Supreme Court directs fresh hearing for alleged fraud in commodity exchange case (27 November 2020)

Introduction

Date of the Judgment: 27 November 2020

Citation: (2020) INSC 922

Judges: Sanjay Kishan Kaul, J., Hrishikesh Roy, J.

Can a regulatory body proceed against a company and its key personnel for alleged fraud without ensuring a fair hearing? The Supreme Court of India addressed this critical question in a case involving the Indian Commodity Exchange Limited (ICEL) and Neptune Overseas Limited (NOL), along with its Managing Director, Mr. Kailash Ramkishan Gupta. The core issue revolved around whether the principles of natural justice were followed by the Forward Markets Commission (FMC), now merged with the Securities and Exchange Board of India (SEBI), when it initiated proceedings against the respondents for alleged irregularities. The Supreme Court, after examining the facts and circumstances, directed a fresh hearing, emphasizing the importance of providing a fair opportunity to be heard. The judgment was delivered by a two-judge bench comprising Justice Sanjay Kishan Kaul and Justice Hrishikesh Roy.

Case Background

The case originated from a complaint made by an independent journalist to the FMC on 28 November 2010, alleging trading irregularities within the National Multi Commodity Exchange of India Limited (NMCE), which is now succeeded by the Indian Commodity Exchange Limited (ICEL). The complaint also accused Neptune Overseas Limited (NOL) and its Managing Director, Mr. Kailash Ramkishan Gupta, of abuse of position. NOL was the core promoter of NMCE and its largest shareholder, while Mr. Gupta held dual roles as the CEO of NMCE and the Managing Director of NOL.

Following the complaint, the FMC initiated an inquiry on 14 December 2010, under Section 8(2) and 8(4) of The Forward Contracts (Regulation) Act, 1952. A detailed show cause notice was served on 21 June 2011 to Mr. Gupta, giving him 10 days to respond and fixing a personal hearing for 4 July 2011. Mr. Gupta was given liberty to peruse any documents within 7 days. This led to a series of communications, including requests for documents and adjournments.

Parallelly, NOL filed a Special Civil Application before the Gujarat High Court on 8 July 2011, challenging the show cause notice and the jurisdiction of the FMC. The High Court dismissed the petition, observing that the principles of natural justice had been complied with. Despite this, Mr. Gupta continued to seek adjournments and raised grievances about the non-supply of documents. The FMC rejected these requests, stating that most documents were either under the control of the respondents or irrelevant. The FMC passed an order on 23 July 2011, holding Mr. Gupta in breach of his fiduciary responsibility and directing NMCE to take legal action against him and his family members.

Timeline

Course of Proceedings

The Gujarat High Court initially dismissed NOL’s challenge to the show cause notice, stating that the principles of natural justice were followed. However, in an intra-court appeal, the Division Bench of the High Court quashed the FMC’s order dated 23 July 2011, citing a violation of the principles of natural justice because the show cause notice was not served on NOL and NMCE. The Supreme Court stayed this order on 22 March 2012, reviving the FMC order.

Subsequently, on 7 March 2018, the Supreme Court set aside the High Court’s order and directed the respondents to approach the Securities Appellate Tribunal (SAT). The SAT, on 18 October 2019, set aside the FMC order, emphasizing the lack of a show cause notice to NOL and the inadequate opportunity given to Mr. Gupta to respond to the allegations. The SAT directed a fresh hearing, which led to the present appeals before the Supreme Court.

Legal Framework

The case primarily involves The Forward Contracts (Regulation) Act, 1952, which aimed to regulate forward contracts and related matters. Key provisions include:

• Section 3: Establishes the Forward Markets Commission (FMC) as an authority to regulate commodities futures market.
• Section 4: Outlines the functions of the FMC, including advising the Central Government and keeping forward markets under observation. Specifically, Section 4(b) states:
  
  “4. Functions of the Commission.—The functions of the Commission shall be—
  (a)xxxx xxxxxxxxxxxxxxxx
  (b) to keep forward markets under observation and to take such action in relation to them as it may consider necessary, in exercise of the powers assigned to it by or under this Act;]
  xxxxxxxx xxxxxxxxxxxx”
• Section 8(2): Empowers the Central Government to direct inquiries into the affairs of a registered association.
  
