landmark judgments

The present compilation attempts to cover landmark judgments rendered by the High Courts across the country and Supreme Court on laws centering around Securities Exchange Board of India (for short “SEBI”) and their Regulations framed thereunder.

SEBI is the principal regulator of the securities market in India which saw a mammoth spurt after liberalisation of the Indian economy in late 1990’s. Part I covers important judgments from January to June 2022 related to laws, legislations and subordinate legislations concerning SEBI, whereas Part II shall highlight judgments from July to December 2022. The judgments covered under Part I are as follows:

(1) Manoj Gokulchand Seksaria v. State of Maharashtra1

(Delivered on 5-1-2022)

Coram: Single Judge Bench of Justice V.G. Bisht

The petitioner approached the High Court under Article 227 of the Constitution of India read with Section 482 CrPC challenging the orders passed by the Special Court (CBI) taking cognizance and issuing process against him in relation to FIR registered by CJM, SEBI.

The FIRs were registered on the allegations of allotment of initial public offerings (IPOs) in fictitious names at the instance of certain brokers and individuals of Yes Bank Limited, to corner more shares meant for retail investors and sell them on higher returns post listing, thus making unjust profits. Demat accounts in fictitious and benami names were opened, for cornering the major quota of shares in IPOs by the companies. In the meanwhile, in April 2007, SEBI issued a circular containing guidelines for consent orders and considering requests for composition of offences. These empowered the SEBI to compound civil and criminal cases instituted by it or being investigated by it against various parties proceeded against for violation of SEBI laws. The petitioners also took advantage of the said scheme with an amount of around Rs 2.05 crores as the disgorgement amount towards the settlement charges. Accordingly, a consent order came to be passed by the SEBI disposing of all the pending proceedings under Section 11-B of the SEBI Act. The petitioner thus filed a writ petition seeking quashing of the criminal proceedings instituted based on the same set of allegations that came to be compromised.

The Court, whilst considering submissions, held that there was no direct loss to any specific real investor, the alleged transactions of which somewhat had commercial overtones. Section 24-A of the SEBI Act was referred to as providing for composition of offences, authorising the SEBI to do so at any stage. It was held that when the petitioner was taking advantage of the composite scheme and had compromised the whole matter, continuance of prosecution was an abuse of the process of law. The Court found that in criminal and civil proceedings launched by it, the allegations are essentially the same so levelled by the SEBI against any defaulting person. This is more so when the disgorgement amount along with penalty was already paid at the time of compromise by the petitioner, prior to which, the gravity of offence, as also larger public interest was duly considered by the SEBI prior to confirming the said offences. Referring to the judgments of Nikhil Merchant v. CBI2, B.S. Joshi v. State of Haryana3, Macrotech Developers Ltd. v. CIT4, the Court held that the effect of settlement of disputes by the authorities on pending prosecution must always be examined. An interpretation that abridges the scope of settlement as contemplated under the settlement or the compromised scheme, therefore, cannot be accepted. Accordingly, the prosecution was held not liable to be continued and thus directed to be quashed against the petitioners.


(2) Nimisha Saraf v. SEBI5

(Delivered on 20-1-2022)

Coram: Single Judge Bench of Justice Purushaindra Kumar Kaurav

The petitioner approached the writ court seeking directions to the respondent (SEBI) to open/enable the link for payment of penalty in terms of the Settlement Scheme of 2022 floated by SEBI. The petitioner was proceeded against for violation of Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices relating to Securities Market), Regulations 2003, on the allegations of carrying out non-genuine unverified trades in liquid stock options at the Bombay Stock Exchange. The proceedings culminated in imposition of penalty of Rs 5 lakhs on the petitioner, which was affirmed by all the superior courts in the appellate/revisional remedies resorted to by her. The petitioner in the meanwhile, approached the respondent authority for opening a portal for acceptance of payment in the settlement scheme with the objective of settling enforcement proceedings settlement proceedings against them. However, he was not allowed to access or open the portal for filing the proposal for settlement. SEBI in reply stated that the settlement scheme included only “approved/initiated enforcement proceedings” and not the proceedings in hand, which had been finally concluded. Referring to Clause 6 — “eligibility”, the Court held that the benefit of scheme can be extended only where the enforcement proceedings have been approved or initiated and are pending before any authority/forum, but the same cannot be extended in the case of the petitioner since the said stage is already over, as the adjudicating officer has already passed an order in the case of the petitioner. Quoting Regulation 5 of the SEBI (Settlement Proceedings) Regulations, 2018, it was stated that there is a specific bar for settlement of such cases where penalty has been already imposed by virtue of an order issued under securities law, in an original proceeding. Accordingly, the relief to the petitioner was declined and the writ petition was dismissed.


(3) Percept Finserve (P) Ltd. v. Edelweiss Financial Services Ltd.6

(Delivered on 2-2-2023)

Coram: Division Judge Bench of Justices K.R. Shriram and Rajesh S. Patil

Authored by: Justice K.R. Shriram

The inter-court appeal was preferred under Section 37 of the Arbitration and Conciliation Act, 1996 against the judgment of Single Judge setting aside the award under Section 34 passed by the sole arbitrator.

