where a preliminary objection was raised that under the Sebi Act, Sebi has administrative,
legislative and quasi-judicial functions.
Appeals preferred to the SAT can only be from quasi-judicial orders, and not administrative and
legislative orders, it was argued. SAT turned down the preliminary objection, saying that “the
expression “order” is extremely wide, and there being nothing in the Sebi Act to restrict an
appeal only against quasi-judicial orders, appeals would lie against all three types of orders under
the Sebi Act i.e., administrative orders, legislative orders as well as quasi-judicial orders”. The
moot question in the present appeal is whether a circular issued by Sebi, under its administrative
power, can be the subject matter of appeal under Section 15T of the said Act. The Supreme Court
believed that the controversy being in a narrow compass, it is necessary for us to lay down law
with some clarity. The apex court, while discussing distinction between the quasi-judicial and
administrative orders, observed that “the act of an administrative body be characterised as quasi-
judicial if: There must be legal authority; This authority must be to determine questions affecting
the rights of subjects; and There must be a duty to act judicially.” Therefore, orders referable to
Sections 11(4), 11(b), 11(d), 12(3) and 15-I of the Sebi Act are quasi-judicial orders, and quasi-
judicial orders made under Rules and Regulations are the subject matter of appeal under Section
15T i.e., appeal before SAT. The apex court further observed that rules and regulations made by
Sebi have to be placed before Parliament. Moreover, the power exercised by Sebi is delegated
legislation and its validity can be tested by the judicial review and not by appeal before the
tribunal (PTC India Ltd vs Central Electricity Regulatory Commission). SAT, being a quasi-
judicial body, administrative orders are outside its appellate jurisdiction
The Chairman, SEBI v. Shriram Mutual Fund & Anr.
In a morale-boosting victory for the Securities and Exchange Board of India (Sebi), the Supreme
Court has upheld its right to impose penalties on mutual funds which violate the conditions
specified in the Sebi (Mutual Funds) Regulations, 1996. 
The court quashed an order of the Mumbai-based Securities Appellate Tribunal against Sebi
which had held the regulator couldn’t punish a violator - in this case, the Shriram Mutual Fund
— unless there was a motive for the violation. 
“In our opinion, the tribunal has miserably failed to appreciate that by setting aside the order of
the adjudicating officer, the tribunal was setting a serious wrong precedent whereby every
offender would take shelter of alleged hardships to violate the provisions of the Act,’’ a bench
comprising justices A R Lakshmanan and Lokeshwar Singh Panta observed. 
“In our opinion, mens rea (motive) is not (an) essential ingredient for contravention of the
provisions of a civil act,’’ the judges said, while distinguishing between civil and criminal law on
the issue. 
“In our view the penalty is attracted as soon as contravention of the statutory obligations, as
contemplated by the Act, is established and, therefore the intention of the parties committing
such violations becomes immaterial,’’ the apex court held. 
Sebi had petitioned the apex court against the tribunal’s order. It said that respondent Shriram
Mutual Fund, registered in 1994, had floated five schemes that conducted business through
brokers in excess of permissible limits prescribed under regulation 25 (7)(a) of the mutual fund
regulations on 12 occasions. The adjudicating officer imposed a penalty of Rs 5 lakh under
section 15E on one respondent while a fine of Rs 2 lakh was imposed on respondent Shriram
Mutual Fund for failure to comply with the terms of the certificate of registration. 
The apex court said the SAT order sets the stage for various market players to violate statutory
regulations with impunity and subsequently plead ignorance of law or lack of mens rea to escape
the imposition of penalty. 
Imputing motives to the provisions of Sebi regulations was against the plain language of the law
and “frustrates the entire purpose and object of introducing chapter VI A to give teeth to Sebi to
secure strict compliance of the Act and the regulations,” added the court.

“N. Narayanan vs. Adjudicating Officer, SEBI” 

The brief facts, which lead the filing of subject appeal, are as under:
The Appellate Jurisdiction of Hon’ble Apex Court has been invoked challenging a joint order
dated 5.10.2012 passed in Appeal Nos. 28 and 29 of 2012 passed by Securities Appellate
Tribunal, Mumbai (for short 'Tribunal') upholding the order passed by SEBI dated April 18, 2011
restraining the Appellant for a period of two years from buying, selling or dealing in securities as
well as imposing a monetary penalty of Rs. 50 Lacs.
The Appellant was the promoter as well as a whole time Director of M/s. Pyramid Saimira
Theatre Limited (PSTL), a company registered under the Companies Act, 1956. The shares of
PSTL were listed on Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange (NSE)
at the relevant time. The company was involved in the business of Exhibition (Theatre), Film and
Television, Content Production, Distribution, Hospitality, Food & Beverage, Animation and
Gaming and Cine Advertising, etc. The company had nine Directors, including the Appellant
himself. The investigation department of SEBI noticed that the company had committed serious
irregularities in its books of accounts and showed inflated profits and revenues in the financial
statements and lured the general public to invest in the shares of the company based on such
false financial statements thereby violated the provisions of Securities and Exchange Board of
India (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market)
Regulations, 2003.
