Adjudication Order passed by SEBI, set aside in the absence of an “Opinion”

The Delhi High Court, has, in Amit Jain v. SEBI[1] set aside a show-cause notice issued and consequent proceedings initiated by the Securities and Exchange Board of India (SEBI) against the petitioner for alleged violations of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations).

The petitioner before the Delhi High Court was a shareholder of a listed company viz. Himalaya Granites Limited (Company). On the basis of certain information shared by the Bombay Stock Exchange Limited (BSE) to SEBI, a group of Assistant General Managers of SEBI allegedly found that the petitioner had violated Regulations 13(3) and (5) of the PIT Regulations and recommended that adjudication proceedings be initiated against him.

The aforesaid recommendations were then considered by a Committee of Division of Chiefs of SEBI who also recommended that the adjudication proceedings under Section 15-A(b) of the Securities and Exchange Board of India Act, 1992 (Act) be initiated against the petitioner.

Further to deliberations and recommendations, the Whole-time Director (WTD) SEBI, appended a noting on the file viz. “Ms Anita Kenkare is appointed as AO.

Accordingly, the Executive Director of SEBI communicated inter alia that (i) SEBI had examined the irregularities observed in the matter of the Company and the possible violations of the provisions of the Act and PIT Regulations; (ii) it prima facie appeared to the WTD that the petitioner had violated Regulations 13(3) and (5) of the PIT Regulations and was satisfied that there existed sufficient grounds to enquire into the affairs and adjudicate upon the alleged violation by the petitioner; and (iii) in exercise of his powers under the Act, the WTD appointed Ms Anita Kenkare as the adjudicating officer (AO).

Following the aforesaid, the AO issued a show-cause notice to the petitioner enclosing a copy of the appointment of the AO, a transaction statement for the alleged period of default by the petitioner and the correspondence issued by SEBI to BSE and the Company.

In response thereto, the petitioner appeared before the AO and subsequently, sought for information including the appointment of the WTD, the powers delegated to the WTD and loss caused to investor or group of investors of the Company by his alleged violation of the PIT Regulations. However, the Assistant General Manager of SEBI refused to disclose the requested information.

The petitioner thereafter, filed a writ petition before the Delhi Court under Articles 226 and 227 of the Constitution of India impugning the show-cause notice and for quashing the proceedings leading to the appointment of the AO to adjudge the penalty to be imposed on the petitioner.

At the hearing before the Delhi High Court, the following issues fell before the Court for its adjudication:

(a) whether the WTD had formed an opinion that there existed grounds for adjudging penalty under Section 15-A(b) of the Act?; and

(b) whether the WTD was required to pass an order under Regulation 14 of the PIT Regulations before taking any step for appointing an adjudicating officer for adjudging any penalty under Section 15-A(b) of the Act?

At the hearing, referring to Regulation 15 of the PIT Regulations, the learned counsel of the petitioner contended that the petitioner was precluded from exercising its right to appeal under the PIT Regulations since SEBI had not passed any order and hence, the petitioner was left with no other option but to approach the present Court.

The learned counsel for the petitioner thereafter contended that in the present case, there is no noting by the WTD expressly stating that he has formed an opinion that there are grounds for adjudging under the provisions of Chapter VI-A of the Act before the appointment of an adjudicating officer, as required under the provisions of Rule 3 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (Inquiry Rules).

Referring to Regulation 4-A of the PIT Regulations, the learned counsel for the petitioner contended that it was mandatory for SEBI, or its delegate being the WTD, to make necessary inquiries for forming a prima facie opinion and to follow the procedure under Chapter III of the PIT Regulations.

The learned counsel for the petitioner also brought the Court’s attention to the caption or heading of Chapter III of the PIT Regulations being “investigation” indicating that the provisions of Regulations 4-A to 10 of the PIT Regulations relate essentially to the investigation that may be conducted by SEBI. Thus, as per the learned counsel for the petitioner, the scheme of the PIT Regulations made it amply evident that SEBI was first required to exhaust the process of investigation and then form a firm opinion, and only thereafter could the question of imposing penalty arise. In addition thereto, the learned counsel for the petitioner also contended that the proceedings for imposing a penalty could not be initiated without a prior order under Regulation 14 of the PIT Regulations.

Reading Regulation 11 with Regulation 14 of the PIT Regulations, the Court explained that initiating any action under Chapter VI-A of the Act is independent from the procedure as specified in the PIT Regulations. Therefore, the contention that SEBI was first required to determine whether the petitioner had violated PIT Regulations before appointing an AO was unmerited. It was further explained that it was also not necessary that the procedure of investigation must be carried out before SEBI can form an opinion that there are grounds for adjudging under any provision under Chapter VI-A of the Act.

While recognising the provision under Rule 3 of the Inquiry Rules, the Court observed that the only noting available on file made by the WTD is “Ms Anita Kenkare is appointed as AO” and there is no scope for inferring formation of an opinion merely for the reason that an adjudicating officer has been appointed and the other officers have forwarded their recommendations for such an opinion. SEBI is required to form an independent opinion that there are grounds for adjudging under Chapter VI-A of the Act. The Court further stated that it is not necessary for SEBI to elaborate its opinion or provide reasons for the same, however, it is required for SEBI to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VI-A of the Act before proceeding to appoint an AO.

The High Court also relied upon Chhugamal Rajpal v. S.P. Chaliha[2] and Central India Electric Supply Co. Ltd. v. ITO[3] to explain that courts have not accepted endorsement made mechanically as indicative of expression of any opinion or satisfaction that necessary statutory conditions have been met. In the present case, the WTD did not even make an endorsement that he is of the opinion that there are grounds for adjudging under Chapter VI-A of the Act and thus, the question of inferring that he had formed such an opinion does not arise.

In light of the aforesaid, the Court set aside the proceedings initiated against the petitioner and set aside the impugned show-cause notice issued to him and clarified that SEBI may examine the file and only after forming an opinion that there are grounds for adjudging under Chapter VI-A of the Act appoint an adjudicating officer for holding an inquiry.

The order passed by the Delhi High Court seems to be in consonance with the maxim delegatus non potest delegare. The jurisprudence of administrative law would affirm that a statutory power ought to be exercised only by the body or officer in whom it has been so conferred.

An implication of this order could be that a WTD is now prevented from delivering mechanical orders solely based upon the recommendations forwarded to it by his or her subordinates. A further implication, one that may even cause severe delays is that; a noticee may exercise its right to seek information from SEBI including but not limited to the “opinion” of the WTD prior to setting the investigation machinery in motion. It may be further possible that proceedings currently sub-judice before SEBI may not proceed further until SEBI responds to these requests from the noticees. One may anticipate a plethora of writ petitions being filed, wherein noticees shall demand their right to natural justice and as a corollary, delay the investigation being undertaken by SEBI.

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* Senior Associate practising with the litigation team at DSK Legal, Mumbai.

** Article practising with the litigation team at DSK Legal, Mumbai.

[1]  2018 SCC OnLine Del 9784.

[2]  (1971) 1 SCC 453 : (1971) 79 ITR 603.

[3]  2011 SCC OnLine Del 472 : (2011) 333 ITR 237.

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