Gauhati High Court
Page No.# 1/97 vs The Securities And Exchange Board ... on 6 September, 2022
Page No.# 1/97
GAHC010015952022
THE GAUHATI HIGH COURT
(HIGH COURT OF ASSAM, NAGALAND, MIZORAM AND ARUNACHAL PRADESH)
Case No. : WP(C)/530/2022
SUNITA AGARWAL
W/O- SRI SANJAY AGARWAL, R/O- 65, BILPAR, REHABARI, GUWAHATI-
781008.
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN,
PLOT NO. C4-A, G- BLOCK, BANDRA KURLA COMPLEX, BANDRA (EAST),
MUMBAI-400051.
2:THE DEPUTY GENERAL MANAGER AND THE ADJUDICATING OFFICER
WESTERN REGIONAL OFFICE
SEBI BHAVAN
PANCHVATI 1ST LANE
GULBAL TEKRA ROAD
AHMEDABAD- 380006
Advocate for the Petitioner : DR. A SARAF
Advocate for the Respondent : SC, SEBI
Linked Case : WP(C)/1434/2022
SANDEEP AGARWAL
S/O. SRI NIRMAL AGARWAL
R/O. 65
BILPAR
Page No.# 2/97
REHABARI
GUWAHATI-781008.
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C4-A
(G)-BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI-400051.
2:THE DEPUTY GENERAL MANAGER AND THE ADJUDICATING OFFICER
WESTERN REGIONAL OFFICE
SEBI BHAVAN
PANCHVATI 1ST LANE
GULBAL TEKRA ROAD
AHMEDABAD-380006.
------------
Advocate for : DR. ASHOK SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR
Linked Case : WP(C)/764/2022
KANTA DIDWANIA
W/O SRI BISHNU KUMAR DIDWANIA
KAMRUP CHAMBER ROAD
FANCY BAZAR
GUWAHATI-781001
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
Page No.# 3/97
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA
Linked Case : WP(C)/765/2022
KAVITA DIDWANIA
W/O SRI KISHAN KUMAR DIDWANIA
KAMRUP CHAMBER ROAD
FACNY BAZAR
GUWAHATI-781001.
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA
Linked Case : WP(C)/1455/2022
BANDANA AGARWAL
W/O- SRI- SANDEEP AGARWAL
R/O 65
BILPAR
REHABARI
GUWAHATI-781008
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR (B)
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C4-A
G- BLOCK
Page No.# 4/97
BANDRA KURLA COMPLEX
BANDRA(EAST)
MUMBAI- 400051.
2:THE DEPUTY GENERAL MANAGER AND THE ADJUDICATING OFFICER
WESTERN REGIONAL OFFICE
SEBI BHAVAN
PANCHVATI 1ST LANE
GULBAL TEKRA ROAD
AHMEDABAD- 380006
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR (B)
Linked Case : WP(C)/1427/2022
USHA DEVI AGARWAL
W/O- SRI NIRMAL AGARWAL
R/O- 65
BILPAR
REHABARI
GUWAHATI-781008.
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REPRESENTED BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI
BHAVAN
PLOT NO. C4-A
G-BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI-400051.
2:THE DEPUTY GENERAL MANAGER AND THE ADJUDICATING OFFICER
WESTERN REGIONAL OFFICE
SEBI BHAVAN
PANCHVATI IST LANE
GULBAL TEKRA ROAD
AHMEDDABAD-380006.
------------
Advocate for : DR. A SARAF
Advocate for : SC
Page No.# 5/97
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR
Linked Case : WP(C)/1179/2022
SMT. ROSHNI DIDWANIA
W/O SRI PARAS DIDWANIA
KAMRUP CHAMBER ROAD
FANCY BAZAR
GUWAHATI-781001
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA
REPRESENTED BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI
BHAVAN
PLOT NO. C 4-A
G-BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI-400051
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA
Linked Case : WP(C)/1533/2022
SANJAY AGARWAL
S/O- SRI NIRMAL AGARWAL
R/O 65
BILPAR
REHABARI
GUWAHATI-781008
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C4-A
Page No.# 6/97
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI- 400051.
2:THE DEPUTY GENERAL MANAGER AND THE ADJUDICATING OFFICER
WESTERN REGIONAL OFFICE
SEBI BHAVAN
PANCHVATI 1ST LANE
GULBAL TEKRA ROAD
AMHEDABAD-380006
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR
Linked Case : WP(C)/766/2022
ANKITA DIDWANIA
W/O SRI RAJIV DIDWANIA
KAMRUP CHAMBER ROAD
FANCY BAZAR
GUWAHATI-781001
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
2:THE ADJUDICATING OFFICER
SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
Page No.# 7/97
ANR
Linked Case : WP(C)/767/2022
NIRMALA DIDWANIA
W/O SRI SAJJAN KUAR DIDWANIA
KAMRUP CHAMBER ROAD
FANCY BAZAR
GUWAHATI-781001.
VERSUS
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
2:THE ADJUDICATING OFFICER
SEBI BHAVAN
PLOT NO. C 4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST) MUMBAI-400051.
------------
Advocate for : DR A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR
Linked Case : WP(C)/852/2022
SWETA DIDWANIA
W/O- VIKRAM DIDWANIA
KAMRUP CHAMBER ROAD
FANCY BAZAR
GUWAHATI-01
VERSUS
Page No.# 8/97
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ANR
REP. BY ITS CHAIRMAN HAVING ITS OFFICE SITUATED AT SEBI BHAVAN
PLOT NO. C4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI-51
2:THE ADJUCATING OFFIDER
SEBI BHAVAN
PLOT NO. C4-A
G- BLOCK
BANDRA KURLA COMPLEX
BANDRA (EAST)
MUMBAI-51
------------
Advocate for : DR. A SARAF
Advocate for : SC
SEBI appearing for THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ANR
BEFORE
HONOURABLE MR. JUSTICE ACHINTYA MALLA BUJOR BARUA
JUDGMENT & ORDER (ORAL)
Date: 06.09.2022
Heard Dr. Ashok Saraf, learned senior counsel assisted by Mr. A. Goyal,
learned counsel for the petitioners and Ms. M. Hazarika, learned senior counsel
assisted by Mr. D. Khan, learned counsel for the respondents in the SEBI in
WP(C) No. 530/2022, WP(C) No. 765/2022, WP(C) No. 767/2022, WP(C) No.
852/2022, WP(C) No. 1179/2022, WP(C) No. 1427/2022, WP(C) No. 1434/2022,
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WP(C) No. 1455/2022 and WP(C) No. 1533/2022 and Mr. A. Choudhury, learned
senior counsel assisted by Mr. A Mahadevan Sethi learned counsel for the
respondents in the SEBI in WP(C) No. 766/2022 and WP(C) No. 764/2022.
2. All the writ petitioners herein are engaged in the activity of purchasing and
selling of shares listed under the Securities and Exchange Board of India (for
short 'SEBI'). According to the respondents in the SEBI, the persons engaged in
buying and selling of the shares also indulges in buying of a particular share of
a listed company and immediately thereafter, sell the purchased share at a price
which would be lower than the price at which the shares were purchased, and
the time gap between the purchase and sell of the shares at times may also be
a fraction of a second. It came to the notice of the authorities of the SEBI that
such manner of purchases and sell of shares were prevalent under the SEBI
which came to be called by the authorities to be reversal trading.
3. The concept of reversal trading came under the consideration of the
Supreme Court in Securities and Exchange Board of India Vs. Rakhi Trading
Private Ltd. reported in (2018) 13 SCC 753. In Rakhi Trading (Supra), certain
decisions of the Adjudicating Officer were assailed before the Securities
Appellate Tribunal (for short, SAT), which also included a decision of an
Adjudicating Officer in respect of Rakhi Trading Pvt. Ltd. The SAT by its
respective orders had set aside the decisions of the Adjudicating Officer. Being
aggrieved by the order of the SAT, the SEBI preferred an appeal before the
Supreme Court under Section 15Z of the Securities and Exchange Board of India
Act, 1992 (hereinafter referred to as 'SEBI Act-1992'). In respect of Rakhi
Trading Pvt. Ltd., a show cause notice dated 05.10.2007 was issued alleging
execution of certain non-trading transactions and the Adjudicating Officer
Page No.# 10/97
analyzed the trade logs and observed that the trades executed by Rakhi Trading
matched with the counter-party, namely, Kasam Holding Pvt. Ltd. within a few
seconds and that the trade reversals took place in a matter of minutes/hours.
The relevant propositions of the Supreme Court in Rakhi Trading (Supra) are
extracted as below:
"28. According to SAT, the synchronisation and reversal of trades effected by the parties
with a significant price difference, some in a few seconds and majority, in any case, on
the same day had no impact on the market and it has not affected the NIFTY index in
any manner or induced investors. SAT has held that such trades are illegal only when
they manipulate the market in any manner and induce investors. It has also taken a
view that there being no physical delivery of any asset, there is no change of beneficial
ownership and what is traded in the F&O segment are only contracts and hence, such
synchronised and reverse trades in NIFTY options in the F&O segment "can never
manipulate the market". It has also held that the trades being settled in cash through a
stock exchange mechanism, are genuine and therefore cannot create a false or
misleading appearance of trading in the F&O segment. Further, any trade to be
objectionable must result in influencing the market one way or the other. SAT held that
these trades were for the purpose of tax planning which is not violative of any
regulation. We are not inclined to get into the issue of tax planning as it was not
mentioned in the show-cause notices.
29. We find it difficult to appreciate the stand taken by SAT which is endorsed by the
learned Senior Counsel appearing for the respondents. Mr Chidambaram, learned Senior
Counsel appearing for Rakhi Trading argues that the SAT decision is valid and proper.
Reliance is also placed on Ketan Parekh [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT
221] in which SAT held that synchronised trades are not per se illegal. As far as reversal
of trades is concerned, the Senior Counsel has sought to distinguish Ketan
Parekh [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221] as it pertained to dealings in
the cash segment whereas the present case deals with the F&O segment. The learned
Senior Counsel has strenuously argued that no rules of the game have been violated.
30. We are unable to agree with the arguments of the learned Senior Counsel appearing
for Rakhi Trading. Regulation 4(1) in clear and unmistakable terms has provided that
"no person shall indulge in a fraudulent or an unfair trade practice in securities".
In SEBI v. Kanaiyalal Baldevbhai Patel [SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15
SCC 1] , it has been held by this Court that a trade practice is unfair if the conduct
undermines the ethical standards and good faith dealings between the parties engaged
in business transactions. To quote: (SCC pp. 22 & 31, paras 31 & 60)
"31. Although unfair trade practice has not been defined under the regulations, various
other legislations in India have defined the concept of unfair trade practice in different
contexts. A clear-cut generalised definition of the "unfair trade practice" may not be
Page No.# 11/97
possible to be culled out from the aforesaid definitions. Broadly, trade practice is unfair
if the conduct undermines the ethical standards and good faith dealings between parties
engaged in business transactions. It is to be noted that unfair trade practices are not
subject to a single definition; rather it requires adjudication on case-to-case basis.
Whether an act or practice is unfair is to be determined by all the facts and
circumstances surrounding the transaction. In the context of this regulation a trade
practice may be unfair, if the conduct undermines the good faith dealings involved in the
transaction. Moreover the concept of "unfairness" appears to be broader than and
includes the concept of "deception" or "fraud".
***
60. Coupled with the above, is the fact, the said conduct can also be construed to be an
act of unfair trade practice, which though not a defined expression, has to be
understood comprehensively to include any act beyond a fair conduct of business
including the business in sale and purchase of securities. However the said question, as
suggested by my learned Brother, Ramana, J. is being kept open for a decision in a
more appropriate occasion as the resolution required presently can be made irrespective
of a decision on the said question."
(emphasis supplied)
31. Having regard to the fact that the dealings in the stock exchange are governed by
the principles of fair play and transparency, one does not have to labour much on the
meaning of unfair trade practices in securities. Contextually and in simple words, it
means a practice which does not conform to the fair and transparent principles of trades
in the stock market. In the instant case, one party booked gains and the other party
booked a loss. Nobody intentionally trades for loss. An intentional trading for loss per
se, is not a genuine dealing in securities. The platform of the stock exchange has been
used for a non-genuine trade. Trading is always with the aim to make profits. But if one
party consistently makes loss and that too in preplanned and rapid reverse trades, it is
not genuine; it is an unfair trade practice. Securities market, as the 1956 Act provides in
the Preamble, does not permit "undesirable transactions in securities". The Act intends
to prevent undesirable transactions in securities by regulating the business of dealing
therein. Undesirable transactions would certainly include unfair practices in trade. The
SEBI Act, 1992 was enacted to protect the interest of the investors in securities.
Protection of interest of investors should necessarily include prevention of misuse of the
market. Orchestrated trades are a misuse of the market mechanism. It is playing the
market and it affects the market integrity.
32. Ordinarily, the trading would have taken place between anonymous parties and the
price would have been determined by the market forces of demand and supply. In the
Page No.# 12/97
instant case, the parties did not stop at synchronised trading. The facts go beyond that.
The trade reversals in this case indicate that the parties did not intend to transfer
beneficial ownership and through these orchestrated transactions, the intention of
which was not regular trading, other investors have been excluded from participating in
these trades. The fact that when the trade was not synchronising, the traders placed it
at unattractive prices is also a strong indication that the traders intended to play with
the market.
33. We also find it difficult to appreciate the stand of SAT that the rationale of change of
beneficial ownership does not arise in the derivatives segment. No doubt, as in the case
of trade in a scrip in the cash segment, there is no physical delivery of the asset.
However, even in the derivative segment there is a change of rights in a contract. In the
instant case, through reverse trades, there was no genuine change of rights in the
contract. SAT has erred in its understanding of change in beneficial ownership in reverse
trades. Even in derivatives, the ownership of the right is restored to the first party when
the reverse trade occurs. In this context, the discussion in Ketan Parekh [Ketan
Parekh v. SEBI, 2006 SCC OnLine SAT 221] assumes significance: (SCC OnLine SAT para
20)
"20. ... As already observed "synchronisation" or a negotiated deal ipso facto is not
illegal. A synchronised transaction will, however, be illegal or violative of the Regulations
if it is executed with a view to manipulate the market or if it results in circular trading or
is dubious in nature and is executed with a view to avoid regulatory detection or does
not involve change of beneficial ownership or is executed to create false volumes
resulting in upsetting the market equilibrium. Any transaction executed with the
intention to defeat the market mechanism whether negotiated or not would be illegal.
Whether a transaction has been executed with the intention to manipulate the market
or defeat its mechanism will depend upon the intention of the parties which could be
inferred from the attending circumstances because direct evidence in such cases may
not be available. The nature of the transaction executed, the frequency with which such
transactions are undertaken, the value of the transactions, whether they involve circular
trading and whether there is real change of beneficial ownership, the conditions then
prevailing in the market are some of the factors which go to show the intention of the
parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one
factor may or may not be decisive and it is from the cumulative effect of these that an
inference will have to be drawn."
(emphasis supplied)
From the facts before us, it is clear that the traders in question did not intend to
transfer beneficial ownership and therefore these trades are non-genuine.
34. Rather than allowing the market forces to operate in their natural course, the
traders repeatedly carried out the impugned transactions which deprived other market
players from full participation. The repeated reversals and predetermined arrangement
to book profits and losses respectively, made it clear that the parties were not trading in
Page No.# 13/97
the normal sense and ordinary course. Resultantly, there has clearly been a restriction
on the free and fair operation of market forces in the instant case.
35. Regulation 2(1)(c) defines "fraud". Under Regulation 2(1)(c)(2) a suggestion as to a
fact which is not true while he does not believe it to be true is fraud. Under Regulation
2(1)(c)(7), a deceptive behaviour of one depriving another of informed consent or full
participation is fraud. And under Regulation 2(1)(c)(8), a false statement without any
reasonable ground for believing it to be true is also fraud. In a synchronised and reverse
dealing in securities, with predetermined arrangement to book loss or gain between pre-
arranged parties, all these vices are attracted.
37. According to SAT, only if there is market impact on account of sham transactions,
could there be violation of the PFUTP Regulations. We find it extremely difficult to agree
with the proposition. As already noted above, SAT has missed the crucial factors
affecting the market integrity, which may be direct or indirect. The stock market is not a
platform for any fraudulent or unfair trade practice. The field is open to all the investors.
By synchronisation and rapid reverse trade, as has been carried out by the traders in
the instant case, the price discovery system itself is affected. Except the parties who
have pre-fixed the price nobody is in the position to participate in the trade. It also has
an adverse impact on the fairness, integrity and transparency of the stock market.
38. We are fortified in our conclusion by the judgment of this Court in SEBI v. Kishore R.
Ajmera [SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368] , though it is a case pertaining to
brokers, wherein it has been held at para 25: (SCC p. 383)
"25. The SEBI Act and the Regulations framed thereunder are intended to protect
the interests of investors in the Securities Market which has seen substantial growth in
tune with the parallel developments in the economy. Investors' confidence in the
capital/securities market is a reflection of the effectiveness of the regulatory mechanism
in force. All such measures are intended to pre-empt manipulative trading and check all
kinds of impermissible conduct in order to boost the investors' confidence in the capital
market. The primary purpose of the statutory enactments is to provide an environment
conducive to increased participation and investment in the securities market which is
vital to the growth and development of the economy. The provisions of the SEBI Act
and the Regulations will, therefore, have to be understood and interpreted in the above
light."
In this case, it was also held that in the absence of direct proof of meeting of
minds elsewhere in synchronised transactions, the test should be one of preponderance
of probabilities as far as adjudication of civil liability arising out of the violation of the
Act or the provision of the Regulations is concerned. To quote: (SCC p. 385, para 31):
Page No.# 14/97
"31. The conclusion has to be gathered from various circumstances like that
volume of the trade effected; the period of persistence in trading in the particular scrip;
the particulars of the buy and sell orders, namely, the volume thereof; the proximity of
time between the two and such other relevant factors."
We do not think that those illustrations are exhaustive. There can be several such
situations, some of which we have discussed hereinabove.
39. The traders thus having engaged in a fraudulent and unfair trade practice while
dealing in securities, are hence liable to be proceeded against for violation of
Regulations 3(a), 4(1) and 4(2)(a) of the PFUTP Regulations. Appeals Nos. 1969 of 2011,
3175 of 2011 and 3180 of 2011 are hence allowed. The orders of the Securities
Appellate Tribunal are set aside and that of SEBI are restored to the extent indicated
above.
41. Before concluding, we would like to reiterate the observations made by this Court
in Kishore R. Ajmera [SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368] and Kanaiyalal
Patel [SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1] regarding the need for a
more comprehensive legal framework governing the securities market. As the market
grows, ingenuous means of manipulation are also employed. In such a scenario, it is
essential that SEBI keeps up with changing times and develops principles for good
governance in the stock market which ensure free and fair trading.
Synchronised Trading:
55. As per Oxford Dictionary, the word "synchronise" means "cause to occur at the same
time; be simultaneous". A synchronised trade is one where the buyer and seller enter
the quantity and price of the shares they wish to transact at substantially the same
time. This could be done through the same broker (termed a cross deal) or through two
different brokers. (Ketan Parekh v. SEBI [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT
221] )
56. Synchronised trade is one wherein "buy and sell" orders are placed simultaneously
for the same quantity and price they wish to transact at substantially the same time.
Synchronised trades are not illegal provided that they are executed on the screens of
the exchange in the price and order matching mechanism of the exchanges just like any
Page No.# 15/97
other normal trade. As per SEBI's Circular No. SMDRP/POLICY/CIR-32/99 dated 14-9-
1999, "All negotiated deals.... shall be executed only on the screens of the exchanges in
the price and order matching mechanism of the exchanges just like any other normal
trade." In the said circular, it was stated that "the above decision was taken as
negotiated deals avoid transparency requirements, do not contribute to price discovery
and some investors do not have benefit of the best possible price and militate against
the basic concept of stock exchanges, which are meant to bring together a large
number of buyers and sellers in an open manner."
57. In Ketan Parekh v. SEBI [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221] the
Securities Appellate Tribunal (SAT) has considered the circumstances under which
"synchronised trade" will be legal and held as under: (SCC OnLine SAT para 20):
"20. There are yet another type of transactions which are commonly called
synchronised deals. The word "synchronise" according to Oxford Dictionary means
"cause to occur at the same time; be simultaneous". A synchronised trade is one where
the buyer and seller enter the quantity and price of the shares they wish to transact at
substantially the same time. This could be done through the same broker (termed a
cross deal) or through two different brokers. Every buy and sell order has to match
before the deal can go through. This matching may take place through the stock
exchange mechanism or off market. When it matches through the stock exchange, it
may or may not be a synchronised deal depending on the time when the buy and sell
orders are placed. There are deals which match off market i.e. the buyer and the seller
agree on the price and quantity and execute the transaction outside the market and
then report the same to the exchange. These are also called negotiated transactions....
