Summary: This blog analyses the duty of the Securities and Exchange Board of India (“SEBI”) to disclose documents during regulatory proceedings. It traces the judicial evolution of SEBI’s disclosure obligations and discusses contrasting judicial views on the extent and limits of such obligation.
The Securities and Exchange Board of India (“SEBI”), as a regulator and a quasi-judicial body, is dutybound to act fairly and adhere to the principles of natural justice while conducting proceedings against parties. One such duty is to grant noticees access to the material that form the basis of the findings/ allegations made against them in the show cause notice.
Whilst the Securities and Exchange Board of India Act, 1992, and the regulations made thereunder do not specify SEBI’s obligations to provide inspection of records in detail, the judiciary has played a crucial role in recognising it over time. Earlier, typically, only the documents relied upon by SEBI were disclosed to the noticees. Over time, judicial rulings broadened this requirement to all relevant material, reinforcing principles of fair play and transparency in regulatory proceedings.
In this blog, we examine some of the key Supreme Court, High Court and the Securities Appellate Tribunal (“SAT”) decisions on the subject, that have shaped SEBI’s disclosure obligations and the extent of information/ documents that the regulator is required to share.
Key Judicial Rulings
In Natwar Singh v. Directorate of Enforcement & Anr.[1] (“Natwar Singh”), the Supreme Court examined the extent of disclosure required by an adjudicating authority during proceedings under the Foreign Exchange and Management Act, 1999. The Court distinguished between the initial stage[2] for the purpose of deciding whether an enquiry has to be held and the subsequent stage of adjudication into the allegations of contravention, and held that the adjudicating authority is required to provide only those documents that have been relied upon to issue the show cause notice, and not all documents in its possession.
SEBI followed the precedent set by Natwar Singh in its adjudication proceedings, specifically in relation to denying inspection of its investigation report. In T. Takano v. SEBI & Anr.[3] (“Takano”), the Supreme Court held that it would be insufficient if only the material relied on is disclosed. The case arose when SEBI refused to provide certain documents that were not specifically relied upon in the show cause notice, but were a part of the investigation record. It was held that it would be fundamentally contrary to the principles of natural justice if the relevant material is not disclosed to the noticee and that an authority cannot avoid disclosing relevant material simply by claiming it was not relied upon, if such material is relevant to the action taken and has a nexus to the decision-making process.
The Court ruled that the only test to be applied for determining the requirement of disclosure of a document / material which admittedly exists and is in exclusive possession of SEBI, is that of “relevancy” and “materiality”. The Apex Court distinguished the ratio of Natwar Singh holding that it is sufficient to disclose the materials relied on if it is for the purpose of initiating an inquiry, however, in adjudication proceedings all information that is relevant to the proceedings must be disclosed. Two exceptions were carved out for denying inspection, viz. (i) documents affecting third-party interests; and (ii) documents affecting the stability and orderly functioning of the securities market.
In Reliance Industries Limited v. SEBI & Ors.[4] (“Reliance Industries”), a three-judge bench of the Supreme Court held that SEBI must disclose to the noticee any legal opinions that formed the basis for issuing the show cause notice. The Court held that such opinions/ reports are an extension of SEBI’s investigation, and that SEBI’s decision to initiate criminal proceedings without providing the requisite documents is in gross violation of the principles of natural justice. Echoing the purpose of disclosure from Takano, the Supreme Court reiterated the three fundamental purposes of information disclosure: (i) reliability (the Court will be able to perform its function accurately only if both parties have access to information and possess opportunity to address arguments and counter arguments), (ii) fair trial (this will enable the parties to effectively participate in the proceedings); and (iii) transparency and accountability (the investigative agencies are held accountable through transparency and not opaqueness).
Despite the progressive rulings in Takano and Reliance, the Supreme Court in Kavi Arora v. SEBI[5] (“Kavi Arora”)followed a more restrictive approach. In the instant case, SEBI appointed a forensic auditor and annexed the report with the show cause notice, but refused to provide inspection of certain annexures of the forensic auditor’s report, contending that it would not rely on the same. SEBI stated before the Court that it would not rely on any document apart from those provided to the Petitioner. The Supreme Court did not find fault with the SEBI’s approach and found it to be in line with Natwar Singh, and held that the documents relied upon for formation of opinion under Rule 4(3), are not required to be disclosed to the notice unless relied upon in the inquiry. However, it also held that in the event, the noticee is prejudiced by reason of any adverse order, based on any materials not supplied to the Petitioner, or any prejudice is demonstrated to have been caused to the Petitioner, it would be open to the Petitioner to approach the appropriate forum.
