The division judge bench of Justice Indira Bannerjee and Justice A.S Bopanna of the apex court in the case of Kavi Arora Vs Securities & Exchange Board of India held that when the documents relied upon for the formation of opinion under Rule 3, are not required to be disclosed to the notice unless relied upon in the inquiry.
BRIEF FACTS
The factual matrix of the case is that the SEBI appointed a forensic auditor to investigate the matter of M/S Religare Private Limited (REL) for alleged violation of the provisions of the SEBI Regulations, 2003. Furthermore, the notice was issued by the 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 a penalty, should not be passed against him. Thereafter, the petitioner sent an e-mail to the respondent SEBI requesting to provide them with the documents on which they relied for the purpose of inspection. Further, the petitioner stated that some documents were supplied but certain documents were denied on the ground that those were confidential documents. According to the SEBI, as per the SEBI Adjudication Rules, the board has to form an opinion on whether the show cause notice is required to be issued or not.
The learned senior counsel appearing on behalf of the petitioner has contended that the Show Cause Notice had been issued to the Petitioner by Respondent SEBI, inter alia, under Section15HA of SEBI Act (Chapter VI-A) and Rule 3 of the SEBI Adjudication Rules which requires the formation of opinion for appointing an Adjudicating Authority, before proceeding under Chapter VIA. It was further submitted that the petitioner has filed the preliminary reply but after reserving the right to file a detailed reply after inspection of documents. Thereafter, the adjudicating authority adjourned the hearing for the purpose of inspection of documents but many documents relied upon in the show cause notice were not provided to the petitioner. It was also contended that the advocate for the petitioner also requested the documents but only some documents were provided rest documents were refused on the ground of confidentiality. It was further argued that the Adjudicating authority fixed the matter for a final hearing without providing them with the concerned documents. The learned counsel sent an email showing that the proceedings could not be fixed for the final hearing in terms of Rule 4(1), 4(2), 4(3) 4(4), and 4(5) of SEBI Adjudication Rules 1995 which provide for the two-tier adjudication process. Also, when SEBI has taken a stand that the documents which are confidential would not be relied upon but the said documents relied upon.
The learned counsel appearing on behalf of the petitioner also relied upon the judgments titled T.Takano v. SEBI, Natwar Singh v. Directorate of Enforcement, and Another and Indian Commodity Exchange Limited v. Neptune Overseas Limited.
The learned counsel also stated that the according to Rule 4 of the SEBI Adjudication Rules 1995, the Adjudicating Authority must first form an opinion on whether an inquiry should be conducted against the noticee based on the response to the Show Cause Notice. Even after forming an opinion, the Adjudicating Authority cannot proceed to the stage of the final hearing without first notifying the Petitioner and providing him with an opportunity to produce documents and question witnesses.
The learned senior counsel appearing on behalf of the respondent has contended that the SEBI had conducted an investigation in the matter of Religare Enterprises Ltd. (REL) and various related entities for alleged violation of the provision of SEBI Act and/or SEBI PFUTP Regulations. It was further submitted that the forensic auditor was appointed to check the diversion of funds from REL and/or its subsidiaries for the benefit of the promoter/promoters and/or connected entities. It was further argued that in the filing of the preliminary reply, the Petitioner repeatedly requested and received an inspection of various records and documents. In addition to physical inspection, SEBI provided a compact disc containing voluminous records of most of the documents, with the exception of some documents that were internal or confidential or endangered third-party confidentiality and thus could not be provided.
COURT’S OBSERVATION
The hon’ble court stated that the Board was of the opinion that there were grounds for adjudication and accordingly appointed Adjudicating Officer. Adjudicating Officer issued Show Cause Notice to the Petitioner to which the Petitioner gave a preliminary reply and thereafter sought documents as observed above. Inspection of some documents was permitted. After considering the reply, the Adjudicating Officer was of the opinion that an inquiry should be held. Accordingly, a notice fixing a date for appearance was issued. There was no procedural irregularity, at least till the stage of notice fixing a date of hearing. Further, the hon’ble court held that the High Court rightly did not interfere with the proceedings at the stage of the Show Cause Notice. The Petitioner has apparently been permitted to inspect the opinion formed under Rule 3 of the SEBI Adjudication Rules. There is apparently no rule which requires SEBI to furnish the opinion under Rule 3 to the noticee in its entirety. The documents relied upon for the formation of opinion under Rule 3, are not required to be disclosed to the notice unless relied upon in the inquiry. In the event, the Petitioner is prejudiced by reason of any adverse order, based on any materials not supplied to the Petitioner, or any prejudice is demonstrated to have been caused to the Petitioner, it would be open to the Petitioner to approach the appropriate forum. Thereafter, the court permitted the respondent to hold an inquiry, without relying upon any documents, not supplied to the Petitioner.
CASE NAME- Kavi Arora Vs Securities & Exchange Board Of India
CORUM- Justice Indira Bannerjee and Justice A.S Bopanna
CITATION- SPECIAL LEAVE PETITION (CIVIL) NO. 15149 OF 2021
DATED- 14.09.22
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