The issue was whether two clauses in the share purchase agreement (for short “SPA”) between the respondent Edelweiss and the appellant Percept Ltd. are illegal because they were forward contracts contrary to the provisions of the circular issued by the SBI under Section 16 of Securities Contracts (Regulation) Act, 1956 (SCRA), was also hit by Section 18-A of the SCRA, being contracts and derivatives not currently being traded on stock exchange. The repurchase of securities by the vendor by virtue of the forward contract, on occurrence of certain contingencies was called into question. The sole arbitrator held that Clauses 8.5 and 8.5.1 are unenforceable, which finding was set aside by the Single Judge in appeal against award under Section 34. The future purchase of shares by Edelweiss was found by the court to be dependent entirely on coming into existence of certain contingencies. It held by the court that in such contracts, there is no present obligation at all for repurchase of securities, but the obligation arises by reason of some provable contingency occurring in future. On the date when SPA was entered, there was no contract of sale or purchase, which was to come into existence only on a future date, the future point of time when Edelweiss was to exercise auction was to repurchase of shares by appellant. Referring to Section 18-A of the SCRA, it was held that the said provision does not render contracts illegal or invalid or invalidate the same. The only requirement is that the conditions mentioned under Section 18-A must be duly complied with. The circular on a proper reading issued by SEBI was found by the Court to be prohibiting forward contracts of sale or purchase of securities, under which the agreement between the parties was not to be falling within its purview. The Court explained the meaning and purpose of “derivatives” as forms of financial institutions that are traded in securities markets, whose values are derived from values of underlying variables like share price of particular scrip in the cash segment of the market or stock index or portfolio of stocks. Differences between “futures” and “options” derivatives were also explained, wherein “future derivative’ was explained as an agreement where two parties decide to buy or sale an asset at a certain time in future. An “option derivative” on the other hand is a contract that gives right, but not an obligation to buy or sell the underlying asset at a stated price on or before specified date. There is no obligation attached to “option derivatives” in the present case clauses. In the present case, Clauses 8.5 and 8.5.1 never obligated Edelweiss to sell the share purchased by it to the appellant but was kept contingent. Merely because the contract contained a “put options” in respect of securities, the contract could not be treated as a deed or contract in derivatives or be treated as illegal under Section 18-A of the SCRA. Both the clauses were treated to be not a contract for sale or purchase of securities, but merely an option with a promissory, which it may or may not exercise. However, entering such an option does not amount to making a contract in a derivative. Such a contract was never prohibited or held as unforeseeable under Section 18-A SCRA. Accordingly, the view taken by the. Single Bench was affirmed by the Division Bench and appeal was dismissed.


(4) N.L. Rajah v. SEBI

(Delivered on 17-2-2022)

Coram: Single Judge Bench of Justice M. Dhandapani

The petitioners approached the High Court challenging show-cause notices (SCNs) issued by SEBI in relation to issuance of global depository receipts (GDRs) by their company alleging multiple irregularities and illegalities in the same. The primary case of the petitioners was that they were non-executive directors, who were not involved in the day-to-day management and affairs of the said company when the GDRs were issued. It is after a period of fourteen years, with a gross delay, that the proceedings were challenged on being reopened by the SEBI arbitrarily when they are in no way connected with the company or dealings with the same. The SCN issued by the SEBI alleges certain malpractices and unfair tactics adopted in issuance of GDRs, specifically relating to non-disclosure of essential information to the stock exchange and resultantly investors. The GDR issue was subscribed by sole subscribers and not an open subscription. The Court returned a finding that though the petitioners may not be involved in the day-to-day affairs of the company, they were part of the audit team, which had finalised the audits of the company. Though this fact has been disputed by the counsel for the petitioner, however, the same could not be done under Article 226 of the Constitution, specifically when SCN is challenged.

On the question of delay in reopening the proceedings after a lapse of sixteen years, it was held that the said fact of GDRs issued in 2002 was not in the knowledge of SEBI till it was investigating certain other transactions pertaining to other companies. It was only when SEBI was investigating a similar type of transaction done by the petitioner Company with a third party that it came to light that GDRs issued in 2002 also involved the same unfair practices. It was further held that remedy against any order of SEBI is available before SAT to the petitioners, which can be approached instead of straightaway rushing to the writ court on issuance of the SCN on disputed facts. Accordingly, the interference was accorded by the High Court in the SCN issued by the SEBI.


(5) T. Takano v. SEBI7

(Delivered on 18-2-2022)

Coram: Division Judge Bench of Justices Dr D.Y. Chandrachud and Sanjiv Khanna

Authored by: Justice D.Y. Chandrachud

The appeal was preferred against the judgment of the Bombay High Court that dismissed the petition of the appellant challenging the show-cause notice issued by the respondent SEBI alleging violations of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Market), Regulations 2003 (for short “PFUTP Regulations”). The primary ground on which the SCN was challenged was non-supply of the investigation report under Regulation 9 of the PFUTP Regulations to the petitioner, which was the basis and background of issuance of background of SCN as well as the initiation of proceedings against the petitioner. A forensic audit was carried out by the auditors of one Ricoh India Ltd. ( “RIL”) which found irregularities, leakage and unauthorised disclosure of sensitive information relating to pricing of shares by the management of RIL. Initially, a penalty was imposed by the SEBI which was set aside by the Securities Appellate Tribunal with liberty to initiate fresh action against the MD, directors and the CEO.

It was alleged that due to these financial misstatements, prices of shares went up artificially and irregularities took place in the sale of shares made to one Fourth Dimension Solutions Limited (FDSL). Thereafter, a fresh SCN was issued, on the basis of the investigation reports prepared by authorised companies based on the internal investigation conducted by SEBI. The disclosure of the same was refused essentially on two grounds “firstly, it was an internal document which could not be shared and secondly, its disclosure to the appellant would have resulted in disclosure and throwing of sensitive third-party information in the public domain”. Comprehensive arguments were made before the Supreme Court on behalf of all the parties. The Court analysed the regulatory framework of PFUTP Regulations, and powers of SEBI provided under the SEBI Act to arrive at a finding that Regulation 10 implies that consideration of the Report of the investigation authority submitted under Regulation 9 is one of the components guiding the court’s satisfaction on the guiding PFUTP Regulations. Without the said investigation report, the decision cannot be arrived at by the SEBI.

The Court then delved into and liberated the “duty to disclose investigative material”, holding that it serves three key purposes viz. reliability, fair trial and transparency and accountability in the decision-making process. All relevant material relied upon in the decision-making process or for the initiation of action against the person concerned be disclosed to the person concerned. If the investigation report is relied upon in any manner, then the same must be mandatorily disclosed, as the consequences of final action are grave. Further, held that even if it was an inter-departmental investigation, the same must be disclosed. Referring to the judgment of Khudiram Das v. State of W.B.8, it was held that even if no reliance is based on the report, the authority cannot refrain from disclosing it to the noticee. The Court may always look into the relevance of the material to the proposed dereliction, and its nexus to the stage of adjudication and if it finds that it has the tendency to influence the decision of the authority, then it shall be mandatorily disclosed. Referring further to the judgments of Union of India v. Mohd. Ramzan Khan9, ECIL v. B Karunakar10 and State of Patiala v. S.K. Sharma11, the Court held disclosure should be the rule and denial an exception. Accordingly, allowing the writ petition, the Court held that SCN could not proceed with until the necessary investigation report and the relied upon material is supplied to the petitioner. An exception, however, was carved out with respect to disclosure of all those contents, that may have serious risk of disclosure of third-party information to the petitioner affecting their privacy. The appeals were accordingly disposed of.