It has recently issued a circular requiring all bulk deals to be transacted through the
exchange even if the price and quantity are settled outside the market. When such
deals go through the exchange, they are bound to synchronise. It would, therefore,
follow that a synchronised trade or a trade that matches off market is per se not illegal.
Merely because a trade was crossed on the floor of the stock exchange with the buyer
and seller entering the price at which they intended to buy and sell respectively, the
transaction does not become illegal. A synchronised transaction even on the trading
screen between genuine parties who intend to transfer beneficial interest in the trading
stock and who undertake the transaction only for that purpose and not for rigging the
market is not illegal and cannot violate the regulations."
(emphasis supplied)
58. A synchronised transaction will become illegal or violative of the Regulations if it is
executed with a view to manipulate the market or if it results in circular trading or is
dubious in nature and with a view to manipulate the price or volume of the scrip or with
some ulterior purpose. In Ketan Parekh case [Ketan Parekh v. SEBI, 2006 SCC OnLine
Page No.# 16/97
SAT 221] , SAT held as under: (SCC OnLine SAT para 20)
"20. ... A synchronised transaction will, however, be illegal or violative of the
Regulations if it is executed with a view to manipulate the market or if it results in
circular trading or is dubious in nature and is executed with a view to avoid regulatory
detection or does not involve change of beneficial ownership or is executed to create
false volumes resulting in upsetting the market equilibrium. Any transaction executed
with the intention to defeat the market mechanism whether negotiated or not would be
illegal. Whether a transaction has been executed with the intention to manipulate the
market or defeat its mechanism will depend upon the intention of the parties which
could be inferred from the attending circumstances because direct evidence in such
cases may not be available. The nature of the transaction executed, the frequency with
which such transactions are undertaken, the value of the transactions, whether they
involve circular trading and whether there is real change of beneficial ownership, the
conditions then prevailing in the market are some of the factors which go to show the
intention of the parties. This list of factors, in the very nature of things, cannot be
exhaustive. Any one factor may or may not be decisive and it is from the cumulative
effect of these that an inference will have to be drawn."
(emphasis supplied)
63. "By manipulation and synchronisation", it is meant that two parties have
premeditated; as such a drastic movement in price within few seconds could have been
only through prior understanding between the parties concerned only to fulfil an
unlawful objective through misuse of the stock exchange. That is, prior
arrangement/prior understanding with each other wherein one will make profit and
other will lose and thereby as soon as one party opens up its trade in the market, the
other party will buy it. Though the trading is shown on the screen, but prior
arrangement is very well possible behind the screen. This is what has been done in the
case in hand. Buy and sell orders were placed at a difference of few seconds/minutes,
while "sell" by respondent to Kasam Holding at a high price and "buy" by the
respondent from Kasam Holding Pvt. Ltd. at a low price. The transactions wherein the
"buy and sell" orders entered almost simultaneously and the transactions matched in
time and quantity with significant price variation and the respondent consistently
making profit but Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal
trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade
taking place repeatedly over a period of time only indicates that there was pre-
arrangement between the parties before the trade was executed. The transactions
involving only the same two parties within few seconds with huge difference in "buy and
sell" value, though there is no difference in the underlying security, can take place only
with prior understanding between the two parties. The Board who is the regulator of
the market, can always lift the veil of such transactions to show the non-genuineness of
such transactions.
Page No.# 17/97
64. Buying and selling of equal quantities within the day may not be wrong but the
trades with ulterior purpose are not genuine for sure. In the present case, every time
one party is making profit and other party is facing loss. Further, there was proximity in
the time of sell orders at a high price to the party Kasam Holding Pvt. Ltd. and the same
quantity being reversed by Kasam Holding Pvt. Ltd. to the same party Rakhi Trading Pvt.
Ltd. at a low price through the same set of brokers. As discussed earlier, during March
2007 thirteen Nifty Option Contracts got matched between the same parties through the
same brokers. I fail to understand as to why Kasam Holding has made the transactions
repeatedly by incurring losses. It seems improbable that Kasam Holding which was
facing loss in each transaction by trading with the respondent, was still eager to trade
with the same repeatedly for about four days which is not in consonance with the
market trend and human conduct; more so, when there has not been any major
difference in the underlying price. It is thus difficult to accept that several such sell and
buy orders between the respondent and Kasam Holding being within a gap of "1", "2" or
"3" or few seconds were by mere coincidence. As contended by the appellant SEBI, it
was too much of coincidence that there were number of transactions of "buy and sell
orders" between the same parties with same quantity of stock with significant variation
in price.
67. In the quasi-judicial proceeding before SEBI, the standard of proof is preponderance
of probability. In a case of similar synchronised trading involving same set of brokers
emphasising that the standard of proof is "preponderance of probability" in paras 26
and 27, in Kishore R. Ajmera case [SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368] , this
Court held as under: (SCC p. 383)
"26. It is a fundamental principle of law that proof of an allegation levelled
against a person may be in the form of direct substantive evidence or, as in many cases,
such proof may have to be inferred by a logical process of reasoning from the totality of
the attending facts and circumstances surrounding the allegations/charges made and
levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in
the absence thereof the courts cannot be helpless. It is the judicial duty to take note of
the immediate and proximate facts and circumstances surrounding the events on which
the charges/allegations are founded and to reach what would appear to the court to be
a reasonable conclusion therefrom. The test would always be that what inferential
process that a reasonable/prudent man would adopt to arrive at a conclusion."
(emphasis supplied)
68. There was no possibility of such perfect matching of quantity, timing, prices, etc.
between the same parties unless there was prior meeting of minds or a specific
Page No.# 18/97
understanding/arrangement between the parties. After referring to Ketan Parekh [Ketan
Parekh v. SEBI, 2006 SCC OnLine SAT 221] and Nirmal Bang [Nirmal Bang Securities (P)
Ltd. v. SEBI, 2003 SCC OnLine SAT 37 : (2004) 49 SCL 421] cases, in Accord Capital
Markets Ltd., In re [Accord Capital Markets Ltd., In re, 2007 SCC OnLine SEBI 181] ,
SEBI held as under: (Accord Capital case [Accord Capital Markets Ltd., In re, 2007 SCC
OnLine SEBI 181] , SCC OnLine SEBI para 4):
"4.12. I note that most of the synchronised trades executed by the Broker were
perfectly matched with the counter-party orders even with respect of the price to the
extent of two decimal points. The proximity in placing the orders at the same price and
for the same quantity almost at the same time (in majority of the cases) resulted in the
matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and
the time, required to conclude the trades. The time difference (between the buy and
sell orders) of majority of the synchronised trades was very less with the price and
quantity matching. The said synchronisation cannot take place in the absence of any
specific understanding/arrangement between the clients at the first instance, especially
when the shares of the company were highly liquid at the time of the trades.
***
4.24. The proof of manipulation in the circumstances always depends on
inferences drawn from a mass of factual details. Findings must be gathered from
patterns of trading data and the nature of the transactions, etc. Several circumstances
of a determinative character coupled with the inference arising from the conduct of the
parties in a major market manipulation could reasonably lead to conclusion that the
Broker was responsible in the manipulation. The evidence, direct or circumstantial,
should be sufficient to raise a presumption in its favour with regard to the existence of a
fact sought to be proved. As pointed out by Best in "Law of Evidence", the presumption
of innocence is no doubt presumptio juris; but everyday practice shows that it may be
successfully encountered by the presumption of guilt arising from circumstances, though
it may be a presumption of fact. Since it is exceedingly difficult to prove facts which are
especially within the knowledge of the parties concerned, the legal proof in such
circumstances partakes the character of a prudent man's estimate as to the probabilities
of the case. Hon'ble Securities Appellate Tribunal (SAT) has observed in the matter
of Ketan Parekh v. SEBI [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221] : (SCC
OnLine SAT para 20):
'20. ... Whether a transaction has been executed with the intention to manipulate
the market or defeat its mechanism will depend upon the intention of the parties which
could be inferred from the attending circumstances because direct evidence in such
cases may not be available....'
4.25. Presumption plays a critical role in coming to a finding as to the
involvement or otherwise of a market participant in any manipulation. For instance,
while trading, a lip service can be paid to a screen based trading system while
agreement is reached beforehand between brokers to effect the transaction. Anonymity
Page No.# 19/97
can be a cloak to cover anastomosis of interest. Therefore, the hackneyed plea based
on intentions in the market place cannot pass muster in all circumstances, more so
when such intentions are in the special/peculiar knowledge of the parties to the
transactions. Also any suggestion attributing innocence to the parties involved in such
transactions would give rise to an untenable situation where certain other third
persons/entities alone would be responsible for the manipulation and none else."
69. Applying the test laid down in Kishore R. Ajmera case [SEBI v. Kishore R. Ajmera,
(2016) 6 SCC 368] to the present case, I find that by cumulative analysis of the reversal
transactions between the respondent and Kasam Holding, quantity, time and significant
variation of prices, without major variation in the underlying price of the securities
clearly indicate that the respondent's trades are not genuine and had only misleading
appearance of trading in the securities market, without intending to transfer beneficial
ownership.
75. Once the reversal transactions are shown to be non-genuine or shown to be
fictitious creating a false or misleading appearance in the market for ulterior purpose
and that the stock market was misused by such manipulative device, this is in clear
violation of the provisions of the PFUTP Regulations, 2003. Regulations 3(a), 4(1) and
4(2)(a) of the PFUTP Regulations prohibit such manipulative trades, unfair trade
practices.
80. The smooth operation of the securities market and its healthy growth and
development depends upon large extent on the quality and integrity of the market.
Unfair trade practices affect the integrity and efficiency of the securities market and the
confidence of the investors. Prevention of market abuse and preservation of market
integrity are the hallmark of securities law. In N. Narayanan v. SEBI [N.
Narayanan v. SEBI, (2013) 12 SCC 152] it was held as under: (SCC p. 168, para 33):
"33. Prevention of market abuse and preservation of market integrity is the
hallmark of securities law. Section 12-A read with Regulations 3 and 4 of the 2003
Regulations essentially intended to preserve "market integrity" and to prevent "market
abuse". The object of the SEBI Act is to protect the interest of investors in securities and
to promote the development and to regulate the securities market, so as to promote
orderly, healthy growth of securities market and to promote investors' protection.
Securities market is based on free and open access to information, the integrity of the
market is predicated on the quality and the manner on which it is made available to
market. "Market abuse" impairs economic growth and erodes investor's confidence.
Market abuse refers to the use of manipulative and deceptive devices, giving out
incorrect or misleading information, so as to encourage investors to jump into
Page No.# 20/97
conclusions, on wrong premises, which is known to be wrong to the abusers. The
statutory provisions mentioned earlier deal with the situations where a person, who
deals in securities, takes advantage of the impact of an action, may be manipulative, on
the anticipated impact on the market resulting in the "creation of artificiality". The same
can be achieved by inflating the company's revenue, profits, security deposits and
receivables, resulting in price rise of the scrip of the company. Investors are then lured
to make their "investment decisions" on those manipulated inflated results, using the
above devices which will amount to market abuse."
82. Stock market is regulated mainly by SEBI and to some extent by the Departments of
Economic Affairs and Company Affairs of the Government of India. Market manipulation
can occur in a variety of ways. Manipulations/unfair trade practices reduce the market
efficacy. Section 11 of the SEBI Act, 1992 provides for the functions of the Board, as per
which it shall be the duty of the Board to protect the interests of the investors in
securities and to promote the development and to regulate the securities market by
such measures as it thinks fit. Main function of SEBI in this regard is to make inquiry,
investigation and to give directions, to promote the orderly and healthy growth of the
securities market. With a view to curb unfair trade practices, market manipulation, price
rigging and other frauds in securities market, SEBI is empowered to make inquiries and
inspection.
84. The capital market regulator, SEBI has a significant role to play in safeguarding the
interest of investors and to ensure strict compliance of all the relevant SEBI Rules and
Regulations targeting at safeguarding the interest of small investors. In order to protect
the interests of the investors and the integrity of the markets, as a regulator, SEBI has
to make the marketplace efficient and clean, wherein all the participants play their role
diligently and professionally within the four corners of the system, without there being
any scope for market abuse. Where certain unscrupulous elements are trying to
manipulate the market to serve their own interest, it becomes imperative on the part of
SEBI to intervene and to curb further mischief and to take necessary action to maintain
public confidence in the integrity of the securities market.
Conclusion:
88. Considering the reversal transactions, quantity, price and time and sale, parties
being persistent in a number of such trade transactions with huge price variations, it will
be too naïve to hold that the transactions are through screen-based trading and hence
anonymous. Such conclusion would be overlooking the prior meeting of minds involving
synchronisation of buy and sell order and not negotiated deals as per the Board's
circular. The impugned transactions are a manipulative/deceptive device to create a
desired loss and/or profit. Such synchronised trading is violative of transparent norms of
trading in securities. If the findings of SAT are to be sustained, it would have serious
Page No.# 21/97
repercussions undermining the integrity of the market and the impugned order of SAT is
liable to be set aside. On the above additional reasonings also, I agree with the
conclusion allowing the appeal preferred by SEBI against the traders. I also agree with
the conclusion dismissing the appeal preferred by SEBI against the brokers."
4. The propositions laid down by the Supreme Court in Rakhi Trading (supra)
are as follows:
i. According to SAT, the synchronization and reversal of
trades effected by the parties with a significant price
difference, some in a few seconds and majority, in any case,
on the same day had no impact on the market and it had not
affected the NIFTY index in any manner or induced investors
and such trades are illegal only when they manipulate the
market in any manner and induce the investors. The Supreme
Court did not appreciate the said stand of the SAT and was of
the view that under Regulation 4(1) of the Securities and
Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Market) Regulations,
2003 (for short 'the PFUTP Regulations'), which provides in
clear and unmistakable terms that no person shall indulge in
a fraudulent or an unfair trade practice in securities, a trade
practice would be unfair if the conduct undermines the ethical
standards and good faith dealings between the parties
engaged in the business transactions.
ii. As the dealings in the stock exchange are governed by
the principles of fair play and transparency, one does not
Page No.# 22/97
have to labour much on the meaning of unfair trade practices
in securities. In other words, it means a practice which does
not conform to the fair and transparent principles of trades in
the stock market. In a case where one party booked a gain
and another party booked a loss, where in a situation, nobody
intentionally trades for loss, an intentional trading for loss,
per se, would not be a genuine dealing in securities. Trading
in securities is always with the aim to make profits, but if one
party consistently makes loss and that too in a pre-planned
rapid reverse trades, it would be not genuine, but an unfair
trade practice.
iii. Protection of interest of investors should necessarily
include prevention of misuse of the market. Orchestrated
trades are a misuse of the market mechanism. It is playing
the market and it affects the market integrity. The trade
reversals indicate that the parties did not intend to transfer
beneficial ownership and through these orchestrated
transactions, the intention was not of regular trading, and
other investors have been excluded from participating in
these trades.
iv. Rather than allowing the market force to operate in their
natural course, the traders involving in synchronization and
reversal trading repeatedly carried out the transactions which
deprived other market players from full participation and the
pre-determined arrangement of reversal trading to book profit
Page No.# 23/97
and losses, made it clear that the parties were not trading in
the normal sense and ordinary course. In a synchronized
and reverse dealing in securities, with predetermined
arrangement to book loss or gain between pre-arranged
parties, all the aforesaid vices are attracted.
While synchronization and rapid reverse trade are being
carried out by the traders, the price discovery system itself is
affected and except the parties who have pre-fixed the price
nobody else is in the position to participate in the trade.
v. In the absence of any direct proof of meeting of minds
elsewhere in a synchronized transaction, a test should be one
of preponderance of probabilities as far as adjudication of civil
liabilities arising out of the violation of the Act or the
provisions of the Regulations are concerned.
vi. All such traders who are engaged in a fraudulent and
unfair trade practice while dealing in securities are hence
liable to be proceeded against for violation of Regulations
3(a), 4(1) and 4(2)(a) of the PFUTP Regulations.
vii. A synchronized transaction will become illegal or would
violate the Regulations if it is executed with a view to
manipulate the market or if it results in circular trading or is
dubious in nature and with a view to manipulate the price or
volume of the scrip and done with some ulterior purpose by
Page No.# 24/97
manipulation or synchronization between two parties in a
premeditated manner, resulting in drastic movement in price
within few seconds which could have been possible only
through prior understanding and to fulfill an unlawful
objective through misuse of the stock exchange.
viii. The transactions involving the same two parties within a
few seconds with huge difference in 'buy and sell' value
though there is no difference in the underlying security, can
take place with prior understanding between the two parties
and the SEBI who is the regulator of the market, can always
lift the veil of such transactions to show the non-genuineness
of such transactions.
ix. In the case before the Supreme Court, every time one of
the parties was making profit and the other was facing loss. It
seemed improbable that one of the parties namely Kasam
Holding who was facing loss in each transaction by trading
with the other party was still eager to trade with the same
repeatedly for about four days, which was not in consonance
with the market trend and human conduct.
x. In a quasi judicial proceeding before the SEBI, the
standard of proof was preponderance of probability and
further that there would be no possibility of such perfect
matching of quantity, timing, prices, etc., between the same
parties unless there was prior meeting of minds or a specific
understanding/arrangement between the parties.
Page No.# 25/97
xi. Reversal transactions are shown to be non-genuine or
fictitious creating false or misleading appearance in the
market for ulterior purpose and it is construed to be a clear
violation of the provisions of Regulations 3(a), 4(1) and 4(2)
(a) of the PFUTP Regulations.
xii. The smooth operation of the securities market and its
healthy growth and development to a large extent depends
on the quality and integrity of the market and unfair trade
practices which affect the integrity and efficiency of the
securities market and prevention of market abuse and
preservation of market integrity are the hallmarks of
securities law.
xiii. Market manipulation can occur in a variety of ways
requiring to make inquiry, investigation and to give directions,
so as to promote the orderly and healthy growth of the
securities market. Where certain unscrupulous elements are
trying to manipulate the market to serve their own interest, it
becomes imperative on the part of SEBI to intervene and to
curb further mischief and to take necessary action to maintain
public confidence in the integrity of the securities market.
xiv. Accordingly, it was concluded by the Supreme Court that in
reversal transactions, quantity, price and time and sale being
persistent in a number of such trade transactions with huge
price variations, it would be too naive to hold that the
transactions are through screen-based trading and hence
Page No.# 26/97
anonymous and such conclusion would lead to over-looking
the prior meeting of minds involving synchronization of buy
and sell order and that it was not a negotiated deal. Such
transactions are manipulative/deceptive device to create a
desired loss and/or profit and such synchronized trading
would violate the transparent norms of trading in securities.
xv. As per the propositions laid down by the Supreme Court in
Rakhi Trading(supra) we have to understand that in a
synchronized trading or reversal trading where there is a
buying and selling of the shares within a very short span of
time and one party gains while the other loses and it happens
repeatedly over a period of time, it would have to be
construed to be a manipulation and unfair trade practice
under the laws which requires enquiry, investigation and
appropriate directions to be given by the SEBI to promote
orderly and healthy growth of the securities market.
5. The respondents in the SEBI had initiated certain proceedings under
Sections 11(1), 11(4) and 11B of the SEBI Act in respect of 59 entities and in
such proceeding, an interim order dated 20.08.2015 was passed with reference
to the proceeding WTM/RKA/ISD/106/2015. In paragraph 40 of the said order, a
conclusion was arrived in the facts of that case that certain misuse of stock
options involved therein displayed not only unreal pictures of market activities,
but also defeated the basic premises of screen based electronic trading system
and price discovery mechanism by repeated execution of pre-decided reversal
trades at irrational/arbitrary prices. Accordingly, a view was formed that the
Page No.# 27/97
abuse of such financial instruments which were made available to the investors
for the purpose of protection of their investment portfolios or the reasons of
adverse price movement, cannot be tolerated and needs to be dealt with. In
view of the prevalence of the pre-decided reversal trades at irrational/arbitrary
prices in respect of 59 such entities, in paragraph 5 of the said order, the
authorities in the SEBI was also of the view that a detailed investigation of the
entire scheme employed in that case was necessary to find out the rationale
behind the entities to have indulged in such suspicious/artificial trades, including
the tracing of fund trails and the role of the intermediaries in allowing such
fictitious trades to enter the system. Accordingly, a view was formed that the
investigation to be done shall also cover the examination of any other entity
executing similar fictitious trades in the stock option segment. In the aforesaid
background, the respondents in the SEBI had undertaken a detailed
investigation and it is claimed that in course of such detailed investigation,
involvement of several other persons in such pre-decided reversal trades were
noticed from the records maintained in the system.
