Supreme Court: In a special leave petition against the impugned judgment passed by the Bombay High Court, whereby, the Court dismissed the writ petition filed by the petitioner to sought directions against Securities and Exchange Board of India (SEBI) to forthwith furnish the documents relied upon by them to issue Show Cause Notice to the petitioner, the division bench of Indira Banerjee* and A.S. Bopanna, JJ. has observed that there was no procedural irregularity, at least till the stage of notice fixing a date of hearing and the High Court rightly did not interfere with the proceedings at the stage of the Show Cause Notice, thus, there is no infirmity in the impugned judgment of the High Court of dismissing the writ petition.

In the present case, the Petitioner was an employee of Religare Finvest Limited (RFL), a subsidiary entity of Religare Enterprises Ltd. (REL); and the respondent appointed a Forensic Auditor to investigate the matter of REL and related entities for alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (the SEBI PFUTP Regulations). Thereafter, a show cause notice was issued to the petitioner by the respondent under section 15-HA of the SEBI Act and Rule 3 of the SEBI Adjudication Rules, 1995 pertaining to Sections 11(1), 11(4), 11-B(1) 11-B (1), 11-B(2), and 11(4A) of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) and Section 12-A(1) and 12-A(2) of the Securities Contract (Regulation) Act, 1956 (SCR Act 1956) read with SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (SEBI Adjudication Rules 1995) and Securities Contract (Regulation) (Procedure for holding inquiry and imposing penalties) Rules, 2005 (SCR Penalties Rules 2005), as to why appropriate directions for imposing penalty, should not be passed against him. Further, the petitioner had sought directions against the respondent to immediately furnish the documents relied upon by the respondent to issue Show Cause Notice to the petitioner.

The Court noted that the allegation in the Show Cause Notice is that funds to the tune of Rs. 2315.66 crores were diverted from RFL through several layers of conduit entities for the ultimate benefit of promoters of REL and RFL. Further, some documents were supplied to the petitioner, however, certain documents were denied on the ground that those were confidential documents.

The Court took note of the ruling in Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255, wherein the Court held that “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. Further, 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”.

The Court took note of the submission by the petitioner that the Adjudicating Authority has not followed the procedure, and instead, fixed the case for final hearing without forming an opinion, as required under Rule 4(3) of the SEBI Adjudication Rules 1995, by relying on the ruling in Shashank Vyankatesh Manohar v. Union of India, 2013 SCC OnLine Bom 987. Further, the Court relied on the decision in T. Takano v. SEBI, (2022) 8 SCC 162, wherein the Court held that “it would be fundamentally contrary to the principles of natural justice if the relevant material were not disclosed to the noticee”. Further, the Court in T. Takano (supra), approved and followed the law laid down in Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255 and reiterated that the Adjudicating Authority had the duty to disclose the materials that had been relied upon during the stage of adjudication and the authority cannot exercise unfettered discretion to redact documents necessary for the noticee to defend his case.

The Court observed that at the stage of Rule 3, the Board appoints an adjudicating officer if it is of the opinion that there are grounds for adjudication under any of the provisions in Chapter VIA of the SEBI Act and the Board only decides whether adjudication proceedings should be initiated or not. Further, the formation of opinion is not a formal inquiry proceeding involving any person against whom inquiry is contemplated and his/her participation is not necessary, and the Board forms its opinion, based on whether there are prima facie materials or grounds for initiation of inquiry and the opinion of the Board under Section 3 has nothing to do with the outcome of the enquiry.

Moreover, after the Board forms its opinion to appoint the officer, comes the next stage, which is the stage under Rule 4 of an inquiry for adjudging under Sections 15A to 15J and 15HB, that whether any person has committed contraventions as specified in those sections. Then the inquiry commences with a Show Cause Notice calling upon the noticee to show cause why an inquiry should not be held against him. The Show Cause Notice must specify the nature of the offence alleged to have been committed and the penalty proposed, to enable the noticee to effectively reply to the show cause.

The Court observed that Section 4(3) makes it clear that, after considering the cause (if any), the Adjudicating Officer is of the opinion that an inquiry should be held, he shall issue a notice fixing a date for appearance of that person either personally or through his lawyer or other authorized representative. Further, the noticee is not required to be heard personally or through a lawyer before taking a decision to proceed with an inquiry in respect of the contraventions alleged in the Show Cause Notice. Moreover, the decision to proceed or not to proceed with the inquiry may be taken based on the reply of the noticee to the Show Cause Notice and once it is decided to proceed with the inquiry, an opportunity of personal hearing is mandatory in accordance with law and in compliance with the principles of natural justice.

The Court viewed that in this case, the Board believed there were grounds for adjudication and accordingly appointed an Adjudicating Officer, who issued the Show Cause Notice to the petitioner, to which he gave a preliminary reply and thereafter sought documents. After considering the reply, the officer believed an inquiry should be held and accordingly, a notice fixing a date for appearance was issued. Thus, there was no procedural irregularity, at least till the stage of notice fixing a date of hearing.

Further, the Court observed that it is well settled that the documents which are not relied upon by the authority need not be supplied as held in Natwar Singh (supra). Thus, it was further observed that the High Court rightly did not interfere with the proceedings at the stage of the Show Cause Notice. Further the petitioner has apparently been permitted to inspect the opinion formed under Rule 3 of the SEBI Adjudication Rules and there is apparently no rule which requires SEBI to furnish the opinion under Rule 3 to the noticee in its entirety. Moreover, the documents relied upon for formation of opinion under Rule 3, are not required to be disclosed to the noticee unless relied upon in the inquiry. Thus, the Court allowed the petitioner to approach the appropriate forum, if he is prejudiced by reason of any adverse order, based on any materials not supplied to him and permitted the respondent to hold the inquiry, without relying upon any documents, not supplied to the petitioner.

[Kavi Arora v. SEBI, 2022 SCC OnLine SC 1217, decided on 14.09.2022]

Judgment by: Justice Indira Banerjee*

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