Landmark Judgments on SEBI by Supreme Court and High Courts in 2022 Part II

Part II of the present article takes forward the round up of landmark judgments delivered by High Courts across the country as also the Supreme Court on laws and legislations centring around Securities and Exchange Board of India ( “SEBI”) and the subordinate legislations framed thereunder. Part I of this article covered judgments from January to June, whereas Part II spans the same from July to December 2023.

The present compilation attempts to cover landmark judgments rendered by the High Courts across the country and the Supreme Court on laws centering around SEBI and its Regulations framed thereunder.

(1) Kunnamkulam Paper Mills Ltd. v. SEBI¹

(Delivered on 5-7-2022)

Coram: Single Judge Bench of Justice D. Bharatha Chakravarthy

The appellants were directors of the company that made allotment of large numbers of equity shares in violation of SEBI (Disclosure and Investor Protection) Guidelines, 2000. SEBI resultantly through its order dated 10-4-2003 directed the appellant to refund the money collected under the issue back to the investors with interest. However, the appellants failed to do the same, in view of which criminal prosecution was launched through a private complaint by the SEBI under Section 24(1) read with Section 27 of the Securities and Exchange Board of India Act, 1992 (SEBI Act), 1992. The appellants were accordingly convicted after framing of charge for commission of offence under Section 24 with the imposition of fine of Rs 50 lakhs on each of the accused, in default of payment of which to undergo simple imprisonment for a period of one year. The primary contention of the appellant before the High Court was that offence was said to have been committed on 27-3-2001 and thus unamended Sections 24 and 26 shall apply. In view thereof maximum penalty that could have been issued or payable is only imprisonment for a period of 1 year or a fine of Rs 10,000 being the maximum fine leviable by the Magistrate at the relevant point of time. The new enhanced punishment of imposition of higher fine came into effect only on 19-10-2002 and thus constitutional protection under Article 20 of the Constitution was claimed. The High Court held that Section 24 provides for two distinct violations or commission/omissions through both its sub-clauses. Section 24(1) implicates a person in contravention of any of the provisions of the Act, Rules or Regulations framed by the SEBI. Under Section 24(2), the person is implicated or prosecuted when there is a failure to pay the penalty imposed by the adjudicator officer or any direction imposed by him on behalf of the SEBI. The Court held that insofar as offence under Section 24(1) was concerned, that was committed prior to the amendment of Section 24 on 28-3-2001 and thus petitioner could have been subjected to punishment under unamended Section 24(1) along with the quantum of fine thereunder. However, so far, as offence under Section 24(2) was concerned, the same was committed subsequent to amendment of non-payment of penalty and refund of amount back to the investors on 10-4-2003, which is subsequent to amendment of Section 24. Thus, the petitioner was rightly penalised with the imposition of an appropriate fine by the Court by resorting to provisions of amended Section 24(2) and Article 20 of the Constitution was not attracted.

Another contention raised was that specific charge under Section 24(2) was never framed by the competent court and thus the petitioner could not be prosecuted or convicted under Section 24(2) for want of specific charge being abducted by the trial court. Referring to the judgment of the Supreme Court in Anil v. Admn. of Daman and Diu²; Abdul Sayeed v. State of M.P.³, and other such judgments it was held that if the charge is unclear and ambiguous, then till and until omission of specific provision of law leads to clear prejudice, the trial and conviction under the said offence is not vitiated.

On the question of challenge to imposition of disproportionate and high penalty, the Court held that even though the court has power to impose a fine of rupees up to 25 crores, the same has to be exercised on a rational basis for reasons evincible from the order. Since there was no discussion or reasons contained in the order of Sessions Court regarding imposition of such a hefty quantum of fine, the same was set aside, whilst reducing the quantum of fine to the amount as directed by the SEBI to be repaid to the investors. Accordingly, the High Court allowed the appeal on the following terms:

(i) The appellants are convicted for an offence punishable under Section 24(1) of the SEBI Act as it stood prior to the SEBI (Amendment) Act, 2002 and imposed a fine of Rs 10,000 each.

(ii) Appellants 1 to 7 are also convicted for the offence punishable under Section 24(2) of the SEBI Act as it stands after the SEBI (Amendment) Act, 2002 and are jointly and separately imposed with a fine of Rs 17,39,950.

(iii) The appellants shall deposit the entire fine amount within a period of four weeks, in default of the payment of fine amount, the appellants shall undergo simple imprisonment for a period of one year.

(iv) Upon the deposit of the fine amount as stated above, a sum of Rs 17,39,950 shall be transferred to the account of SEBI and on receipt of the same, the said Board will disburse the same to the persons, who are entitled to the amount in accordance with law.

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(2) SEBI v. Sunil Krishna Khaitan⁴

(Delivered on 11-7-2022)

Coram: Two-Judge Bench of Justices Sanjiv Khanna and Bela M. Trivedi

Delivered by: Justice Sanjiv Khanna

The judgment decided two appeals preferred by SEBI challenging the orders passed by SAT in two statutory appeals passed against the orders of the whole-time member, SEBI. Essentially, three questions of law arose before the Supreme Court, which were as follows:

1. Interpretation of scope of applicability of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short “Takeover Regulations 1997”).
2. The power and exercise of the power by the Board under Regulation 44 read with Regulation 45 of the Takeover Regulations, 1997.

3. Powers and jurisdiction of the Appellate Tribunal under Section 15-T of the SEBI Act, 1992.

Khaitan Electrical Limited (KEL), a listed company decided to issue 10 lakh equity share warrants, which were decided to be allotted on a preferential basis to Khaitan Lefin Limited (KLL), an identified member of the promoter group of KEL. Thereafter, further 13,000 shares in KEL were acquired, in a way that shareholding of the promoters in KLL increased from 7.96% to 17.16%, that triggered an issuance of show-cause notice under Regulations 10 and 11(1) of the Takeover Regulations, 1997 by the SEBI to both KEL and KLL for violation of the provisions contained therein. There was a mandatory requirement for KEL to make a public announcement in accordance with the provisions of Regulation 10 r/w Regulation 41(1) within the stipulated time of their intent to acquire the shareholding of the company. In all, the shareholding of the promoters jointly increased from 25.83% to 34.21%, and acquirers collectively were required to announce their proposal of acquisition via public announcement to all the shareholders in accordance with Regulation 11(1), but it was never made.

The WTM of SEBI directed for a time-bound public announcement of the acquired shares as also payment of the consideration amount along with interest to the shareholders holding shares in KEL on the date of violation.