Consequently, a notice was issued to the Appellant and to the other Directors to show cause why
appropriate directions as deemed fit and proper under Sections 11, 11B and 11(4) of the SEBI
Act read with Regulation 11 of Regulations 2003 be not issued against them and subsequently
another notice dated April 8, 2010 under Rule 4(1) of the SEBI (Procedure for Holding Inquiry
and imposing penalties by Adjudicating Officer) Rules, 1995 was issued to the Directors to show
cause why penalty be not imposed under Section 15HA of the SEBI Act for the alleged
contravention of the provision of the Act.
The Appellant's main contention was that, though he was the Whole Time Director as well as
Promoter of the company, yet was not involved in the day-to-day management of the company
and that he was looking after the Human Resource Department of the company. Further, it was
also stated that the financial statements, accounts etc. were prepared and duly audited by the
statutory auditors, verified by the audit committees and reviewed by the managing Director and
that, in the company, the role of each Director was confined to his field of operation and there
was no justification for holding a Director to be in over-all charge and control of the affairs of
the company. Further, it was also pointed out that the auditors were well versed in accounts and
finance; therefore, there was no reason for the Directors who have no expertise or knowledge of
the intricacies of the accounts and finance to suspect them or sit in judgment over their decisions.
In such circumstances, it was contended, that there is no justification in debarring them from
buying, selling or dealing in securities or accessing securities market or to impose penalty since
there is no mens rea on the part of the Appellant in intentionally stating any untrue statement or
preparing false records and that he has no role as such in preparing the accounts and finance of
the company.
After considering personal hearing as well as written Submissions by the Appellant, the Board
noticed following specific violations:
a. manipulated accounts by fictitious entries;
b. made false disclosures to the stock exchange;
c. did not co-operate with the investigations, and
d. did not maintain certain books of accounts.
On facts, all the above-mentioned violations had been established and consequently, the Whole
Time Member (WTM) of SEBI, in exercise of the powers conferred on him, passed an order
restraining the Appellant and other Directors for a period of two years and three years
respectively from buying, selling or dealing in securities in any manner whatsoever or accessing
the securities market directly or indirectly and from being Director of any listed company and
also held that the Appellant and other Directors are liable for monetary penalty under Section
15HA of SEBI Act whereby a penalty of Rs.50 Lacs was imposed on the Appellant
The above order was affirmed in an appeal by the Tribunal, the legality of which is the subject
matter of this appeal.
Hon’ble Apex Court observed that the investigation had revealed that the financial results
contained in the quarterly report filed with the stock exchanges contained inflated figures of the
company's revenue profits, security deposits and receivables. Further, the manipulation in the
financial results of the company resulted in price rise of the scrip of the company and the
promoters pledged their shares to raise substantial funds from financial institutions.
The object and purpose of the Section 12A of SEBI Act and Regulations 3 and 4 of 2003
Regulations are to curb "market manipulation". As per Palmer's Company Law, "Market
manipulation” is normally regarded as the "unwarranted" interference in the operation of
ordinary market forces of supply and demand and thus undermines the "integrity" and efficiency
of the market." Reference was also be made to the penalty provisions which is contained in
Chapter VI A of the SEBI Act of which is mainly concerned with Section 15HA which deals
with penalty for fraudulent and unfair trade practices and Section 15J which deals with the
factors to be taken into account by the adjudicating officer while adjudging the quantum of
penalty.
Hon’ble Supreme Court has observed that the company had made false corporate announcement
stating that it had entered into agreements with 802 theatres and that false corporate
announcement gave false figures relating to advance, security deposit and income pertaining to
the theatres which were not in existence. The deposits shown were turned out to be not genuine
but mere book entries to hide receivables in the balance sheet.
Negating the stand of the appellant that he was not conversant with the accounts and finance and
was only dealing with the human resource management of the company, hence, he had no
fraudulent intention to deceive the investors, the Hon’ble Court has held Directors of the
companies, especially of the listed companies, have access to inside knowledge, such as,
financial position of the company, dividend rates, annual accounts etc. Directors are expected to
exercise the powers for the purposes for which they are conferred. Sometimes they may misuse
their powers for their personal gain and makes false representations to the public for unlawful
gain.
It was observed that the Directors of the company in question had failed in their duty to exercise
due care and diligence and allowed the company to fabricate the figures and making false
disclosures. Facts indicate that they have overlooked the numerous red flags in the revenues,
profits, receivables, deposits etc. which should not have escaped the attention of a prudent
person.
It was further observed that after the declaration of financial results on January 31, 2008,
containing inflated profits, revenues for the quarter ended on 31.12.2007, the Managing
Directors of the company, his wife and the Appellant had together pledged 72, 75, 455 shares of
the company with various banks and financial institutions and raised 97.30 crores as loans. We
have noticed that the Directors and the Chief Financial Officers of the company had caused to
publish forged and misleading results of the company, various quarterly financial results and the
annual results for the year 2007-08, were reported to the stock-exchanges containing inflated
figures of the company's revenue, profits, security deposits and receivables and those financial
statements which were relied upon by investors in making investment decisions, which did not
reflect a true and fair view of the state of affairs of the company.