(6) Invesco Developing Markets Fund v. ZEE Entertainment Enterprises Ltd.12

(Delivered on 22-3-2022)

Coram: Division Judge Bench of Justices S.J. Kathawalla and Milind Narendra Jadhav

The appeal was preferred against the order passed by the Single Bench restraining the shareholders of Zee Entertainment Enterprises Limited (ZEEL) from holding an extraordinary general meeting (EGM) as requisitioned by them. ZEEL filed a suit under Section 9 CPC seeking a restraint order against the appellants who were holding 17.88% of the total paid up share capital of ZEEL, is a publicly listed company. Questions of jurisdiction of the Single Bench in suit proceedings, alleged illegalities in the resolutions proposed by the shareholders and actual remedy available to the shareholders arose before the High Court. In the civil suit filed by ZEEL, the Single Judge Bench granted an injunction restraining the appellant shareholders from taking any action or step in furtherance of the requisition including calling and holding an EGM under Section 100(4) of the Companies Act, 2013. Referring to the judgment of LIC v. Escorts Ltd.,13 of the Supreme Court, it was held that corporate democracy requires that there must not be any interference on the rights of shareholders to move resolutions for EGM, and the same cannot be interfered with or restrained by courts or tribunal. Shareholders can issue a notice requisitioning a meeting of the company anytime, which cannot be injuncted by any court or tribunal, nor the resolution/notice requisitioning such meeting is liable to be questioned.

Accordingly, it was held that the Single Judge went against the law laid in LIC v. Escorts Ltd.14 as also Cricket Club of India Ltd. v. Madhav L. Apte15, of limitations in granting injunctions to resolutions seeking EGM of listed companies for which reason the judgment became suspect. The Division Bench further held that corporate democracy would be rendered nugatory if shareholders are repeatedly restrained and exempted from exercising their statutory rights available under the Companies Act. This clearly cannot be the intent of the Companies Act, 2013.

Referring to Section 430 of the Companies Act, 2013, it was further held that civil court cannot have jurisdiction in two contingencies: First, where a civil court jurisdiction is barred in respect of any matter which NCLT or NCLAT is empowered to determine. Second, no civil court shall grant an injunction in respect of any action likely to be taken to NCLT or NCLAT concerning power conferred on them. Referring to the judgment of Madras High Court in Selvarathnam v. Standard Fire Words (P) Ltd.16, it was held that the bar under Section 430 is absolute, and the civil suit could not be entertained at all. Accordingly, the Single Judge Bench was held to have erred in exercise of jurisdiction, whilst entertaining the civil suit.

The next question that was examined by the court was ground of inherent illegality in the resolution passed by the shareholders seeking convening of EGM. Referring to Sections 149 and 150, it was held that appointment of directors is to be made and can be made only in EGMs and not otherwise. Referring also to the provisions of the SEBI Act and the resolutions thereunder, it was held that there was no bar on the shareholders to appoint independent directors on the board of the company or move a resolution for the said process on the said behalf. In that view thereof, therefore no legality can be attached to the resolution moved by shareholders. The judgment of the Single Bench was accordingly set aside on all counts as an interference in the right of the shareholders to call for the General Body Meeting.


(7) SEBI v. Mega Corpn. Ltd.17

(Delivered on 25-3-2022)

Coram: Two-Judge Bench of Justices L. Nageswara Rao and P.S. Narasimha

Authored by: Justice P.S. Narasimha

The Court was dealing with a statutory appeal under Section 15-Z of the SEBI Act, 1992 against the final order of SAT, which set aside the order of SEBI restricting respondent Company from accessing the capital market for one year with other penalties. The Supreme Court in this matter, whilst dismissing the appeal, elaborated on the scope and extent of appellate jurisdiction of the Supreme Court available under Section 15-Z which was held to be confined to “questions of law”.

The respondent Company was prosecuted by the SEBI when allegations of unusual price movement of shares of the company surfaced between January and September 2005. Huge profits from undeclared business with uncertainty about the sources of income were discovered, for which no reasonable explanation was provided to the SEBI. Accordingly, under Regulations 3 and 4 of the PFUTP Regulations, the company as its managerial board was restrained from buying, selling or otherwise dealing in securities in a manner for a period of one year. Against the penalty imposed by the SEBI, the respondent Company preferred an appeal under Section 15-T before SAT, which allowed the appeal to hold broadly that extraordinary or huge profits earned by the company cannot be the basis for concluding that its accounts were manipulated or were so done with the specific objective for misleading the investigators. Insofar as allegations relating to manipulations in pricing of shares was concerned, the findings of SEBI could not be treated as satisfactory about linkages with unknown, unverified entities of various transactions entered by it. The Supreme Court examined the following issues in the judgment:

“10.1 What is the scope and ambit of statutory appeal to the Supreme Court under Section 15-Z of the Act against an order passed by the Securities Appellate Tribunal?

10.2 Whether the advertisements dated 7-4-2005 and 20-4-2005, are in violation of Regulations 3(a), (b), (c), (d) read with Regulation 4(1), (2)(k) and (r) as amounting to misleading and defrauding the investors?

10.3 Whether the company has violated Regulations 3(a), (b), (c) and (d) and Regulation 4(1), 4(2)(k) and 4(2)(r) of the SEBI (PFUTP) Regulations, 2003 ??by manipulating the share prices and accounts?

10.4 Whether there is a right to cross-examine the author of a document if SEBI seeks to rely on that document which is against the interest of the company?”