In appeal under Section 15-T of the SEBI Act, the SAT set aside the directions pertaining to public announcement within a time-bound period, but in turn, imposed a penalty on the appellants under the provisions of Section 11 of the SEBI Act. The Court examined, analysed and interpreted the provisions of the Takeover Regulations, 1997, especially Regulations 10 and 11. The expression “persons acting in concert” under Section 2(1)(e) was held to be broad and expansive, leading to a legal fiction of a presumption against the transferor company of having acted in concert with its promoters and the transferee company to change the shareholding pattern to its own advantage. However, the said presumption was to be looked at and treated as “the bats of law, flitting in the sunlight but disappearing in the sunshine of fact”.⁵ The object of definition of “persons acting in concert” was held to be wide enough to ensure that no one is able to dribble past and defeat the Takeover Regulations by resorting to camouflage and subterfuge. In the same wheel, the definition of the word “acquirer” occurring under Section 2(1) was held to be inclusive of both the individuals acting alone or as part of a group of persons acting in concert. Referring to the judgment of SEBI v. Sunil Krishna Khaitan⁶, it was held that use of expression “acquirer” under Regulation 10 was made deliberately instead of the word “person”, compared to wordings of the Regulations 6 and 8 of the very same Regulations. Regulation 10 was held to be applicable to the “acquirer” acquiring voting rights with reference to the existing shareholding. “Acquirer” was explained as a person acting in concert with other persons because such acquisition is to be seen and treated collectively along with persons acting in concert with him. If the acquirer already holds more than 15% shares of the voting rights in concert with other persons, such holding is not to be fragmented to calculate the shares of the voting rights of the acquirer in his personal capacity under Regulation 10 for imposing the conditions of public announcement thereunder. Regulation 10 was held to be not applicable when the acquirer already holds more than 15% shares of the voting rights in the target company. If the acquirer holds more than 15%, then Regulation 11(1) applies to anyone who intends to acquire additional shareholding between 15% and 55% of the shares with voting rights. There would not be any violation of Regulation 10 if the acquirer was acquiring shares over and above his 15% shareholding.

The Court also referred to the interpretation accorded by SEBI in the past ten years to Regulation 10 in such similar circumstances, holding that SEBI itself had dropped proceedings where the shareholding of the acquirer along with the persons acting in concert with him was more than 15% jointly. Once the SEBI had dropped proceedings and treated such an interpretation qua many other companies in the past, consistency was required to be followed. Holding that consistency is a matter of occupational effectiveness, giving rise to substantive legitimate expectation then departure should not be made irrationally or on perverse grounds by the SEBI. The deviations from a pattern or a mode of interpretation adopted in the past by the regulatory authority without any reasonable cause or principle can clearly be labelled as arbitrary in nature. Relying on the judgments of Punjab Communications Ltd. v. Union of India⁷ and Tolaram Relumal v. State of Bombay⁸ it was held that if two views are possible whilst reasonably constructing any provision, the principle of “doubtful penalisation” comes into scene, with the court leaning in the favour of that construction which exempts the subject from penalty rather than one which imposes it. This doctrine of doubtful penalisation is not limited to only criminal statutes but extends to any form of detriment. The Court also referred to “legacy issue”, holding that since Regulation 10 was interpreted in a particular way by the SEBI for over the last 10 years, they cannot be permitted to overturn their own view creating penal consequences. It was, therefore, held that the interpretation accorded to Regulation 10 as above be adhered to by the SEBI even in the case of the KEL and KLL for ensuring consistency and continuity in their interpretative approach.

The Court also found certain important factors weighing in favour of the respondent promoters. The investors of the transferor of the targeted company never raised any objection, nor was there any specific allegation or any material pointing out any market manipulation or fluctuation in share prices detrimental to the interests of the investors due to the change in shareholding pattern. The order passed by the WTM also did not advert to any such ground or reason for issuing adverse directions against the promoters. Thus, the directions of the WTM were held to be unsustainable for want of actual prejudice to the investors of the transferor company.

On the other issue of powers of Securities Appellate Tribunal (SAT) under Section 15-T viz. imposition of penalty by SAT usurping the powers of the adjudicating authority, it was held that though under Section 15-T SAT exercised powers of the first appellate body, empowered to decide all questions of fact and law, but however it never possessed any inherent powers to impose penalty, that was not so imposed by the adjudicating authority or the WTM. The SAT was never hearing any appeal against the imposition of penalty under Section 15-H, nor was any such order in existence. Therefore, since the SAT has never been conferred or enjoined with any specific powers under the SEBI Act or the Regulations framed thereunder for imposing any penalty, the power is the exclusive reserve of the adjudicating authority. Thus, SAT was held to have illegally imposed the penalty by usurping the power which was never vested in it. Accordingly, the direction of SAT imposing penalty was also held to be unsustainable, though it was not set aside since no cross-appeal was filed challenging the said penalty order of SAT by the promoters of KEL. The civil appeals were accordingly disposed of.

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(3) Reliance Industries Ltd. v. SEBI⁹

(Delivered on 5-8-2022)

Coram: Three-Judge Bench of Justices N.V. Ramana, J.K. Maheshwari and Ms Hima Kohli

Authored by: Justice N.V. Ramana

The appeal before the Supreme Court was filed against the order passed by the Bombay High Court adjourning the adjudication of an interlocutory application filed in a Section 482 CrPC petition seeking certain directions. The SEBI had initially instituted proceedings under the provisions of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 alleging violation of Regulation 11(1) of SEBI (Takeover Regulations). The Ministry of Corporate Affairs gave a clean chit to the petitioner Reliance Industries Limited Ltd. (RIL) on allegations of violation of provisions of the Companies Act, 1956. Expert opinion from a former Judge, Supreme Court of India Justice B.N. Srikrishna as well as opinion from a Chartered Accountant of repute were sought for. Thereafter, settlement proceedings also started, in which RIL sought for the necessary documents pertaining to the opinion of both experts from SEBI, which request for disclosure of documents was rejected by the SEBI.

Thereafter, SEBI filed a criminal complaint under Section 24 r/w Section 27 of the SEBI Act in July 2020, before the Sessions Court, Mumbai, that came to be rejected on the grounds of limitation. The matter was taken to the High Court at the behest 0f SEBI, where a prayer was made by RIL for providing copies of both the opinions. The said interim application was, however, deferred for consideration till the final stage by the High Court, against which RIL approached the Supreme Court. The Court framed two issues viz. whether the appeal against an order adjourning the consideration of application was maintainable and secondly, whether SEBI is required to disclose documents to RIL.

The Court found that the dispute pertains to facts that took place in 1992-1994, when the initial complaint was instituted before SEBI in 2002. However, the SEBI chose to institute the complaint only after almost eighteen years in 2020, which was therefore barred by limitation. SEBI preferred the revision petition before the High Court not only on the grounds of condonation of delay or inapplicability of Limitation Act to the offences alleged, being continuing in nature, but it also pleaded the case on merits, referring specifically to the legal and expert opinion tendered to it by the two persons as aforementioned. Thus, the complaint was clearly time-barred so instituted by the SEBI.

On the second issue it was held that even though in the settlement proceedings, the request for furnishing a copy of the expert opinion was rejected, however, subsequently the said settlement proceedings were terminated, and criminal complaint instituted against the appellants by the SEBI.

