Beyond the Shield: Delhi High Court Demands Transparency in SEBI Compounding Decisions

The Delhi High Court has delivered a significant ruling concerning the extent of regulatory autonomy versus judicial oversight in financial litigation. By setting aside a trial court order, the High Court has mandated that the Securities and Exchange Board of India (SEBI) must produce records considered by its High Powered Advisory Committee (HPAC) when rejecting a request to compound an alleged market manipulation offence.

The Backdrop: A Dispute Over Disclosure

The case involves petitioner Sanjay Kumar, who faced criminal charges initiated by SEBI for alleged market manipulation and forgery concerning the scrip of "Padmini Technologies." During the pendency of the criminal complaint, Kumar filed an application under Section 24-A of the SEBI Act, seeking to compound the offences.

SEBI’s HPAC and a panel of Whole Time Members rejected the request. Kumar subsequently filed an application under Section 91 of the Criminal Procedure Code (CrPC) before the trial court, seeking discovery of the documents and findings that led to the rejection. The trial court initially denied the request, citing the confidential nature of such proceedings under the SEBI (Settlement Proceedings) Regulations, 2018.

Arguments at the Bar

The petitioner argued that justice required the disclosure of the rationale behind SEBI’s refusal. Citing Prakash Gupta v. SEBI and T. Takano v. SEBI , his counsel contended that SEBI’s decision must be transparent enough to survive judicial scrutiny, especially since the trial court is not strictly bound by the regulator’s recommendation.

Conversely, SEBI maintained that its internal advisory process is protected by confidentiality. Relying on Regulation 29 of the Settlement Regulations, SEBI argued that material placed before the HPAC should not be made public, as it is received in a "fiduciary capacity" and cannot serve as evidence in court proceedings.

Judicial Analysis: The Power of the Court

The High Court, presided over by Hon'ble Mr. Justice Subramonium Prasad, emphasized that while SEBI is an expert regulator entitled to deference, it does not possess a "veto" power over the court’s authority to compound offences under Section 24-A.

The Court clarified that the confidentiality protections in the Settlement Regulations do not create an absolute bar against a court’s access to relevant documents. The judge noted that for the court to effectively evaluate whether a rejection of compounding was "arbitrary or mala fide," it must have access to the materials that formed the basis of that decision.

Key Observations

The judgment underscores the importance of a balanced approach in financial crime adjudication:

• On the role of SEBI: "While SEBI does not have a veto, having regard to the language of Section 24-A, its views must be elicited... These views, unless manifestly arbitrary or mala fide, must be accorded a high degree of deference."
• On the Court’s authority: "These regulations cannot prohibit any Court to look into the material which was placed before the HPAC or the SEBI Board before it comes to the conclusion."
• On the necessity of the record: "In the considered opinion of this Court, the documents will be necessary for the Court to consider the application of the Petitioner to quash the complaint in view of the guidelines laid down by the Apex Court."

Impact of the Decision

The Delhi High Court's decision serves as a reminder that executive or regulatory expertise does not operate in a vacuum. By directing SEBI to submit the relevant files in a sealed cover, the Court has adopted a middle-ground approach: protecting sensitive regulatory processes from broad public disclosure while ensuring that the judiciary retains the ultimate authority to review the fairness of a compounding decision.

For future cases, this establishes a clear precedent: when an accused challenges a compounding rejection, SEBI may be required to place its internal reasoning files before the court, ensuring that the integrity of the judicial process is preserved against arbitrary administrative outcomes.