6. It is the stand of the respondents in the SEBI that pursuant to such
detailed investigation that was conducted, the notices impugned in this batch of
writ petitions were issued. In the instant case, the notices under Rule 4(1) of
the Securities and Exchange Board of India (Procedure for holding enquiry and
imposing penalties) Rules, 1995 (in short PR- 1995) issued by the authorities in
the respondent SEBI are being assailed.
7. Dr. Ashok Saraf, learned senior counsel for the writ petitioners by referring
to various provisions of the SEBI Act and the Rules made thereunder has raised
a contention that the procedure adopted by the respondents in the SEBI leading
Page No.# 28/97
to the impugned notices under Rule 4(1) of the PR-1995 were in
violation/aberration of the procedure prescribed in the statutes for the purpose.
8. On the other hand, Ms. M Hazarika, learned senior counsel and Mr. A
Choudhury, learned senior counsel for the respondents in the SEBI raised a
counter contention that all the procedures as required by the statues for the
purpose have been duly followed and therefore, no interference is required in
respect of the impugned notices.
9. Before adventing into the detailed submissions being raised by the rival
parties as regards the violation/compliance of the necessary procedures, we are
of the view that it would be pertinent to refer to the judgment of the Supreme
Court in T Takano Vs. Securities and Exchange Board of India and Another
reported in 2022 SCC Online SC 210 which are extracted as below:
By a judgment dated 29 September 2020, a Division Bench of the Bombay High
Court dismissed the petition instituted by the appellant under Article 226 of the
Constitution for challenging a show cause notice which was issued by the first
respondent1 alleging a violation of the provisions of the SEBI (Prohibition of Fraudulent
and Unfair Trade Practices) Regulations 2003. A petition seeking a review of the
judgment of the Division Bench was disposed of by an order dated 22 October 2020.
The appellant moved a Special Leave Petition against the judgment in the writ petition
and the order in review. The principal issue is whether an investigation report under
Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a
notice to show cause is issued.
9. The appellant claims that he received the show cause notice by email on 4
August 2020. The appellant responded to the show cause notice on 6 August 2020
stating that though he had received the forensic audit report submitted by Pipara & Co.
LLP, he had not received the report of the investigation conducted by SEBI. The
appellant sought an opportunity to inspect the following records:
"[...] including but not limited to all material on which reliance was placed Pipara & Co.
LLP for the purpose of preparing the forensic audit report, all material on which reliance
has been placed while issuing the Show Cause Notice, and on which reliance is intended
to be placed while making any adjudication on the Show Cause Notice ("material")."
Page No.# 29/97
10. By its communication dated 13 August 2020, the first respondent stated that
the investigation report is an 'internal document' which cannot be shared. The appellant
was provided time until 9 August 2020 to inspect the other documents. The first
respondent enclosed soft copies of the annexures to the forensic report and called upon
the appellant to submit a reply. The appellant reiterated the demand to inspect the
investigation report. By an email dated 4 September 2020, the appellant was informed
that the investigation report of SEBI was not relied on to issue the show cause notice
and hence, would not be provided.
12. By its judgment dated 29 September 2020, the High Court held that the
investigation report prepared under Regulation 9 of PFUTP Regulations is solely for
internal purposes. In concluding that the investigation report need not be furnished
while issuing a show cause notice, the High Court has relied on the decision of this
Court in Natwar Singh v. Director of Enforcement. In sum and substance, the High court
has held that the report does not form the basis of the show cause notice and therefore
need not be disclosed. The review petition challenging the judgment of the Division
Bench of the High Court was rejected.
24. While the respondents have submitted that only materials that have been relied
on by the Board need to be disclosed, the appellant has contended that all relevant
materials need to be disclosed. While trying to answer this issue, we are faced with a
multitude of other equally important issues. These issues, all paramount in shaping the
jurisprudence surrounding the principles of access to justice and transparency, range
from identifying the purpose and extent of disclosure required, to balancing the
conflicting claims of access to justice and grounds of public interest such as privacy,
confidentiality and market interest. An identification of the purpose of disclosure would
lead us closer identifying the extent of required disclosure. There are three key
purposes that disclosure of information serves: (i) Reliability: The possession of
information by both the parties can aid the courts in determining the truth of the
contentions. The role of the court is not restricted to interpreting the provisions of law
but also determining the veracity and truth of the allegations made before it. The court
would be able to perform this function accurately only if both parties have access to
information and possess the opportunity to address arguments and counter-arguments
related to the information; (ii) Fair Trial: Since a verdict of the Court has far reaching
repercussions on the life and liberty of an individual, it is only fair that there is a
legitimate expectation that the parties are provided all the aid in order for them to
effectively participate in the proceedings; (iii) Transparency and accountability: The
investigative agencies and the judicial institution are held accountable through
transparency and not opaqueness of proceedings. Opaqueness furthers a culture of
prejudice, bias, and impunity - principles that are antithetical to transparency. It is of
utmost importance that in a country grounded in the Rule of Law, the institutions adopt
those procedures that further the democratic principles of transparency and
accountability. The principles of fairness and transparency of adjudicatory proceedings
are the cornerstones of the principle of open justice. This is the reason why an
adjudicatory authority is required to record its reasons for every judgement or order it
passes. However, the duty to be transparent in the adjudicatory process does not begin
Page No.# 30/97
and end at providing a reasoned order. Keeping a party bereft of the information that
influenced the decision of an authority undertaking an adjudicatory function also
undermines the transparency of the judicial process. It denies the concerned party and
the public at large the ability to effectively scrutinise the decisions of the authority since
it creates an information asymmetry.
25. The purpose of disclosure of information is not merely individualistic, that is to
prevent errors in the verdict but is also towards fulfilling the larger institutional purpose
of fair trial and transparency. Since the purpose of disclosure of information targets both
the outcome (reliability) and the process (fair trial and transparency), it would be
insufficient if only the material relied on is disclosed. Such a rule of disclosure, only
holds nexus to the outcome and not the process. Therefore, as a default rule, all
relevant material must be disclosed.
32. Now in the above context, it would be material to advert to the decision of this
court in Natwar Singh (supra). The issue before the two-judge Bench of this Court was
whether a noticee who is served with a show cause notice under Rule 4(1) of the
Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000 , is
entitled to demand all the documents in the possession of the adjudicating authority
including those documents upon which no reliance has been placed while issuing a
notice to show cause as to why an enquiry should not be initiated against him. Rule 4 is
in the following terms: "4. Holding of inquiry.-- (1) For the purpose of Adjudicating
under section 13 of the Act whether any person has committed any contravention as
specified in that section of the Act, the Adjudicating Authority shall, issue a notice to
such person requiring him to show cause within such period as may be specified in the
notice (being not less than ten days from the date of service thereof) why an inquiry
should not be held against him. (2) Every notice under sub-rule (1) to any such person
shall indicate the nature of contravention alleged to have been committed by him. (3)
After considering the cause, if any, shown by such person, the Adjudicating Authority is
of the opinion that an inquiry should be held, he shall issue a notice fixing a date for
the appearance of that person either personally or through his legal practitioner or a
chartered accountant duly authorised by him."
33. Rule 4(1) of the FEMA Rules 2000 indicates that in the first instance, the
adjudicating authority has to issue a notice requiring the person to show cause why an
enquiry should not be held against him. The stage of the notice under Rule 4(1) is not
for adjudication but is for the purpose of deciding whether an enquiry should be held. If
after considering the cause which is shown, the adjudicating authority is of the opinion
that an enquiry should be held, thereupon under Rule 4(3), a notice is issued for the
appearance of the person. Sub-Rule (4) provides that on the date fixed, the
adjudicating authority shall explain the contravention alleged to have been committed
and under sub-Rule (5) an opportunity of producing documents or evidence has to be
given. Under sub-Rule (8), the adjudicating authority is empowered to impose a penalty
if it is satisfied, upon considering the evidence produced that there has been a
contravention.
Page No.# 31/97
34. Now in this backdrop, Justice B. Sudarshan Reddy speaking for the two-judge
Bench of this Court interpreted Rule 4 as follows: "23. The Rules do not provide and
empower the Adjudicating Authority to straightaway make any inquiry into allegations of
contravention against any person against whom a complaint has been received by it.
Rule 4 of the Rules mandates that for the purpose of adjudication whether any person
has committed any contravention, the Adjudicating Authority shall issue a notice to such
person requiring him to show cause as to why an inquiry should not be held against
him. It is clear from a bare reading of the rule that show cause notice to be so issued is
not for the purposes of making any adjudication into alleged contravention but only for
the purpose of deciding whether an inquiry should be held against him or not. Every
such notice is required to indicate the nature of contravention alleged to have been
committed by the person concerned. That after taking the cause, if any, shown by such
person, the Adjudicating Authority is required to form an opinion as to whether an
inquiry is required to be held into the allegations of contravention. It is only then the
real and substantial inquiry into allegations of contravention begins."
35. The above extract clearly indicates that the show cause notice under Rule 4(1)
is not for the purpose of making an adjudication into the alleged contravention but only
for deciding whether an enquiry must be conducted. The stage when an enquiry is held
is subsequent to the initial stage contemplated by Rule 4(1). During the course of the
adjudication, the fundamental principle is that material which is used against a person
must be brought to notice. As this Court observed: "30. The right to fair hearing is a
guaranteed right. Every person before an authority exercising the adjudicatory powers
has a right to know the evidence to be used against him. This principle is firmly
established and recognised by this Court in Dhakeswari Cotton Mills Ltd. v. CIT [AIR
1955 SC 65 : (1955) 1 SCR 941]. However, disclosure not necessarily involves supply of
the material. A person may be allowed to inspect the file and take notes. Whatever
mode is used, the fundamental principle remains that nothing should be used against
the person which has not been brought to his notice. If relevant material is not
disclosed to a party, there is prima facie unfairness irrespective of whether the material
in question arose before, during or after the hearing. The law is fairly well settled if
prejudicial allegations are to be made against a person, he must be given particulars of
that before hearing so that he can prepare his defence. However, there are various
exceptions to this general rule where disclosure of evidential material might inflict
serious harm on the person directly concerned or other persons or where disclosure
would be breach of confidence or might be injurious to the public interest because it
would involve the revelation of official secrets, inhibit frankness of comment and the
detection of crime, might make it impossible to obtain certain clauses of essential
information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H [[1995]
Q.B. 43 : [1994] 3 WLR 1110 : (1995) 1 All ER 479 (CA)]). 31. The concept of fairness
may require the adjudicating authority to furnish copies of those documents upon which
reliance has been placed by him to issue show-cause notice requiring the noticee to
explain as to why an inquiry under Section 16 of the Act should not be initiated. To this
extent, the principles of natural justice and concept of fairness are required to be read
into Rule 4(1) of the Rules. Fair procedure and the principles of natural justice are in-
built into the Rules. A noticee is always entitled to satisfy the adjudicating authority that
Page No.# 32/97
those very documents upon which reliance has been placed do not make out even a
prima facie case requiring any further inquiry. In such view of the matter, we hold that
all such documents relied on by the authority are required to be furnished to the noticee
enabling him to show a proper cause as to why an inquiry should not be held against
him though the Rules do not provide for the same. Such a fair reading of the provision
would not amount to supplanting the procedure laid down and would in no manner
frustrate the apparent purpose of the statute." (emphasis supplied)
36. The decision of this Court distinguishes between the initial stage under Rule 4
(1) which is only for the purpose of deciding whether an enquiry has to be held and the
subsequent stage of adjudication into the allegations of contravention. This Court
further held: "34. As noticed, a reasonable opportunity of being heard is to be provided
by the adjudicating authority in the manner prescribed for the purpose of imposing any
penalty as provided for in the Act and not at the stage where the adjudicating authority
is required merely to decide as to whether an inquiry at all be held into the matter.
Imposing of penalty after the adjudication is fraught with grave and serious
consequences and therefore, the requirement of providing a reasonable opportunity of
being heard before imposition of any such penalty is to be met. In contradistinction, the
opinion formed by the adjudicating authority whether an inquiry should be held into the
allegations made in the complaint are not fraught with such grave consequences and
therefore the minimum requirement of a showcause notice and consideration of cause
shown would meet the ends of justice. A proper hearing always include, no doubt, a fair
opportunity to those who are parties in the controversy for correcting or contradicting
anything prejudicial to their view."
37. On the facts of that case, the Court held that the enquiry against the noticee
was yet to commence: "36. In the present case, the inquiry against the noticee is yet to
commence. The evidence as may be available upon which the adjudicating authority
may place reliance, undoubtedly, is required to be furnished to the person proceeded
against at the second stage of inquiry into allegations of contravention. It is at that
stage, the adjudicating authority is not only required to give an opportunity to such
person to produce such documents as evidence as he may consider relevant to the
inquiry, but also enforce attendance of any person acquainted with the facts of the case
to give evidence or to produce any document which in its opinion may be useful for or
relevant to the subject-matter of the inquiry. It is no doubt true that natural justice
often requires the disclosure of the reports and evidence in the possession of the
deciding authority and such reports and evidence relevant to the subject-matter of the
inquiry may have to be furnished unless the scheme of the Act specifically prohibits
such disclosure."
39. The issue in Natwar Singh (supra) was whether the authority was bound to
disclose to the noticee all the documents in its possession before forming an opinion on
whether an enquiry is required to be held into the alleged contravention by the noticee.
The Court held that at that stage there was no requirement of furnishing all such
documents to the noticee since the only purpose of the notice under Rule 4(1) was for
deciding whether an enquiry should be held. Rule 4(1), in other words, was not a final
Page No.# 33/97
adjudication and consequently the requirement of a disclosure of all materials in the
possession of the authority was not attracted. At that stage, it was sufficient that only
documents that have been relied on are disclosed.
40. The High Court in the present case has palpably misconstrued the judgment in
Natwar Singh (supra). The High Court has failed to notice that the issue in that case
was whether at the stage when the authority decides under Rule 4(1) of the FEMA
Rules 2000 whether an enquiry should be held, a disclosure of all documents in the
possession of the authority to the noticee is warranted. This was answered in the
negative. This Court distinguished the stage of adjudication as distinct from the initial
stage under Rule 4(1). At the stage of adjudication, all documents useful or relevant to
the subject-matter have to be disclosed to the notice, subject to exceptions noticed by
the court.
41. On behalf of the Board, it has been urged that the investigation report is in the
nature of an inter-departmental communication and need not be disclosed. Reliance
was placed on the judgment of this Court in Krishna Chandra Tandon (supra) to buttress
the submission. However, it is clear from the judgment that even if the documents are
merely inter-departmental communications, there is a duty to disclose such documents
if they have been relied upon by the enquiry officer. A two-Judge Bench of this
observed: "16. Mr. Hardy next contended that the appellant had really no reasonable
opportunity to defend himself and in this connection he invited our attention to some of
the points connected with the enquiry with which we have now to deal. It was first
contended that inspection of relevant records and copies of documents were not
granted to him. The High Court has dealt with the matter and found that there was no
substance in the complaint. All that Mr. Hardy was able to point out to us was that the
reports received by the CIT from his departmental subordinates before the charge-sheet
was served on the appellant had not been made available to the appellant. It appears
that on complaints being received about his work the CIT had asked the Inspecting
Assistant Commissioner Shri R.N. Srivastava to make a report. He made a report. It is
obvious that the appellant was not entitled to a copy of the report made by Mr.
Srivastava or any other officer unless the enquiry officer relied on these reports. It is
very necessary for an authority which orders an enquiry to be satisfied that there are
prima facie grounds for holding a disciplinary enquiry and, therefore, before he makes
up his mind he will either himself investigate or direct his subordinates to investigate in
the matter and it is only after he receives the result of these investigations that he can
decide as to whether disciplinary action is called for or not. Therefore, these documents
of the nature of interdepartmental communications between officers preliminary to the
holding of enquiry have really no importance unless the Enquiry Officer wants to rely on
them for his conclusions. In that case it would only be right that copies of the same
should be given to the delinquent. It is not the case here that either the Enquiry Officer
or the CIT relied on the report of Shri R.N. Srivastava or any other officer for his finding
against the appellant. Therefore, there is no substance in this submission." (emphasis
supplied)
42. However, merely because the investigating authority has denied placing reliance
Page No.# 34/97
on the report would not mean that such material cannot be disclosed to the noticee.
The court may look into the relevance of the material to the proposed action and its
nexus to the stage of adjudication. Simply put, this entails evaluating whether the
material in all reasonable probability would influence the decision of the authority. The
above position was laid down by this Court in Khudiram Das v. State of West Bengal .
Ruling in the context of preventive detention, a four-judge Bench of this Court
observed: "15. Now, the proposition can hardly be disputed that if there is before the
District Magistrate material against the detenu which is of a highly damaging character
and having nexus and relevancy with the object of detention, and proximity with the
time when the subjective satisfaction forming the basis of the detention order was
arrived at, it would be legitimate for the Court to infer that such material must have
influenced the District Magistrate in arriving at his subjective satisfaction and in such a
case the Court would refuse to accept the bald statement of the District Magistrate that
he did not take such material into account and excluded it from consideration. It is
elementary that the human mind does not function in compartments. When it receives
impressions from different sources, it is the totality of the impressions which goes into
the making of the decision and it is not possible to analyse and dissect the impressions
and predicate which impressions went into the making of the decision and which did
not. Nor is it an easy exercise to erase the impression created by particular
circumstances so as to exclude the influence of such impression in the decision making
process. Therefore, in a case where the material before the District Magistrate is of a
character which would in all reasonable probability be likely to influence the decision of
any reasonable human being, the Court would be most reluctant to accept the ipse dixit
of the District Magistrate that he was not so influenced and a fortiori, if such material is
not disclosed to the detenu, the order of detention would be vitiated, both on the
ground that all the basic facts and materials which influenced the subjective satisfaction
of the District Magistrate were not communicated to the detenu as also on the ground
that the detenu was denied an opportunity of making an effective representation
against the order of detention." (emphasis supplied)
43. The principle that the material that may influence the decision of a quasijudicial
authority to award a penalty must be disclosed to a delinquent was affirmed by this
Court in Union of India v. Mohd. Ramzan Khan . In that case, this Court laid down that a
delinquent officer is entitled to receive the report of the enquiry officer which has been
furnished to the disciplinary authority. This principle was affirmed by a Constitution
Bench of this Court in Managing Director, ECIL, Hyderabad v. B. Karunakar . The
rationale behind the right to receive the report of the enquiry officer was explained by
this Court in the following terms: "26. The reason why the right to receive the report of
the enquiry officer is considered an essential part of the reasonable opportunity at the
first stage and also a principle of natural justice is that the findings recorded by the
enquiry officer form an important material before the disciplinary authority which along
with the evidence is taken into consideration by it to come to its conclusions. It is
difficult to say in advance, to what extent the said findings including the punishment, if
any, recommended in the report would influence the disciplinary authority while drawing
its conclusions. The findings further might have been recorded without considering the
relevant evidence on record, or by misconstruing it or unsupported by it. If such a
Page No.# 35/97
finding is to be one of the documents to be considered by the disciplinary authority, the
principles of natural justice require that the employee should have a fair opportunity to
meet, explain and controvert it before he is condemned. It is negation of the tenets of
justice and a denial of fair opportunity to the employee to consider the findings
recorded by a third party like the enquiry officer without giving the employee an
opportunity to reply to it. Although it is true that the disciplinary authority is supposed
to arrive at its own findings on the basis of the evidence recorded in the inquiry, it is
also equally true that the disciplinary authority takes into consideration the findings
recorded by the enquiry officer along with the evidence on record. In the circumstances,
the findings of the enquiry officer do constitute an important material before the
disciplinary authority which is likely to influence its conclusions. If the enquiry officer
were only to record the evidence and forward the same to the disciplinary authority,
that would not constitute any additional material before the disciplinary authority of
which the delinquent employee has no knowledge. However, when the enquiry officer
goes further and records his findings, as stated above, which may or may not be based
on the evidence on record or are contrary to the same or in ignorance of it, such
findings are an additional material unknown to the employee but are taken into
consideration by the disciplinary authority while arriving at its conclusions. Both the
dictates of the reasonable opportunity as well as the principles of natural justice,
therefore, require that before the disciplinary authority comes to its own conclusions,
the delinquent employee should have an opportunity to reply to the enquiry officer's
findings. The disciplinary authority is then required to consider the evidence, the report
of the enquiry officer and the representation of the employee against it." (emphasis
supplied)
44. For the purpose of determining if prejudice has been caused by a
nondisclosure, this Court held that the report must be furnished to the aggrieved person
and the employee must shoulder the burden of proving on facts that his case was
prejudiced - either the outcome or the punishment - by the nondisclosure:
"30.[v]] The next question to be answered is what is the effect on the order of
punishment when the report of the enquiry officer is not furnished to the employee and
what relief should be granted to him in such cases. The answer to this question has to
be relative to the punishment awarded. When the employee is dismissed or removed
from service and the inquiry is set aside because the report is not furnished to him, in
some cases the non-furnishing of the report may have prejudiced him gravely while in
other cases it may have made no difference to the ultimate punishment awarded to
him. Hence to direct reinstatement of the employee with back-wages in all cases is to
reduce the rules of justice to a mechanical ritual. The theory of reasonable opportunity
and the principles of natural justice have been evolved to uphold the rule of law and to
assist the individual to vindicate his just rights. They are not incantations to be invoked
nor rites to be performed on all and sundry occasions. Whether in fact, prejudice has
been caused to the employee or not on account of the denial to him of the report, has
to be considered on the facts and circumstances of each case. Where, therefore, even
after the furnishing of the report, no different consequence would have followed, it
would be a perversion of justice to permit the employee to resume duty and to get all
Page No.# 36/97
the consequential benefits. It amounts to rewarding the dishonest and the guilty and
thus to stretching the concept of justice to illogical and exasperating limits. It amounts
to an "unnatural expansion of natural justice" which in itself is antithetical to justice.