Referring to the judgments of State Bank of Patiala v. S.K. Sharma¹⁰ as also the judgment of T. Takano v. SEBI¹¹, it was held by the Court that duty to disclose documents and material being relied upon by the SEBI was sanguine. On the argument of the legal opinions being protected by Section 129, Evidence Act 1872, which SEBI was seeking exemption on the grounds of, it was held that there is a difference between “client privilege” and “litigation privilege”. The position in UK and US was examined in this context and it was held that Indian position stands on a different footing than England. The opinion was not a mere opinion but was held by the Court to be an extension of the investigation enabling SEBI as a regulator to ascertain the facts and reach conclusions of prosecution against RIL. SEBI launched the prosecution against RIL based on both the investigation report as also the opinions tendered by both the entities as aforementioned. Thus, the expert opinions being a continuation of the fact-finding exercise undertaken by SEBI, they were liable to be disclosed to RIL.

On the next argument of right of the accused (RIL) to seek disclosure of certain information prior to the stage of Sections 207 and 208 CrPC, referring to the judgment of S.P. Velumani v. Arappor Iyakkam¹², held that Section 207 CrPC does not exhaust the right of the accused to seek documents if he feels necessary to defend himself at the stage of cognizance of complaint by the competent court. The request for disclosure of documents cannot be treated as premature in terms of CrPC awaiting arrival of stage of Section 207.

The Court also referred to conduct of SEBI as “cherry picking the documents”, insofar as disclosure of information and documents to RIL was concerned. Certain excerpts only of the opinion of the experts were disclosed, whilst the remaining was declined to be divulged. Referring to the judgment of Nea Karteria Maritime Co. Ltd. v. Atlantic and Great Lakes Steamship Corpn.¹³, it was held that in light of “cherry picking principle”, SEBI cannot claim privilege over certain parts of documents, whilst disclosing other parts from the very same document or opinion. Selective disclosure cannot be countenanced in law if it is prejudicing the defence of the person sought to be proceeded against. Accordingly, the SEBI was directed to disclose all the legal and expert opinions to the petitioner RIL and the appeal was disposed of with directions.

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(4) Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg¹⁴

(Delivered on 12-8-2022)

Coram: Two-Judge Bench of Justices S. Abdul Nazeer and Sanjiv Khanna

Authored by: Justice Sanjiv Khanna

Issue before the court was regarding the payment of commission to financial advisors/mutual fund distributors as agreed between them and Franklin Templeton Asset Management India Pvt. Ltd., which was claimed to be “recurring expenses”, as per Regulation 52 of SEBI (Mutual Fund) Regulations, 1996. It was pleaded that recurring expenses encompass marketing and selling expenses, including agent commission if any. The commission/service charges that were claimed were for the period from 23-4-2020 to 17-3-2021, when notices under Section 39(3)(b) were issued pertaining to complete seizure of carrying on business by the asset management company of the six schemes that were wound up. The Court held that deduction of expenses towards the commission payable to the distributor is applicable when the scheme is in operation and not post issuance of notice under Regulation 39(2)(a) when the mandate of freezing of business kicks in. The commission payable to the mutual fund distributors was held to be certainly not an expense connected with the winding-up scheme. While interpreting the expression “due and payable” it was held that same has to be interpreted with reference to the context in which the words appear and the said expression refers to the present liabilities payable in praesenti or in futuro. There must be an existing obligation to pay on the appointed date of payment and the said liability to be “due and payable” must be as a statutory obligation. Accordingly, it was held that the asset management company (FTTSPL) is not liable to pay commission charges and expenses to the distributors. The application filed for disbursement was accordingly dismissed.

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(5) SEBI v. Rajkumar Nagpal¹⁵

(Delivered on 30-8-2022)

Coram: 3-Judge Bench of Justices D.Y. Chandrachud, Surya Kant and A.S. Bopanna

Authored by: Justice D.Y. Chandrachud

The secured creditors entered into agreement with respect to the resolution plan for the recovery of outstanding dues along with other lenders of Reliance Commercial Finance Limited (RCFL). The said resolution plan was executed amongst various institutional creditors based on the inter-creditors agreement (ICA) prepared in light of the Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions, 2019 (“RBI Circular”). SEBI also issued a circular on 13-10-2020, titled as “Standardisation of procedure to be followed by debenture trustee(s) in case of default by issuers of listed debt securities”. Disputes arose about the interplay of both the RBI as well as SEBI Circular; the rights of debenture trustees vis-à-vis the secured creditors/lenders in case of enforceability of a resolution plan against the distressed defaulting company. Two broad issues were framed by the court which were as follows:

(a) whether the debenture-holders and other parties in the present case were required to follow the procedure under the SEBI Circular; and

(b) whether the civil court had the jurisdiction to entertain the lis in this case.

Referring to the history, purposes, and objective of RBI Circular of 06-07-2019, Court held that it contemplates a resolution plan inclusive of restructuring of a default account with lender institutions falling within the ambit of Clause 3. It was held to have been issued within the four corners of the provisions of Sections 1(4)(e) and 230(2)(c)(iv) of the Companies Act, 2013. The resolution plan-cum-scheme of corporate debt restructuring must be consented to buy not less than 75% of the secured creditors by value and 60% by number. Under the RBI Circular, all lenders must enter an ICA, where a resolution plan is being implemented and it must have a minimum of 75% by value and 60% by number to bind all the lenders, including those who dissent.

The court also traced the background, objective, and purpose behind the enactment of SEBI (Debenture Trustees) Regulations, 1993 as a circular meant for and containing provisions for registration of debenture trustees. The court also referred to the SEBI Circular in question involved in the lis. SEBI Circular also specifies conditions for signing of an ICA by any debenture trustee on behalf of the investors and it is the debenture trustee who is vested with the discretion to sign or not to sign the resolution plan on behalf of the investors. Subsequent to the issuance of SEBI Circular, debenture holders can bind the dissenters by taking recourse to it, which facilitates the process of seeking consent for enforcement of security or entering an ICA. After the advent of a SEBI Circular, debenture-holders and investors of debt securities are also enabled and empowered to sign the ICA under the RBI Circular. Thus, the SEBI Circular has essentially facilitated the role of debenture-holders in the insolvency proceedings and the ICA which occurs under the umbrella of RBI Circular. The SEBI Circular was held to be possessing a statutory character and colour having been issued under the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the various regulations framed thereunder.

Examining the various clauses of SEBI Circular, Court held that the debenture-holders may opt to exercise their rights through the mechanism of resolution plan of ICA provided under RBI Circular, or they may stand out. However, once they opt for the mechanism provided under the SEBI Circular, they cannot opt out of it and the resolution plan provided thereunder is the one which is under the umbrella of RBI Circular. ICA is the only route for entering into a compromise with the issuer company and a root to the resolution plan with the lenders. This procedure cannot be circumvented, once being opted by the debenture holders. Referring to Clause 6 of the SEBI Circular, the Court held that it binds even the dissenting creditors/debenture-holders, who do not have the option of exiting the compromise or arrangement arrived at under the RBI Circular in terms of Section 230 of the Companies Act, 2013. The decision of the respective majorities bind the dissenting creditors and thus, the argument that even a single debenture holder will veto the entire resolution plan is an unsustainable one.

