SEBI Failed To Act Fairly – SC Directs SEBI To Disclose Documents To Reliance For Filing Complaint

The Bench of CJI NV Ramana, Justice JK Maheshwari, and Justice Hima Kohli while holding so, observed –

"SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties. Being a quasi­judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law. The role of a Regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions. There is a substantive duty on the Regulators to show fairness, in the form of public co­operation and deference."

The Court also held that the duty to act fairly by SEBI is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself.

In this case, a complaint was filed with SEBI against RIL alleging that they fraudulently allotted 12 crore equity shares of RIL to entities purportedly connected with the promoters of RIL, which were funded by RIL and other group companies in 1994. It was alleged that the company and its directors were in violation of Section 77 of the Companies Act, 1956.

As per RIL, a note was prepared by the Department of Legal Affairs of SEBI wherein it was noted that the report had not brought out any specific violation of any legal provision by RIL.

Later, SEBI sent a letter to RIL alleging that the latter had funded purchase of its own shares by 38 related entities and thereby violated Section 77(2) of the Companies Act and further violated Regulations 3, 5, and 6 of that they fraudulently allotted 12 crore equity shares of RIL to entities purportedly connected with the promoters of RIL, which were funded by RIL and other group companies in 1994. It was alleged that the company and its directors were in violation of Section 77 of the Companies Act, 1956.

Thereafter, RIL in its reply addressed numerous letters to SEBI requesting copies of the documents and submitting inter alia that the issue concerning violation of Section 77 of the Companies Act, 1956 was examined by the Ministry of Corporate Affairs which had concluded that the transaction was compliant with the applicable law.

However, SEBI repeatedly rejected the request for disclosure of the documents to RIL.

Aggrieved, RIL approached the Bombay High Court, however, the Court dismissed its Petition.

This was followed by SEBI filing a complaint in the Court of SEBI, Special Judge, Mumbai for issuing the process against RIL for the aforementioned offences. However, the Court dismissed the complaint filed by SEBI as being barred by limitation.

This order was challenged before the Bombay High Court and in the said proceedings RIL also filed an I.A. seeking the disclosure of documents used for filing complaint.

Aggrieved with the order of the High Court holding that the Interim Application will have to be heard along with the main Revision Application, on the next date, RIL approached the Apex Court.

Senior Advocate Harish Salve appeared for RIL while Senior Advocate Arvind P. Datar appeared for the Respondent before the Supreme Court.

The issues dealt with by the Court were –

• Whether this appeal is maintainable?

• Whether SEBI is required to disclose documents in the present set of proceedings?

• Issue 1

The Court while adjudicating upon the first issue regarding the maintainability of the appeal, the Court observed –

"Initiation of criminal action in commercial transactions, should take place with a lot of circumspection and the Courts ought to act as gate keepers for the same. Initiating frivolous criminal actions against large corporations, would give rise to adverse economic consequences for the country in the long run. Therefore, the Regulator must be cautious in initiating such an action and carefully weigh each factor."

Further, the Court held that in the ordinary course, the Court would have remanded the matter for adjudication by the High Court on the interim application moved by RIL seeking disclosure of documents. However, since arguments were advanced extensively before the Court that touch upon important aspects of criminal jurisprudence that require consideration.

"Moreover, the facts stated above, clearly indicate that the acts which are sought to be prosecuted go back to the year 1992­1994, and over three decades have passed without there being any end to the litigation. In this regard, the Court intends to examine this important issue and pass appropriate orders to ensure that the adjudication is not delayed unnecessarily, ad infinitum," the Bench held.

• Issue 2

The Court while adjudicating upon the second issue concerning the right of RIL to seek document disclosure noted that the Appellant was pursuing SEBI for the documents as they believe that an attempt was made by SEBI to suppress the Opinions and Reports as they are adverse to the cause of SEBI.

The Court held, "SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties."

The Bench further placed reliance on T. Takano v. Securities and Exchange Board of India, 2022 SCC Online SC 210 and observed that keeping a party abreast of the information that influenced the decision promotes transparency of the judicial process.

The Court held, "In this light, SEBI's action to initiate a criminal complaint without providing the appellant an adequate opportunity to defend itself by releasing necessary Reports and other documents, cannot be appreciated by this Court as it is in gross violation of the appellant's right to natural justice."

"The approach of SEBI, in failing to disclose the documents also raises concerns of transparency and fair trial. Opaqueness only propagates prejudice and partiality. Opaqueness is antithetical to transparency. It is of utmost importance that in a country grounded in the Rule of Law, institutions ought to adopt procedures that further the democratic principles of transparency and accountability. Principles of fairness and transparency of adjudicatory proceedings the cornerstone of the principles of open justice," the Bench opined.

Thus, the Court held that the defence taken by SEBI that they need not disclose any documents at this stage as such request is pre-mature in terms of CrPC and cannot be sustained.

Further, the Bench addressed the allegation of the appellant that while the parts which were disclosed, vaguely point to the culpability of the appellant, SEBI is refusing to divulge the information which exonerates it and held that such cherry­picking by SEBI only derogates the commitment to a fair trial.

In the light of these observations, the Court allowed the appeal and directed SEBI to furnish a copy of the documents used for filing the complaint against RIL.

Cause Title - Reliance Industries Limited v. Securities and Exchange Board of India & Ors.

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