31. Hence, in all cases where the enquiry officer's report is not furnished to the
delinquent employee in the disciplinary proceedings, the Courts and Tribunals should
cause the copy of the report to be furnished to the aggrieved employee if he has not
already secured it before coming to the Court/Tribunal and give the employee an
opportunity to show how his or her case was prejudiced because of the non-supply of
the report. If after hearing the parties, the Court/Tribunal comes to the conclusion that
the non-supply of the report would have made no difference to the ultimate findings
and the punishment given, the Court/Tribunal should not interfere with the order of
punishment. The Court/Tribunal should not mechanically set aside the order of
punishment on the ground that the report was not furnished as is regrettably being
done at present."
48. The following principles emerge from the above discussion: (i) A quasi-judicial
authority has a duty to disclose the material that has been relied upon at the stage of
adjudication; and (ii) An ipse dixit of the authority that it has not relied on certain
material would not exempt it of its liability to disclose such material if it is relevant to
and has a nexus to the action that is taken by the authority. In all reasonable
probability, such material would have influenced the decision reached by the authority.
49. Thus, the actual test is whether the material that is required to be disclosed is
relevant for purpose of adjudication. If it is, then the principles of natural justice require
its due disclosure.
50. The investigation report forms the material considering which, the Board arrives
at a satisfaction regarding whether there has been a violation of the regulations. If it is
satisfied that there has been a violation of the regulations, after giving a reasonable
opportunity to be heard, the Board is empowered to take action according to
Regulations 11 and 12. It would not suffice for the first respondent to claim as it did
before the High Court that it did not rely on the investigation report. The ipse dixit of
the authority that it was not influenced by certain material would not suffice. If the
material is relevant to and has a nexus to the stage at which satisfaction is reached by
an authority, such material would be deemed to be important for the purpose of
adjudication. The written submissions of the Board clearly state that the findings of the
investigation report are important for the authority to decide whether there are any
prima facie grounds to initiate enforcement proceedings under Regulation 10. The
relevant extract of the submissions is reproduced below: "It is submitted that Regulation
9 of PFUTP Regulations require the Investigating Authority to submit the report after
completion of the investigation to the appointing authority. However, the provision does
not require furnishing of the report to the Noticee. Further, the investigation report is
merely a culmination of documents which the investigating authority relies on/come
across while conducting the investigation and is not a piece of evidence in itself. It is a
report which is necessary for an authority, who orders an investigation, to decide as to
Page No.# 37/97
whether there are prima-facie grounds to initiate enforcement proceedings or not.
Therefore, before the authority makes up his mind, he will either himself investigate or
direct his subordinates to investigate in the matter. It is only after the authority receives
the report of the investigation that he can decide as to whether action is called for or
not. Therefore, the investigation report is in the nature of inter-departmental
communications between officers investigating the matter and authority who can decide
any enforcement action against the entity. ..... The findings recorded in the investigation
report against the Noticee are brought out in the SCN and the copies of all the
documents that are relied upon by SEBI, while issuing the SCN are always shared with
the concerned. The present case is no exception." (emphasis supplied)
51. The above extracts indicate that the findings of the investigation report are
relevant for the Board to arrive at the satisfaction on whether the Regulations have
been violated. Even if it is assumed that the report is an inter-departmental
communication, as held in Krishna Chandra Tandon (supra), there is a duty to disclose
such report if it is relevant for the satisfaction of the enforcement authority for the
determination of the alleged violation.
52. In Khudiram Das (supra), a four-Judge Bench of this Court laid down a
twoprong test for the standard of 'relevancy'; firstly, the material must have nexus with
the order and secondly, the material might have influenced the decision of the authority.
A Constitution Bench of this Court in Karunakar (supra) held that the nondisclosure of
the relevant information is not in itself sufficient to warrant the setting aside of the
order of punishment. It was held that in order to set aside the order of punishment, the
aggrieved person must be able prove that prejudice has been caused to him due to
non-disclosure. To prove prejudice, he must prove that had the material been disclosed
to him the outcome or the punishment would have been different. The test for the
extent of disclosure and the corresponding remedy for non-disclosure is dependent on
the objective that the disclosure seeks to achieve. Therefore, the impact of non-
disclosure on the reliability of the verdict must also be determined vis-à-vis, the overall
fairness of the proceeding. While determining the reliability of the verdict and
punishment, the court must also look into the possible uses of the undisclosed
information for purposes ancillary to the outcome, but that which might have impacted
the verdict.
58. The appellant did not sufficiently discharge his burden by proving that the
nondisclosure of the above information would affect his ability to defend himself.
However, merely because a few portions of the enquiry report involve information on
thirdparties or confidential information on the securities market, the respondent does
not have a right to withhold the disclosure of the relevant portions of the report. The
first respondent can only claim non-disclosure of those sections of the report which deal
with third party personal information and strategic information on the functioning of the
securities market.
Page No.# 38/97
59. Therefore, the Board should determine such parts of the investigation report
under Regulation 9 which have a bearing on the action which is proposed to be taken
against the person to whom the notice to show cause is issued and disclose the same.
It can redact information that impinges on the privacy of third parties. It cannot
exercise unfettered discretion in redacting information. On the other hand, such parts of
the report which are necessary for the appellant to defend his case against the action
proposed to be taken against him need to be disclosed. It is needless to say that the
investigating authority is duty-bound to disclose such parts of the report to the noticee
in good faith. If the investigating authority attempts to circumvent its duty by revealing
minimal information, to the prejudice of the appellant, it will be in violation of the
principles of natural justice. The court/appellate forum in an appropriate case will be
empowered to call for the investigation report and determine if the duty to disclose has
been effectively complied with.
60. The notice to show cause issued to the appellant is for violation of the
provisions of the SEBI Act, SCRA and PFUTP Regulations. The show cause notice has
specifically referred to what was revealed during the course of the investigation and has
invoked the provisions of the PFUTP Regulations in the allegations against the appellant.
Para 8(2) of the show cause notice is extracted below: "(II) It is alleged that Mr. T.
Takano, during whose tenure the business transactions with FDSL started by virtue of
his position as MD & CEO of Ricoh during FY 2012-13 to FY 2014-15, was actively
involved in committing the fraud and had knowingly restricted the mandate given to
PwC to six month so as to succeed in hiding his role in the commission of fraud of
publishing untrue financial statement of Ricoh which resulted in misleading the investors
about the financial performance of the company and thereby resulted in inducement of
traders in the scrip. The said acts of the Noticee no. 2 are alleged to be violation of
regulations 3(b), (c), (d), 4 (1) and 4(2)(e), (f), (k) and (r) of SEBI (PFUTP)
Regulations, 2003 and clause 49 (V) read with 41(II)(a) of the erstwhile Listing
Agreement."
62. The conclusions are summarised below: (i) The appellant has a right to
disclosure of the material relevant to the proceedings initiated against him. A deviation
from the general rule of disclosure of relevant information was made in Natwar Singh
(supra) based on the stage of the proceedings. It is sufficient to disclose the materials
relied on if it is for the purpose of issuing a show cause notice for deciding whether to
initiate an inquiry. However, all information that is relevant to the proceedings must be
disclosed in adjudication proceedings; (ii) The Board under Regulation 10 considers the
investigation report submitted by the Investigating Authority under Regulation 9, and if
it is satisfied with the allegations, it could issue punitive measures under Regulations 11
and 12. Therefore, the investigation report is not merely an internal document. In any
event, the language of Regulation 10 makes it clear that the Board forms an opinion
regarding the violation of Regulations after considering the investigation report prepared
Page No.# 39/97
under Regulation 9; (iii) The disclosure of material serves a three-fold purpose of
decreasing the error in the verdict, protecting the fairness of the proceedings, and
enhancing the transparency of the investigatory bodies and judicial institutions; (iv) A
focus on the institutional impact of suppression of material prioritises the process as
opposed to the outcome. The direction of the Constitution Bench of this Court in
Karunakar (supra) that the non-disclosure of relevant information would render the
order of punishment void only if the aggrieved person is able to prove that prejudice
has been caused to him due to non-disclosure is founded both on the outcome and the
process; (v) The right to disclosure is not absolute. The disclosure of information may
affect other third-party interests and the stability and orderly functioning of the
securities market. The respondent should prima facie establish that the disclosure of the
report would affect third-party rights and the stability and orderly functioning of the
securities market. The onus then shifts to the appellant to prove that the information is
necessary to defend his case appropriately; and (vi) Where some portions of the
enquiry report involve information on third-parties or confidential information on the
securities market, the respondent cannot for that reason assert a privilege against
disclosing any part of the report. The respondents can withhold disclosure of those
sections of the report which deal with third-party personal information and strategic
information bearing upon the stable and orderly functioning of the securities market.
63. The Board shall be duty-bound to provide copies of such parts of the report
which concern the specific allegations which have been levelled against the appellant in
the notice to show cause. However, this does not entitle the appellant to receive
sensitive information regarding third parties and unrelated transactions that may form
part of the investigation report.
64. During the course of the hearing, the Court has been apprised of the fact that
though the hearing before the designated officer has been held, no orders have been
passed in deference to the pendency of the present proceedings. Having regard to the
conclusion which has been arrived at above, we direct that after a due disclosure is
made to the appellant in terms as noted above, a reasonable opportunity shall be
granted to the appellant of being heard with reference to the matters of disclosure in
compliance with the principles of natural justice before a final decision is arrived at."
10. In the matter before the Supreme Court in T Takano (supra), the Division
Bench of the Bombay High Court had dismissed a petition under Article 226 of
the Constitution assailing a show cause notice issued by the authorities under
the SEBI under the PFUTP-2003 where the principle issue raised was whether
an investigation report under Regulation 9 of the PFUTP-2003 must be disclosed
to the person to whom a notice of show cause is issued.
Page No.# 40/97
11. Regulation 9 of the PFUTP-2003 is in respect of the submission of a report
of investigation done in exercise of the powers under Regulation 5 of the said
Regulations. Regulation 5 of the PFUTP-2003 provides for an investigation,
where the Board, the Chairman, the member or the Executive Director has
reasonable ground to believe that-- (a) the transactions in securities are being
dealt with in a manner detrimental to the investors or the securities market in
violation of the regulations; (b) any intermediary or any person associated with
the securities market has violated any of the provisions of the SEBI Act of 1992
or the Rules or the Regulations, framed thereunder and further to report
thereon to the Board in the manner provided under Section 11C of the SEBI Act.
12. Primarily it appears that the provisions of Section 11C of the SEBI Act of
1992 and the provisions of Regulations 5 of the PFUTP-2003 are perimateria.
13. From paragraph 9 of the judgment of the Supreme Court in T
Takano(supra) it transpires that the allegation raised by the petitioner therein
was that they were not provided with the report of the investigation conducted
by the SEBI under Regulations 9 of the PFUTP-2003. In paragraph 4 thereof, it
was taken note of that prima facie the provision of Sections 12 A(a), 12A(b) and
12A(c) of the SEBI Act, read with Regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e),
4(2)(k) and 4(2)(r) of the PFUTP-2003 were violated. Accordingly, certain
directions were issued under Sections 11(1), 11(4) and 11B of the SEBI Act read
with Regulation 11 of the PFUTP Regulations.
14. The respondent SEBI took a stand that the investigation report was an
internal document which cannot be shared and further that the investigation
report was not relied upon for the purpose of the show cause notice that was
issued.
Page No.# 41/97
15. The Bombay High Court by its judgment dated 29.09.2020 had held that
the investigation report under Regulation 9 of the PFUTP-2003 was solely for
internal purpose and accordingly dismissed the writ petitions. Upon such
dismissal, the appeal was carried before the Supreme Court.
16. On the issue as to whether there is a requirement of a disclosure of the
investigation report, the Supreme Court in paragraphs 24 & 25 of its judgment
was of the view that in shaping the jurisprudence surrounding the principles of
access to justice and transparency as well as by balancing the conflicting claims
of access to justice and the grounds of public interest such as privacy,
confidentiality and market interest, the purpose of disclosure of information is
not merely individualistic, that is to prevent error in the verdict, but is also
towards fulfilling the larger institutional purpose of fair trial and transparency.
The Supreme Court was also of the view that as the purpose of disclosure of
information targets both outcome i.e., reliability and the process i.e., fair trial
and transparency, it would be insufficient if only material relied on is disclosed.
Such Rule of disclosure of only the material relied upon only holds the nexus to
the outcome and not the process and, therefore, as a default Rule, all relevant
materials must be disclosed.
The Supreme Court also provided that as the purpose of disclosure of
information is not merely individualistic i.e. to prevent errors in the verdict but
also for fulfilling the larger institutional purpose of fair trial and transparency,
therefore, all relevant materials must be disclosed.
17. In paragraph 32, the Supreme Court referred to Rule 4(1) of the Foreign
Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (for
short 'the FEMA Rules, 2000') which is pari materia to Rule 4(1) of the PR-1995.
Page No.# 42/97
In respect of Rule 4(1) of the FEMA Rules, 2000, the Supreme Court observed
that the stage of the notice under Rule 4(1) is not for adjudication, but it is for
the purpose of deciding whether an enquiry should be held. By referring to the
interpretation of Rule 4(1) of the FEMA Rules, 2000 in Natwar Singh (supra),
wherein it was held that the adjudicating authority is required to form an
opinion as to whether an enquiry is required to be held into the allegations of
contravention and it is only thereafter the substantial enquiry into the
allegations of contravention begins. Accordingly, in paragraph 35, it was held
that the show cause notice under Rule 4(1) is not for the purpose for making
adjudication into the alleged contravention but only for deciding whether an
enquiry must be conducted. The stage when an enquiry is held is subsequent to
the initial stage contemplated under Rule 4(1). Accordingly, by referring to the
interpretation of Rule 4(1) of the FEMA Rules, 2000, wherein it was held that
the right to fair hearing is a guaranteed right and if relevant material is not
disclosed to a party, there is prima facie unfairness irrespective of whether the
material in question arose before, during or after the hearing. And fair
procedure and principles of natural justice are enabled into the rules and a
noticee is always entitled to satisfy the adjudicating authority that those very
documents upon which relevance has been placed do not make out even a
prima facie case requiring any further enquiry. The Supreme Court in paragraph
36 in its judgment in T. Takano (supra) held that the Court distinguishes
between the initial stage under Rule 4(1) which is only for the purpose of
deciding whether an enquiry has to be held and the subsequent stage of
adjudication is into the allegations of contravention. Accordingly, while
interpreting the provision from Rule 4(1) of the PR-1995 Rules, a clear
distinction is to be made between the two stages i.e. the first stage where the
Page No.# 43/97
notice concerned would be on the question as to whether an enquiry at all has
to be made and if the procedure results in a conclusion that an enquiry is
required, in the subsequent stage the adjudicating authorities would go into the
veracity of the actual allegations of contravention that may have been raised.
18. In the conspectus of the aforementioned propositions laid down by the
Supreme Court, Dr. Ashok Saraf, learned senior counsel for the petitioners
assails the impugned show cause notices which are the subject matter of the
present writ petitions by raising the following contentions:
(i). By referring to the provisions of Section 11C of the SEBI Act contends
that the Board in order to embark upon an investigation under Section 11C
would have to satisfy the condition precedent of having a reasonable ground to
believe that the transactions in securities are being dealt in a manner
detrimental to the investors or the securities market or that any intermediaries
or any person associated with the securities market had violated any of the
provisions of the SEBI Act or the Rules or Regulations or any directions issued
by the Board.
(ii). By referring to Rule 4 of the PR-1995, it is the contention that the
expression 'any person' contained therein would have to be understood to be a
particular person to whom the notice under Section 4(1) had been issued and
therefore, the requirement of the opinion to be formed by the Board under Rule
3 would have to be in respect of such particular person to whom the notice had
been issued and therefore, there would be a requirement of the respondents in
the SEBI to show it from the records that the opinion formed under Rule 3 are
in existence in respect of the individual petitioner noticees.
Page No.# 44/97
(iii). The report of the investigation under Section 11(C) of the SEBI Act
and the individual opinions formed by the Board in respect of the petitioner
noticees are required to be provided to the petitioner noticees along with the
notice under Rule 4(1) of the PR-1995.
(iv). The adjudicating officers appointed by the Board as provided under
Section 15-I read with Rule 3 of the PR-1995 were not appointed by following
the procedure of appointment and persons who are ineligible to be appointed as
adjudicating officers have been appointed and that the adjudicating officers who
were appointed are not the respective Division Chiefs.
(v). By referring to the impugned notices under Rule 4(1) of the PR-1995,
Dr. Ashok Saraf, learned senior counsel for the petitioners point out that the
notices required the noticees to show cause as to why an enquiry should not be
held against them and also, as to why the penalties provided under Section
15HA of the SEBI Act should not be imposed upon them and further some of
the notices also provided that the noticees may avail the benefit of a conciliation
that are also available. Accordingly, it is the submission that the scheme of Rule
4 of PR-1995 splits the proceedings into two separate and distinct stages i.e. the
first stage being the show cause notice as to why an enquiry should not be held
and if the conclusion arrived at the first stage is that an enquiry is required to
be held, the second stage would be for imposing the punishment. But in the
notices impugned both the stages have been combined to make it a composite
notice to show cause as to why the enquiry should not be held as well as, as
regards the punishment that may be imposed. Further in some of the notices,
the noticees were also required to avail the benefit of the conciliation process to
accept a reduced punishment, which according to the learned senior counsel
Page No.# 45/97
could have been made only after the punishments have been imposed.
19. Ms. M Hazarika, learned senior counsel and Mr. A Choudhury, learned
senior counsel for the respondent SEBI on the other hand raise counter
contentions that the report of the investigation under section 11C of the SEBI
Act would be an investigation report for the internal purpose of the authorities
of the SEBI, and, therefore, there is no requirement under the law to provide a
copy thereof to the petitioner noticees. It is contended that the investigation
under section 11C being a wide based investigation to arrive at a satisfaction
whether the provisions of the SEBI Act, Rules and Regulations have been
violated in respect of the tradings in stocks and securities by using the SEBI
platform, the entire report if provided to the individual petitioner noticees, would
adversely affect the process initiated by the authorities under the SEBI and
materials collected in respect of other entities would also be available in the
public domain.
20. With regard to the contention of the petitioners that in order to initiate an
investigation under section 11C, 'reasonable grounds to believe' must exist to
initiate such investigation, it is the contention of Mr. A Choudhury, learned senior
counsel that the order dated 20.08.2015 of the SEBI in WTM/RKA/ISD/106/2015
itself contains sufficient materials leading to the reasonable ground to believe to
initiate the investigation under section 11C.
21. With regard to the contention that persons ineligible have also been
appointed as adjudicating officers, meaning thereby that the persons so
appointed are not the respective Division Chiefs, it is the submission of Ms. M
Hazarika, learned senior counsel for the authorities in the SEBI that all such
persons who were appointed as adjudicating officers are the respective Division
Page No.# 46/97
Chiefs of the Divisions from where the individual notices were issued and further
the records would show that the required procedure for appointing the
adjudicating officers have been duly followed.
22. With regard to the contention that the opinion to be formed under Rule 3
of the PR-1995 would have to be individual opinions against the respective
noticees, it is the submission of Ms. M Hazarika, learned senior counsel for the
authorities in the SEBI that materials implicating the individual noticees are
available on record and the individual opinions do exist and are formed on the
basis of such materials.
23. With regard to the contention that the impugned notices under Rule 4(1)
are composite notices for the purpose of arriving at a conclusion as to whether
an enquiry is to be held and as to what punishment is to be imposed, it is the
submission of Ms. M Hazarika, learned senior counsel that the contents of the
notices are expressive to enable the noticees to know as to what are the
allegations against them and accordingly they can respond to the same and as
such, no prejudice had been caused to either of the petitioner noticees. A
further contention is raised that the writ petitions assailing a show cause notice
itself is not maintainable inasmuch as, the law provides that it would be more
appropriate for the noticees to respond to the notices and make whatever
submission they intend to make against the allegations provided therein and
therefore, seeking an interference with the notices in a petition under Article
226 of the Constitution of India would be not maintainable.