On its applicability, the Court held that the SEBI Circular is not retrospective but has a “retroactive” application. Referring to the judgments of Vineeta Sharma v. Rakesh Sharma¹⁶ and State Bank’s Staff Union v. Union of India¹⁷, court distinguished between the two terms “retrospective” and “retroactive”. Retroactivity of any law arises when it is to an act or transaction which is still underway, not completed and is in the process of completion. Just because a law operates on certain circumstances which are antecedent to its passing does not mean that it is retrospective if certain stages of that transaction are remaining. The test is whether the person affected has been vested with any right or not by the completed chain of transactions and circumstances. Even though the SEBI Circular applied to certain transactions that were completed before its introduction, however it applies to the transaction of framing a resolution plan which is subsequent to its introduction and thus, it is “retroactive” in nature and not strictly “retrospective”. Even otherwise, a contractually vested right can always be taken away by operation of a statutory instrument was so held by the court. The SEBI Circular being enacted in exercise of statutory powers conferred by special legislation for protecting the interests of investors; ensuring the stable and orderly growth and development of market for securities, can very well alter, modify, or take away vested rights created by way of any contract being a statutory instrument in itself. It thus takes precedence over and above various contractual clauses. The court also examined the breadth and width of Article 142 of the Constitution of India which can be used to relax the rigours of law depending upon the peculiar facts and circumstances. Referring to the judgments of State v. Kalyan Singh¹⁸ and Laxmidas Morarji v. Behrose Darab Madan¹⁹, Court held that Article 142 can be resorted to issue directions for moulding of relief and court to the extent of relaxing the application of law to the parties or exempting altogether the parties from the rigours of law in view of peculiar facts and circumstances of the case. It is a power to be used sparingly in cases for doing complete justice which cannot be effectively and appropriately tackled by existing provisions of law. Accordingly, the court after interpreting the applicability and interplay of the SEBI Circular vis-à-vis RBI Circular on the framing of a resolution plan, issue certain directions protecting the interest of the ICA lenders as also the debenture holders in a just and fair manner exercising powers under Article 142 of the Constitution of India.

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(5) MPS Greenery Developers Ltd. v. State of W.B.²⁰

(Delivered on 1-9-2022)

Coram: Single Judge Bench of Justice Sabyasachi Bhattacharyya

The matter related to the infamous case of ‘West Bengal chit fund scam’, wherein Petitioner 2 being the Chairman and CMD of the petitioner Company challenged the legality and validity of investigation by the CBI on the grounds of lack of jurisdiction. The cancellation of the CBI case and resultant proceedings pending before the Court of CJM were challenged on the ground that petitioner’s company was not a chit fund company engaged in chit business, but a company governed by the SEBI Act, 1992 and SEBI (Collective Investment Sschemes) Regulations, 1999. It was issued the professional/provisional registration certificate (for short “PRC”) by the SEBI for carrying on the investment business. The Court held that the provisional/professional certificate so issued by the SEBI is restricted, conditional and not conclusive of the petitioner’s status as CIS (collective investment scheme), falling outside the expression and purview of the chit fund. The petitioner had breached the restrictions and conditions imposed under the provisional registration certificate, wherein the SEBI had expressly stipulated to the petitioner to not undertake any investment schemes, without its prior permission for the same.

The Court further found that in the notorious W.B. chit fund scam, the Supreme Court in the judgment of Subrata Chattoraj v. Union of India²¹ had doubted and suspected the role of SEBI itself in the grant of PRC to the petitioner’s company, that justified the CBI investigation against the petitioner. Since the very PRC issued by the SEBI was put into serious doubt, therefore the scale and magnitude of the scam at the national level necessitated the investigation and prosecution by specialised agencies like CBI itself. It was yet to be proved as to whether the source of money involved and routed in the chit fund scam or not. The rerouting of the funds involved in the scam was allegedly traceable to Petitioner 1’s company, even though it was not a chit fund company. If the funds had nexus with the finances of the petitioner’s company, then clearly they were to be treated as part of a larger chit fund scam and thus criminal prosecution was declined to be nipped in the bud by the Court. The writ petition preferred by the petitioner thus came to be dismissed.

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(6) Sunita Agarwal v. SEBI²²

(Delivered on 6-9-2022)

Coram: Single Judge Bench of Justice A.M.B. Barua

The writ petitioners had challenged the show-cause notices issued by the SEBI under Section 11 of the SEBI Act on various grounds. They were persons engaged in buying and selling of shares as stockbrokers. Buying a particular share of a listed company and immediately thereafter selling the same at a price which would be lower than the price at which shares were being traded on screen of the stock exchange. This trend came to be known as “reversal trading”, and was taken cognizance of by SEBI, an appropriate action was taken on the basis thereof. Referring to the judgment of SEBI v. Rakhi Trading (P) Ltd.²³, it was held that even “reversal trading” may have its own dimensions of fraud, manipulation, and unfair trade practices, undermining the ethical standards and good faith dealings between the parties engaged in business transactions. It was further held that generally, the presumption is that nobody trades for a loss and that therefore, manipulation or deception may not be easily inferred, but however, when the same happens within fractions of seconds in a premeditated, planned manner between the very same entities, then it is bound to give rise to suspicion and manipulation at the hands of stockbrokers concerned.

Referring to the judgment of SEBI v. Kishore R. Ajmera²⁴, it was held that the SEBI Act and the Regulations thereunder are framed to check measures that may pre-empt manipulative trading. It also operates to check all kinds of impermissible conduct in order to boost the investor’s confidence in the capital market. The Court also explained the concept of “synchronised training” where the “buy and sell orders of shares” are placed simultaneously for the safe quantity and price the parties wish to transact at substantially the same time. However, a synchronised transaction is bound to become illegal or violative of Regulations if it smacks of being executed with a view to manipulate the market or results in circular trading, being devised in nature or for manipulating the entire securities market. Explaining the practices of “manipulation and synchronisation” in trading of securities, it was held that, within a few seconds, buy and sell orders between the same parties at low prices of shares were discovered by the SEBI. It was found that the company in this matter, viz. Kasam Holding Pvt. Ltd., had share dealings of buy and sell within fractions of seconds, for a stretched period of multiple days. The standard of proof of proceedings before SEBI was held to be one of the preponderance of probability and not beyond any reasonable doubt. The reverse transactions being shown to be non-genuine or fictitious, it is clear that they lead to patent violation of provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, especially Regulations 3(a) and 4(1) & (2)(a) of the Regulations of 1999. SEBI has been authorised to make inquiries and inspections if such allegations surface, alleging compromise with ethical standards and absence of good faith dealings between parties engaged in the business transaction on the screen. Since the whole matter had been pending investigation, therefore, the Court declined to interfere with the same.

