While observing that SEBI can issue directions under Section 11B of the SEBI Act to any person/class of persons referred to in Section 12 (which includes a bank) irrespective of registration of such person with SEBI under Section 12, the Delhi High Court clarified that the powers so conferred upon SEBI under the SEBI Act, 1992 need to be exercised in a manner such that they do not come in conflict with, or curtail the effect of, other laws.

Therefore, the High Court ruled that SEBI's direction u/s 11B(1) can't restrain a bank from auctioning the defaulter's property in accordance with the bank's rights under SARFAESI Act.

Meaning thereby, that the exercise of power by SEBI, which is conferred upon it by the SEBI Act, 1992 remains a legal and legitimate exercise of power only, and insofar as, it does not breach the mandate of other laws, since in view of sections 35 and 37 of SARFAESI Act, provisions of that Act override SEBI in case of a conflict, added the Court.

A Single Judge Bench of Justice Purushaindra Kumar Kaurav observed that “the provisions of the SARFAESI Act, 2002 create a prioritization. It being that the debts of the secured creditor are to be prioritized over any dues to the government or any local authority. The insertion of Section 26E was, therefore, for a broader purpose, it being to protect our banks from the force of the State machinery that had hitherto interfered with the rights of the banks to realize their dues”.

Senior Advocate Sanjiv Sen appeared for the Petitioner, whereas Senior Advocate Arunabh Choudhury appeared for the Respondent.

The brief facts of the case were that the third and fourth Respondent who are the borrowers of the petitioner bank, had availed a home loan facility from the petitioner bank after mortgaging a property. (Palm Springs, Gurgaon). The home loan was disbursed against a Deed of Guarantee while depositing with the petitioner bank the original title document of the said mortgaged property. In 2017, SEBI started an investigation against F6 Commodities Private Limited of which the third and fourth respondents were directors, which resulted in an order directing the noticees not to dispose of or alienate any assets whether moveable or immovable, except with the prior permission of SEBI. In the meantime, the petitioner bank noted that the third & fourth respondent defaulted in repayment of the loan and accordingly, the account in question was classified as a Non-Performing Asset. The petitioner bank thereafter issued a demand notice under Section 13(2) of the SARFAESI Act, 2002 calling upon the respondent and the guarantor to repay the outstanding amount. Since the Respondent failed to repay the outstanding amount, the petitioner bank approached the District Magistrate under Section 14 of the SARFAESI Act, 2002 for taking over the physical possession which came to be allowed. When the petitioner bank published the notice for auction sale of the mortgaged property, they were communicated the SEBI Order whereby the respondent was restrained from disposing of or alienating any assets without prior permission of SEBI.

After considering the submission, the Bench observed that SEBI is possessed with powers under the SEBI Act, 1992 to direct the petitioner bank in specific, and banks in general, regardless of them being registered with SEBI.

Indeed, the SEBI does have the power to direct the petitioner bank, however, that power must be exercised with due caution, to not curtail the effect of other laws, added the Bench.

The High Court clarified that said Orders operate in rem, cannot change the material terms of the direction, and they cannot make the direction applicable to persons to whom it is not applicable.

Therefore, in view of the unbridled non-obstante clause contained in Section 35 of the SARFAESI Act, 2002, which is not made subject to Section 37 of the SARFAESI Act, 2002, the SEBI Act, 1992 must give way to the SARFAESI Act, 2002, added the Court.

The High Court further observed that “While the SARFAESI Act, 2002 was enacted to allow the swift realization of securities, that were registered by banks under the Act; the SEBI Act, 1992, on the other hand, manifests the intention of the Parliament to protect investors, and confers upon SEBI powers to regulate the securities market. In the process of regulating, SEBI can issue directions to, inter alia, persons, who are found conducting themselves or their business, contrary to the interest of the market. As is in the present case, the action of the petitioner bank is wholly unconnected with the subject matter of the said Orders. The petitioner bank is attempting to realize its secured asset, which is the mortgage made in favour of the petitioner bank, for the loan taken by respondents nos.3 and 4. The mortgaged property is neither a security in the context of the securities market nor is associated with such a security, and is also not specifically governed by the SEBI Act, 1992. There is, therefore, a functional aspect that needs to be considered in the present issue. SEBI and the said Orders function in a field different from the field in which the petitioner bank has taken their actions under the SARFAESI Act, 2002”.

Finally, the High Court concluded that the scheme of the statutes would reveal that in the facts and circumstances like the present case, a carve can be made to allow banks to realize the security which they had registered through a statutorily prescribed process.

Indeed, in such a case, the operation of the SARFAESI Act, 2002 is the specific legislation which applies to a specified secured debt while the directions under the SEBI Act, 1992, which prevent the dissipation or alienation of assets, is the generalized law applicable to a broader set of assets, added the Court.

Cause Title: ICICI Bank v. Deputy General Manager and Ors. [Neutral Citation: 2023: DHC: 5088]

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Delhi High CourtJustice Purushaindra Kumar Kaurav

Pankaj Bajpai