A bench of the Supreme Court of Judge Indira Banerjee and Justice AS Bopanna heard a motion for special leave against a judgment in the Bombay High Court, whereby a motion seeking directions against SEBI to provide documents on which they relied for a show cause notice was dismissed.
The Supreme Court upheld the High Court’s orders and held that there is no rule requiring SEBI to provide the notice to the notice in its entirety under Rule 3 of the Security and Exchanges Council of India (Procedure for Investigation and Imposition of Sanctions by Adjudicating Officer) Rules, 1995.
Senior Advisor Sidharth Luthra appeared for the petitioner. Chander Uday Singh appeared for SEBI.
In this case, the claimant had joined Religare Finvest Limited (RFL), a subsidiary of Religare Enterprises Ltd. (REL) as Chairman-Consumer Finance, to set up and manage its SME lending business. Subsequently, he worked as Managing Director (MD) and Chief Executive Officer (CEO) of RFL to represent the SME lending business.
The Respondent SEBI has appointed a Forensic Hearing Officer to conduct an investigation into the matter of REL and Related Entities for the alleged breach of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Business Practices relating to the Securities Market) Regulations, 2003 (Regulations SEBI PFUTP).
SEBI issued a show cause notice to the petitioner explaining why the proper direction to impose a sanction should not be issued against him. This was done pursuant to Section 15HA of the SEBI Act and Rule 3 of the Arbitration Rules relating to Sections 11(1), 11(4), 11B(1), 11B(2) and 11(4A) of the SEBI Act. with Sections 12A(1) and 12A(2) of the SCR Act 1956, read together with the SEBI Arbitration Rules of 1995 and the SCR Penalties Rules of 2005.
Show cause notices were issued against 13 notices, the applicant being one of them (Notice No. 12). The allegation in the show cause notice was that funds to the tune of Rs. 2315.66 crores were diverted from RFL through multiple layers of conduit entities for the ultimate benefit of the promoters of REL and RFL.
Upon receipt of the show cause notice, the claimant filed a claim for settlement, proposing to settle the proceedings initiated by the show cause notice, in terms of the SEBI (settlement proceeding), 2018 settlement (settlement settlement) . However, the petitioner was unable to settle the proceedings.
The petitioner emailed SEBI, asking for the opportunity to inspect the documents they rely on. According to the Applicant, while certain documents were provided to him as well as other opinions, certain documents were refused for reasons of confidentiality.
The Petitioner submitted that, pursuant to SEBI rules, it is mandatory for SEBI to provide a copy of the notice formed by SEBI for issuance of the show cause notice to the notice, prior to hear the show cause notice. It was further argued that copies of all documents relied upon by SEBI at the time of issuing the show cause notice should be provided to the petitioner. It was argued that without having access to these documents, it would not be possible for the applicant to respond to the show cause notice.
On the other hand, SEBI argued that according to SEBI’s arbitration rules, the board must form an opinion, decide whether or not the show cause notice should be issued and that SEBI is not bound to provide the notice with a copy of the notice.
SEBI further argued that in addition to the physical inspection of all relevant documents, they provided the Claimant with a compact disc containing large recordings, except for those containing confidential internal documents or documents that affect the confidentiality of third parties, and that the applicant has been informed of the same by e-mail.
The Supreme Court referred to Rules 3 and 4 of the Security and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and observed that “There is apparently no rule that requires SEBI to provide the notice under Rule 3 to the person notified in its entirety. rule 3 shall not be disclosed to the person notified unless they are relied upon in the investigation. or any harm is demonstrated to have been caused to the Applicant, it would be open to the Applicant to apply to the appropriate forum.”
Therefore, the Court upheld its previous interim which allowed SEBI to conduct the investigation without relying on documents that had not been provided by the petitioner and dismissed the request for special authorization.
Title of cause – Kavi Arora v. Securities Exchange Board of India