The other issue that the Court was examining was about non-supply of essential documents constituting the prima facie provisions of Sections 12-A and 12-C of the SEBI Act, which were found to have been violated. The Court held that whatever material was taken into consideration by the authority deciding to institute inquiry against the petitioner by way of appointment of an adjudicating officer must all be supplied to the petitioner in terms of the judgment of T. Takano v. SEBI²⁵. Thus, it was held that SEBI was duty-bound to disclose the entire report of investigation as also the opinion formed by it, based on which SEBI decided to proceed with the inquiry against the petitioner.

The further contention of the petitioner was that for initiating an investigation under Section 11-C of the SEBI Act, “reasonable grounds to believe” must exist with the SEBI. The same cannot be initiated based on speculations, apprehensions or complaints received by the SEBI. Referring to the judgment of M.P. Industries Ltd. v. CIT²⁶, it was held that the phrase “reasonable ground to believe” is much wider than the phrase “reasons to believe”. It is a state of mind regarding the existence of some facts or material for exercising the power of initiating investigation or inquiry. It is the information that establishes sufficient articulable facts making it a basis to believe about existence of a cause, explanation, or justification sufficient to proceed against any person. Referring to the judgment of Collector of Customs v. Ahmadalieva Nodira²⁷, “reasonable ground to believe” implies material comparatively more than what is expected to be available when the phrase “reasons to believe” is employed. The material that triggers the SEBI to institute an investigation against any person must indicate that transactions in the securities were affected in a way detrimental to the interest of the investors and violates the provisions of the SEBI Act, Rules or Regulations made thereunder. The requirement of forming an opinion under Rule 3 of the Rules of 1995 is thus an opinion against the “person-specific” against whom the inquiry is contemplated, and it cannot be a broad-based generalised opinion against a group of persons.

Referring further to the judgment of Siemens Ltd. v. State of Maharashtra²⁸ and Union of India v. Vicco Laboratories²⁹, it was held that Article 226 remedy by way of writ petition is maintainable against a show-cause notice if glaring lapses in the procedure are pointed out, or the procedure being carried out in a premeditated manner is alleged in the writ petition. The writ petitioner cannot be relegated back to the very same authority, who has not followed the procedure or proceeding in a premeditated manner by the writ court and challenge in such circumstances is maintainable.

On the aspect of competency of divisional officers undertaking investigations against the petitioners, it was held that in view of Section 15-I(1), the SEBI must examine whether the officers are competent statutorily to undertake the investigation or not and pass rectification orders in case they are found to be not competent.

The Court further held that the opinion formed against the noticee under Rule 3 leading to the appointment of an adjudicating officer for undertaking an investigation into allegations of malpractices needs to be disclosed necessarily to the person who is being proceeded against. The same cannot be withheld by the SEBI.

It was further held that there could not be a composite notice, requiring the noticee to respond under both Rules 4(1) and (3) of the SEBI Rules. Rule 4(1) relates to the first stage of seeking a response on the desirability of instituting an investigation with the appointment of an adjudicating officer, which is a stage preceding Rule 4(3) notice. Under Rule 4(3), a separate subsequent show-cause notice has to be issued requiring the person concerned to respond to allegations levelled against him on merits to the adjudicating officer. Referring to the judgment of Natwar Singh v. Enforcement Directorate³⁰, in the context of provisions of Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, it was held that notice under Rule 4(1), must precede notice under Rule 4(3). The opinion first has to be formed about the necessity of inquiry, before calling upon the person concerned to participate in the inquiry. Straightaway holding inquiry is not possible nor permissible against any person accused of violation of provisions of the SEBI Act, or the Rules or Regulations made thereunder. The notice under Rule 4(3) as to why penalty should not be imposed under Section 15-HA of the SEBI Act cannot be clubbed and combined with the initial notice to show cause why an inquiry should not be held, and adjudication proceedings be carried forward. Accordingly, the notice issued to the petitioner being composite and combined was treated as a notice defective in form and was directed to be quashed.

The SEBI was permitted to proceed afresh against the petitioners in accordance with the law.

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(7) Bidesh Basu v. SEBI³¹

(Delivered on 9-9-2022)

Coram: Single Judge Bench of Justice Bibek Chaudhuri

The petitioner approached the High Court challenging the issuance of non-bailable warrants (for short “NBW”) against him, relying on the judgment of Satender Kumar Antil v. CBI.³² The petitioner was accused of issuing non-convertible debentures to huge numbers of investors, thereby making it a public issue of securities, without complying with the regulatory provisions applicable to the public issue as laid down by the SEBI. Thus, offences under Sections 2(36) and 73 of the Companies Act, 1956 read with Regulation 3 of the SEBI (PFUTP) Regulations, 2003 and other provisions came to be registered against him through a complaint lodged by SEBI on the said allegations. The NBW so issued against the petitioner was assailed on the grounds that they were so issued directly without first issuing summons or bailable warrants, and thus the guidelines of the Supreme Court of India were violated. The NBW could not have been directly issued and the lower court was under an obligation to issue summons after filing of charge-sheet or taking cognizance in respect of offences being proceeded against the petitioner, followed by bailable warrants. Referring to the guidelines and the categorisation of the offences laid down in Satendra Kumar Antil case³³, it was held by the High Court that the sentence punishable under offences related to SEBI Act extends to 10 years and thus petitioner’s case was not falling under “Category A” of the four categories specified under the judgment of Satendra Kumar Antil case³⁴. In Satendra Kumar Antil case³⁵, the Supreme Court also categorised the offences into four groups which were as follows:

1. Offences punishable with imprisonment of 7 years or less not falling in Categories B and D.
2. Offences punishable with death, imprisonment for life, or imprisonment for more than 7 years.
3. Offences punishable under special Acts containing stringent provisions for bail like Narcotic Drugs and Psychotropic Substances Act, 1985 (Section 37), Prevention of Money-Laundering Act, 2002 (Section 45), Unlawful Activities (Prevention) Act, 1967 [Section 43-D(5)], Companies Act, 2013 [Section 212(6)], etc.

4. Economic offences not covered by special Acts.

Since the offence committed by the petitioner accused did not fall under the Category A, therefore guidelines under Satendra Kumar Antil case³⁶ were not at all attracted and applicable, and thus the petition was dismissed.

