Revocation of SEBI Settlement Order Without Hearing Violates Natural Justice, Sets Aside Decision Against Bharat Nidhi Ltd: Bombay High Court

Bombay High Court Sets Aside SEBI's Revocation of Bharat Nidhi Settlement, Cites Violation of Natural Justice

MUMBAI: In a significant ruling on administrative fairness, the Bombay High Court has quashed the Securities and Exchange Board of India's (SEBI) decision to revoke a settlement order with Bharat Nidhi Ltd. ( BNL ) and its associated entities. The division bench of Justice Bharati Dangre and Justice Manjusha Deshpande held that SEBI's revocation, carried out without providing a hearing to the petitioners, was a violation of the principles of natural justice and remanded the matter for fresh consideration.

The court set aside SEBI's communication dated November 10, 2023, which had cancelled a comprehensive settlement reached on September 12, 2022. The bench directed SEBI to reconsider the matter after affording the petitioners a proper hearing and to pass a reasoned order within four months.

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Background of the Dispute

The case originates from a show-cause notice issued by SEBI in October 2020 to BNL and seven other entities, including companies like Ashoka Marketing Ltd., Matrix Merchandise Ltd., and individual director Vineet Jain . The notice alleged serious violations, including: - Misrepresentation of promoter shareholding as public shareholding. - Non-compliance with Minimum Public Shareholding (MPS) norms. - Violations of SEBI's Listing Obligations and Disclosure Requirements (LODR) and other regulations.

The petitioners opted for a settlement under the SEBI (Settlement Proceedings) Regulations, 2018. After negotiations involving SEBI's Internal Committee and High-Powered Advisory Committee, a settlement order was passed. The terms included substantial monetary payments by all entities and specific non-monetary undertakings. Crucially, BNL undertook to provide an "exit offer" to its public shareholders for three months.

The settlement order stipulated that if BNL failed to report compliance within 15 days, the entire order would "cease to operate qua all the applicants."

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Arguments Before the Court

Petitioners' Stance: The petitioners, represented by senior advocates Venkatesh Dhond , Janak Dwarkadas , and Ashish Kamat , argued that SEBI's revocation was arbitrary and illegal. Their key contentions were: - Violation of Natural Justice: The revocation order was passed without a hearing or a reasoned explanation, violating the principle of audi alteram partem (the right to be heard). - Impossibility of Performance: BNL had initiated steps to comply by launching a share buy-back but was hindered by statutory limitations under the Companies Act and a High Court interim order obtained by minority shareholders (the Ashok Shah Group). - SEBI's Awareness: BNL consistently kept SEBI informed of its compliance efforts and the legal impediments. For over a year, SEBI raised no objections and even acknowledged the court-imposed stay in its own court filings. - Knee-Jerk Reaction: The sudden revocation was a "knee-jerk reaction" to a separate court order directing SEBI to disclose confidential settlement documents to the minority shareholders.

SEBI and Minority Shareholders' Counter-Arguments: SEBI, represented by senior advocate J.J. Bhatt , and the minority shareholders, represented by senior advocates Navroze Seervai and Gaurav Joshi , defended the revocation. They argued: - Clear Non-Compliance: BNL had demonstrably failed to provide the mandated exit offer to all public shareholders within the stipulated three-month period. The limited buy-back offer to only 1.067% of shareholders was insufficient. - Automatic Revocation: Regulation 28 of the Settlement Regulations provides for automatic revocation upon failure to comply, making a hearing an "empty formality." - Composite Order: The settlement was a single, composite order. A breach by one party ( BNL ) rightfully led to the revocation for all. - No Prejudice: Since the facts of non-compliance were admitted by BNL itself in its communications, no prejudice was caused by the lack of a hearing.

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Court's Pivotal Observations and Ruling

The High Court meticulously analyzed the correspondence between BNL and SEBI, noting that SEBI was aware of BNL 's step-by-step compliance plan and the legal hurdles it faced.

The bench made several key observations:

"It is not the case that SEBI arrived at a conclusion that there was the breach of the non-monetary terms of settlement order immediately after three months had lapsed but for almost for fourteen months, SEBI continued to entertain BNL and even found the stand of BNL to be a plausible one... What made SEBI suddenly adopt a 'U' turn and alleged failure of compliance as not fathomable."

On the necessity of a hearing, the court emphasized that administrative actions with civil consequences must adhere to natural justice. Revoking the settlement stripped the petitioners of the immunity granted by it, a significant civil consequence.

"The rationale in passing a reasoned order is also being that the affected party know why the decision has gone against him and this being recognised as a statutory requirement of natural justice, the impugned order which fails to ensure its compliance cannot be sustained."

The court held that it was not for SEBI to unilaterally decide that a hearing would serve no purpose. Whether prejudice was caused is a determination for the court, not the administrative authority. Given the complex facts and BNL 's consistent plea for a hearing, the denial was unjustified.

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Final Decision and Implications

The Bombay High Court concluded that SEBI's unreasoned, one-line revocation order, passed 14 months after the settlement and without a hearing, was unsustainable in law.

The court quashed the revocation order of November 10, 2023, and remanded the matter to SEBI. The regulator must now conduct a fresh hearing, consider the petitioners' submissions, and pass a reasoned order on whether the settlement should be revoked. This landmark decision reinforces the duty of regulatory bodies like SEBI to act fairly, transparently, and in adherence to the principles of natural justice, even when enforcing compliance with settlement terms.