Case BriefsSupreme Court

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

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

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

The Court took note of the ruling in Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255, wherein the Court held that “the concept of fairness may require the adjudicating authority to furnish copies of those documents upon which reliance has been placed by him to issue show-cause notice, requiring the noticee to explain as to why an inquiry under Section 16 of the Act should not be initiated. Further, all such documents relied on by the authority are required to be furnished to the noticee enabling him to show a proper cause as to why an inquiry should not be held against him though the Rules do not provide for the same”.

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

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

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

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

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

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

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

Judgment by: Justice Indira Banerjee*

NewsTreaties/Conventions/International Agreements

The Securities and Exchange Board of India (SEBI) and the Astana Financial Services Authority (AFSA) have entered into a bilateral Memorandum of Understanding (MoU) for mutual co-operation and technical assistance. The MoU was signed by Mr. Ajay Tyagi, Chairman, SEBI and Mr. Mukhtar Bubeyev, the Acting Chief Executive Officer, AFSA.

The objective of the bilateral MoU is to strengthen cross border co-operation in the area of securities regulation. This will facilitate mutual assistance, contribute towards the efficient performance of the supervisory functions, and enable effective enforcement of laws and regulations governing the securities markets.

SEBI has signed bilateral MoUs with securities regulators of a number of jurisdictions. SEBI is also a signatory to the Multilateral MoU of International Organization of Securities Commissions (IOSCO).

Securities Exchange Board of India

PR No.: 30/2019

[Press Release dt. 23-12-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Appellate Tribunal (SAT): Tarun Agarwala, J. (Presiding Officer) and Dr C. K. G. Nair, Member quashed an order passed by the Securities and Exchange Board of India (‘SEBI’) which imposed a ban on auditing firm, however, upheld the punitive damages awarded for wrongful gain.

In the present case, the appellants being the auditing firm, Price Waterhouse Coopers (‘PWC’) had challenged an order passed by the SEBI wherein a two-year ban was imposed on the firm from auditing any listed company due to its involvement in the 2009 Satyam Scam. The auditing firm had been the auditor of the Satyam Computers Services Limited (‘Satyam’) during the period 2000-2009 and in the year 2009, the Chairman of Satyam stated that the books of accounts of Satyam were not true and the company was involved in large scale financial irregularities and misappropriation of funds. SEBI, upon an investigation of the books of Satyam, found out that PWC was the statutory auditor of the company and there were fabrication, falsification and misrepresentation in the books of account and financial statements of Satyam.

The senior counsels representing the appellants, Janak Dwarkadas along with Mukul Rohatgi questioned the jurisdiction of SEBI in banning an audit firm and submitted that the impugned order deals with the roles of an auditor and its contravention which are prescribed by Institute of Chartered Accountants of India (‘ICAI’) and thus, having the jurisdiction to deal with matter relating to contravention by audit firms. It was contended that as on the date of the impugned order there were new partners who were not partners of the firms during the period 2000 to 2009 and thus, banning them from doing audit work of listed Company merely because those are presently partners in PWC firms is wholly arbitrary and illegal.

The senior advocates representing the respondents, Ravi Kadam being assisted by Kevic Setalvad, submitted that the impugned order does not suffer from any illegality since the Satyam scam had a direct and adverse effect on the securities market. They also urged that failure to comply with the basic auditing standards constituted fraud and thus it was ideal to impose a ban on the auditing firm.

The Appellate Tribunal upon perusal of facts and circumstances of the case stated that it was true that the network of firms under PWC alleged to have been involved in the scam was not under the PWC hence had no stake and vicarious liability of a chartered accountant cannot be extended to a firm. The Appellate Tribunal stated that “in the absence of any finding of connivance or collusion or intention or knowledge on the part of the ten firms in the audit of Satyam Computers, and in view of the clear cut directions of the Bombay High Court, no directions could have been issued by the Whole Time Member against the ten firms.” Dealing with the issue of jurisdiction the Tribunal said SEBI did not have any authority to look into the quality of audit and auditing services and it can only take remedial and preventative action. The direction issued is neither remedial nor preventive, but punitive in nature and thereby quashing the order passed by the SEBI. However, the Appellate Tribunal upheld SEBI’s direction on disgorgement of Rs 13 crore from the auditor along with interest of 12% since 2007 for the wrongful gain.[Price Waterhouse & Co. v. Securities and Exchange Board of India, 2019 SCC OnLine SAT 165, decided on 09-09-2019]

NewsTreaties/Conventions/International Agreements

Securities and Exchange Board of India (SEBI) signed a Memorandum of Understanding (MoU) today with the Insolvency and Bankruptcy Board of India (IBBI) at Mumbai. The said MoU was signed by Shri Anand R. Baiwar – Executive Director, SEBI and Shri Ritesh Kavdia – Executive Director, IBBI.

SEBI and IBBI being interested in the effective implementation of securities laws and Insolvency and Bankruptcy Code, 2016 (‘Code’) including the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (Administrator Regulations) have agreed under the MoU to co-operate with each other.

The MoU, inter alia, provides for: (a) sharing of information between SEBI and IBBI subject to the limitations imposed by the applicable laws; (b) panel of Insolvency Professionals (IPs) to be appointed as Administrators underAdministrator Regulations; (c) periodic meetings to discuss matters of mutual interest, including regulatory requirements that impact their responsibilities, research and data analysis, information technology and data sharing; (d) cross-training of staff; (e) capacity building of insolvency professionals and financial creditors; (f) joint efforts towards enhancing the level of awareness among IPs about the importance and necessity of swift administration process under the provisions of the Administrator Regulations, promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders under the Code, etc.

[Press Release dt. : 19-03-2019]

Securities Exchange Board of India

Legislation UpdatesNotifications

Circular on Mutual Funds

[SEBI/HO/IMD/DF2/CIR/P/2017/35  dated April 28, 2017]

1.Please  refer  to SEBI  Circular  No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated 18 March 2016.

2.In partial modification of the above mentioned circular, para C of the circular pertaining to disclosure of executive remuneration shall read as under:

“With the  underlying objective to promote transparency in remuneration policies so that executive remuneration is aligned with the interest of investors, MFs/AMCs shall make the  following disclosures pertaining to a financial year on the MF/AMC website under a separate head–’Remuneration‘:

1. Name, designation and remuneration of Chief Executive Officer (CEO), Chief  Investment  Officer  (CIO) and Chief Operations Officer (COO) or their  corresponding equivalent by whatever name called.

2. Name, designation and remuneration received by top ten employees in terms of remuneration drawn for that financial year.

3. Name,  designation  and  remuneration of  every  employee of  MF/AMC whose :

a. Annual remuneration was equal to or above one crore and two lakh rupees for that financial year.

b. Monthly remuneration in the aggregate was not less than eight lakh and fifty thousand rupees per month, if the employee is employed for a part of that financial year.

4. The  ratio  of  CEO’s  remuneration  to  median  remuneration  of  MF/AMC employees.

5. MF’s total AAUM, debt AAUM and equity AAUM and rate of growth over last three years. For  this  purpose,  remuneration  shall  mean  remuneration  as  defined  in clause  (78)  of section  2 of the Companies Act, 2013.

The AMCs/MFs shall disclose this information within one month  from  the  end  of  the  respective financial year (effective from FY 2016-17).”

3. This   circular   is   issued   in   exercise   of   the   powers   conferred   under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with the provision of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996 to  protect  the  interests  of  investors  in  securities  and  to  promote  the development of, and to regulate the securities market.

Securities and Exchange Board of India