Flummoxed by Finality: Supreme Court Reaffirms Applicability of Res Judicata to SEBI

Introduction

The principle of res judicata has ancient roots, dating back to the Babylonian Code of Hammurabi, which prohibited Judges from changing judgments once a case had been finally decided.¹ In India, the principle of res judicata is codified under Section 11² of the Civil Procedure Code, 1908 (CPC). This principle entails that administrative and judicial decisions, having attained finality, cannot be called into question.³ It is rooted in public policy and justice, aiming to ensure fair administration of justice and to prevent the misuse of legal processes. The purpose of this doctrine is to provide finality in litigation, preventing parties from being litigated against twice for the same cause. It is foundational to the rule of law and ensures that no person is subjected to repeated litigation for the same issue.⁴

Section 11 CPC stipulates that a court cannot try a “suit or issue” if the matter in question has already been directly and substantially in issue in previous suit between the same parties or those claiming under them and has been heard and finally decided by a court of competent jurisdiction. To apply the doctrine of res judicata it is essential that actual issues in the two proceedings are identical.⁵ Furthermore, Indian courts also uphold the rule of constructive res judicata.⁶ This rule complements the principle of res judicata and requires that all claims arising from the cause of action must be brought up in the initial suit or proceeding. Any claims not made in the original suit/proceeding are considered to have been abandoned and cannot be raised later in subsequent proceeding.⁷

A related doctrine that seeks to prevent multiplicity of proceedings is the doctrine of res sub judice. This doctrine requires that if a matter is pending trial before a competent court, it operates as a bar to trial of a subsequent suit filed between the same parties, if the issue in the subsequent suit is substantially the same as the previously instituted suit. The object of both the doctrines is to avoid multiplicity of proceedings on the same issue.⁸ The difference is that res judicata also aims to ensure finality to the judgment of a competent court. This doctrine of res sub judice is codified in Indian law under Section 10 CPC, which bars a court from trying a suit in which a matter directly and substantially in issue is also a subject-matter of a previous suit between the same parties.

Despite this fundamental rule, there have been numerous instances where Securities and Exchange Board of India (SEBI’s) different authorities have initiated parallel proceedings under different sections of the Securities and Exchange Board of India Act, 1992 (SEBI Act)⁹ for the same violation. This has led to contradictory orders passed by whole time member (under Sections 11 and 11-B of the SEBI Act) and adjudication officer (under Section 15-I of the SEBI Act) based on the same facts involving the same parties, leaving these parties flummoxed by so-called finality of the order.¹⁰

Although in these proceedings, SEBI contended that order of adjudicating officer (AO) was erroneous and not binding on whole time member (WTM) which had passed contradictory orders on same issue previously decided by the AO, the Securities Appellate Tribunal, set aside the subsequent orders of WTM. The Tribunal noted that res judicata applies to SEBI, requiring consistency. It concluded that it was no longer permissible for another authority of SEBI to take a different view on the same issue based on the same facts and law and between the same parties.¹¹ It further noted that for the purposes of orderly development of securities market, quasi-judicial authorities are required to maintain discipline and ensure that divergent opinion on the same issue are not taken.¹²

Recently, the Supreme Court reaffirmed the applicability of the fundamental rule of res judicata to proceedings before the SEBI and proceedings before Securities Appellate Tribunal (SAT) in SEBI v. Ram Kishori Gupta¹³ (Ram Kishori Gupta). This article examines the implications of the judgment for SEBI, particularly in the context of its enforcement procedures for securities law violations.

Ram Kishori Gupta case: Following what is sauce for the goose is sauce for the gander

In 2005, SEBI issued a show-cause notice to Vital Communications Limited (VCL) and its promoters for allegedly violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (PFUTP) by disseminating misleading advertisements to inflate interest in VCL shares. Based on the said show-cause notice (SCN), SEBI’s WTM issued an order on 20-2-2008, restraining VCL and its Directors, from accessing the securities market (2008 WTM Order). This Order was appealed and set aside by the SAT on 28-8-2008 with directions to SEBI to issue a fresh show-cause notice. A new SCN was issued and on 31-7-2014, the WTM debarred VCL and related promoters and Directors from the securities market and froze their demat accounts (2014 Final WTM Order). Notably, SEBI did not pass any disgorgement order, despite being aware of the violations.