On the first issue, the Court referring to the judgment of Videocon International Ltd. v. SEBI18, the Court held that the amended Section 15-Z whilst altering the appellant Forum and remedy available from the High Court to the Supreme Court (post amendment), curtailed the restricted scope of appeal against the orders passed by SAT. The appellate remedy is now available only for determining a “question of law”, and not factual questions. Referring to Black’s Law Dictionary and other documents, specifically its judgment in RBI v. Peerless General Finance and Investment Co .Ltd.19, it was held that Section 15-Z must be interpreted in the light of its surrounding provisions viz. the jurisdiction of the Tribunal available under Sections 15-K, 15-L, 15-M, 15-T, 15-U and 15-Y of the Act. Accordingly, it was held that Supreme Court shall exercise jurisdiction only when there are “questions of law” about erroneous construction of legal provisions of the statute or general principles of law, when the Supreme Court may substitute its decision if it considers appropriate. However, the freedom to evolve and interpret laws must belong to the Tribunal only to subserve the regulatory regime for clarity, consistency and factual issues cannot be looked into by the Supreme Court in a statutory appeal.

On Issues 2 and 3, the Court held that it failed to qualify as a “question of law”, but was relating to factual inferences drawn by the Tribunal for which the jurisdiction of the Supreme Court cannot be invoked.

On Issue 4 viz. the question of the right to cross-examination available with the person concerned being proceeded against by SEBI, it was held that though SEBI has a statutory obligation to follow the principles of natural justice, however, it cannot be held that there is a right inherent to cross-examine witnesses of the SEBI available to the defaulting company in each and every case. The said finding was accordingly set aside holding the right to cross-examine to be available in all the cases. The “question of law” was left open to be decided in an appropriate case. The appeals by the SEBI accordingly were dismissed by the Supreme Court.


(8) Tomorrowland Ltd. v. Hemdev Securities (India) (P) Ltd.20

(Delivered on 27-4-2022)

Coram: Single Judge Bench of Justice Prathiba M. Singh

The High Court was deciding a batch of suits that were related to the dispute between plaintiff (M/s Shoes East Ltd.) and its underwriters as respondents. The plaintiff had launched a public issue in 1995 for issuance of fully convertible debentures ( “FCD”). However, SEBI detected certain irregularities and directed the plaintiff to give an option to all the subscribers to either continue their offers or withdraw the same. Even though the issue had been subscribed up to 90%, due to SEBI advisory, several subscribers withdrew the same and the issue thus got undersubscribed. The plaintiff then raised demand against the underwriters for subscribing to the respective portions of the underwritten FCD’s, which the subscribers declined to. The defendants for various reasons did not appear and remained ex parte in the arbitration proceedings. The awards by the arbitrator were passed ex parte against the underwriters, which were put to challenge before the High Court. The entire issue revolved around the liability of underwriters in pursuance of an underwriter’s agreement, whereunder, there were 267 underwriters in total, with each underwriter underwriting for a certain amount and shares. However, due to failure of the underwriters in not subscribing or paying the said amount of shareholding within the stipulated period of 60 days after the closure of the public issue, the plaintiff company had to refund the entire application money collected from the public. Arbitration proceedings were commenced that resulted in passing ofawards against the underwriters requiring them to restitute and reinstate the petitioner monetarily for the loss suffered by them in repaying the investors. The suit was thus filed by the plaintiff under Sections 14 and 17 of the Arbitration and Conciliation Act, 1996, seeking declaration of the award passed by the sole arbitrator as a judgment and a decree. The underwriters challenging the award on merits stated that there was no devolution of liabilities upon them once the public issue was closed on the earlier closing date and the issue was admittedly fully subscribed. Due to illegalities and irregularities on the part of the plaintiff and market malpractices, SEBI had to intervene and pass directives for the withdrawal of the subscription. Court referred to provisions of SEBI (Underwriters) Regulations, 1993, which governs the conduct of underwriters and the process of underwriting. Court interpreted Regulations 14, 15 and 9-A of aforesaid SEBI (Underwriters) Regulations, to interpret when the obligations of underwriters under underwriting agreement are discharged qua the company going for a public issue. It was held that the underwriters were supplied with the copies of the prospectus; they had complete knowledge of the factual position related to the plaintiff Company, as also various obligations and rights as set out in the prospectus. The manner in which the computation of obligations of underwriters was to take place was also specified which was to be conveyed within a period of 30 days. SEBI, even though its warning advisory directed the plaintiff company to give an option to the investors to withdraw their investments, however there was no collateral direction ever to the underwriters discharging their obligations in relation to the same. Thus, they continued to be governed by the Underwriter Regulations and the obligations provided thereunder. Explaining the scheme of underwriting agreement, it was stated that it is in the nature of an insurance contract wherein the underwriter performs the role of an entity providing insurance to the company going for public issue, the underwriter is bound to subscribe to the FCDs/shares. Referring to the judgment of Naini Gopal Lahiri v. State of U.P.21, the Court concluded that the role of underwriter triggers when the shares of the company are not taken up by the public and he has to step in to make up the deficiency and the total number of shares underwritten by him. It is in the nature of an insurance against the possibility of inadequate subscription. In the facts and circumstances of the case, it was thus held that the underwriters were not discharged simply upon the issue being fully subscribed as that is not one of the grounds of discharge of obligation, neither under the applicable Underwriters Regulations, nor under the prospectus. The minimum window till when the obligations of the underwriters exist is a period of 30 days, till when no communication is received by the underwriter. Thus, the stand of the defendant was accordingly repelled. It was further held that the devolution/devolvement notice was duly served by the company to all the underwriters, which was not even replied to on the contract’s underwriting agreement stated. So much so that the underwriters chose not to show appearance before the arbitrator, which clearly shows that they had no intentions to respect their obligations under the contract. In the eventual analysis, the award of the arbitrator was thus affirmed and consequential directions for payment of the principal amount with interest from the date of award were directed to be paid. Judgment and decree as per the award were directed to be drawn accordingly by the court.