The conduct of the Appellant and Ors. was, therefore, fraudulent and the practices they had
adopted, relating to securities, were unfair, which attracted the penalty provisions contained in
Section 15HA read with 15J of the SEBI Act and accordingly the appeal has been dismissed.
PGF LTD. v. UOI At the very outset, we wish to note that though this appeal has been preferred
by PGF Ltd., its Chairman-cum-Managing Director and two other individuals who are stated to
be residents of Village Khabra and Samaspur of Punjab but the same has been really contested
by Appellant 1 whom we will hereinafter refer to as "PGF Ltd."
Of the above three operations, when the writ petition was heard by the Division Bench of the
High Court it was reported on 28-5-2004 by the learned counsel for the appellants that PGF Ltd.
took a decision to disband all its schemes, other than its operations relating to the business
connected with sale of agricultural land and/or sale and development of agricultural land.
The learned Senior Counsel contended that the conclusion of the Division Bench in holding that
the sale and development of agricultural land would fall within the definition of collective
investment schemes under Section 2(1)(ba) read along with 11-AA of the SEBI Act, was
erroneous and the judgment of the Division Bench as well as the order of the second respondent
dated 6-12-2002 are liable to be set aside.
As far as the vires of Section 11-AA of the SEBI Act is concerned, the learned Senior Counsel
primarily contended that the business of PGF Ltd. being sale of agricultural land and sale and
development of agricultural land to its customers, the said activity would only fall under
Schedule VII List II Entry 18 and the State Legislature alone was competent to bring about any
legislation for the purpose of regulating its activities.
The learned Senior Counsel strenuously contended that the stand of the respondents as accepted
by the Division Bench, namely, that the collective investment scheme would fall within the
expression "investor protection" and thereby governed by Schedule VII List I Entry 97 read
along with Article 248 of the Constitution was wholly misconceived and on the ground of
legislative competence, Section 11-AA of the SEBI Act is liable to be struck down.
It was contended that even if Section 11-AA can be held to be valid, it should be declared that
the said provision will have no application to sale and development of agricultural land.
The learned counsel contended that the submission that there was no competence for Parliament
to enact Section 11-AA of the SEBI Act and based on the said provision SEBI cannot control the
business of PGF Ltd., cannot be countenanced.
According to the learned Senior Counsel the salient features of the business of PGF Ltd., namely,
sale and development of agricultural land in reality was an investment simpliciter by the gullible
public under the guise of sale and development of agricultural land and Section 11-AA of the
SEBI Act was valid in law and PGF Ltd. is bound to comply with the requirements of the SEBI
Act in order to protect the interests of the investors.
It was submitted that in reality the business of PGF Ltd. was purely an investment scheme and
governed by the definition of "collective investment scheme" as defined under Section 2(1)(ba)
read along with Section 11-AA of the SEBI Act.
With regard to the legislative competence, the learned Senior Counsel submitted that having
regard to the nature of business transaction of PGF Ltd., in pith and substance, it was a collective
investment scheme of PGF Ltd. along with the investors and as rightly claimed by the respondent
the introduction of Section 11-AA of the SEBI Act by Parliament was governed by the concept
of "investor protection" falling within residuary Entry 97 of List I read along with Article 248 of
the Constitution and not governed by Entry 18 of List II.
The learned Senior Counsel contended that even a certificate, receipt, registration letter or a unit
certificate or any such similar document would fulfil the criteria of "by whatever name called" in
the definition of the term "unit" under Regulation 2(1)(z) and (dd) and it can be treated as an
instrument and subject to the rigours of the SEBI (Collective Investment Schemes) Regulations,
1999.
The learned Senior Counsel also drew our attention to the fact that in the case on hand, the sale
of land in multiple units could always be sold or disposed of after getting a no-objection
certificate from PGF Ltd. and from that angle as well as the contention of PGF Ltd. was liable to
be rejected.
The main contention of PGF Ltd. was that since indisputably the business of PGF Ltd. was sale
and development of agricultural land, the same would be governed by Entry 18 of List II,
namely, the State subject and the Central legislation brought about by Parliament in introducing
Section 11-AA of the SEBI Act cannot be sustained.
As a matter of fact the provision does not make any reference to agricultural or any other specific
activity and at the very outset it will have to be held that the submission based on
The fallacy in the submission of PGF Ltd. is that it proceeds on the footing as though the said
provision, namely, Section 11-AA was also intended to cover an activity relating to agriculture
and its development and the provision conflicts with Entry 18 of List II of the State List to be
struck down on that score.
The said submission made on behalf of the appellants is liable to be rejected on that sole ground.
We are not in a position to countenance the stand of PGF Ltd. that what it sought to carry out
under its scheme was merely sale and development simpliciter of agricultural land and not a
collective investment scheme.We are convinced that PGF Ltd. deliberately did not furnish the
amounts till this date what was collected from the customers who made their investments in the
so-called venture of sale and development of agricultural lands.