24. With regard to the contention that offering the petitioner noticees an
opportunity to participate in a conciliation proceeding is an attempt to provide
the opportunity to the noticees to accept a lesser punishment without going
Page No.# 47/97
through the rigours of participating in an proceeding under Rule 4 and
therefore, such provisions incorporated in the show cause notices would not
vitiate the procedure adopted.
25. In the premises of the contentions and counter contentions raised as
indicated above, the following questions for determination would arise in the
present writ petitions.
(i) Whether the 'grounds to believe' which is a condition precedent of
initiating an investigation under Section 11C did exist in the facts and
circumstance of the present case.
(ii) Whether the opinion to be formed under Rule 3 of the PR-1995 is an
individual opinion in respect of the person specific against whom the
notices under Rule 4(1) are to be issued and if yes, whether any such
individual opinion had been formed.
(iii) Whether a notice under Rule 4 of the PR-1995 can be assailed in a
proceeding under Article 226 of the Constitution of India.
(iv) Whether the adjudicating officers appointed for the purpose are the
respective Division Chiefs.
(v) Whether the appointment of an officer not below the rank of a
Division Chief to be an adjudicating officer was done in accordance with
the requirement under Section 15-I of the SEBI Act, 1992.
(vi) Whether the individual opinions formed against the person specific
with reference to Rule 3 of the PR-1995 are required to be provided to the
noticees and in the present case, whether it had been provided.
(vii) Whether a notice under Rule 4(1) of the PR-1995 can be a composite
notice requiring the noticee to respond as to whether an enquiry should
Page No.# 48/97
be held under Rule 4(1) and also requiring the noticee to respond under
Rule 4(3) as to why any of the penalties contemplated under section 15A
to Section 15HB should not be imposed.
Whether the 'grounds to believe' which is a condition precedent of
initiating an investigation under section 11C did exist in the facts and
circumstance of the present case:
26. Dr. Ashok Saraf learned senior counsel refers to the pronouncement of the
Supreme Court rendered in the case of Madhya Pradesh Industries Ltd. Vs.
Income-Tax Officer reported in (1965) 57 ITR 637, wherein in paragraph 7 it had
been held that in the absence of reasons to believe, the Income Tax Officer has
no jurisdiction to issue a notice under Section 34 of the Income Tax Act.
Accordingly, the contention raised is that in order to embark upon an
investigation under Section 11C of the SEBI Act, if the Board does not have
reasonable grounds to believe that the transactions in securities are being dealt
with in a manner detrimental to the investors or the securities market or that
any intermediaries or any person associated with the securities market had
violated any of the provisions of the SEBI Act or the Rules or Regulations, or any
directions made thereunder, the Board would have no jurisdiction to embark
upon such investigation.
27. By referring to a pronouncement of the Supreme Court in Madhya Pradesh
Industries Ltd. Vs. Income Tax Officer, Nagpur reported in (1970) 2 SCC 32, in
paragraph 12 it is contended that the expression 'has reason to believe'
appearing in Section 34(1)(a) of the Income Tax Act does not mean a purely
subjective satisfaction of the Income Tax Officer but predicates the existence of
Page No.# 49/97
reasons on which such belief has to be founded and that it cannot be founded
on a mere suspicion and must be based on evidence, although the question of
adequacy of evidence would be immaterial at that stage. By referring to the said
proposition, it is the contention of the learned senior counsel that for the Board
to embark upon an investigation under Section 11C of the SEBI Act, there is a
requirement of existence of reason to believe which again should not be purely
a subjective satisfaction of the Board but upon existence of some material which
may lead to the satisfaction of such reason to believe. Accordingly, the
contention raised is that it will be for the respondent Board to satisfy from the
records that materials did exist for the Board to have a reasonable ground to
believe that the transactions in securities are being dealt in a manner
detrimental to the investors or the securities market or any intermediary or any
person associated with a securities market had violated any of the provisions of
the Act or Rules or Regulations. Dr. Ashok Saraf, learned senior counsel by
referring to the propositions laid down by the Supreme Court in paragraph 4 in
the case of Chhugamal Rajpal Vs. S.P. Chaliha & Ors. reported in (1971) 1 SCC
453 and paragraph 6 in the case of S.Ganga Saran and Sons Pvt. Ltd. Calcutta
Vs. Income Tax Officer & Ors. reported in (1981) 3 SCC 143, contends that the
expression 'reason to believe' is stronger than the expression 'satisfied' and it
must have a rational nexus between the believe and the materials available.
28. Per contra, both Mr. A Choudhury, learned senior counsel and Ms. M.
Hazarika, learned senior counsel appearing for the respondent SEBI in different
writ petitions, in response to the contention of Dr. Ashok Saraf learned senior
counsel for the petitioners as regards the interpretation and requirements of
Section 11C of the SEBI Act, 1992 as well as, as to whether any materials were
available before the respondent SEBI to embark upon an investigation under
Page No.# 50/97
Section 11C have raised a counter contention that in the instant case, the
authorities in the SEBI while enquiring certain regulation matters had noticed
that large scale tradings were taking place, whose nature thereof would indicate
that such tradings amounted to reversal trades. For the purpose, reference is
made to an ex-parte ad-interim order dated 20.08.2005 bearing No.
WTM/RKA/ISD/106/2015, which was passed by the authorities in the SEBI
under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 in the matter of
illiquid stock options.
29. Paragraph 1 of the aforesaid ex-parte ad-interim order provides that as a
part of the ongoing surveillance, the SEBI came across several
instances/internal alerts wherein a set of entities were consistently making loss
by their trading in option on individual stocks which are listed on the Bombay
Stock Exchange. Trading of such entities appeared to the SEBI to be abnormal
because they were consistently seen making significant loss by their trades,
which were reversed with the same counterparts either on the same day or the
next day. As per the analysis of the stock options segment of the Bombay Stock
Exchange (BSE) for the period 01.04.2014 to 31.03.2015, it was observed that
several entities were consistently making significant loss and others were
consistently making significant profits by executing reversal trades in stock
options on the BSE. Although the enquiries related to the ex-parte ad-interim
order dated 20.08.2015 were in respect of certain other specific entities, but in
paragraph 41 thereof, the authorities under the SEBI by considering the nature
of the trades that were enquired into, arrived at a view that a detail
investigation of the entire scheme employed in the case was necessary to find
out the rational of such suspicious/artificial trades, including tracing the fund
trail and the role of intermediaries in allowing such fictitious trades to enter the
Page No.# 51/97
system. The said aspect is available at paragraph 41 of the ad-interim order
dated 20.08.2015, which is extracted as below:-
"41. While ascertaining the exact reasons for such abnormal behavior by
each of the loss-making/profit-making entities remains the subject matter of
detailed investigation, maintaining market integrity and protecting interest of
investors is my main concern right now. In my view, a detailed investigation of
the entire scheme employed in this case is necessary to find out the rationale of
entities to indulge in such suspicious/artificial trades including tracing the fund
trail and the role of intermediaries in allowing such fictitious trades to enter the
system. The investigation shall also cover the examination of any other entity
executing similar fictitious trades in the stock options segment."
30. By referring to the aforesaid view formed in paragraph 41 of the ad-
interim order dated 20.08.2015, it is the contention of Mr. A Choudhury, learned
senior counsel for the respondents in the SEBI that in course of the enquiry
involved in the said order of 20.08.2015, the authorities in the SEBI came across
several such transactions involving reversal trades or trading in illiquid stocks.
The materials that were available before the authorities in the SEBI pursuant to
the said enquiry in connection with the ad-interim order dated 20.08.2015 is the
basis of the SEBI authorities to arrive at a conclusion that the reasonable
ground to believe exist in the instant case, so as to require the authorities in the
SEBI to initiate an investigation under Section 11(C) of the SEBI Act, 1992.
31. We have considered the rival contentions raised on the issue as to
whether the requirements of initiating an investigation under Section 11C of the
SEBI Act, 1992 as well as the required conditions precedent thereof, did exist in
the facts and circumstances of the present case.
32. It is the submission of Dr. Ashok Saraf, learned senior counsel for the
petitioners by referring to the pronouncement of the Supreme Court in Madhya
Page No.# 52/97
Pradesh Industries Limited (supra), which is reported in (1965) 57 ITR 637,
(referred as Madhya Pradesh Industries Limited-I) and Madhya Pradesh
Industries Limited (supra), reported in (1970) 2 SCC 32, (referred as Madhya
Pradesh Industries Limited-II) that the expression 'has a reasonable ground to
believe' would have the same meaning as the expression 'has reason to believe'
appearing in Section 34(1)(a) of the Income Tax Act, 1922 as amended. In
Madhya Pradesh Industries Limited-I (supra), in paragraph-7, it had been held
that in the absence of any reason to believe, the income tax authorities would
have no jurisdiction to issue a notice under Section 34 of the Income Tax Act.
Accordingly, it is the submission that in the instant case, there were no materials
before the authorities of the SEBI to have a reasonable ground to believe that
there was a requirement to initiate an investigation under Section 11C in respect
of reversal trades having taken place in illiquid stocks. The relevant portions of
paragraphs 7, 8, 9 and 10 of Madhya Pradesh Industries Limited-I (supra) are
extracted as below:-
"7. This Court in Calcutta Discount Company Ltd. v. Income Tax Officer,
Companies District, I [(1961) 2 SCR 241] observed that the Income Tax Officer
has power to issue a notice under Section 34(1)(a) only if he has reason to
believe (1) that income, profits or gains had been under-assessed and (2) that
such under-assessment was due to non-disclosure of material facts by the
assessee, and that where facts which invest the Income Tax Officer with
jurisdiction to issue the notice do not exist, the assessee may apply to the High
Court under Article 226 of the Constitution for appropriate relief. The Company
has asserted that the facts which attract the jurisdiction of the Income Tax
Officer to issue a notice under Section 34 did not exist, and the impugned
notice was issued in colourable exercise of power.
.................. The High Court must in each case consider, whether the act or
omission complained of has resulted or is likely to result in grave injustice, and
whether the party approaching it has another adequate remedy which is equally
efficacious, whether he has approached the Court without acquiescence, and
without undue delay, whether the problem posed raises complicated questions
Page No.# 53/97
be inappropriate for the High Court to determine, whether the aggrieved party
has been guilty of misrepresentation or suppression of material facts, and
whether notwithstanding the apparent breach it would be inequitable to grant
relief.
8. It is unfortunate that the learned Judges of the High Court have not
indicated the considerations which persuaded them to reject the petition in
limine. There can be no doubt that the averments made in the petition by the
Company if proved may justify the issue of the writs claimed, for it is or the
case of the Company that the facts which alone invest the Income Tax Officer
with jurisdiction to issue the impugned notice did not exist. The Company has
also submitted that the power under Section 34 was sought to be utilised as a
mere cloak or pretence for making a "fishing enquiry or investigation with the
object of reviewing the previous order". Whether the disclosure made by the
Company was full and true in respect of all material facts necessary for the
assessment cannot obviously be determined in the absence of an affidavit by
the Income Tax Officer. Again the plea that the impugned notice was issued
with a collateral object could not be rejected without an enquiry.
12. Jurisdiction of the Income Tax Officer obviously arises when he has reason
to believe that by reason of omission or failure on the part of an assessee to
disclose fully and truly all material facts necessary for his assessment, income
of the assessee has escaped assessment, or has been under-assessed, and
when the party claiming relief challenges on oath the existence of the
conditions which confer jurisdiction, and sets out facts which may, unless
disproved, support his case, an order dismissing his petition in limine may not
properly be made.
10............. But where, as in the present case, the claim made is that the
Income Tax Officer had no power to issue the notice under Section 34, and that
the power is exercised not for any legitimate purpose for which it may be used,
but for the purpose of making a fishing enquiry and to review a previous order
passed in favour of the Company, a Rule upon the Income Tax; Officer to show
cause why the order should not be set aside and an opportunity to the authority
whose action was challenged either to accept or deny the facts alleged and to
set out such other material facts as have a bearing on the question, was at
least called for.
33. In Madhya Pradesh Industries Limited/(ii)(supra) in paragraph 12 it had
been provided that the expression 'has reason to believe' does not mean a
Page No.# 54/97
purely subjective satisfaction of the Income Tax Officer but predicates the
existence of reasons on which such belief has to be founded.
34. Paragraph 12 of Madhya Pradesh Industries Limited/(ii)(supra) is extracted
as below:
"12. Shah, J. (one of us) in his dissenting judgment has observed that the expression
"has reason to believe" in Section 34(1)(a) of the Indian Income Tax Act does not
mean a purely subjective satisfaction of the Income Tax Officer but predicates the
existence of reasons on which such belief has to be founded. That belief, therefore,
cannot be founded on mere suspicion and must be based on evidence and any
question as to the adequacy of such evidence is wholly immaterial at that stage. He
further observed that where the existence of reasonable belief that there had been
underassessment due to non-disclosure by the assessee, which is a condition
precedent to exercise of the power under Section 34(1)(a) is asserted by the assessing
authority and the record prima facie supports its existence, any enquiry as to whether
the authority could reasonably hold the belief that the underassessment was due to
non-disclosure by the assessee of material facts necessary for the assessment must be
barred."
35. The first proposition as provided in Madhya Pradesh Industries Limited/(i)
(supra) is that if the Income Tax Authorities has no reason to believe that
certain income had escaped, the jurisdiction to issue a notice under Section 34
of the Income Tax Act, 1922 will be absent. The other proposition in Madhya
Pradesh Industries Limited/(ii)(supra) provides the reason to believe is not
purely a subjective satisfaction of the Income Tax Authority but predicates the
existence of reason on which such belief is to be founded and that a mere
suspicion cannot be the basis to have a reason to believe.
36. In the instant case, we are required to interpret whether the two
expressions i.e. 'has reasonable ground to believe' as appearing in Section 11C
of the SEBI Act, 1992 and 'has reason to believe' as appearing in Section 34 (1)
(a) of the Income Tax Act, 1922 have the same meaning. The expression ' has
Page No.# 55/97
reason to believe' is based on the expressions 'reason' and 'belief'. As per the
Black's Law Dictionary, the word 'belief' means a state of mind that regards the
existence of something as likely or relatively certain. While, the word ' reason' as
per the Oxford English Dictionary, amongst others, means a cause, explanation
or justification for an action or event. Accordingly, the expression ' has reason to
believe' would have to be understood to be a state of mind regarding the
existence of something as likely or relatively certain on the basis of certain
cause, explanation or justification for arriving at such state of mind.
37. On the other hand, the expression 'has reasonable ground to believe'
would have to be understood to be the state of mind as regards the existence of
something as likely or relatively certain and would have to be backed by some
reasonable grounds. Reasonable ground is understood to mean the information
that establishes sufficient articulable fact that gives a reasonable basis to
believe. In other words, to be a reasonable ground, it would have to be based
on certain information that establishes sufficient articulable fact to make it a
basis to believe whereas existence of cause, explanation or justification would
be sufficient in order to constitute a reason.
38. Accordingly, we have to understand that to have a reason to believe, the
basis for the belief may be any cause, explanation or justification whereas for
having a reasonable ground to believe the basis for the belief would have to be
the information, in other words, comparable to knowledge.
39. 'Knowledge' is defined in the Blacks' Law Dictionary to be an awareness or
understanding of a fact or circumstance; a state of mind in which the person
has no substantial doubt about the existence of a fact. ' Belief' is regarding the
existence of something which is likely or relatively certain whereas ' knowledge'
Page No.# 56/97
is the absence of any substantial doubt in the mind of the person about its
existence. In other words, in order to be knowledge, the element of unlikely or
uncertainty of the existence of the fact is absent and there would remain no
substantial doubt about its existence.
40. The Supreme Court in its pronouncement in Collector of Customs, New
Delhi v. Ahmadalieva Nodira reported in (2004) 3 SCC 549 had held that the
expression 'reasonable grounds' mean something more than prima facie
grounds and it contemplates substantial probable causes for believing.
Accordingly, we will have to understand that the test of certainty to arrive at a
'reasonable ground to believe', of there being material available on record,
would comparably be more than the test of certainty that would be required for
arriving at 'has reasons to believe'.
41. But, at the same time, although the element of certainty in respect of
'reasonable ground to believe' would be more than in that of 'has reasons to
believe', but the same time, we are also required to look into the relevancy and
purpose of the respective statutes wherein the two expressions may have been
used. The expression 'has reason to believe' is from Section 34(1)(a) of the
Income Tax Act, 1922, whereas the expression 'has reasonable grounds to
believe' is to be understood from the point of view of Section 11C of the SEBI
Act, 1992. The Income Tax Act, 1922 or as a matter of fact, the Income Tax Act,
1961 are statutory provisions to regulate the payment of income tax, where
income tax may be paid either by individuals or Hindu undivided families or
corporates, as the case may be. In the circumstance, any enquiries that are
required to be made by the Income Tax Authorities under the Income Tax Act
would be either against an individual or a Hindu undivided family or any
Page No.# 57/97
specified corporate entity. Therefore, the requirement of having reasons to
believe for issuing a notice under Section 34 of the Income Tax Act, 1922 (as it
was earlier), would have to be the formation of a believe with reasons for an
enquiry against such specified individual, Hindu undivided family or corporate.
The enquiries specific does not involve any other person or entity for that given
particular enquiry. On the other hand, the SEBI Act, 1992 was enacted to
provide for the establishment of a Board to protect the interest of investors,
insecurities and to promote the development and regulate the securities market
and for matters connected therewith or incidental thereto as held by the
Supreme Court in the case of Clariant International Ltd. Vs. Securities and
Exchange Board of India reported in (2004) 8 SCC 524. In other words, the
SEBI Act, 1992 is for regulating and promoting the securities market as a whole.
In the circumstance, any enquiry that may be required to be made under the
SEBI Act, 1992, would be of a broader compass than that of an enquiry to be
made under the Income Tax Act either of 1922 or 1961. Correspondingly, the
requirement of having a reasonable ground to believe for initiating an enquiry
under Section 11C of the SEBI Act, 1992 would also have to be on the basis of a
broader spectrum as regards the activities that the SEBI is required to regulate,
promote or develop.
42. As the enquiry may be in respect of a broader spectrum of the
circumstances and activities, the element of higher certainty required for having
a reasonable ground to believe under Section 11C would also have to be based
on a broader spectrum of activities that are required to be regulated or
promoted. If we proceed on the aforesaid premises, the materials produced by
the respondents in the SEBI by referring to the interim order dated 20.08.2015
to form a view that a detailed investigation of the entire scheme as regards the
Page No.# 58/97
reversal trades and illiquid stocks options where the involvement of more
number of persons in such reversal trades and illiquid stocks options cannot be
ruled out, we are of the view that it cannot be said that there was no
reasonable ground to believe that an enquiry is required to be conducted under
Section 11C of the SEBI Act, 1992.
Whether the opinion to be formed under Rule 3 of the
PR-1995 is an individual opinion in respect of the person specific
against whom the notices under Rule 4(1) are to be issued and if yes,
whether any such individual opinion had been formed:
43. By referring to Rule 4 of the PR-1995, the further contention of Dr. Ashok
Saraf, learned senior counsel for the petitioners is that the expression 'any
person contained therein' would have to be understood to be a particular person
specific to whom the notice under Section 4(1) would be issued and therefore,
the requirement of forming an opinion by the Board under Rule 3 would have to
be in respect of such particular person specific to whom the notice may be
issued. By referring to the said provision, it is the contention of Dr. Ashok Saraf
that as a condition precedent to issue the notice under Rule 4(1) of the PR-
1995, the Board would necessarily have to form an opinion against the
particular person specific that the material available on record leads to the
formation of such an opinion. Accordingly, it is the contention that in order to
satisfy the requirement of forming an opinion against the petitioners, it would
be for the respondents to show it from the records that such materials do exist
for formation of such an opinion.
44. According to Dr. Ashok Saraf, learned senior counsel for the petitioners the
requirement of Rule 4 of the PR-1995 is that the Board has to form the opinion
Page No.# 59/97
that there are grounds for adjudging under any of the provisions of Chapter VIA
of the SEBI Act of 1992 and such opinion be formed against the individual
person concerned against whom the Board is of the view that there are grounds
for adjudging. The said contention is of its own relevance inasmuch as in
respect of having a reasonable ground to believe to initiate an investigation
under Section 11C of the SEBI Act of 1992, it had been held that the reasonable
grounds to believe would be more broad based and may pertain to a ground to
believe that the rules and procedures in conducting the trades under SEBI have
been violated by someone rather than it being a reasonable ground to believe
that it had been violated by a specific person concerned.