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(8) Vasantha Kumar Ayyavu Palanichamy v. SEBI³⁷

(Delivered on 9-9-2022)

Coram: Single Judge Bench of Justice G.K. Ilanthiraiyan

The petition was filed seeking quashing of the proceedings instituted before the Court of Principal Sessions Judge at Chennai for offences under Section 24(1) of the SEBI Act read with Section 207 of the Companies Act, 1956 and Section 127 of the Companies Act, 2013. The allegations against the petitioner were regarding non-payment of declared dividends within the statutory time-frame, for which reason, SEBI accordingly instituted and lodged criminal proceedings against the petitioner. The petitioner took a fundamental plea that he was never responsible or was in charge of the conduct of the business of a company, nor he was signatory to any bank account of the same. Without making even a single averment as to what was the role of the petitioner and why he had been implicated, the prosecution was launched against him. It was further stated that the SEBI also never instituted any disciplinary proceedings or show-cause notice of any nature relating to the allegations levelled against him. Relying on Section 27 of the SEBI Act, titled as “offences by companies”, it was further contended that it is necessary to not only proceed against the petitioner, but also against the company in the criminal complaint by arraying the same as one of the accused necessarily in the proceedings. The petitioner was admittedly never served with any show-cause notice nor given any opportunity to explain the controversy as given under the statutory provision under Section 11 of the SEBI Act. The High Court referring to the judgments of Dayle De’souza v. Union of India³⁸ and other judgments held that prosecution of the company by it being arrayed as one of the accused is mandatory under Section 27 of the SEBI Act. Till the company itself ceases to exist or cannot be prosecuted due to statutory Bar, prosecution under Section 27 without it being impleaded as a necessary party is non-maintainable. Prosecuting the directors and instrumentalities of the company vicariously in such circumstances is nothing but an abuse of the process of law. The entire complaint is thus a clear abuse of process of law and cannot be sustained against the petitioner. Accordingly, the complaint proceedings pending before the Court of Principal Sessions Judge, Chennai were quashed, whilst allowing the petition instituted by the petitioner.

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(9) Multibagger Securities Research & Advisory (P) Ltd. v. SEBI³⁹

(Delivered on 12-9-2022)

[2022] 174 SCL 638 (Punj & Har)

Coram: Division Bench of Justices M.S. Ramachandra Rao and Harminder Singh Madaan

Authored by: Justice M.S. Ramachandra Rao

The petitioner challenged the notices and summons issued under Section 11-C(5) by the SEBI, also directing the personal appearance of the Director of Omaxe Ltd. The investigation by the SEBI was conducted into the trading activities of certain entities in the scrip of Omaxe Ltd. a listed public limited company. Based on information received by the SEBI that SMS recommendations were sent by the petitioners to the public at large. The petitioner’s defence was that the SEBI had initiated the process of investigation, summoning and personal presence of the directors based on false and bogus documents that were never issued from or on behalf of the company. Thus, millions of messages fraudulently were sent to unsuspecting investors in the name of the petitioners and petitioners had even lodged a police complaint for instituting appropriate criminal proceedings to this effect. The challenge was accordingly laid to Section 11-C(5) on the ground that it is violative of the fundamental right of protection against self-incrimination; affects the rights available under Article 19 of the Constitution to the petitioner to carry out their trade, raising investments and raising capital to investments and propagating or publicising their company. The petitioners were compelled to make statements on oath or produce documents, that may invite penalty to them compulsorily of up to Rs 1 crore and thus valuable rights were infringed. The Court examined provisions of Section 11-C and relied on the judgment of DLF Ltd. v. SEBI⁴⁰, it held that an investigation by the specialised authority by itself does not adversely affect any person or intermediary, with no severe consequences flowing from such an order directing an investigation. The three modes-cum-stages of inquiry into complaints by SEBI as per the scheme of the SEBI Act are as under:

1. Investigations conducted prior to ordering investigation under Section 11-C.
2. The investigation under Section 11-C by the investigating authority, exercising powers enumerated under that section.

3. Finally, adjudication conducted under Section 15-I, if such course is thought prudent.

Thereafter, the Court held that since SEBI found certain material pertaining to transactions in securities markets being done in a manner detrimental to investors, the same triggered inquiry against Omaxe Ltd. During inquiry, the SEBI has powers to require the person to cooperate with the investigation by furnishing information in person or producing documents necessary thereto. The question of punishment of imprisonment or fine comes only after a Section 11-C(6) complaint is lodged before the competent criminal court by the SEBI after a full-fledged trial and not before. The petitioners had miserably failed to show how their fundamental rights under Articles 19, 20(3) and 21 of the Constitution of India were violated and thus writ petition was accordingly dismissed.

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(10) DKG Buildcon (P) Ltd. v. SEBI⁴¹

(Delivered on 14-9-2022)

Coram: Two-Judge Bench of Justices Ajay Rastogi and B.V Nagarathna

Authored by: Justice Ajay Rastogi

The appellants before the Supreme Court were shareholders and promoters of one Shonkh Technology International Ltd. (for short “STIL”), which was proceeded against under the provisions of SEBI (PFUTP) Regulations, 1995 for unfair trading in buying, selling and dealings in its shares. Appeals before the Supreme Court were filed against the order of SAT, Mumbai, which had affirmed the imposition of heavy penalties of around Rs 1 crore each by the SEBI on the appellants. The SEBI had found a series of unauthorised activities starting from allotment of shares of STIL to various people through a web of transfers, routed eventually to scamster Ketan Parekh. The appellant DKG Buildcon Private Ltd. and other appellants were summoned by the SEBI, and required thereafter to furnish details and documents, which were not properly either responded to or the information as required by the SEBI being furnished by the appellants to it. Accordingly, for violation of requirement of compliance with the summons of SEBI penalty was imposed under Section 15-A(a) of the SEBI Act for having adopted dilatory tactics of stonewalling investigations launched by the SEBI. The appeal preferred before the SAT, Mumbai came to be dismissed, which held broadly that they had tried to block the investigation by not responding to the summons issued to them; wilfully failed to furnish the necessary information sought by the SEBI crucial for concluding the investigations and such other grounds.

The appellants assailed the penalty imposed by SEBI as also the appellate order of the SAT on the following broad grounds:

1. Penalty above Rs 1.5 lakhs could not have been imposed as the power to impose a penalty of Rs 1 crore came to be introduced only after amendment to Section 15-A(a), which was in October 2002, prior to which the cause of action had arisen, and summons were all issued.

   The summons cannot be treated as separate and disjunct from each other and thus when earlier summons were issued under unamended Section 15-A(a), the penalty prescribed under the earlier provision shall only be applied. The appellants had already replied to the summons and were thus under the bona fide belief that the requirements of the same had been complied with.

2. Section 15-A of the SEBI Act will not apply to the adjudicating officer acting as investigating authority, as the requirement of furnishing documents is qua the SEBI and not the investigating authority, which is separately defined under Section 11-C of the SEBI, Act. Both are different and independent of each other.

3. The AO had disregarded the provisions of Section 15-J while quantifying and imposing the penalty, which was to be assessed and determined on the basis of the amount of disproportionate gains or the loss caused to the investors as a result of the default.

The Court in its eventual analysis held that summons issued after October 2002 had independent separate existence and failure to respond to them invited punitive actions under the amended Section 15 A(a) of the SEBI Act. The allegations against the petitioners were serious of facilitating scamster Ketan Parekh in manipulating the securities markets and virtually wrecking the integrity of the securities market eventually. The relevant orders of the SEBI implicating Ketan Parekh and a group of companies, including STIL for their involvement in unauthorised transfers of shares through a web of transfers had all attained finality. The said investigation reports had already concluded that the appellants had played an active role in facilitating such activities of manipulation of the securities markets, and thus were to be accepted on their face value. They had deliberately stonewalled the investigation by not getting their statements recorded or furnishing the information sought by the SEBI. Once the fault was found to have been committed by the appellants owing to their non-cooperative attitude, the quantum of the penalty could not be gone into in judicial review and was completely justified.

