1. Show Cause Notice issued by SEBI for alleged fund diversion — Petitioner seeks disclosure of relied-upon documents and the opinion formed under Rule 3, SEBI Adjudication Rules 1995. (Para 1 , 3 , 4 , 5 )
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2022 Supreme(SC) 933
SUPREME COURT OF INDIA
INDIRA BANERJEE, A.S. BOPANNA, JJ.
Kavi Arora – Appellant
Versus
Securities & Exchange Board of India - Respondent
Special Leave Petition (Civil) No. 15149 of 2021
Decided on : 14-09-2022
Important Points
The duty of adequate disclosure and the principles of natural justice must be considered in the context of supplying relied-upon documents to the noticee, as established in previous judgments such as Natwar Singh v. Directorate of Enforcement and Another and T. Takano v. SEBI.
Subject
Administrative Law - Regulatory Compliance
Act Referred
CONSTITUTION OF INDIA: Art.226
FOREIGN EXCHANGE MANAGEMENT ADJUDICATION PROCEEDINGS AND APPEAL RULES: R.4
SCR Act: S.12(a)(1), S.12(a)(2)
SECURITIES AND EXCHANGE BOARD OF INDIA ACT: S.11(1), S.12(a)(1), S.15(h)(a)
SECURITIES AND EXCHANGE BOARD OF INDIA Adjudication Rules: R.4(1), R.4(2), R.4(3), R.4(4), R.4(5), R.3
FOREIGN EXCHANGE MANAGEMENT ADJUDICATION PROCEEDINGS AND APPEAL RULES: R.4
SCR Act: S.12(a)(1), S.12(a)(2)
SECURITIES AND EXCHANGE BOARD OF INDIA ACT: S.11(1), S.12(a)(1), S.15(h)(a)
SECURITIES AND EXCHANGE BOARD OF INDIA Adjudication Rules: R.4(1), R.4(2), R.4(3), R.4(4), R.4(5), R.3
Headnote
SEBI - Writ Petition - SEBI Act 1992, SCR Act 1956 - The court discussed the provisions of SEBI Act 1992 and SCR Act 1956, including Sections 11(1), 11(4), 11B(1), 11B(2), 11(4A), 12A(1), and 12A(2) of the SEBI Act, and SEBI Adjudication Rules 1995 and SCR Penalties Rules 2005. The court emphasized the duty of adequate disclosure and the principles of natural justice in the context of supplying relied-upon documents to the noticee, as established in previous judgments such as Natwar Singh v. Directorate of Enforcement and Another and T. Takano v. SEBI.
Fact of the Case:
The Petitioner sought directions against SEBI to furnish documents relied upon in a Show Cause Notice. The Petitioner joined a subsidiary entity of Religare Enterprises Ltd. and was issued a Show Cause Notice for alleged diversion of funds. The Petitioner requested inspection of relied-upon documents, but SEBI withheld some documents as confidential. The Adjudicating Authority fixed the matter for final hearing without supplying the documents relied upon.
Finding of the Court:
The court dismissed the writ petition, stating that SEBI was not required to furnish all documents in its possession before forming an opinion to hold an inquiry. The court permitted SEBI to hold the inquiry without relying on any documents not supplied to the Petitioner.
Issues: The issues included the duty of adequate disclosure, the requirement of supplying relied-upon documents to the noticee, and the procedural irregularities in the conduct of the inquiry by the Adjudicating Authority.
Ratio Decidendi: The court emphasized the duty of adequate disclosure and the principles of natural justice, stating that SEBI was not required to disclose all documents in its possession before forming an opinion to hold an inquiry. The court also allowed SEBI to hold the inquiry without relying on documents not supplied to the Petitioner.
Final Decision: The Special Leave petition was dismissed by the court.
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. Sidharth Luthra, Sr. Adv. Mr. Madhav Khurana, Adv. Mr. Pankaj Singhal, Adv. Mr. Kartikay Dang, Adv. Mr. Pankaj Singhal, Adv. Mr. Hardik Rupal, Adv. Ms. Shivani Luthra, Adv. Mr. Varun Pandit, Adv. Mr. Nitin Saluja, AOR
For the Respondent(s): Mr. Dhaval Mehrotra, Adv. Mr. Abhishek Singh, Adv. For M/S. K Ashar & Co., AOR
For the Petitioner(s): Mr. Sidharth Luthra, Sr. Adv. Mr. Madhav Khurana, Adv. Mr. Pankaj Singhal, Adv. Mr. Kartikay Dang, Adv. Mr. Pankaj Singhal, Adv. Mr. Hardik Rupal, Adv. Ms. Shivani Luthra, Adv. Mr. Varun Pandit, Adv. Mr. Nitin Saluja, AOR
For the Respondent(s): Mr. Dhaval Mehrotra, Adv. Mr. Abhishek Singh, Adv. For M/S. K Ashar & Co., AOR
Table of Contents
2. Petitioner alleges violation of natural justice due to non-disclosure of relied-upon documents; SEBI contends confidentiality of internal records and compliance with the two-tier adjudication process. (Para 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 37 , 38 , 39 , 40 , 41 , 42 , 43 )
3. Rule 3 opinion formation is a preliminary stage not requiring noticee participation; Rule 4 requires disclosure of documents actually relied upon during the adjudication process. (Para 45 , 46 , 47 , 49 , 50 )
4. Adjudicating authorities must disclose documents relied upon for the final order, but are not required to disclose all internal materials or opinions used to initiate proceedings. (Para 49 , 50 )
5. Special Leave Petition dismissed; High Court judgment upheld; inquiry to proceed without relying on any documents not supplied to the Petitioner. (Para 51 , 52 , 53 )
6. Is the adjudicating authority required to furnish all documents in its possession to the noticee during SEBI proceedings?