(9) Balram Garg v. SEBI22

(Delivered on 19-4-2022)

Coram: Two-Judge Bench of Justices Vineet Saran and Aniruddha Bose

Authored by: Justice Vineet Saran

The petitioners were all family members, with the seniormost family member, Mr P.C. Gupta being the Chairman of PC Jewellers Ltd. The family members of Mr P.C. Gupta viz. the appellant-petitioner and others were proceeded against by the SEBI, alleging that all the family members occupied and shared the same residence. The petitioner along with other family members had indulged in disclosure of sensitive price information relating to shares of the company and thus violated SEBI (Prohibition of Insider Trading) Regulations, 2015 as an “insider” under Regulation 2(1)(g) and “connected person” under Regulation 2(1)(d)(i). The essential allegations were related to transfer of sensitive information by misusing transfer sensitive information related to shares of the company misusing their position and taking advantage of their family relations with the directors of the company. SEBI accordingly imposed heavy penalties on the petitioners, restraining them simultaneously from accessing the security market and buying, selling, or dealing with the same. The appeal preferred before SAT was also of no avail, which simply affirmed the order passed by the whole-time member, SEBI. Referring to Sections 11, 12-A and 15-G of the SEBI Act, the Court discussed prohibition of insider trading in securities and measures that can be taken against the erring officials of the company. If the information is generally available in public domain and its disclosure is not attributable to the petitioner being proceeded against by SEBI, then no illegality can be said to have been committed. It was further held that being the First Court of Appeal, SAT was obligated to deal with all issues and evidence led by the parties, as also to have adjudicated the questions of fact arising in the matter. It was the duty of the SAT to have dealt with and considered all the issues and evidence led by the parties, specifically when there was no direct evidence suggesting as to who had disseminated the insider information to the appellants. SAT was held to have overlooked that there was no evidence, direct or indirect, produced by the SEBI to show the involvement of the petitioner in the allegations. The persons who were being proceeded against by the SEBI had resigned from the positions in the company way back and were having absolutely no affairs with the same. The approach adopted by SAT was stated to have turned SEBI on its head by placing the burden of proving that there was complete breakdown 0f ties between the parties on the appellants. To the contrary the onus was entirely on the SEBI to have shown that appellants were in possession or having direct access to unpublished price sensitive information (UPSI) and that the dissemination of the same happened at their hands and no one else. The onus of showing that a certain person was in possession of and had access to unpublished price sensitive information at the time of trading is thus on the SEBI and not vice versa. The allegations raised by SEBI were found to be not in sync with the movement of UPSI in the hands of the petitioner or the family members being proceeded against. On the date the shares were sold, UPSI in question had not even come into existence and therefore, there was no question of dissemination or leakage of the same. There was no direct correlation established between dissemination, disclosure of UPSI and the sale of shares by the family members of the family tree. Frequent communications between the parties, in the absence of any other material, cannot give rise to a presumption of communication of UPSI by the family members to the petitioner, if otherwise no material was shown or produced before the Court that shows frequent communication and interaction on the settlement of the price of shares or securities.

Referring to the judgments of Hanumant v. State of M.P.23, it was held that wherever evidence is of circumstantial nature, the conclusion of guilt to be drawn from such circumstantial evidence must be fully established and the facts to be established must be consistent only with the hypothesis of the guilt of the accused, and no one else. Referring to the judgment of Chintalapati Srinivasa Raju v. SEBI24, it was further held that expression “reasonably expected” cannot be mere ipse dixit when it comes to access to UPSI. There must be material to show that such a person can have reasonable access and that he took advantage of the same. Presumptions unsupported by law of unwarranted nature cannot be raised, specifically when the relation between the petitioners and other family members had ceased to exist and they were completely financially independent of the appellant and had nothing to do with his decision-making process in relation to securities or otherwise. Accordingly, the judgment of SAT was set aside, whilst allowing the appeals preferred against the same.


(10) Souvenir Developers (India) (P) Ltd. v. Union of India25

(Delivered on 6-5-2022)

Coram: Division Judge Bench of Justices R.D. Dhanuka and S.G. Mehare

Authored by: Justice R.D. Dhanuka

This was an appeal under Section 260-A of the Income Tax Act, 1961 by the assessee, however, raising questions of law relating to “derivatives” being treated as “speculative transactions” for being denied the benefit of setoff/adjustment with other business income of the assessee. Two substantial questions of law arose before the High Court, which were as follows:

(i) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in confirming any addition on transaction in derivatives on recognised stock exchange as defined under Section 43 (5)(d) of the Income Tax Act, 1961 with reference to explanation given to Section 73 of the Income Tax Act, 1961 which is applicable to speculative transactions.

(ii) Whether loss suffered by the appellant on the transactions in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange by the appellant could have been set off against the income of the appellant arisen out of infrastructure business carried on by the appellant under Section 70 of the Income Tax Act, 1961.

The petitioner had been trading and undertaking business in securities and derivatives. The dispute pertains to the Financial Year 2008-2009 (AY 2009-2010), when losses were suffered by the assessee on transactions in derivatives. This loss was sought to be set off in overall business income under other heads of the assessee, which was denied by the assessing officer relying on Sections 43 and 73 of the IT Act, 1961 holding that losses from income from speculative businesses cannot be set off against the income from non-speculative businesses. Section 43(5) defines a “speculative transaction” as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or strips. However, through a proviso added in the year 2005, transactions in respect of trading in derivatives were taken out of the purview of the speculative transactions. Section 73 of the IT Act, 1961 placed an embargo setting off any loss computed in respect of the speculation business against profits and gains of another speculative business or other business. The ITAT had declined to accept the claim of set off in respect of the losses suffered by the assessee in trading and business of derivatives. Deprecating the stand taken by the ITAT, and relying on the judgment of the Supreme Court in Snowtex Investment Ltd. v. CIT26 It was held by the High Court that amendment to Section 43(5) of the Income Tax Act by Finance Act 2005, as aforementioned, was neither considered nor appreciated in proper perspective. In conclusion, it was held that since transactions and derivatives covered by Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out and recognised by the stock exchange are not speculative transactions, therefore, the IT Department cannot be allowed to deny the claim of set off. Thus, the loss suffered in the trading of such derivatives was a business loss and not a speculative loss, post 1-4-2006, which is the date of insertion of proviso under the section. Accordingly, both the substantial questions were answered in favour of the assessee by the High Court, holding that they were entitled to claim for set off in their favour.


