[DHFL scam] Madras High Court issues notice in PIL seeking fact-finding investigation by SEBI

The Madras High Court on Tuesday issued notice in a public interest litigation (PIL) petition urging the Court to direct the Securities and Exchange Board of India (SEBI) to investigate, solve and settle the crisis that arose out of the fraudulent affairs of the Dewan Housing Finance Corporation Ltd (DHFL) and its key managerial personnel (Ranganathan v. SEBI)..A Bench of Chief Justice Sanjib Banerjee and Justice Senthilkumar Ramamoorthy issued notice after hearing arguments by advocate Nithyaesh Nataraj who appeared for the petitioner, Ranganathan who had invested Rs 30 lakhs to purchase Non-Convertible Debentures issued by DHFL..Nataraj said that the DHFL scam was testament to the fact that there is something wrong with our regulators. .The petitioner raised grievance that SEBI, credit rating agencies, auditors and others were lax in performing their role i.e. to vet DHFL's functioning, owing to which investors lost money in excess of Rs. 40,000 crores..DHFL was given the highest "AAA" rating by credit rating agencies, it was highlighted today. People trusted the system to invest in the company, not knowing that a book value of Rs 1.20 crores would go kaput overnight, advocate Nataraj argued. .“If it is too good to be true, it is untrue,” the Chief Justice orally observed as he heard the submissions..On being asked by the Court if the SEBI had taken any action in the matter, Nataraj submitted that the SEBI, in a measure that was "too little, too late", held the DHFL promoters as guilty under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations (PFUT regulations) and prohibited them from accessing the securities market. .This does not help any of the investors, Nataraj added..Since SEBI was not represented in the hearing, the Court decided to issue notice and adjourn the matter so that the regulatory body may give its response. .Chief Justice Banerjee noted that in matters such as this, the regulators would often object to court interference. .Advocate Nataraj responded that "commercial wisdom" and "financial matters" are phrases used by regulators when they are asked questions in such cases to state that the Court should not interfere. .He went on to argue that while people invest trusting the system, SEBI is seen outsourcing its work to others. .The Chief Justice added that the question of whether the Court may interfere in this issue could hinge upon whether the petitioner is able to show that an intentional fraud had played out in the DHFL case. .“There is a fine line between the vicissitudes of the market and between a planned scam. It’s a tall order for you. You have to demonstrate that they intended to defraud, not just that they managed to, that they had a scheme to do it and ultimately succeeded in the scheme, and that the regulators should not have missed what they missed," Chief Justice Banerjee said..The Court went on to add, "It is possible that the vicissitudes of markets .... many things, we cannot control - oil prices, pandemic, souring international relations - markets fluctuate. It goes into a tailspin sometimes. Those are other reasons. If fundamental reasons are sound, then we don’t look at those things. Those are not amendable to judicial review.".The matter is expected to be taken up after three weeks. .Of financial scams and drug money.Interestingly, the Court also briefly discussed the possible links between financial scams and funding for drugs and terrorism..Nataraj today submitted that in the Enforcement Directorate's remand application in a money laundering case concerning underworld don, Iqbal Mirchi, it had submitted that monies diverted from DHFL were used to fund Mirchi's alleged terror activities. .This prompted the Chief Justice to recall that in several orders passed while he was sitting as a judge of the Calcutta High Court, he had implored the authorities to check on amalgamations and demergers of companies, which may have involved drug money or terrorists' money. ."No one took action", the Chief Justice added, while commenting that there will be many forces stopping the Court from going into the root of such matters. .Courts have to be introspect in playing their role: Chief Justice Sanjib Banerjee.Chief Justice Banerjee went on to comment that while the Court may agree with the petitioner on several aspects, it must introspect what its role should be..In this regard, the Chief Justice also pointed out that sometimes the Courts are quick to grant relief to scamsters, thereby impeding the investigation in such cases. ."We couldn't agree with you more on several aspects, but sometimes we, the court, have to introspect on the role we play. Often we are very quick to grant stay or relief to scamsters, which impedes the investigation, probably not understanding, because these scamsters can afford the best legal advice. Sometimes, we tend to be over whelmed whether it is lack of domain knowledge or whatever else," Chief Justice Banerjee orally observed. .Advocate Nataraj, in turn, submitted that the Wadhawan brothers, who were key managerial personnel in DHFL, were also able to secure release on bail because of such indulgence by the Court. .He recalled that the Economics Offences Wing (EOW) at Tamil Nadu had registered a case against the Wadhawans, even arrested them from Mumbai and brought them to Tamil Nadu, having complied with the prisoner transit procedure. However, within three days of their judicial remand by a TANPID court, they were granted bail "without a paisa being paid", he pointed out. .He further noted that even the Supreme Court has held that COVID-19 cannot be used as a ground to grant bail in cases involving heinous offences, adding that this was also a case involving remand prisoners and not undertrials. .These are very powerful people, he observed as his arguments drew to a close for the day..What the petition says.The petition called for the SEBI to take action against DHFL invoking its myriad powers under the SEBI Act, 1992 read with the SEBI (Prohibition Fraudulent and Unfair Trade Practices Regulations) 2003, SEBI (Issue and Listing of Debt Securities) Regulations 2008, Securities Contracts (Regulation) Act 1956, SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and allied rules and regulations..In this regard, the petitioner had also addressed a representation on a June 15 to SEBI..Grievance was raised that SEBI has completely distanced itself from taking action against the scam-ridden DHFL, its erstwhile Chairman and Managing Director Kapil Wadhawan and its erstwhile Director, Dheeraj Wadhawan. ."It is in the common knowledge that the DHFL scam is one of the India’s largest scam in the history of the independent India and there are several thousands of depositors who have lost monies by investing on the platform of the DHFL ... investors were made to believe that DHFL has a sound financial health and that the investors will yield profit in the platform floated by the DHFL," the petition stated..The scam came to light after a 2019 exposé by investigative media outlet, Cobrapost, which highlighted how DHFL used Credit Rating Agencies and statutory auditors as deceptive tools to by-pass regulatory provisions under the SEBI Act and to defraud innocent investors and creditors, the petitioner recalled. .Despite wide ranging powers being available to SEBI, there was no action forthcoming towards solving and settling the crisis arising out of the DHFL scam, the petitioner said. .As such, it is a fit case for the Court to exercise its powers under Article 226 of the Constitution to direct SEBI to conduct a probe in the matter and pass and order under Section 11 of the SEBI Act, it was contended. .The petition was filed through advocates Nithyaesh Natraj, Vaibhav R Venkatesh and Anirudh A Sriram..[Read Order]