45. Ms. M Hazarika, learned senior counsel for the respondents in the SEBI on
the other hand has raised a contention that in the facts and circumstances of
the present case, there are materials on record to indicate that the individual
noticees had indulged in certain trades, which according to the SEBI amounted
to reversal trade in illiquid stock options.
46. With regard to the contention of Dr. Ashok Saraf, learned senior counsel
for the petitioners as to whether the opinion of the Board to be formed as to
whether there are grounds for adjudging under the provisions of Chapter VIA of
the SEBI Act of 1992 that such opinion would have to be in respect of the
involvements of the noticee concerned, we examine the provisions of Section
11C of the SEBI Act of 1992 and that of Rule 3 of the Procedure Rules 1995 as
to under what circumstances, the two requirements i.e. reasonable ground to
believe of Section 11C and the opinion of the Board that there are grounds for
adjudging are circumstanced.
Page No.# 60/97
47. Section 11C of the SEBI Act of 1992 provides that where the Board has
reasonable ground to believe that transactions in securities are being dealt in a
manner detrimental to the investors or the securities market or any intermediary
or any person associated with the securities market has violated any of the
provisions or the Rules or a Regulation made there-under or the directions
issued by the Board, it may at any time by order in writing, direct any person to
be referred as the Investigating authority to investigate the affairs of such
intermediary or persons associated with the securities market and to report
thereon to the Board.
48. Sub-clause A of Section 11C(1) refers to the transactions in securities that
are being dealt in a manner detrimental to the investors or the securities
market. The expression 'transaction in securities' may be of any such
transactions in the securities which may be person specific. If any such
transactions in securities are detected by the SEBI to have been dealt in a
manner detrimental to the investors or the securities market, it would be for the
Board to embark upon an investigation under Section 11C and such
investigation may involve any further transactions that any securities that may
have been undertaken against which the Board, the Board may have reasonable
ground to believe to have been done in a manner detrimental to the investors or
the securities market. The expression 'transactions in securities' appearing in
Section 11C(1)(a) appears not to be person specific, but it being more broad
based, which may involve any such transactions in securities wherein the Board
has reasonable ground to believe to be detrimental to the investors or the
securities market. Again with reference to the expression 'any intermediary or
any person' appearing in Section 11C(1)(b), the provisions of Section 11C(1)
provides that there may be an order in writing directing the investigating
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authority to investigate the affairs of such intermediary or persons associated
with the securities market where the expression 'persons' also gives an
indication that the investigation may not be person specific, but more broad
based to arrive at any such transactions in securities that may have taken place
which are detrimental to the investors or the securities market.
49. Considering both the aspects above, the purport of an investigation under
Section 11C of the SEBI Act of 1992 would be broad based rather than person
specific investigation.
50. Section 11C(1) provides that the investigation to be conducted by the
investigating authority, would ultimately result in a report thereon to the Board.
Accordingly, it has to be understood that the report to be submitted by the
investigating authorities to the Board would contain such materials which may
indicate as to whether the transactions in all the securities was dealt in a
manner detrimental to the investors or the securities market or whether any
intermediary or any persons had violated any of the provisions of the SEBI Act,
Rules or the Regulation made there-under.
51. While Sections 15A to Section 15HB provides for the various penalties that
may be imposed for different circumstances leading to a violation of the SEBI
Act as well as the Rules and Regulations made thereunder Section 15-I provides
for the power to adjudicate. Section 15-I provides that for the purpose of
adjudging under Sections 15A to 15HB, the Board may appoint any person not
below the rank of a Division Chief to be an adjudicating officer for holding an
enquiry in the prescribed manner after giving any person concerned a
reasonable opportunity of being heard for the purpose of imposing the penalty.
52. On a reading of Section 15-I, makes it discernible that Section 15-I
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provides for the holding of an enquiry by the adjudicating officer in the
prescribed manner after giving any person concerned a reasonable opportunity
and further for the purpose of imposing any penalty i.e. any of the penalties
that may be provided under Sections 15A to Section 15HB. The expression 'any
person concerned' appearing in Section 15-I for the purpose of holding an
enquiry in the prescribed manner after providing a reasonable opportunity of
being heard to such person, by itself shows that the proceedings under Section
15-I would be person specific rather than it being a more broad based
investigation as made under Section 11C.
53. As a reading of the provision of Section 15-I makes it discernible that the
investigation contemplated thereunder would have to be against the person
concerned against whom the Board intends to hold an enquiry, it has to be
understood that the expression 'whenever the Board is of the opinion that there
are grounds of adjudging' as appearing in Rule 3 of the Procedure and Rules of
1995 would have to be understood that the expression 'opinion' referred therein
would be a formation of an opinion by the Board against the specific person
concerned.
54. Accordingly, we are in agreement with Dr. Ashok Saraf, learned senior
counsel for the petitioners that the requirement of forming an opinion as
provided in Rule 3 of the Procedure and Rules of 1995 would be an opinion
against the person specific against whom an enquiry is being contemplated and
such opinion would not be a broad based opinion.
55. Having arrived at such conclusion, we take note of the submissions of Ms.
M Hazarika, learned senior counsel appearing for the respondents in the SEBI
who had by producing the records have referred to certain materials which
shows that the Board do have the materials before it to form an opinion against
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the individual writ petitioners noticee of the present proceedings. We are not
expressing any view on the adequacy or accuracy of such materials that are
being produced inasmuch as, in exercise of the jurisdiction under Article 226 of
the Constitution of India, we are not going into such aspect of the matter and
we leave it to the individual writ petitioner noticees to take it up with the
authorities concerned on the question of adequacy or accuracy of such materials
against them. But at the same time, we are of the view that whatever materials
are being relied or referred by the respondent authorities against the writ
petitioners noticees, such materials would have to be materials pertaining to the
specific person concerned and not broad based.
56. We have perused the records produced by the respondent SEBI in respect
of the opinion required to be formed under Rule 3 of the PR-1995. The records
produced contain materials which may be a basis to form an opinion, but the
records do not indicate the formation of any such opinion by the respondent
SEBI.
WHETHER A NOTICE UNDER RULE 4 OF THE PR-1995 CAN BE
ASSAILED IN A PROCEEDING UNDER ARTICLE 226 OF THE
CONSTITUTION OF INDIA :
57. Ms. M Hazarika, learned senior counsel for the respondents in the SEBI
has raised a contention that in the instant writ petitions, the notices under Rule
4(1) of the PR-1995 are notices issued in the facts and circumstance of the case
inviting the objections from the petitioner noticees and any grievances that they
may have against such notices can be appropriately dealt with upon the
petitioners noticees appearing before the authorities and making their
respective submissions.
Page No.# 64/97
58. Dr. Ashok Saraf, learned senior counsel for the writ petitioners raises the
counter contention that the impugned notices under Rule 4(1) of the PR-1995
are challenged primarily on the ground that the prescribed procedure under the
Rules had not been followed and a bare perusal of the notices itself would make
it apparent that such procedures had not been followed. According to the
learned senior counsel, ordinarily a show-cause notice is not to be interfered in
the proceeding under Article 226 of the Constitution of the India inasmuch as
the noticee would have an adequate opportunity to reply in course of the
proceeding pursuant to such notices. But, if the statutory provisions provides for
a particular procedure to be followed while issuing the notices itself and the
notices on a cursory glance, makes it apparent that such procedures have not
been followed, a Court under Article 226 of the Constitution of India can always
look into the aspect and decide the matter on the procedural proprieties as
regards the notice.
59. In this respect, Dr. Ashok Saraf, learned senior counsel for the writ
petitioners relies upon the pronouncement of the Supreme Court in paragraphs
9 and 11 of Siemens Ltd. v. State of Maharashtra, reported in (2006) 12 SCC 33
as extracted herein below:
"9. Although ordinarily a writ court may not exercise its discretionary
jurisdiction in entertaining a writ petition questioning a notice to show
cause unless the same inter alia appears to have been without jurisdiction
as has been held by this Court in some decisions including State of
U.P. v. Brahm Datt Sharma [(1987) 2 SCC 179 : (1987) 3 ATC 319 : AIR
1987 SC 943] , Special Director v. Mohd. Ghulam Ghouse [(2004) 3 SCC
440 : 2004 SCC (Cri) 826] and Union of India v. Kunisetty
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Satyanarayana [(2006) 12 SCC 28 : (2006) 12 Scale 262] , but the
question herein has to be considered from a different angle viz. when a
notice is issued with premeditation, a writ petition would be maintainable.
In such an event, even if the court directs the statutory authority to hear
the matter afresh, ordinarily such hearing would not yield any fruitful
purpose. (See K.I. Shephard v. Union of India [(1987) 4 SCC 431 : 1987
SCC (L&S) 438 : AIR 1988 SC 686] .) It is evident in the instant case that
the respondent has clearly made up its mind. It explicitly said so both in
the counter-affidavit as also in its purported show-cause notice.
11. A bare perusal of the order impugned before the High Court as
also the statements made before us in the counter-affidavit filed by the
respondents, we are satisfied that the statutory authority has already
applied its mind and has formed an opinion as regards the liability or
otherwise of the appellant. If in passing the order the respondent has
already determined the liability of the appellant and the only question
which remains for its consideration is quantification thereof, the same
does not remain in the realm of a show-cause notice. The writ petition, in
our opinion, was maintainable."
60. Reliance has also been placed in the pronouncement of the Supreme
Court in paragraph 31 of Union of India Vs. VICCO Laboratories , reported in
(2007) 13 SCC 270 as extracted herein below:
31. Normally, the writ court should not interfere at the stage of issuance
of show-cause notice by the authorities. In such a case, the parties get
ample opportunity to put forth their contentions before the authorities
concerned and to satisfy the authorities concerned about the absence of
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case for proceeding against the person against whom the show-cause
notices have been issued. Abstinence from interference at the stage of
issuance of show-cause notice in order to relegate the parties to the
proceedings before the authorities concerned is the normal rule. However,
the said rule is not without exceptions. Where a show-cause notice is
issued either without jurisdiction or in an abuse of process of law,
certainly in that case, the writ court would not hesitate to interfere even
at the stage of issuance of show-cause notice. The interference at the
show-cause notice stage should be rare and not in a routine manner. Mere
assertion by the writ petitioner that notice was without jurisdiction and/or
abuse of process of law would not suffice. It should be prima facie
established to be so. Where factual adjudication would be necessary,
interference is ruled out.
61. A reading of the aforesaid propositions of law as regards maintainability of
a writ petition under Article 226 of the Constitution of India against the notice of
show-cause, makes it discernible that it is not an invariable rule that no writ
petition under Article 226 would be maintainable against a show cause notice
and it would always be for the noticee to raise the objections in the proceedings
itself. Certain circumstances are provided by the Supreme Court, i.e., when a
notice is issued with premeditation, where the application of mind and formation
of opinion as regards the liability or otherwise of the noticee had already been
made, where the notice is issued without jurisdiction or in an abuse of process
of law, an interference in respect of a notice even in a writ petition under Article
226 would be permissible.
62. In the instant case, the issues raised against the impugned notices are
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that the procedure prescribed under the statutory provisions for issuing such
notices had not been followed and in the process certain formations of opinion
in a premeditated manner had already been made and by not following the
procedure prescribed under the statutory provisions an abuse of process of law
had also taken place. In order to appreciate such issues raised, we are of the
view that the same can be done in the present writ petitions and not require the
petitioner noticees to subject themselves to the process to be initiated as per
the impugned show cause notices, in respect of such issues regarding the
procedure adopted that had been raised.
63. In order to appreciate the rival contentions, we look into one of the
notices under Rule 4(1) of the PR-1995 in respect of the writ petitioner Ankita
Didwania in WP(C)No.766/2022. In paragraph 1 of the notice dated 17.09.2021,
it is stated that an adjudication proceeding had been initiated in respect of the
writ petitioner Ms. Ankita Didwania bearing PAN No. BFYPB2268B for carrying
out alleged non-genuine trades in illiquid stock options at the BSE and thereby
violated the regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of the SEBI
(Prohibition of Fraudulent and Unfair Trading Practices related to Securities
Market) Regulations, 2003 (in short, referred as PFUTP Regulations, 2003).
64. In paragraph 5, it is stated that pursuant to an investigation under Section
11C of the SEBI Act, 1992, it was noticed that 2,91,744 trades which comprises
81.41% of all trades executed in the stock options segment of BSE were non-
genuine trades and the non-genuine trades resulted in the creation of artificial
volume to the tune of 826.21 crore units or 54.68% of the total market volume.
In paragraph 6, it is stated that the writ petitioner noticee was one of the
various entities which indulged in execution of the non-genuine trades in the
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stock options segment of BSE during the period of investigation. In paragraph
14 of the notice dated 17.09.2021, it is provided that the writ petitioner noticee
is therefore, called upon to show cause as to why an inquiry should not be held
against her in terms of Rule 4 of the Procedural Rules, 1995 read with Section
15-I of the SEBI Act, 1992 and penalty should not be imposed in terms of Rule
5 of the said Procedural Rules read with the provisions of Section 15HA of the
SEBI Act, 1992.
65. It is the submission of Dr. Ashok Saraf, learned senior counsel for the writ
petitioners that the scheme of the procedure prescribed under Rule 4 of the PR-
1995 provides for two separate and distinct stages of the proceeding where at
the first stage, the noticee is required to be noticed to show cause as to why an
adjudication proceeding should not initiated and the second stage pertains to
the actual penalty proceeding that may be undertaken. By referring to
paragraph 14 of the notice dated 17.09.2021, Dr. Ashok Saraf, learned senior
counsel for the writ petitioners points out that in the impugned notice, the two
separate and distinct stages provided under the scheme of the procedure of the
Rule 4 of the PR-1995 had been amalgamated and joined into a single
proceeding which would be impermissible under the scheme of the procedure. It
is the submission of the learned senior counsel that by amalgamating and
joining the two separate stages under the scheme of the procedure under Rule
4 of the PR-1995, there is an aberration of the prescribed procedure under the
Rules. Accordingly, it is submitted that as there is an aberration of the procedure
provided under Rule 4(1) of the PR-1995, the said aspect would touch upon the
jurisdiction of the authority issuing the impugned notices which under the law
proposition indicated above would enable the Court under Article 226 to look
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into the matter.
66. Rule 4 of the PR-1995 under Rule 4(1) provides that in holding an enquiry
for the purpose of adjudging under Section 15HA, amongst others, as to
whether any person had committed a contravention, in the first instance, a
notice is to be issued to such person requiring him to show cause within such
period as may be specified in the notice, not being less than 14 (fourteen) days
from the date of service thereof, as to why an enquiry should not be held.
67. Rule 4(3) provides that if after considering the cause, if any, shown by
such person, the Adjudicating Officer is of the opinion that an enquiry should be
held, he shall issue a notice fixing a date for the appearance of the person
concerned either personally or through his lawyer or other authorized
representative.
68. The very expression 'in the first instance' of Rule 4(1) of the Procedural
Rules, 1995 gives an indication that the scheme of procedure provides for two
different stages as submitted by Dr. Ashok Saraf, learned senior counsel for the
writ petitioners. If it is so, the said question raised by the petitioner requires an
examination and if it is so, requiring the noticee to raise a complete and
comprehensive objection to the notice before the Adjudicating Officer wherein
such question of procedural aberration may also be raised, may require the
noticee to set forth many other such circumstances to give a wholesome reply
rather than finding it as a whole scheme of the procedure requires the notices
to be in two separate stages.
69. Considering the aforesaid aspect, we are of the view that the question on
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the procedural aberration of Rule 4(1) raised in these writ petitions can also be
adjudicated in a proceeding under Article 226 of the Constitution of India rather
than requiring the noticee to give a wholesome and composite reply to all such
allegations that may be made in the notice and thereafter take a decision as to
whether the procedural requirements were duly followed. From such point of
view, we reject the objections raised by the respondents SEBI as regards the
maintainability of the writ petition on the ground that the issues raised could
also have been answered by the writ petitioner noticees in the proceeding
before the adjudicating officer itself.
WHETHER THE ADJUDICATING OFFICERS APPOINTED FOR THE
PURPOSE ARE THE RESPECTIVE DIVISION CHIEFS:
70. Another contention raised by Dr. Ashok Saraf, learned senior counsel is
that as required under Section 15-I of the SEBI Act 1992, it is for the Board to
appoint any officer not below the rank of a Division Chief to be an adjudicating
officer. But in the instant case, the notices impugned have been issued by
authorities other than a person in the rank of a Division Chief and nor such
Division Chiefs have been appointed by the Board to be the adjudicating
officers.
71. Dr. Ashok Saraf, learned senior counsel for the petitioners by referring to
the provisions of Section 15-I of the SEBI Act 1992 raises a contention that the
adjudicating officers to be appointed for the purpose of adjudging under Section
15HA, amongst others, would have to be an officer not below the rank of a
Division Chief and as a corollary if any officer other than a Division Chief is
appointed as the adjudicating officer, the process initiated by such adjudicating
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officer would be without jurisdiction. To substantiate the contention, a reference
is made to the provisions of Securities and Exchange Board of India (Delegation
of Statutory and Financial Powers) Order, 2019 (for short, the Delegation Order
2019). As per the definition of Division Chief under Clause 2(1)(i), a Division
Chief means an officer of the Board in the Grades D to F. Clause 2(1)(f) provides
that a Chief General Manager means an Officer of the Board in the Grade F.
Clause 2(1)(k) provides that General Manager means an officer of the Board in
the Grade E and Clause 2(1)(h) Deputy General Manager means an officer of
the Board in the Grade D.
72. On a conjoint reading of Clause 2(1) with Clauses 2(1)(f) to 2(1)(k) and
Clause 2(1)(h) we have to understand that a Division Chief may be a Chief
General Manager or a General Manager or a Deputy General Manager depending
upon as to an officer of which rank is the Division Chief of a particular Division.
In a given Division if the Division Chief is the Chief General Manager for that
particular Division, the Division Chief would have to be the Chief General
Manager and if for another given Division, it is the Deputy General Manager, it
has to be understood that the Deputy General Manager would be the Division
Chief of that particular Division and accordingly. Clauses 2(1)(f), 2(1)(i), 2(1)(k)
and 2(1)(h) are extracted hereunder:
"2(1)(f) Chief General Manager means an officer of the Board in the Grade F;
2(1)(i) Division Chief means an officer of the Board in the Grades D to F;
2(1)(k) General Manager means an officer of the Board in the Grade E;
2(1)(h) Deputy General Manager means an officer of the Board in the Grade D."
73. In order to appreciate the contentions raised by Dr. Ashok Saraf, learned
senior counsel, which would depend on the factual situation as to whether the
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authority issuing the notices under Rule 4(1) of the PR- 1995 in a given case
was the Division Chief of that given Division would be a question of fact to be
examined from the records.
74. Dr. Ashok Saraf, learned senior counsel refers to a particular document
downloaded from the website of the SEBI which provides for the organisation
structure within the Board. By referring to the said document providing for the
organisation structure in the SEBI, Dr. Ashok Saraf, learned senior counsel
points out that the adjudicating authority who had issued the notices under Rule
4(1) of the PR-1995 in WP(C)No.766/2022, where Ms. Ankita Didwania is the
writ petitioner. The said notice was issued by the Corporation Finance
Department. By an order dated 06.07.2021 under the signature of M/s. Bhavana
RaviKumar, General Manager, SEBI in paragraph 3 thereof, it is provided that the
competent authority in exercise of the power under Section 19 of the SEBI Act,
read with Section 15-I (1) thereof and Rule 3 of the PR- 1995 appointed certain
Division Chiefs as adjudicating officers as per Order dated 02.07.2021 to enquire
and adjudicate under Section 15HA of the SEBI Act. Accordingly, Sri Rajesh
Anand Gujjar had been appointed as the adjudicating officer in respect of the
writ petitioner Ankita Didwania bearing Case ID No.20018267. Sri Rajesh Anand
Gujjar is stated by the respondents SEBI to be the Deputy General Manager in
the Division of Issues and Listing-1. Accordingly it is given to be understood that
the notice under Rule 4(1) of the PR-1995 in respect of the writ petitioner Ms.
Ankita Didwania had been issued by the Issues and Listing-1 Division, where Sri
Rajesh Anand Gujjar being the Deputy General Manager is the Division Chief.
75. As per the organisation structure of SEBI referred by Dr. Ashok Saraf,
learned Senior counsel for the writ petitioners Issues and Listing-1 Division is a
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Division and the Division Head is Sri Rajesh Anand Gujjar.