(11) PTC India Financial Services Ltd. v. Venkateswarlu Kari27

(Delivered on 12-5-2022)

Coram: Two Judge Bench of Justices M.R Shah and Sanjiv Khanna

Authored by: Justice Sanjiv Khanna

The primary issue that arose for consideration before the Supreme Court was whether the Depositories Act, 1996 read with Regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996 overwrites the provisions relating to the contracts of pledge under the Contract Act, 1872. The question arose in the context of the judgment of NCLAT, holding that the Depositories Act overrides provisions of the Contract Act. The appellant, PTC India Financial Services Limited (PIFSL), is an NBFC that extended loan to respondent Mandava Holdings Private Limited (MHPL). In lieu thereof, a pledge deed, pledging shares equivalent to 26% was executed by MHPL in favour of PIFSL. PIFSL in terms of Regulation 58 of the Depositories Regulations, was registered as a “beneficial owner”, after the debts remain unpaid and PIFSL wrote to the depository participant for invocation of the said rights under Clause 6.1 of the pledge deed. It was thus contended that MHPL no longer possessed any title or right over the said pledged shares, of which PIFSL became the “beneficial owner”. The question arose whether the right to redeem available to MHPL of the pledge disappeared or diminished with PIFSL becoming the “beneficial owner’ and what was the extent of rights available to MHPL post the registration of PIFSL as the “beneficial owner”. Referring to the provisions of Chapter IX of the Contract Act, specifically Sections 172 and 176-179, the Supreme Court held the following:

  1. Pledge confers lesser rights over the pledgee/pawnee viz. rights available in a mortgage. A pledgee/pawnee never has absolute ownership of the goods but only special property in them coupled with a power of selling and transferring them to a purchaser on default of payment at the stipulated time; to the contrary, a mortgagee acquires general rights in the mortgaged property from the date of the mortgage, which is not available to the pawnee.
  2. The pawnee cannot sell or transfer the pledged property in default of the pawnor/pledger’s default in repayment of the bailment amount but has to give prior notice of sale to the third party accruing because of the former’s default. It is only after giving prior notice that pawnee would be authorised to sell the pledged property to a third party towards the realisation of its outstanding debt.
  3. The right of the pawnor/pledger to redeem the pledged property remains until the lawful sale at the hands of the pawnee. Till the time the sale is affected, the pledged property can be redeemed and retrieved by the pledger.
  4. The pawnee cannot sell to self under a contract of pledge as there is no concept of sale to self that does not affect the right to redeem the pledge available to the pawnor. At best, sale to self-amounts to conversion of the nature of property but cannot be treated as a sale conferring absolute ownership rights on the pawnee.

    The Court then proceeded to explain the effect and purpose of the Depositories Act as also the Depositories Regulations, 1996 on the pledging of securities. Explaining the background, purpose and object behind enactment of the Depositories Act, it was held that depositories simply convert securities from tangible to fungible form. They dematerialise the security for this reason also known as DEMAT securities. As per the statutory dispensation, the depository is the “registered owner”, whereas the owner of the said fungible share is the “beneficial owner”, after surrendering the physical shares. Thus, the “registered owner” differs entirely from the “beneficial owner”, the latter being the actual entity authorised to take decisions in respect of trading, transaction and transfer of the said dematerialised security. The “beneficial owner” was entitled to create a pledge on security owned by him, just in a way, any owner of a physical commodity/property is entitled to create a pledge. A pawnee, in the event of default of the pledger/pawnor in case of depositories, has to necessarily get themselves registered as the “beneficial owner”, without which they cannot sell the depositories to third parties. There is no derogation or contradiction, or conflict between Section 10 of the Depositories Act or in the event of default of the pledgee/pawnor. Thus, Sections 176 and 177, Contract Act apply with equal force to pawned dematerialised securities as they apply to other pawned goods. The provisions are not in conflict with each other but are facilitating the operation of each other.

Finally, the Court held that there is no derogation or conflict between Regulation 58 of the Depository Regulations and the provisions of ICA. The selling of depositories to the third party by the pledgee can happen only after the issuance of prior notice under Section 176 of the Contract Act by the pledgee to the pledger, whereafter only, even in case of dematerialised securities, can happen after the said notice. Accordingly, the Court disposed of the appeal preferred before it by holding the PIFSL had rightly stepped into the shoes and shares of MHPL as the “beneficial owner”, however the same cannot be treated as the sale. MHPL possessed the right to redeem the shares by repayment of the debt amount till the actual sale of the same.


(12) BRD Securities Ltd. v. Union of India28

(Delivered on: 25-5-2022)

Coram: Single Judge Bench of Justice V.G. Arun

The petitioner is an unlisted public limited company, that was carrying on the business of asset financing. SEBI issued a show-cause notice alleging violation of provisions of Companies Act, 1956, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Disclosure and Investor Protection) Guidelines, in the issuance of debentures and bonds during the period 2003 to 2017. The petitioner refuted the allegations asserting that no contravention of statutory provisions has been carried out by them and that all the provisions have been adhered to. However, the writ petition was preferred, when the hearing of the petitioner was scheduled before the Chief General Manager of SEBI, in place of the whole-time member of the board. It was argued that quasi-judicial functions being performed by the authorities designated under the enactment cannot be delegated or sub-delegated to the officers and the same falls beyond the bounds of “permissible delegation”. Multiple judgments, authorities of the Supreme Court, foreign judgements, etc. were cited to assert the said proposition. However, referring to Section 19 of the SEBI Act, and the judgments of the Supreme Court in Saurashtra Kutch Stock Exchange Ltd v. SEBI29, it was held that Notification dated 30-9-1994 issued by the SEBI delegating the powers of adjudication and quasi-judicial functions under Section 11 to full-time members of the board is valid. Interpreting Section 19, it was held that challenge against delegation of powers to a permanent/full-time member of the Board cannot be found fault with and the fact that the members of the Board appointed by the Central Government and Reserve Bank, whilst the officers to whom the delegation is affected are appointed by the Board will not render the delegation back. A public authority is always at liberty to employ agents to exercise its powers. Referring to the judgments of Newtech Promoters and Developers (P) Ltd. v. State of U.P.30 judgment on pari materia provision under Section 81 of the Real Estate (Regulation and Development) Act, 2016. Referring to this provision, it was held that through an express provision in the statute, delegation of such quasi-judicial powers can be duly affected. In the Indian context, the delegation of quasi-judicial functions is permissible if the statute provides a sub-delegation, and in the SEBI Act, Section 19 so authorises SEBI to delegate such powers. Accordingly, the challenge to the delegation order passed by the SEBI of quasi-judicial functions to its Chief Manager was rejected and writ petition also accordingly dismissed.