Referring to explanation to Section 15-J of the SEBI Act, it was held that the order imposing penalty by the AO is presumed to have been passed on behalf of SEBI after due consideration of all the factors. Referring to the judgment of MBL & Co. Ltd. v. SEBI⁴², the Court held that judicial review cannot be exercised to interfere with the quantum of punishment, especially when it is proportionate and within the confines of Sections 15A(a) and 15-J of the SEBI Act. The appellant fell within the scope and ken of Section 11-C(3) of the SEBI Act, wherein the investigating authority (adjudicating officer) was deemed to be acting on behalf of the SEBI for inquiring into the activities of the “persons associated with the security market in any manner”. The authority flows from the wording of Section 11-C(3) of the SEBI Act. Accordingly, the appeals were all dismissed.

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(11) Kavi Arora v. SEBI⁴³

(Delivered on 149-2022)

Coram: Two-Judge Bench of Justices Indira Banerjee and A.S. Bopanna

Authored by: Justice Indira Banerjee

The petitioner had joined as President of one of the subsidiary companies of Religare Enterprises Ltd. (for short “REL”). The petitioner challenged the show-cause notice (for short “SCN”) issued by the SEBI before the Bombay High Court, the Division Bench of which dismissed the said challenge. The primary ground of the petitioner, whilst challenging the SCN was the non-supply of documents, especially the supply of copy of the opinion formed under Rule 3 of the SEBI Adjudication Rules, 1995, formed by the SEBI whilst constituting adjudicating authority for investigating into allegations against the petitioner Company. The petitioner was proceeded after allegation was levelled against him for trading of shares in violation of provisions of SEBI (PFUTP) Regulations, 2003. The allegations in the SCN were 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.

The petitioner contended that it is mandatory on the part of respondent SEBI to provide a copy of the opinion formed by it for issuance of SCN to it. Relying on the judgment of T. Takano v. SEBI⁴⁴, Natwar Singh v. Enforcement Directorate⁴⁵, it was pleaded that the SEBI Adjudication Rules, 1995, especially Rule 3 obligates the SEBI to provide such documents.

Repelling the contention of the appellant, the Court held that principles of natural justice do not require the supply of documents upon which no reliance is proposed to be placed by the authority setting the law into motion. If the documents sought to be relied upon, which are the basis of issuance of SCN, then courts cannot compel authorities to supply documents that are not to be considered or relied upon. Further, on the ground of being provided a reasonable opportunity of being heard by the adjudicating authority, prior to the imposition of penalty provided under the Act, it was held that no hearing is required to be provided at the stage when the adjudicating authority is deciding merely on the aspect of holding of inquiry. Referring to the judgments of Shashank Vyankatesh Manohar v. Union of India⁴⁶ and Amit Jain v. SEBI⁴⁷, it was held that no opportunity of hearing can be sought for, when only an opinion is to be formed by the authority for initiation of inquiry or adjudication proceedings by appointment of an adjudicating officer. Referring to Rules 3 and 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, the Court further held that the formation of opinion for the holding of a formal inquiry is not an inquiry in itself or a proceeding that involves a person or person against whom such inquiry is contemplated to be held. Thus, the opinion formed by the Board, being a part of proceedings where no inquiry is being held, cannot be claimed to be supplied. Accordingly, the SLP was dismissed, affirming the judgment of the Bombay High Court.

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(12) SEBI v. Abhijit Rajan⁴⁸

(Delivered on 19-9-2022)

Coram: Single Judge Bench of Justice V. Ramasubramanian

A statutory appeal under Section 15-Z of the SEBI Act, 1992 was preferred against the order passed by SAT, Mumbai, that set aside the order of its whole-time member (for short “WTM”) directing the respondent to disgorge the amount of unlawful gains made by him. The respondent being the Chairman and MD of Gammon Infrastructure Projects Limited (for short “GIPL”) was proceeded against for insider trading and disclosure of unpublished “price sensitive information” in relation to the shareholding of GIPL. He had sold about 144 lakh shares held by him in GIPL for an aggregate value of approximately Rs 10.28 crores, whereafter GIPL made a disclosure to NSE and BSE regarding the termination of two shareholding agreements that GIPL had with special purpose vehicle set up for the purposes of development of infrastructure projects. SEBI conducted a preliminary inquiry, followed by a final order of disgorging the whole amount of unlawful gains made by him to a tune of Rs 1.09 crores. SAT in appeal set aside the aforesaid order on essentially three grounds primarily being that information regarding termination of two shareholders’ agreement was not a “price sensitive information” and the shares were sold for the purposes of corporate debt restructuring (for short “CDR”), by way of the distressed sale.

The Court before proceeding to the merits of the matter analysed the pre-amended SEBI (Prohibition of Insider Trading) Regulations, 1992, prior to Amendment of 2002 and post-amendments. The ingredients of violation of Regulation 3 viz. breaching the prohibition on dealing, communicating or counselling on matters relating to insider trading, the Court held that the inquiry must be into the following aspects: (i) is he an insider?; (ii) did he possess or have access to any information relating to the company?; (iii) whether such information was price sensitive?; (iv) whether the information was unpublished?; and (v) whether he dealt in securities by subscribing, buying, selling or agreeing to do any of these things in any securities?

Accordingly, it was held that price sensitivity of an information has a direct correlation to the materiality of the impact that it can have on the price of the securities of the company. The information should have the potential either to catapult the price of the securities of the company to a higher level or to make it plunge, being “bullish” or “bearish”. Analysing the inter se correlation of Regulation 2(ha) defining “price sensitive information”, with various other clauses occurring under Regulation 2(ha)?, it was held that whilst dealing with Explanation (vii) of Regulation 2(ha), what is to be seen is the profit motive, if not the actual profit. It is the motive to earn profit, which should be the motivating factor for the person to indulge in insider training. This is why information vide Item (vii) of Regulation 2(ha) has to be examined with reference to the words “likely to materially affect the price”. If a person enters a transaction, which is surely likely to result in loss, he cannot be accused of insider training and thus the actual gain or loss is immaterial but the motive of making the said gain is essential. The motive has to be judged on the basis of the preponderance of probabilities. The respondent was found to have disposed of the shares as part of “distress sale” for the purposes of honouring the CDR package and if the CDR package had not gone through successfully, the parent company of GIPL, namely, “Gammon Infrastructure Projects Limited” could have gone for bankruptcy. The SAT therefore rightly returned the finding that respondent had no motive or intention to make undeserved gains by encashing on unpublished price sensitive information that he possessed. The closing price of shares rose after the disclosure of the information relating to the termination of shareholding agreement and thus this information was likely to be more beneficial to the shareholders post its disclosure. Any person desiring to indulge in insider trading would have waited till the information went public to sell his holdings, which the respondent did not do so obviously on account of the pressing necessity of generation of capital for meeting the CDR package. Referring to the judgment of SEBI v. Kanaiyalal Baldevbhai Patel⁴⁹, it was held that the nature of trading and timing of transactions may be taken into account to find out whether there has been an attempt at encashing the benefit of the information that the insider was in possession. It should not be judged on the avail of mens rea, but on the sound probability of expected gains. Accordingly, the appeal of SEBI was dismissed.