In contrast, in Milind Patel v. Union Bank of India and Ors.[6], the Bombay High Court addressed the issue of inspecting relevant materials pertaining to a show cause notice issued for declaring bodies corporate, their promoters and directors as “wilful defaulters”, under the Reserve Bank of India’s Master Circular[7]. The petitioner relied on Takano and argued that the Bank must disclose all relevant documents that could potentially assist in the defence, and not just those relied upon in the show cause notice. Union Bank argued that it had already disclosed the documents it had relied on, and it had no obligation to share anything further. Disagreeing with Union Bank, the Court held that exculpatory material or information that may undermine the allegations contained in the show cause notice (which may, therefore, not be referred to or relied on) must also be supplied to the petitioner. The Court held that such access to record is a vital element of complying with principles of natural justice and such information would be relevant for arriving at the truth.
Recently, in Madhyam Agrivet Industries Ltd. & Ors. v. SEBI[8] (“Madhyam Agrivet”), the appellants sought access to several categories of documents. These included show cause notice(s) issued to independent directors and other officials associated with the appellant, internal communications related to the investigation and inter-department transfers within SEBI, and correspondence between SEBI and the forensic auditor. While the SAT permitted inspection of the show cause notice(s), it denied the request to inspect SEBI’s internal communications and correspondence with the forensic auditor, basis the fact that the appellant had already received the final product of these communications, i.e. the Forensic Audit Report and the Investigation Report. The appellants’ have challenged the SAT’s decision before the Supreme Court and it is currently pending adjudication.
Concluding Remarks
Whilst Takano and Reliance Industries stress that regulators must disclose all relevant material, prioritising transparency and fairness; Kavi Arora and Madhyam Agrivet appear to support a narrower disclosure approach. Notably, Takano and Kavi Arora were pronounced by two-judge benches of the Supreme Court, whereas Reliance Industries was a three-judge bench decision. Though both Kavi Arora and Madhyam Agrivet reference Takano, it appears that Reliance Industries was not placed before them for consideration. Perhaps the dust will settle when the Supreme Court rules on the appeal from SAT’s decision in Madhyam Agrivet.
SEBI, as a regulator, has wide powers to summon documents and information from various persons. During investigations, a wide range of material is gathered, including items that may eventually not be relied upon or deemed relevant to the proceedings. SEBI has full discretion to decide which documents to rely on in the show cause notice. In such a scenario, providing documents that are only relied on by SEBI (to meet its case) would certainly be insufficient. Therefore, it is necessary that SEBI is mandated to provide all material that is relevant to the subject matter of the proceedings. Since SEBI may possess a wide range of sensitive information, safeguards against material affecting the stability and orderly functioning of the securities market and third-party interests have been duly recognised as an exception to SEBI’s disclosure obligation. The test of relevancy, coupled with the aforesaid exceptions help in avoiding a roving enquiry or an unrelated demand for information.
In conclusion, the duty of disclosure on SEBI is a proactive obligation to disclose relevant documents, promoting transparency and fairness in adjudication proceedings. It not only ensures that necessary information is made available to support the administration of justice, but also enhances public confidence in the regulatory framework and integrity of the securities market.
For further information, please contact:
Vasudha Goenka, Partner, Cyril Amarchand Mangaldas
vasudha.goenka@cyrilshroff.com
[1] (2010) 13 SCC 255
[2] under Rule 4(1) of Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000, which is pari materia to SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995
[3] (2022) 8 SCC 162
[4] (2022) 10 SCC 181
[5] 2022 SCC OnLine SC 1217
[6] 2024 SCC OnLine Bom 745
[7] Reserve Bank of India’s Master Circular on Wilful Defaulters dated 1st July 2015
[8] 2024 SCC OnLine SAT 296