No. Only documents upon which reliance is placed to issue a show-cause notice or for the final adjudication must be furnished to ensure fairness and natural justice. There is no duty to disclose all documents in possession of the authority before forming an opinion that an inquiry is required. (Para 28 , 49 , 50 )
7. Must the Board furnish the copy of the opinion formed under Rule 3 of the SEBI Adjudication Rules 1995 to the noticee?
No. The formation of opinion under Rule 3 is a preliminary stage to decide if adjudication proceedings should be initiated and is not a formal inquiry proceeding. Consequently, the participation of the person against whom inquiry is contemplated is not necessary at this stage. (Para 45 , 50 )
8. What is the nature of the two-tier adjudication process under Rule 4 of the SEBI Adjudication Rules 1995?
The process first requires the adjudicating officer to issue a show-cause notice to determine if an inquiry should be held. If, after considering the reply, the officer forms an opinion to proceed, a second notice is issued fixing a date for a mandatory personal hearing. (Para 44 , 46 , 47 )
JUDGMENT :
Indira Banerjee, J.
This present special leave petition is against the impugned judgment and final order dated 15th September 2021, passed by the Division Bench of the High Court of Judicature at Bombay, dismissing Writ Petition (L) No. 19352 of 2021, filed by the Petitioner under Article 226 of the Constitution of India, whereby the Petitioner had sought directions against the Respondent, Security and Exchange Board of India (SEBI), to forthwith furnish to the Petitioner documents relied upon by the Respondent-SEBI, in Show Cause Notice No. SEBI/HO/IVD/ID2/OW/P/2020/19435/1 dated 17th November 2020 issued to the Petitioner to show cause why appropriate directions should not be taken against him under Sections 11(1), 11(4), 11B(1) 11B(1), 11B(2), and 11(4A) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “the SEBI Act”) and Section 12A(1) and 12A(2) of the Securities Contract (Regulation) Act, 1956 (hereinafter referred to as “ SCR Act 1956”) read with SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as, as "SEBI Adjudication Rules 1995") and Securities Contract (Regulation) (Procedure for holding inquiry and imposing penalties) Rules, 2005 (hereinafter referred to as “SCR Penalties Rules 2005”). The Petitioner had also sought orders for supply of a copy of the opinion formed under Rule 3 of the SEBI Adjudication Rules 1995, for constituting an Adjudicating Authority to issue Show Cause Notice dated 17th November 2020 to the Petitioner.
2. The Petitioner joined Religare Finvest Limited (RFL), a subsidiary entity of Religare Enterprises Ltd. (REL) as the President-Consumer Finance, to set up and manage its retail lending business i.e. SME Lending business. Thereafter, he worked as the Managing Director (MD) and Chief Executive Officer (CEO) of RFL to represent the SME Lending Business.
3. Respondent SEBI appointed a Forensic Auditor, M/s MSA Probe Consulting Private Limited (hereinafter referred to as “MSA Probe Consulting”) to conduct an investigation in the matter of M/s Religare Enterprises Private Ltd. (REL) and related entities for alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "the SEBI PFUTP Regulations").
4. Show Cause Notice (SCN) No. SEBI/HO/IVD/ID2/OW/P/2020/19435/1 dated 17.11.2020 was issued by Respondent SEBI to the Petitioner under Section 15HA of the SEBI Act and Rule 3 of the Adjudication Rules pertaining to Section 11(1), 11(4), 11B(1), 11B(2), and 11(4A) of the SEBI Act along with Section 12A(1) and 12A (2) of the SCR Act 1956 read with SEBI Adjudication Rules 1995 and SCR Penalties Rules 2005 as to why appropriate directions for imposing penalty, should not be passed against him.
5. Show Cause Notices were issued against 13 noticees, the Petitioner being one of them (Noticee No. 12). The allegation in the Show Cause Notice is that funds to the tune of Rs. 2315.66 crores were diverted from RFL through several layers of conduit entities for the ultimate benefit of promoters of REL and RFL.
6. On receipt of the Show Cause Notice, the Petitioner filed a Settlement Application dated 22.02.2021, proposing to settle the proceedings initiated by the Show Cause Notice, in terms of SEBI (Settlement Proceedings), Regulations, 2018 (hereinafter referred to, in short as "the Settlement Regulations"). The Petitioner could not settle the proceedings.
7. The Petitioner sent an e-mail to the Respondent SEBI, requesting Respondent SEBI to afford him an opportunity to inspect the documents relied upon by the Respondent SEBI. Ms. Sneha Jalan, Assistant General Manager, SEBI, offered some documents for inspection of the Petitioner, on 15th January 2021.
8. The Petitioner submits that from time to time, the Petitioner asked the Respondent SEBI to provide for inspection to the Petitioner,