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(13) CGT v. BPL Ltd.⁵⁰.

(Delivered on 13-10-2022)

Coram: Two-Judge Bench of Justices Sanjiv Khanna and J.K. Maheshwari

Authored by: Justice Sanjiv Khanna

The issue before the Supreme Court related to the valuation of shares of BPL Sanyo Group of Companies that were gifted by the respondentassessee from his promoter quota for the purposes of exigibility to gift tax. The said shares were under a lock-in period of non-transferability belonging to the respondent assessee, when they were so gifted, and thus, the question arose whether they should be valued at the same rate as other open, non-restricted shares. Referring to Sections 4 and 6 of the Gift Tax Act, 1958 (for short “GT Act”), it was held that where any gift made without adequate consideration, it shall be valued in terms of its actual prevailing value on the date on which the gift was made as per provisions of Schedule II of the GT Act. The machinery provision of the method of valuation under Schedule II is mandatory and cannot be deviated. Rules 9 and 11 of Part C of Schedule III of the Wealth Tax Act (for short “WT Act”) have to be resorted to for the valuation of the gifted property as per the mandate of Schedule II of the GT Act. Rules 9 and 11 provide for valuation of “quoted shares” and “debentures of companies” and “unquoted equity shares in companies other than investment companies” respectively. The definition and meaning of quoted share and unquoted share were also elaborated and discussed by the Supreme Court as those shares that were quoted regularly on a recognised stock exchange based on current transactions made in the ordinary course of business.

However, the Court held that “equity shares” under the lock-in period were not “quoted shares” since such shares with the lock-in period were not traded or quoted in any recognised stock exchange with regularity from time to time. There are no current transactions or evidence of trading of such lock-in shares that would accord them a quotable value. Rather, there is a complete bar on the transfer of such shares, operating as a prohibition in terms of the guidelines issued by the SEBI. Such shares become transferable only post the expiry of lock-in period and not before. Therefore, it is necessary to depreciate the value of the lock-in equity shares, vis-à-vis the shares that are free from such prohibitive restrictions. Hybrid methods of valuation cannot be applied to such lock-in equity shares, the solitary reason that their trading does not happen in open markets. The respondent Revenue accordingly relied upon Rule 21 of Part H of Schedule III of the Wealth Tax Act, which allowed ignoring and overlooking of restrictive covenants in determination of market value of any gifted property. However, the Court repelled the said argument of the Revenue, holding that the valuation of such lock-in prohibitive shares cannot be made artificially, ignoring the restrictions of the property. In such cases, suitable and appropriate deductions by way of depreciation be made in the valuation, for which reference was made to the judgment of Madras High Court in CWT v. Thirupathy Kumar Khemka⁵¹ and CIT v. Sadhana Devi⁵². The property was directed to be valued as per the restrictions accompanying it, and not by ignoring them, nor can Rule 21 of the Schedule III of the WT Act be treated to be justifying an absolute artificial valuation ignoring the restrictive covenants. The assessing authorities have absolute right and power to value an equity or preference share independent of the opinion about their share being “quoted” or “unquoted” as received from the stock exchange concerned. Accordingly, the appeal of the Revenue was dismissed.

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(14) SEBI v. National Stock Exchange Members Assn.⁵³

(Delivered on 13-10-2022)

Coram: Two-Judge Bench of Justices Ajay Rastogi and B.V. Nagarathna

Authored by: Justice Ajay Rastogi

The core issue before the Supreme Court related to the requirement of multiple registration of stockbrokers with various stock exchanges and payment of corresponding separate fees to each of them as registration fees. The Division Bench of the Delhi High Court arrived at the conclusion that in terms of Section 12(1) of the SEBI Act, 1992 single registration with SEBI is sufficient even if the stockbroker has various membership and operational functioning in several stock exchanges and therefore, they will have to pay one-time initial registration fees at the SEBI, whilst setting aside the direction contained under the Circular dated 28-3-2022 issued by the SEBI. The Court delineated the history of SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992, so framed under Section 30 by the SEBI (for short the “Regulations of 1992”). The levy of fees on the stockbrokers in terms of Regulation 10 of the Regulations of 1992 by the SEBI as prescribed under Schedule 3 was previously affirmed as constitutional by the Supreme Court in BSE Brokers’ Forum v. SEBI⁵⁴. The fee charged by the SEBI was held to be not a tax but as a fee, being regulatory in nature without any element of quid quo pro. Accordingly, the Circular dated 28-3-2022 came to be issued proposing the requirement of registration of stockbrokers with every stock exchange they were operating with corresponding amounts of separate fees payable to each of them.

The Single Bench of the Delhi High Court after examining the Regulations of 1992 as well the circular as aforementioned held that multiple registrations are envisaged under the statutory scheme and upholding the Circular dated 28-3-2002, also affirmed the requirement of multiple registrations with separate stock exchanges. This view was set aside by the Division Bench of the High Court. The Court accordingly framed two issues for its consideration and resolution, that were as follows:

(1) Whether under the Act, 1992, a stockbroker has to obtain a certificate of registration from SEBI for each of the stock exchanges where he operates or whether a single certificate of registration from SEBI is sufficient and the same would enable him to trade in all other stock exchanges?

(2) Whether the ad valorem fee to be paid for an initial period of five years will recur with every such registration?

Referring to Section 12 of Chapter V of the SEBI Act, wherein there is a mandatory requirement of procuring a certificate of registration from the SEBI by the stockbroker concerned, the Court held purposive interpretation must be applied suiting the legislative intent and objective. It was held that the term “a certificate of registration” referred to under Section 12(1) under the SEBI Act would have both singular as well as plural implications and cannot be presumed to be referring to a singular certificate. The Regulations of 1992 being in the form of subordinate legislation supplement the mechanism/procedure under which the broker concerned has to obtain certificate of registration from the SEBI. The conjoint reading of Rule 12 with the scheme of Regulations of 1992 was accordingly undertaken by the Court to hold that the stockbroker not only has to obtain a certificate of registration from SEBI for each of the stock exchanges where he operates at the same time but is required to pay ad valorem fees prescribed in terms of Part 3 of Regulation 10 of Regulations of 1992 qua each certificate of registration from the SEBI. The Circular of 28-3-2002 was held to be just a guiding principle for the stockbrokers to be followed by the stockbrokers for the quantification of the registration fees payable by them. Accordingly, the judgment of the Division Bench of the Delhi High Court was set aside.

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