(13) MBL and Co. Ltd. v. SEBI31

(Delivered on 26-5-2022)

Coram: Two-Judge Bench of HM Justices Dr D.Y. Chandrachud & Bela M. Trivedi

Authored by: Justice Dr D.Y. Chandrachud

The challenge was laid to an order passed by the whole-time member (WTM), SEBI restraining the appellant from buying, selling, or otherwise dealing with securities and proprietary accounts for a period of four years. A mandatory penalty was also imposed of Rs 30 lakhs after finding the petitioner guilty of violation of PFUTP Regulations. The allegation against the petitioner was that he had indulged in manipulative trade practices for artificial escalation of share prices of the company. The Court in its ultimate analysis found that modus operandi of the appellant was to place the huge sale offer at a price higher than the last traded price (LTP) of the company and thereafter to make a self-trade of only one share for that higher price, thus, establishing a new higher LTP. Referring to its judgment in the matter of SEBI v. Bhavesh Pabari32, the Court held that in exercise of the appellate powers under Section 15-Z of the SEBI Act, Court cannot go into the proportionality and the quantum of the penalty imposed unless the same is distinctively disproportionate to the nature of the violation that makes it offensive, tyrannous or intolerable. The conduct of the appellant was found to be seriously impinging upon other counterparties in the securities market, cannot be assessed only in terms of the gain, but has wider consequences on the securities market. It affects investor confidence and healthy growth of the market, affects the “market integrity”, predicated on the quality and manner in which it is to be preserved. It causes serious detriment, dents to investors’ wealth and confidence and thus, the order of the WTM is fully justified in the facts of the case. The appeal of the appellant was accordingly dismissed.


(14) Kanwal Prakash Singh v. State of W.B.33

(Delivered on 17-6-2022)

Coram: Single Judge Bench of Justice Anand Kumar Mukherjee

The petitioners preferred revisional applications under Sections 397 and 401 CrPC, read with Section 260 of the SEBI Act, seeking discharge from criminal prosecution initiated against them for violation of various provisions of the Companies Act and the SEBI (Disclosure and Investor Protection) Guidelines, 2000 read with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The discharge was sought on the ground that they were never involved in the affairs of the company. The primary allegation against the petitioner was that the company had issued public shares without filing any offer documents or complying with disclosure requirements prescribed by SEBI. There was no application made for listing of shares in the stock exchanges prior to issuance of shares to the investors. Thus, offences punishable under Sections 24, 26-A, 26-B, 26-E and 27 of the SEBI Act as also Sections 56, 60 and 73 of the Companies Act, 1956 were alleged. The whole-time number of SEBI found that the noticees were managing the affairs of the company as its directors during the relevant period. Thus, they cannot absolve themselves of their responsibilities or liabilities. Referring to proviso to Section 27 of the SEBI Act, it was stated that a person may escape liability from the punishment if he “proves” that a contravention was committed without his knowledge or that he had exercised all due diligence for avoiding the commission of such contravention. The onus therefore shifts upon the petitioners to dislodge under proviso to Section 27, SEBI Act, once allegation is prima facie shown to be existing. The petitioners were fully aware of the activities of issuance of shares from their company and a prima facie case was found to exist against them. The same therefore cannot be foreclosed based on simple defence that petitioners had no knowledge of the company’s activities, which fact must be proved during the trial. The material averment in the complaint disclosed that the accused persons were the directors of the company and the fact having once shown, the case for discharge is clearly not made out. Accordingly, the revision petition was dismissed by the High Court.


(15) World Crest Advisors LLP v. Catalyst Trusteeship Ltd.34

(Delivered on 23-6-2022)

Coram: Division Judge Bench of HM Justices G.S. Patel and Madhav J. Jamdar

Authored by: Justice G.S. Patel

The appeal was preferred against the order of Single Judge, who declined to grant an interim injunction to the plaintiff, appellant World Crest Advisors LLP. At the threshold, referring to the judgments of the Supreme Court in Wander Limited v. Antox India (P) Ltd.35 Mohd. Mehtab Khan v. Khushnuma Ibrahim Khan36, Monsanto Technology LLC v. Nuziveedu Seeds Ltd.37, and in other such judgments, the Court held that the appellate court must not usurp the jurisdiction of the Single Judge; it must confine itself to an adjudication of whether the impugned order was or was not justified in the facts and circumstances of the case. Once the discretion is exercised either way at the ad interim stage by the Single Judge, in appeal the burden is much heavier to show that the appellate court must interfere and grant ad interim relief so refused by the Single Bench. The appellant had pledged certain shares in Dish TV India Ltd., a media company to Catalyst Trusteeship Ltd. as a security trustee. In the said pledge agreement, the shares were all in DEMAT/derivative form, stored as depositories. The document or agreement of pledge is so created in favour of a specifically permitted catalyst as a pledge to transfer the pledged share to itself in the event of default. Default occurred and catalyst immediately transferred the pledged Dish TV shares to itself, by getting its name noted as “beneficial owners” under the provisions of Regulation 58(8) of the Depository Regulations. Thereafter, notifying YBL as its nominee, the said shares were transferred to it. Thus, the following issues arose before the Court:

(a) Whether the catalyst could have made the sale to self by transferring the ownership under its own name of pledged shares.

(b) Whether the catalyst acquired the fullness of rights in those shares, exercising voting rights over them and further transferring them thereafter by constituting a nominee.

(c) Whether such transfer to sale to self of pledged shares was against the dicta of the Supreme Court in PTC India Financial Services Limited case38.