76. A reading of the materials produced and the statements made by the
petitioners and the authorities in the SEBI, in respect of the writ petitioner
Ankita Didwania, it can be noticed that the notices under Rule 4(1) of the PR-
1995 had been issued by the Division Chief. Instead of venturing into examining
the factual aspect as to whether in respect of the other writ petitions, the
authorities issuing notices under Rule 4(1) of the PR-1995 are Division Chief or
not, in the light of the analysis made hereinabove, the Executive Director of the
SEBI is required to look into the individual notices and arrive at his own
satisfaction as to whether the respective authorities who have issued the notices
do satisfy the requirement of being the Division Chiefs. If the Executive Director
upon examining the records arrive at any conclusion that the authorities who
have issued the notice would be not a Division Chief of the Division which had
issued the notices, appropriate steps be taken to ensure that only the person
who would be the Division Chief of the Division issuing the notices be appointed
as the adjudicating officer. In such event, the notices that may have been
issued, if any, by an authority otherwise than that of a Division Chief be recalled
and necessary corrective measures be taken.
WHETHER THE APPOINTMENTS OF AN OFFICER NOT BELOW THE
RANK OF A DIVISION CHIEF TO BE AN ADJUDICATING OFFICER WAS
DONE IN ACCORDANCE WITH THE REQUIREMENT UNDER SECTION
15-I OF THE SEBI ACT, 1992
77. Dr. Ashok Saraf, learned Senior counsel for the petitioner by referring to
the provisions of Section 15-I of the SEBI Act, 1992 contends that for the
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purpose of adjudging under the Sections referred therein, amongst others,
Section 15HA, the Board may appoint any officer not below the rank of a
Division Chief to be an adjudicating officer for holding an enquiry in the
prescribed manner. Accordingly, reference is made to Section 2A of the SEBI
Act, 1992, wherein it is provided that the 'Board' means the Securities and
Exchange Board of India established under Section 3. Section 3 of the SEBI Act,
1992 provides that the Central Government may by notification appoint and
establish for the purpose of the Act, a Board by the name of Securities and
Exchange Board of India where Section 3(2) provides that the Board shall be a
body corporate by the name of Securities and Exchange Board of India having
perpetual succession and a common seal. Further reference is made under
Section 4(1) of the SEBI Act, 1992 which provides that the Board shall consist of
a Chairman, two members from amongst the officials of the Ministry of the
Central Government dealing with the finance and administration of Companies
Act, one member amongst the officials of the Reserve Bank of India, five other
members of whom at least three shall be whole time members to be appointed
by the Central Government.
78. By referring to the provisions of Section 4 of the SEBI Act, 1992, it is the
contention of Dr. Ashok Saraf, learned Senior counsel for the petitioner that the
Board being a defined concept under the SEBI Act, 1992, the appointment of
the adjudicating officer under Section 15-I can be made only by the said defined
concept alone and not by any other authority.
79. Ms. M. Hazarika, learned Senior counsel for the respondents in the SEBI
per contra refers to Section 19 of the SEBI Act, 1992, which provides for
delegation of powers and functions under the Act. By referring to the delegation
of powers at Entry 20(A), it is pointed out that for the purpose of appointing an
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adjudicating officer under Section 15-I, the delegated authority would be the
Executive Director In-charge of EFD (in short referred to as 'ED-EFD'). By
referring to the delegation of the powers, further reference is made to the
records containing the note sheet which provides for the appointment of
adjudicating officers for the different adjudicating proceedings. By referring to
the said note sheet, it is pointed out that the various adjudicating officers
appointed for the adjudicating proceedings were submitted for consideration by
an officer who signed as GM (SM) on 03.04.2018. The said note sheet was
thereafter signed by the CGM (AP) on 03.04.2018 by providing the endorsement
'as proposed, AOs may be appointed by ED(Law)'. Subsequent thereto, there is
an endorsement 'approved the name of the adjudicating officers as per the list 1
to 9 given above' by the ED(Law), which is also dated 03.04.2018 and
thereafter, the file goes back to the CGM, VSS and other authorities.
80. Dr. Ashok Saraf, learned Senior counsel for the petitioner has raised an
issue that even if we go by the note sheet produced from the records, the ED-
EFD had only approved the names of the adjudicating officers and it cannot be
said to be an appointment made by the ED-EFD. To substantiate the contention
raised, it is the submission of Dr. Ashok Saraf, learned Senior counsel for the
petitioner that there is substantial difference between the appointment of a
person and the approval given to such appointment of that person. The
expression appointment is defined in Black's Law Dictionary to mean ' the
designation of a person, such as non-elected public official, for a job or duty'.
According to Oxford English Dictionary, one of the meanings of the word
'appointment' is 'an act of assigning a job or position to someone'. On the other
hand, the word 'approval' which flows from the word 'approve' as per the Black's
Law Dictionary means 'to give formal sanction; to confirm authoritatively'. Again
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as per the Oxford English Dictionary 'approval', amongst others, means 'an
official statement or indication that something is accepted or regarded
favourably,' whereas the word 'approve' means ' officially agree or accept as
satisfactory'.
81. Going by the aforesaid meanings of the words 'appointment' and
'approval', we have to understand that 'appointment' means the designation of a
person for a job or duty or to assign a person for a job or position to someone
whereas 'approval' means to officially agree or accept as satisfactory of any
appointment or any act or assigning a job or position to someone by an
authority other than the authority assigning it. Going by the aforesaid difference
in the concepts of 'appointment' and 'approval', we examine the note sheet
produced by the respondents in the SEBI, wherein the endorsements indicated
above are found, as well as the order communicating the appointment of
adjudicating officer dated 06.07.2021 under the signature of Ms. Bhavana
Ravikumar, GM, SEBI. A reading of the note sheet goes to show that the
General Manager (SM) had put up a note providing for the names of the officials
who can be appointed as adjudicating officers in respect of various adjudications
to be made and to such note, the CGM(AB) gives the endorsement that the
adjudicating officers as proposed by the GM(SM) may be appointed by the
ED(Law) and thereafter, the ED(Law)/ED-EFD had given the endorsement,
approved the name of the adjudicating officers as per the list provided. If we
read the sequence of events from the note sheet, the GM(SM) had provided a
list of officers who can be appointed as adjudicating officers for the various
adjudications and the CGM(AB) had endorsed that whatever list of officers that
were presented may be appointed by the ED(Law), meaning thereby that up the
stage of being considered by the CGM(AB), the appointment had not taken
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place and it is to be made by the ED(Law)/ED-EFD. But the ED(Law)/ED-EFD
has used the expression 'approved the name of the adjudicating officers as per
the list', although a more appropriate wording could have been 'appoint the
adjudicating officers as per the list'.
82. As no appointment had taken place upto the stage of the consideration by
the CGM(AP), who again provided that the appointment may be made by the ED
(law)/ED-EFD, the word approved appearing in the endorsement of the ED
(law)/ED-EFD would have to be accepted to be not a very happily worded
endorsement, but the meaning thereof would be that the ED (law)/ED-EFD had
made the appointments.
83. Clause 3 of the order communicating appointment of Adjudicating Officer
dated 06.07.2021 under the signature of Ms. Bhavana Ravikumar, General
Manager, SEBI is extracted as below:
"3. The Competent Authority has, therefore, in exercise of the powers conferred upon
her under Section 19 of the SEBI Act read with Section 15 I(1) of the SEBI Act and
Rules 3 of securities and Exchange Board of India (Procedure for Holding Inquiry and
Imposing Penalties) Rules, 1995 ("hereinafter referred as the 'SEBI Rules') read with
section 19 of the SEBI Act appointed certain Division Chiefs as Adjudicating Officers
vide Order dated July 02, 2021 to enquire into and adjudge under Sections 15HA SEBI
Act the alleged violations by the entities."
84. A reading of the Clause 3 of the said order makes it discernable that the
competent authority in exercise of the powers under Section 19 of the SEBI Act
read with Section 15-I(1) and Rule 3 of the Procedural Rules, 1995 had
appointed certain Division Chiefs as the adjudicating officers. In other words,
when the order dated 06.07.2021 was issued by Ms. Bhavana Ravikumar,
General Manager, SEBI, the competent authority had already appointed the
Division Chiefs as adjudicating officers.
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85. Dr. Ashok Saraf, learned senior counsel submits that in the process there
ought to have been in place an actual order appointing the Division Chiefs as
adjudicating officers which in the instant case is found absent.
86. We are in agreement with Dr. Ashok Saraf, learned senior counsel of the
petitioners to that extent that the authorities in the SEBI while undertaking the
process of appointing the adjudicating officers had not meticulously followed the
procedure as suggested by the petitioners, but going by the steps adopted as
per the note-sheet as well as the order dated 06.07.2021, we are of the view
that there is a substantial compliance of the requirement of the Board through
its delegated authority in appointing the Division Chiefs as adjudicating officers
in view of the conclusion which has been arrived hereinbefore.
87. In order to avoid such issues, it is the suggestion by Dr. Ashok Saraf, the
learned senior counsel for the writ petitioners, that the ED (law)/ED-EFD may be
more careful in exercising his powers.
WHETHER THE INDIVIDUAL OPINIONS FORMED AGAINST THE
PERSON SPECIFIC WITH REFERENCE TO RULE 3 OF THE PR-1995 ARE
REQUIRED TO BE PROVIDED TO THE NOTICEES AND IN THE PRESENT
CASE, WHETHER IT HAD BEEN PROVIDED.
88. Rule 3 of the PR-1995 provides that whenever the Board is of the opinion
that there are grounds for adjudging under any of the provisions of Chapter VI-
A of the SEBI Act of 1992, it may appoint any of its officers not below the rank
of Division Chiefs to be an adjudicating officer. The opinion to be formed under
Page No.# 79/97
Rule 3 therefore would have to precede the appointment of adjudicating
officers.
89. The Supreme Court in paragraph 24 and 25 of T Takano (supra) had
provided that in shaping the jurisprudence surrounding the principles of access
to justice and transparency as well as balancing the conflicting claims of access
of justice and the grounds of public interest such as privacy, confidentiality and
market interest, the purpose of disclosure of information is not merely
individualistic, that is to prevent error in the verdict, but is also towards fulfilling
the larger institutional purpose of fair trial and transparency, and, therefore,
there is a requirement of a disclosure of the investigation report.
90. The opinion to be formed under Rule 3 of the PR-1995 against the person
specific is in the nature of a disclosure of an investigation report. Therefore,
from the point of view of fulfilling the larger institutional purpose of fair trial and
transparency, as enunciated by the Supreme Court in paragraphs 24 and 25 of T
Takano (supra), we are of the view that there would be a requirement for the
respondents in the SEBI to provide the noticees the opinion formed against the
individual noticee under Rule 3 of PR-1995 along with any such notice that may
be issued under Rule 4(1) of the PR-1995.
WHETHER A NOTICE UNDER RULE 4(1) OF THE PROCEDURAL RULES
OF 1995 CAN BE A COMPOSITE NOTICE REQUIRING THE NOTICEE TO
RESPOND AS TO WHETHER AN ENQUIRY SHOULD BE HELD UNDER
RULE 4(1) AND ALSO REQURING THE NOTICEE TO RESPOND UNDER
RULE 4(3) AS TO WHY ANY OF THE PENALTIES CONTEMPLATED
UNDER SECTION 11-A TO SECTION 11HB SHOULD NOT BE IMPOSED:
Page No.# 80/97
91. It is the contention of Dr. Ashok Saraf, learned senior counsel for the
petitioner that the notices impugned in these writ petitions comprises of two
parts as to why an enquiry should not be conducted by the adjudicating officers
against the noticees and secondly as to why the penalties prescribed under
section 15HA should not be inflicted upon them. According to the learned senior
counsel, Rule 4 having provided for two separate proceedings i.e. one to show
cause the noticee and give a hearing as to why an enquiry should not be held
and the second being an actual enquiry into the allegations of contravention
that may have been raised and the Supreme Court in T. Takano (supra) having
clearly distinguished and provided for it, the combined show cause notices for
the purpose of showing cause as to why the enquiry should not be held and as
to why the penalty under section 15HA should not be inflicted would not be
maintainable in law.
92. Dr. Ashok Saraf learned senior counsel for the petitioners has taken the
Court to the notice dated 17.09.2021 issued by the adjudicating officer under
Rule 4 of the Procedure Rules of 1995 read with Section 15-I of the SEBI Act of
1992. By referring to the said notice of 17.09.2021, it is pointed out by the
learned senior counsel that it is a notice under Rule 4 of the PR-1995, meaning
thereby, that the notice covers the requirements of the provisions of the entire
Rule 4 and not specific to any of the sub-rules under Rule 4. The notice dated
17.09.2021 being made conjointly to be read with Section 15-I of the SEBI Act
of 1992, it is pointed out that the notice covers the entire procedural
requirements of arriving at a penalty under any of the Sections from 15A to
15HB.
93. By referring to paragraph 5 and 6 of the notice dated 17.09.2021, Dr. Ashok
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Saraf learned senior counsel contends that pursuant to the investigation under
Section 11C of the SEBI Act 1992, the adjudicating officer arrived at a
conclusion as regards the prevalence of non-genuine trades in the stock options
segment of the BSE totaling 2,91,744 trades which comprised a substantial
81.41% of all trades. By further referring to paragraph 6 of the said notice, it is
contended that the adjudicating officer had arrived at his conclusion that the
writ petitioner noticee Ankita Didwania was involved in such non-genuine trades
in the stock options segment of BSE. In paragraph 7 of the notice, it is provided
that during the investigation period four trades of 99,000 units were executed in
respect of contract viz., DIVI15APR1920.00CE and the petitioner noticee had
executed two trades for 29,000 units in the said contract on 30.03.2015. While
dealing with the said contract on 30.03.2015, the petitioner noticee at 15:14:45
hrs., had entered one buy trade with a counter party namely Open Futures and
Derivatives Pvt. Ltd., for 14,500 units @Rs.4/- per unit and thereafter at
15:14:51 hrs., had entered one sell trade with the same counter party for
14,500 units @Rs.28/- per unit. Paragraph 8 of the notice provides for the
details of the non-genuine trades at Annexure-B to the notice.
94. Paragraphs 5, 6, 7 and 8 of the notice dated 17.09.2021 are extracted as
below:
5. Pursuant to investigation, it is observed that during the investigation period,
total 2,91,744 trades comprising substantial 81.41% of all the trades executed in Stock
Options Segment of BSE were non genuine trades. The aforesaid non genuine trades
resulted into creation of artificial volume to the tune of 826.21 crore units or 54.68%
of the total market resulted into creation of artificial volume in Stock Options segment
of BSE during the investigation period.
6. It is noted that Noticee was one of the various entities which were indulged in
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execution of non-genuine trade(s) in Stock Options Segment of BSE during the
investigation period. Following points mention the dealings of Noticee in Stock Options
segment of BSE during the investigation period and allegations against Noticee for
execution of non-genuine trade(s).
7. Non- genuine trade(s) and artificial volume are illustrated through the dealings of
the Noticee in the contract viz, "DIVI15APR1920.00CE" during the investigation period,
mentioned as follows:
(a) During the investigation period, total 4 trades for 99,000 units were executed in
the said contract. Noticee had executed 2 trades for 29,000 units in the said contract
on 30/03/2015.
(a) While dealing in the said contract on 30/03/2015, Noticee at 15:14:45 hrs entered
into 1 buy trade with counterparty viz, OPEN FUTURES AND DERIVATIVES PRIVATE
LIMITED for 14,500 units at rate of Rs. 4/- per unit. Thereafter, the Noticee at
14:14:51 hrs entered into 1 sell trade with the same counter party for 14,500 units at
rate of Rs. 28/- per unit.
(b) From the above, it is noted that while dealing in the said contract during the
investigation period, Noticee executed total 2reversal trades (1buy trade + 1 sell
trade) with same counterpart viz, OPEN FUTURES AND DERIVATIVES PRIVATE
LIMITED on the same day and with significant price differential in buy and sell rate.
(c) Thus, Noticee, through its dealing in the contract viz, "DIVI15APR1920.00CE"
during the investigation period, executed 01(One) trade reversal through 2 non
genuine trades which is 50% of the total trades from the market in the said contract
during the investigation period, and thereby, Noticee generated artificial volume of
29,000 units which is 29.29% of the volume traded in the said contract from the
market during the investigation period.
8. Details of both the trades, which are non- genuine, of Noticee in Stock Options
segment of BSE during the investigation period is given in "Annexure B", and the
detailed summary of all the dealings in the contract "DIVI15APR1920.00CE" IN WHICH
Noticee allegedly executed non genuine trades during the investigation period is given
in "Annexure C".
Page No.# 83/97
95. Thereupon, Dr. Ashok Saraf, learned senior counsel for the petitioners
refers to paragraph 14 of the notice dated 17.09.2021 wherein the petitioner
noticee Ankita Didwania was called upon to show cause as to why an enquiry
should not be held under Rule 4 of the Procedure Rules of 1995 read with
Section 15-I of the SEBI Act of 1992 and further why penalty should not be
imposed in terms of Rule 5 of the Procedure Rules of 1995 read with Section
15HA of the SEBI Act of 1992. By referring to the paragraph 14 of the notice
dated 17.09.2021, the learned senior counsel submits that the purport of the
notice dated 17.09.2021 is two-fold. Firstly it is a notice upon the noticee to
show cause as to why an enquiry should not be held against her and secondly,
as to why the penalties prescribed under Section 15HA of the SEBI Act of 1992
should not be imposed under Rule 5 of the Procedure Rules of 1995.
96. Dr. Ashok Saraf, learned senior counsel for the petitioners makes a
submission that the scheme of Rule 4 of the PR-1995 provides for a proceeding
under Rule 4(1) of the PR-1995, in the first instance, to issue a notice requiring
the person concerned to show-cause as to why an enquiry should not be held
against him/her and thereafter if under Rule 4(3) an opinion is formed that an
enquiry should be held, a further notice fixing a date for appearance of that
person either personally or through a lawyer or representative be issued
whereafter the person concerned would be explained the offence alleged to
have been committed by indicating the provisions of the Act, Rules, Regulations
etc., of which the contravention had taken place. It is further submitted that
under Rule 4(5) the person concerned is required to be given an opportunity to
produce such documents or evidence as he may consider relevant to the
enquiry. According to the learned senior counsel after following the procedure
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from Rule 4(3) onwards, any order of penalty may be passed under Rule 5
thereof.
97. By referring to the scheme of Rule 4, it is the submission of Dr. Ashok Saraf,
learned senior counsel that the composite notice as discernible from paragraph
14 of the notice dated 17.09.2021 requiring the petitioner noticee to show cause
as to why an enquiry should not be held against her and also as to why the
penalties under Section 15HA of the SEBI Act of 1992 in terms of Rule 5 of the
PR-1995 should not be imposed, would be not maintainable. It is the submission
of the learned senior counsel for the petitioners that the scheme of Rule 4 of
PR-1995 provides for two separate and distinct stages of the proceeding, one
being a show-cause as to why an enquiry should not be held and only after
arriving at an opinion that an enquiry is required to be held, the other notice as
regards the penalty to be imposed can be made. The composite notice as
discernible from paragraph 14 of the notice dated 17.09.2021 by which the two
stages of the proceeding was amalgamated into one would not be maintainable
as the second stage of issuing the notice for penalty requires the satisfaction of
the condition precedent of there being an opinion formed that the enquiry is
required to be held.
98. Ms. M Hazarika, learned senior counsel for the respondent SEBI per contra
contends that the notice dated 17.09.2021 is only a show cause notice and the
writ petitioners can respond to the notices and when such responses are
submitted, the authorities in the SEBI would give a consideration to it.
Accordingly, it is the contention that no interference is required against the
notice under Rule 4 of PR-1995.
Page No.# 85/97
99. According to Ms. M Hazarika, learned senior counsel, the provisions of Rule
4 of PR-1995 itself are composite in nature and therefore, a composite notice in
respect of all the aspect of Rule 4 would be permissible under the law.
100. Having heard the contentions and the counter contentions raised by the
petitioner and the respondent SEBI on the question as to whether a composite
notice with regard to all the aspects of Rule 4 of PR-1995 would be
maintainable, we examined the provisions of the Rule 4 of PR-1995 itself.
101. Rule 4 of PR-1995 is extracted as below:-
4. Holding of inquiry- (1) In holding an inquiry for the purpose of adjudging under
Sections 15-A, 15-B, 15-C, 15-D, 15-E, [15-EA, 15-EB,] A5-F, 15-G [,15-HA and 15-HB]
whether any person has committed contraventions as specified in any of Sections 15-A,
15-B, 15-C, 15-D, 15-E, [15-EA, 15-EB,] A5-F, 15-G [,15-HA and 15-HB] the [the Board
or adjudicating officer] shall, in the first instance, issue a notice to such person requiring
him to show cause within such period as may be specified in the notice(being not less
than fourteen days from the date of service thereof) why an inquiry should not be held
against him.
(2) Every notice under sub-rule (1) to any such person shall indicate the nature of
offence alleged to have been committed by him.
(3) If, after considering the cause, if any, shown by such person, the [the Board or the
adjudicating officer] is of the opinion that an inquiry should be held, he shall issue a
notice fixing a date for the appearance of that person either personally or through his
lawyer or other authorized representative.
