SEBI's Revocation of Settlement Order Under Regulation 28 Without Hearing Violates Natural Justice, Must Be Reasoned: Bombay High Court - 2025-06-19

Bombay High Court Quashes SEBI's "Unreasoned" Revocation of Settlement Order, Cites Violation of Natural Justice

Mumbai: The Bombay High Court, in a significant ruling, has quashed and set aside an order by the Securities and Exchange Board of India (SEBI) that revoked a prior settlement order concerning Bharat Nidhi Limited (BNL) and several other entities. The bench, comprising Justices Bharati Dangre and Manjusha Deshpande , held that SEBI's revocation, communicated on November 10, 2023, was passed without affording the petitioners an opportunity of hearing and lacked reasoning, thereby violating the principles of natural justice. The matter has been remanded to SEBI for reconsideration after a proper hearing.

The judgment, pronounced on June 11, 2025, addresses three writ petitions filed by Bharat Nidhi Limited (WP No. 3977/2024), Matrix Merchandise Limited & others (WP No. 4828/2024), and Ashoka Marketing Limited & Arth Udyog Limited (WP (L) No. 2325/2024).

Case Background: From Show Cause to Settlement and Sudden Revocation

The core of the dispute traces back to a show-cause notice issued by SEBI on October 28, 2020, to BNL and seven other entities (including an individual, Vineet Jain). The notice alleged violations of SEBI norms, primarily concerning misrepresentation of promoter shareholding as public shareholding and non-compliance with Minimum Public Shareholding (MPS) norms and disclosure requirements.

Subsequently, the petitioners filed separate settlement applications, which, after due process involving SEBI's Internal Committee (IC) and High Powered Advisory Committee (HPAC), culminated in a common Settlement Order on September 12, 2022. This order involved monetary payments and certain non-monetary undertakings, particularly for BNL, which included providing an exit offer to its public shareholders.

However, on November 10, 2023, SEBI revoked this Settlement Order, citing "failure to comply with its terms" under Regulation 28 of the SEBI (Settlement Proceedings) Regulations, 2018. This revocation was challenged by the petitioners.

Arguments Before the Court

Petitioners' Contentions: Led by Senior Advocates Venkatesh Dhond (for BNL), Janak Dwarkadas , and Ashish Kamat , the petitioners argued: * The revocation was arbitrary and violated principles of natural justice as no hearing was granted, and the order was unreasoned. * There was no case made out for revocation under Regulation 28, as BNL had taken substantial steps to comply with the non-monetary terms (exit offer) and any delays or modifications were due to statutory limitations (e.g., Companies Act provisions on buy-backs) or interim court orders obtained by minority shareholders. * SEBI was kept informed of all compliance efforts and had not previously indicated dissatisfaction. * The revocation was a "knee-jerk reaction" to a High Court order directing SEBI to disclose internal documents related to the settlement to minority shareholders. * The settlement terms were, in part, distinct for each petitioner, and the alleged non-compliance by BNL should not affect others who had fulfilled their monetary obligations.

SEBI's Defence: Represented by Senior Advocate J.J. Bhatt , SEBI contended: * BNL and other applicants failed to comply with the Settlement Order, particularly BNL's undertaking to provide an exit offer to all public shareholders. * The revocation was in accordance with Regulation 28, which allows for revocation upon failure to comply. * Given the clear non-compliance, a hearing would have been an "empty formality." * The Settlement Order was composite, and failure by one entity (BNL) impacted the entire settlement. * The decision to revoke was not influenced by court orders for document disclosure.

Minority Shareholders' Stance: Senior Advocates Navroze Seervai and Gaurav Joshi, representing minority shareholder groups ( Ashok Shah Group and Pina Pankaj Shah Group), supported SEBI's revocation. They argued: * BNL demonstrably failed to provide a proper exit offer to all public shareholders as required. * BNL's proposed buy-back (limited to 1.067% of shares) did not meet the settlement terms. * Revocation under Regulation 28 is automatic upon non-compliance. * The petitioners were attempting to escape their commitments under the settlement.

Court's Analysis and Findings: Upholding Natural Justice

The High Court meticulously examined Regulation 28 of the SEBI (Settlement Proceedings) Regulations, 2018, which states: > "28.(1) If the applicant fails to comply with the settlement order or at any time after the settlement order is passed, it comes to the notice of the Board that the applicant has not made full and true disclosure or has violated the undertakings or waivers, settlement order shall stand revoked and withdrawn and the Board shall restore or initiate the proceedings, with respect to which the settlement order was passed."

The Court observed that BNL had engaged in extensive correspondence with SEBI regarding its compliance efforts, including the challenges posed by statutory limitations on buy-backs under the Companies Act and interim orders from the High Court in litigation initiated by minority shareholders.

On Compliance and SEBI's Conduct: The judgment noted that SEBI itself, in an earlier affidavit (March 13, 2023), had acknowledged the difficulties BNL faced in finalizing the exit offer due to court orders. The Court found SEBI's sudden "U turn" to allege failure of compliance, after nearly 14 months of interaction and without prior indication of dissatisfaction, questionable. > "The entire communication placed on record between SEBI and BNL...is clearly indicative that BNL had kept SEBI informed about the manner in which it planned to comply with the settlement order and SEBI never indicated its dissatisfaction on the proposed compliance." (Para 95 excerpt)

The Court, however, agreed with SEBI that the settlement order was composite, given the nature of the allegations in the original show-cause notice.

Violation of Principles of Natural Justice: The cornerstone of the High Court's decision was the violation of principles of natural justice. The Court emphasized that an administrative or quasi-judicial order entailing civil consequences must adhere to these principles, including the right to be heard (audi alteram partem) and the necessity of a reasoned order. > "The adherence to the principles, act as a guarantee against arbitrary action...every person is protected against exercise of arbitrary authority by the State or its officers..." (referring to A. K. Kraipak & Ors. vs. Union of India & Ors. and SBI vs. Rajesh Agarwal )

The Court rejected SEBI's argument that a hearing was unnecessary, stating: > "...we are of the firm view, that this is a fit case where it ought to have granted an opportunity of hearing to the Petitioners before it embarked upon the journey to revoke the settlement order." (Para 112 excerpt)

Further, the Court found the one-sentence revocation order, lacking any explanation, to be unsustainable: > "Absence of reason has rendered the impugned order unsustainable...the reasoning in an order ensure transparency and fairness in decision making and particularly when SEBI, a Regulator is expected to act fairly..." (Para 110 excerpt)

The Court cited Reliance Industries Ltd. v. SEBI , underscoring SEBI's duty to act fairly and transparently.

The Final Order

The Bombay High Court concluded: > "In the wake of the aforesaid discussion, we quash and set aside the impugned order passed by SEBI, communicated to the Petitioners on 10.11.2023 and remand the proceedings of the settlement applications qua each of the Petitioner to SEBI for reconsideration, by affording an opportunity of hearing to the Petitioners within a time bound manner and we expect the order to be passed, to be reasoned order. The aforesaid exercise shall be carried out within a period of four months from the receipt of the order by SEBI."

The decision reaffirms the critical importance of procedural fairness and reasoned decision-making by regulatory authorities like SEBI, even when dealing with the revocation of settlement orders. It underscores that parties facing adverse actions with civil consequences are entitled to a fair hearing.