The Division Bench went into the said issues at length, whilst analysing the judgment of PTC India Financial Services Ltd.39 Referring to the clauses of the pledge agreement, it was held that the said pledge agreement transferred all its rights in the shares, including voting rights, rights to control or direct the affairs of the company to the pledgee along with all its incidental benefits viz. allotments powers, authorities claims and demands in respect of the said securities. Thus, World Crest as the pledger and the owner of the pledged shares consciously and knowingly transferred all the rights in the share to the catalyst as pledgee. Clause 7 of the said agreement was also referred to specifying the consequences of default on the part of pledger. Clause 7.1(c) specifically stated that in the event of default, pledgee shall be entitled to transfer securities, assets into its own name or their nominees. Thus, by way of agreement the said right to transfer the pledge shares to the nominee was conferred on the catalyst. The right to redeem the pledge share was always available to World Crest.? Until the debt was repaid, the pledger would remain the “beneficial owner” of the shares, except till the sale was made by the pledgee.

However, the Court referring to clauses in the pledge agreement held that the share security pledged with catalyst cannot be treated as notional or having no value. It cannot be treated as waste or barren. The World Crest had not shown any earnest efforts of making repayment of the debt due to it, which it was obligated after slipping into default and being notified about pledgee catalyst acquiring ownership rights in the pledge shares. Once the catalyst became the “beneficial owner” under Section 10(3) of the Depositories Act read with Sections 47 of the Companies Act, it was an owner for all the purposes. The next step was an obvious sale to third parties, including the nominee by Yes Bank Limited by the pledgee. The whole transaction held to have had no illegality in it and a mere transfer by the pledgee to itself not inconsistent with Sections 176 and 177, Contract Act specifically when the pledge agreement permitted the pledgee to do so. Accordingly, the appeal was dismissed, and the Division Bench declined to interfere with the discretion refusing ad interim injunction, so exercised by the Single Bench.


(16) Tirupathi Kumar v. SEBI40

(Delivered on 28-6-2022)

Coram: Division Judge Bench of Justices T. Raja and T.V. Thamilselvi

Authored by: Justice T. Raja

The writ appeals were preferred challenging the judgment of Single Bench, which repelled challenge to summons issued under Sections 11-C (3), (5) and (6) of the SEBI Act, 1992, laid by the appellant writ petitioners. The writ petitioners stated themselves to be involved in the business of buying, selling, or dealing in shares of Sai Televisions Limited during the period between April 2001 and June 2002 and SEBI directed them to furnish the details/information for transaction held by them for investigating into allegations of adoption of unfair practices and adoption of artificial manipulative means for dealing in the purchase of the shares.

The sheet anchor of the submissions of the petitioner was that the transactions in question were dating back to between April to June 2002, whereas the section in question was introduced through the amendment effected in October 2002, which thus cannot be applied retrospectively. It was urged that the Board had no power to call for information and investigations into the affairs prior to 29-10-2002, that is prior to coming into force of the Amendment Act, which is why the summons were without jurisdiction. On examination of SEBI PFUTP Regulations, 1995 and SEBI PFUTP Regulations, 2003, the Court stated that in both the set of regulations as also the pre-amended provisions, SEBI possesses the power to order for investigation by any person or authority found suitable in this regard. Under Sections 11-C(1)(a) and 11-C(1)(b), which are slightly different, the SEBI possessed power to order for investigation even with respect to past transactions which may include an intermediary on any person associated with the trading and selling of shares (securities). The two provisions of 11-C (1)(a) and 11-C(1)(b), have to be read disjunctively and not conjunctively, as Parliament has employed the word “or” between these two provisions. Thus, one and all persons associated with the securities market are covered under Section 11 of the SEBI Act for being proceeded against if found to be illegally, irregularly trading in securities market. Referring to the judgment of the Gujarat High Court in Karnavati Fincap Ltd. v. SEBI41, as also the judgment of the Supreme Court in SEBI v. Ajay Agarwal42, it was held that Sections 11-B and 11-C are procedural in nature, applying to all actions, pending as well as future. Thus, SEBI can inquire even into past conduct, prior to notification, as it is just a procedural facet and aspect. The power to enquire, investigate and proceed against defaulters had been existing both prior and post 2002 Amendment under Section 11 of the SEBI Act and it cannot be held that the said power has been incorporated for the first time by virtue of the 2002 Amendment. Accordingly, the writ petitions challenging the summons issued by SEBI were held to be non-maintainable and dismissed.


* Expert in constitutional, civil and financial laws, practising advocate at the Supreme Court of India.

1. WP No. 245 of 2020, order dated 5-1-2022.

2. (2008) 9 SCC 677.

3. (2003) 4 SCC 675.

4. 2021 SCC OnLine Bom 459.

5. 2023 SCC OnLine Del 348.

6. 2023 SCC OnLine Bom 319.

7. (2022) 8 SCC 162.

8. (1975) 2 SCC 81.

9. (1991) 1 SCC 588.

10. (1993) 4 SCC 727.

11. (1996) SCC 3 364

12. 2022 SCC OnLine Bom 630.

13. (1986) 1 SCC 264.

14. (1986) 1 SCC 264.

15. 1974 SCC OnLine Bom 40.

16. CRP (PD)(MD) No. 775 of 2017, order dated 19-7-2016.

17. 2022 SCC OnLine SC 361.

18. (2015) 4 SCC 33.

19. (1987) 1 SCC 424.

20. 2022 SCC OnLine Del 1241

21. 1964 SCC OnLine SC 2.

22. (2022) 9 SCC 425.

23. (1952) 2 SCC 71.

24. (2018) 7 SCC 443.

25. (2022) 444 ITR 167 (Bom).

26. 2019 SCC OnLine SC 749

27. (2022) 9 SCC 704.

28. 2023 SCC OnLine Ker 3529.

29. (2012) 13 SCC 501.

30. 2021 SCC OnLine SC 1044.

31. (2022) 8 SCC 273.

32. (2019) 5 SCC 90.

33. 2022 SCC OnLine Cal 2181.

34. 2022 SCC OnLine Bom 1409.

35. 1990 Supp SCC 727.

36. (2013) 9 SCC 221.

37. (2019) 3 SCC 381.

38. PTC India Financial Services Ltd. v. Venkateswarlu Kari, (2022) 9 SCC 704.

39. (2022) 9 SCC 704.

40. (2022) 2 Writ LR 52.

41. 1996 SCC OnLine Guj 119.

42. (2010) 3 SCC 765.

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