(4) On the date fixed, the [the Board or the adjudicating officer] shall explain to the
person proceeded against or his lawyer or authorized representative, the offence,
alleged to have been committed by such person indicating the provisions of the Act,
rules or regulations in respect of which contravention is alleged to have taken place.
(5) The [the Board or the adjudicating officer] shall then aive an opportunity to such
person to produce such documents or evidence as he may consider relevant to the
inquiry and if necessary the hearing may be adjourned to a future date and in taking
such evidence the [the Board or the adjudicating officer] shall not be bound to observe
the provisions of the Evidence Act, 1872 (11 of 1872):
Provided that the notice referred to in sub-rule (3), and the personal hearing referred
to in sub-rules (3), (4) and (5) may, at the request of the person concerned, be waived.
[(5-A) The Board may appoint a presenting officer in an inquiry under this rule.]
(6) While holding an inquiry under this inquiry the [the Board or the adjudicating officer]
shall have the power to summon and enforce the attendance of any person acquainted
with the facts and circumstances of the case to give evidence or to produce any
Page No.# 86/97
document which, in opinion of the [the Board or the adjudicating officer], may be useful
for or relevant to, the subject-matter of the inquiry.
(7) If any person fails, neglects or refuses to appear as required by sub-rule (3) before
the [the Board or the adjudicating officer], the [the Board or the adjudicating officer]
may proceed with the inquiry in the absence of such person after recording the reasons
for doing so.
102. Rule 4 (1) of PR-1995 provides that in holding an enquiry for the purpose
of adjudging under Sections 15A to 15HB of the SEBI Act, 1992 as to whether
any person had contravened any of the provisions thereof, the adjudicating
officer at the first instance to issue a notice to such person requiring him/her to
show cause as to why an enquiry should not be held against him/her. The
expression 'first instance' in Rule 4(1) of PR-1995 gives the indication that a
notice under Rule 4(1) requiring the person to show cause as to why an enquiry
should not be held against him/her, should precede all such notices that may be
issued as per the subsequent sub Rules of Rule 4.
103. The expression 'first instance', as per the Merriam Webster dictionary
means 'before other events happen or as the first thing in a series of actions .'
The meaning of the expression 'first instance' would have to be understood to
be that whatever process is required to be undertaken before embarking upon
the subsequent processes, would have to be first completed and thereafter
alone the subsequent processes can be initiated. When Rule 4(1) of PR-1995
provides that at the first instance a notice is to be issued as to why an enquiry
should not be held, such notice would have to remain confined on the issue as
to why the enquiry should not be held and cannot embark upon any other
subsequent processes that may be provided by the subsequent provisions after
the opinion to hold the enquiry is arrived at.
Page No.# 87/97
104. Rule 4(3) of PR-1995 inter-alia provides that if after considering the cause
shown pursuant to the notice under Sub-Rule 1, the adjudicating officer is of the
opinion that an enquiry should be held, he may issue a notice fixing a date for
appearance of that person either personally or through a lawyer or
representative. Further Rule 4(4) provides that on the date so fixed under Rule
4(3), the adjudicating officer shall explain to the person concerned or his lawyer
or representative the offence alleged to have been committed by him by
indicating the provisions of the Act, Rules or Regulations in respect of which the
contravention is alleged to have taken place. It is to be noticed that the further
process of issuing a notice for fixing the date of appearance of the person and
upon his appearance to explain him the offence that he has been alleged to
have been committed by referring to the provisions of the Act, Rules or
Regulations can take place only upon the opinion being formed that there is a
requirement to hold an enquiry pursuant to the process under Rule 4(1) of PR-
1995. In other words, only upon a completion of the process of the notice
issued under Rule 4(1) by forming an opinion that an enquiry is required to be
held, the further processes under Rule 4(3) and 4(4) can be initiated.
105. In Natwar Singh Vs. Directorate of Enforcement, reported in (2010) 13 SCC
255, the Supreme Court examined the provisions of Rule 4 of the Foreign
Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, (in
short FEMA Rules 2000) which is extracted as below:-
20. Rule 4 of the said Rules which prescribes the procedure for holding of
inquiry which is material for our present purpose is as under:
"4. Holding of inquiry.- (1) For the purpose of adjudicating under Section 13 of the Act
whether any person has committed any contravention as specified in that section of
the Act, the adjudicating authority shall, issue a notice to such person requiring him to
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show cause within such period as may be specified in the notice (being not less than
ten days from the date of service thereof) why an inquiry should not be held against
him.
(2)Every notice under sub-rule (1) to any person shall indicate the nature of
contravention alleged to have been committed by him.
(3) After considering the cause, if any, shown by such person, the adjudicating
authority is of the opinion that an inquiry should be held, he shall issue a notice fixing
a date for the appearance of that person either personally or through his legal
practitioner or a chartered accountant duly authorized by him.
(4) On the date fixed, the adjudicating authority shall explain to the person proceeded
against or his legal practitioner or the chartered accountant, as the case may be, the
contravention, alleged to have been committed by such person indicating the
provisions of the Act or of rules, regulations, notifications, direction or orders or any
condition subject to which an authorization is issued by the Reserve Bank of India in
respect of which contravention is alleged to have taken place.
(5) The adjudicating authority shall, then, given an opportunity to such person to
produce such documents or evidence as he may consider relevant to the inquiry and if
necessary, the hearing any be adjourned to future date and in taking such evidence
the adjudicating authority shall not be bound to observe the provisions of the Indian
Evidence Act,1872 (1 of 1872).
(6) While holding an inquiry under this rule the adjudicating authority shall have the
power to summon and enforce attendance of any person acquainted with the facts
and circumstances of the case to give evidence or to produce any document which is
in the opinion of the adjudicating authority may be useful for or relevant to the
subject- matter of the inquiry.
(7) If any person fails neglects or refuses to appear as required by sub-rule (3) before
the adjudicating authority, the adjudicating authority may proceed with the
adjudicating proceedings in the absence of such person after recording the reasons for
doing so.
(8) If, upon consideration of the evidence produces before the adjudicating authority,
the adjudicating authority is satisfied that the person has committed the
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contravention, he may, by order in writing, impose such penalty as he thinks fit, in
accordance with provisions of Section 13 of the Act.
(9) Every order made under sub-rule 8 of Rule 4 shall specify the provisions of the
Act or of the rules, regulations, notifications, direction or orders or any condition
subject to which an authorization is issued by the Reserve Bank of India in respect of
which contravention has taken place and shall contain brief reasons for such decisions.
(10) Every order made under sub-rule (8) shall be dated and signed by the
adjudicating authority.
(11) A copy of the order made under sub-rule (8) of Rule 4 shall be supplied free of
charge to the person against whom the order is made and all other copies of
proceedings shall be supplied to him on payment of copying fee @2 per page.
(12) The copying fee referred to in sub-rule (11) shall be paid in cash or in the form of
demand draft in form of the adjudicating authority.
(emphasis supplied)
106. Rule 4 (1) of the FEMA Rules 2000 provides that for the purpose of
adjudicating under section 13 of the Foreign Exchange Regulation Act, 1973, the
adjudicating authority shall issue notice to such person requiring him to show
cause within such period as to why an enquiry should not be held against him.
Rule 4(3) of the FEMA Rules, 2000 provides that after considering the cause if
any shown by such person, the adjudicating authority is of the opinion that an
enquiry should be held, a notice fixing a date for appearance of that person,
either personally or through lawyer or authorized chartered accountant, be
issued.
107. While interpreting of the provisions of Rules 4(1) and 4(3) of the FEMA
Rules 2000, the Supreme Court in Natwar Singh (supra) arrived at its conclusion
in paragraph 23 of its judgment that the Rules do not provide and empower the
adjudicating officer to straight away make an enquiry into the allegations of
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contravention in respect of any person, against whom a complaint had been
received. The Supreme Court was of the view that for the purpose of
adjudication whether any person has committed any contravention, the
adjudicating officer shall issue notice requiring him to show cause as to why an
enquiry should not be held and the notice to be issued is not for the purposes of
making any adjudication into the alleged contravention, but only for the purpose
of deciding whether an enquiry should be held. After taking the cause shown by
such person the adjudicating officer is required to form an opinion as to whether
any enquiry is required to be held and it is only then the real and substantial
enquiry into the allegations of contravention begins.
Paragraph 23 of the Natwar Singh (supra) is extracted below:-
23. The Rules do not provide and empower the adjudicating authority to
straightway make any inquiry into allegations of contravention against any person
against whom a complaint has been received by it. Rule 4 of the Rules mandates that
for the purpose of adjudication whether any person has committed any contravention,
the adjudicating authority shall issue a notice to such person requiring him to show
cause as to why an inquiry should not be held against him. It is clear from a bare
reading of the rule that show-cause notice to be so issued is not for the purpose of
making any adjudication into alleged contravention but only for the purpose of
deciding whether an inquiry should be held against him or not. Every such notice is
required to indicate the nature of contravention alleged to have been committed by
the person concerned. That after taking the cause, if any, shown by such person, the
adjudicating authority is required to form an opinion as to whether any inquiry is
required to be held into the allegations of contravention. It is only then the real and
substantial inquiry into allegations of contravention begins.
108. While examining the provisions of Rule 4(1) of the PR-1995, the Supreme
Court in T. Takano (supra), had in paragraph 34 referred to the proposition laid
down in paragraph 23 of Natwar Singh (supra). In paragraph 35, the conclusion
arrived was that the notice under Rule 4(1) of PR-1995 is not for the purpose of
making an adjudication into the alleged contravention, but only for deciding
whether an enquiry must be conducted. It was also held that the stage when an
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enquiry is held is subsequent to the initial stage contemplated by Rule 4(1). In
paragraph 36 of T. Takano (supra), it had been held that the Court distinguishes
between the initial stage under Rule 4(1) which is only for the purpose of
deciding whether an enquiry has to be held and the subsequent stage of
adjudication into the allegations of contravention.
109. Paragraphs 34, 35 and 36 of T. Takano (supra) are extracted below:-
34. Now in this backdrop, Justice B. Sudarshan Reddy speaking for the two-judge
Bench of this Court interpreted Rule 4 as follows: "23. The Rules do not provide and
empower the Adjudicating Authority to straightaway make any inquiry into allegations of
contravention against any person against whom a complaint has been received by it.
Rule 4 of the Rules mandates that for the purpose of adjudication whether any person
has committed any contravention, the Adjudicating Authority shall issue a notice to such
person requiring him to show cause as to why an inquiry should not be held against
him. It is clear from a bare reading of the rule that show cause notice to be so issued is
not for the purposes of making any adjudication into alleged contravention but only for
the purpose of deciding whether an inquiry should be held against him or not. Every
such notice is required to indicate the nature of contravention alleged to have been
committed by the person concerned. That after taking the cause, if any, shown by such
person, the Adjudicating Authority is required to form an opinion as to whether an
inquiry is required to be held into the allegations of contravention. It is only then the
real and substantial inquiry into allegations of contravention begins."
35. The above extract clearly indicates that the show cause notice under Rule 4(1)
is not for the purpose of making an adjudication into the alleged contravention but only
for deciding whether an enquiry must be conducted. The stage when an enquiry is held
is subsequent to the initial stage contemplated by Rule 4(1). During the course of the
adjudication, the fundamental principle is that material which is used against a person
must be brought to notice. As this Court observed: "30. The right to fair hearing is a
guaranteed right. Every person before an authority exercising the adjudicatory powers
has a right to know the evidence to be used against him. This principle is firmly
established and recognised by this Court in Dhakeswari Cotton Mills Ltd. v. CIT [AIR
1955 SC 65 : (1955) 1 SCR 941]. However, disclosure not necessarily involves supply of
the material. A person may be allowed to inspect the file and take notes. Whatever
mode is used, the fundamental principle remains that nothing should be used against
the person which has not been brought to his notice. If relevant material is not
disclosed to a party, there is prima facie unfairness irrespective of whether the material
in question arose before, during or after the hearing. The law is fairly well settled if
prejudicial allegations are to be made against a person, he must be given particulars of
that before hearing so that he can prepare his defence. However, there are various
exceptions to this general rule where disclosure of evidential material might inflict
Page No.# 92/97
serious harm on the person directly concerned or other persons or where disclosure
would be breach of confidence or might be injurious to the public interest because it
would involve the revelation of official secrets, inhibit frankness of comment and the
detection of crime, might make it impossible to obtain certain clauses of essential
information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H [[1995]
Q.B. 43 : [1994] 3 WLR 1110 : (1995) 1 All ER 479 (CA)]). 31. The concept of fairness
may require the adjudicating authority to furnish copies of those documents upon which
reliance has been placed by him to issue show-cause notice requiring the noticee to
explain as to why an inquiry under Section 16 of the Act should not be initiated. To this
extent, the principles of natural justice and concept of fairness are required to be read
into Rule 4(1) of the Rules. Fair procedure and the principles of natural justice are in-
built into the Rules. A noticee is always entitled to satisfy the adjudicating authority that
those very documents upon which reliance has been placed do not make out even a
prima facie case requiring any further inquiry. In such view of the matter, we hold that
all such documents relied on by the authority are required to be furnished to the noticee
enabling him to show a proper cause as to why an inquiry should not be held against
him though the Rules do not provide for the same. Such a fair reading of the provision
would not amount to supplanting the procedure laid down and would in no manner
frustrate the apparent purpose of the statute." (emphasis supplied)
36. The decision of this Court distinguishes between the initial stage under Rule 4
(1) which is only for the purpose of deciding whether an enquiry has to be held and the
subsequent stage of adjudication into the allegations of contravention. This Court
further held: "34. As noticed, a reasonable opportunity of being heard is to be provided
by the adjudicating authority in the manner prescribed for the purpose of imposing any
penalty as provided for in the Act and not at the stage where the adjudicating authority
is required merely to decide as to whether an inquiry at all be held into the matter.
Imposing of penalty after the adjudication is fraught with grave and serious
consequences and therefore, the requirement of providing a reasonable opportunity of
being heard before imposition of any such penalty is to be met. In contradistinction, the
opinion formed by the adjudicating authority whether an inquiry should be held into the
allegations made in the complaint are not fraught with such grave consequences and
therefore the minimum requirement of a showcause notice and consideration of cause
shown would meet the ends of justice. A proper hearing always include, no doubt, a fair
opportunity to those who are parties in the controversy for correcting or contradicting
anything prejudicial to their view."
109. By following the aforesaid propositions of law laid down by the Supreme
Court in Natwar Singh (supra) and T. Takano (supra), we have to arrive at a
conclusion that a notice under Rule 4(1) of the PR-1995 would be a notice only
for the purpose as to whether an enquiry should be held and such notice cannot
embark into an actual adjudication being made which ultimately may lead to
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any of the penalties under sections 15A to 15HB. As clearly provided under Rule
4(3) of PR-1995, upon the causes being shown to the notice as to whether an
enquiry is to be held, the adjudicating authority is required to form an opinion
that in the case at hand, an enquiry is required to be held. Only upon forming
such opinion that an enquiry is required to be held, the subsequent process of
fixing a date of appearance for explaining the person concerned as to the
alleged offence that had been committed by indicating the provisions of the
Acts, Rules or Regulations that were contravened, can be carried forward.
110. When we examine the impugned notice dated 17.09.2021 in respect of the
writ petitioner noticee Ankita Didwania at paragraph 14, as per the aforesaid
proposition of the law, it is noticed that the noticee is called upon to show cause
not only as to why an enquiry should not be held against her under Rule 4, but
also why penalty should not be imposed under the provisions of Section 15HA of
the SEBI Act, 1992 in terms of Rule 5 of the PR-1995. In other words, the notice
dated 19.09.2021 in respect of petitioner noticee Ankita Didwania is a composite
notice comprising of a notice as to why an enquiry should not be held and also
why the adjudication proceeding be not carried forward and brought to its end
by referring to the penalty.
111. Rule 4(3) of the PR-1995 provides that the subsequent process of
adjudication by fixing a date of appearance of the person concerned leading to
a penalty in terms of Rule 5 is to be preceded by the condition precedent of
forming an opinion that an enquiry is required to be held. If we go by paragraph
14 of the impugned notice dated 17.09.2021 in respect of petitioner noticee
Ankita Didwania, it has to be understood that the notice is also for the
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adjudication proceeding which may result in a penalty and that it was made
without the satisfaction of the condition precedent of forming an opinion by the
adjudicating officer that an enquiry is required to be held.
112. Accordingly, we are to arrive at a conclusion that the impugned notice
dated 17.09.2021 in respect of petitioner noticee Ankita Didwania is a notice
defective in form, although we may not have had arrived at any conclusion nor
expressed any view on the substance of the notice dated 17.09.2021.
113. A contention has been raised by Ms. M Hazarika, learned senior counsel
for the respondent SEBI that even if the notice dated 17.09.2021 is a notice
defective in form, but no prejudice would be caused to the petitioners and
therefore, an interference of the notice may not be made.
114. Whether or not, a prejudice has been caused would be a matter of
individual perception, but by the impugned notices, the noticees are required to
show cause firstly, as to why an enquiry should not be held and secondly, as to
why the penalty should not be imposed. By the composite notices, the noticees
are put at a disadvantage that their show cause also would have to be
composite and while providing for any reply to the adjudication stage as to why
penalty should not be imposed, the reply thereof can also be used for the first
stage of giving a reply as to whether the enquiry is to be held or not. Had the
appropriate procedure of separating the two stages would have been followed
by issuing the notice under Rule 4(1) of PR-1995 by confining it on the issue as
to whether an enquiry should be held or not, the noticees would have had the
opportunity not to give any reply with regard to the further issue on the penalty
which would be a part of the subsequent stage of the proceeding. Therefore, it
cannot be wholly agreed upon that no prejudice of any kind was caused to the
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petitioner noticees because of the composite notice of requiring to show cause
both against as to why an enquiry should not be held and also on the
adjudication proceedings which may result in the penalty to be imposed.
115. By following the propositions laid down by the Supreme Court in Natwar
Singh (supra) and T. Takano (supra), as well as taking note of the procedural
requirements of Rule 4 of the PR-1995, we are of the view that the impugned
notice dated 17.09.2021 in respect of the petitioner noticee Ankita Didwania in
WP(C) No. 766 of 2022 and other similar notices in respect of the petitioner
noticees of the other writ petitions would not be sustainable in the present form
and accordingly, they are all set aside.
116. We also take note that some of the impugned notices provide for an
opportunity to the noticees to avail certain conciliation process in respect of the
penalties to be imposed. If any such petitioner noticees without intending to
raise objection to any of the notices intends to avail any offer of conciliation in
respect of the quantum of penalty, liberty would remain to any such petitioner
noticees to avail the same.
117. However, as the interference is on a technical aspect on the procedure
adopted in the matter, with regard to the manner in which the notices were
issued, without any view being expressed on the legality and validity of the
notices as regards the subject matter involved, as well as on the materials
available on record, the respondents in the SEBI may proceed against the
petitioner noticees from the stage of issuing the notices under Rule 4(1) of PR-
1995, if so advised subject to it being otherwise sustainable in law.
118. We have taken note of a submission being made by Dr. Ashok Saraf,
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learned senior counsel for the petitioners that under Rule 3 of the PR-1995, the
Board may appoint any of its officers not below the rank of Division Chief to be
the adjudicating officer for holding an enquiry whenever the Board is of the
opinion that there are grounds for adjudging under Chapter VI-A of the SEBI
Act, 1992. The learned senior counsel submits that even prior to appointment of
an adjudicating officer by the Board, there is a requirement of an opinion to be
formed that there are grounds for adjudging under Chapter VI-A of the SEBI Act
1992. The learned senior counsel further submits that the opinion to be formed
would have to be person specific against whom the adjudication process is
sought to be initiated.
119. Ms. M Hazarika, learned senior counsel for the respondents in the SEBI on
the other hand submits that the records itself would show that such individual
opinion had been formed by the Board through its appropriate authority who
had been delegated in exercise of the powers under Rule 19 of the SEBI Act,
1992.
120. As we have interfered with the notices issued by the adjudicating officers
of the respondent SEBI on the technical ground of it not conforming to the
requirements of the Rule 4 of PR-1995, we further provide that the delegated
authority of the Board who is required to form the opinion before appointing the
adjudicating officer to look into the records on the opinion being formed against
the persons specific against whom the adjudication process is sought to be
initiated and ensure that the required opinion referred under Rule 3 of PR-1995
is duly formed.
121. As provided by the Supreme Court in paragraphs 24 and 25 in T Takano
(supra), the opinion to be formed under Rule 3 of the PR-1995, which would
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have to be person specific to the individual noticees, be also served on the
noticees along with the de-novo notice that may be issued under Rule 4(1) of
the PR-1995.
122. The writ petitions are answered and decided accordingly.
JUDGE
Comparing Assistant