Meanwhile, two VCL investors, Ram Kishori and her husband (appellants) raised grievances over losses due to misleading advertisements. In 2012, they appealed to SAT, seeking a direction to SEBI to pay them compensation.¹⁴ SAT directed SEBI on 30-4-2013, to consider their complaint and potentially direct VCL/entity concerned to refund the share application money with interest if found guilty of fraud. In 2014, the appellant investors also challenged the July 2014 WTM Order before SAT, contending it did not comply with SAT’s 30-4-2013 directions regarding refund of the invested amount.¹⁵ SAT disposed of the appeal based on the statement made by SEBI’s counsel that SEBI would issue an additional order addressing the Tribunal’s earlier directions.

Subsequently, the WTM issued an additional order dated 16-12-2014, directing the Investigations Department to examine the feasibility of ill-gotten gains for the purpose of disgorgement. Eventually, a WTM order dated 29-8-2018 (2018 Disgorgement Order) mandated VCL and its Directors, promoters and other entities to jointly and severally disgorge the ill-gotten gains. However, it was noted that restitution for appellants was beyond SEBI’s authority. Multiple appeals were filed against the 2018 Disgorgement Order, including by the appellants, which was disposed of by SAT vide order dated 2-8-2019. SAT while partly allowing the appeal directed SEBI to pay compensation to the appellants from the amount disgorged from VCL and connected entities or from its Investor Protection and Education Fund. This was stayed by the Supreme Court on 18-10-2019. VCL and others also filed appeal before SAT against the direction for disgorgement, which was disposed of by SAT vide order dated 20-12-2021. SAT while quashing the 2018 Disgorgement Order held that it was barred by the principle of res judicata on the premise that the fresh SCN had already culminated in the 2014 Final WTM Order. The 2014 Final WTM Order had attained finality and there was no cause for SEBI to pass a fresh order for disgorgement.

Upon appeal, the Supreme Court noted that the 2014 and 2018 Orders arose from the same cause and show-cause notice. As the 2014 Order was valid and unchallenged, SEBI had no authority to issue the 2018 Order.¹⁶ The Court ruled that SEBI could not issue multiple final orders on the same matter, given the finality of the 2014 Order. Although, SEBI argued res judicata principles could not be imported to proceedings before SEBI and SAT, the Supreme Court dismissed the same. Following what is sauce for the goose ought to be sauce for the gander, the Court noted that stellar principles of res judicata, constructive res judicata are equally applicable in proceedings before administrative authorities. SEBI cannot claim exemption from the applicability of principle of res judicata.

Implication of Ram Kishori Gupta ruling on SEBI enforcement actions

The existing legal framework permits SEBI to initiate parallel proceedings for adjudication, enquiry and prosecution.¹⁷ As pointed out earlier, there have been numerous instances where WTM and AO of SEBI have passed contradictory orders based on the same facts involving the same parties, leaving these parties flummoxed by so-called finality of the order and flummoxed by which authority of SEBI would hold precedence.¹⁸

Furthermore, such parallel proceedings mechanism, often results in multiple jeopardy, as the impacted party is penalised multiple times for same violation based on the same set of facts, by different authorities. The impacted party is flummoxed by the arsenal of enforcement action which SEBI and other second level regulator (such as the stock exchanges) can initiate for such securities violation. Such parallel proceedings in respect of the same violation between same parties’ conflict with the doctrine of res judicata and res sub judice. For instance, for violation of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), SEBI can initiate adjudication proceedings under Section 15-I of the SEBI Act whereby SEBI has the power to impose penalties for non-compliance with any provisions of the Act, rules or regulations for instance under Section 15-HB¹⁹ of the SEBI Act or under Section 23-H²⁰ of the Securities Contracts (Regulation) Act, 1956 (SCRA). The penalties for such violation range from INR 1,00,000 up to INR 1,00,00,000. Similarly, stock exchanges can in terms of their byelaws also impose penalty or the same violations. Such imposition of separate penalties by two different stock exchanges for violation of Regulations 17 and 19 of the LODR has been upheld by SAT in PVP Ventures Ltd. v. Bombay Stock Exchange Ltd.²¹.

Given SEBI’s track record in exercising its adjudication powers, there is much room for improvement. The Supreme Court’s ruling in Ram Kishori Gupta case²² sets a precedent for future cases, demanding clear accountability in regulatory actions. SEBI must reconsider its enforcement actions in respect of securities law violations.