  “8. Power of Central Government to call for periodical returns or direct inquiries to be made.—
  [(1) Every recognised association and every member thereof shall furnish to the Central Government such periodical returns relating to its affairs, or the affairs of its members, or his affairs, as the case may be, as may be prescribed.]
  (2) Without prejudice to the provisions contained in sub-section (1) where the Central Government considers it expedient so to do, it may, by order in writing,—
  (a) xxxx xxxxxxxxxxxxxxxx
  (b) appoint one or more persons to make an inquiry in relation to the affairs of such association or the affairs of any of its members and submit a report of the result of such inquiry to the Central Government within such time as may be specified in the order or, in the alternative, direct the inquiry to be made, and the report to be submitted, by the governing body of such association acting jointly with one or more representatives of the Central Government; and”
• The powers of the Central Government under Section 8(2) were delegated to the officers of the FMC by Government Notifications S.O. Nos. 1162 and 928 dated 4.4.1960 and 12.3.1964, respectively.

The Securities and Exchange Board of India Act, 1992, under Section 15Z, allows appeals to the Supreme Court against orders of the Securities Appellate Tribunal (SAT) on questions of law.

“15Z. Appeal to Supreme Court.— Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order:
Provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.”

Arguments

The arguments presented before the Supreme Court were multifaceted, with both sides relying on various legal principles and factual aspects. Here’s a breakdown of the main arguments:

Arguments by the Indian Commodity Exchange Limited (ICEL):

• Sub-argument 1: ICEL argued that the SAT’s order was incorrect because it was based on the premise that ICEL was not served with a show cause notice, which was not the case. ICEL itself was in appeal before the Supreme Court, indicating that it was aware of the proceedings.

• Sub-argument 2: ICEL contended that the principles of natural justice should be seen holistically and that adequate opportunities had been granted to both respondents.

• Sub-argument 3: ICEL emphasized that NOL and Mr. Gupta were essentially the same entity and were playing games by appearing as separate entities. They argued that the corporate veil should be pierced to see the real intention of the respondents.

• Sub-argument 4: ICEL relied on several judgments to support its arguments:

  • Chairman, Board of Mining Examination and Chief Inspector of Mines and Anr. v. Ramjee: Principles of natural justice require substantial compliance, not every minor violation.

  • Titaghur Paper Mills Co. Ltd. and Anr. v. State of Orissa and Ors. and Cement Workers Karamchari Sangh v. Jaipur Udyog Limited and Ors.: Mere denial of adjournment is not always a violation of natural justice.

  • Dharampal Satyapal Ltd. v. Deputy Commissioner of Central Excise, Gauhati and Ors.: Natural justice cannot be applied rigidly, and the futility of giving relief should be considered. The test is of prejudice or fair hearing.

Arguments by the Securities and Exchange Board of India (SEBI):

• Sub-argument 1: SEBI supported ICEL’s plea and argued that the Supreme Court’s previous order dated 7 March 2018, had already settled the issue of violation of natural justice. Since the High Court’s order was based on the denial of a fair hearing and that order was set aside, the issue was closed.

• Sub-argument 2: SEBI contended that the relegation of proceedings to the SAT did not imply that the entire chapter would be reopened. The Supreme Court had directed the SAT to hear the appeal “on merits,” which should not include re-examining the issue of natural justice.

• Sub-argument 3: SEBI emphasized that sufficient opportunities were granted and no prejudice was caused to the respondents. They also highlighted the need to pierce the corporate veil due to the gross mismanagement by NOL and Mr. Gupta.

Arguments by Neptune Overseas Limited (NOL) and Mr. Kailash Ramkishan Gupta:

• Sub-argument 1: The respondents argued that the appeals were not maintainable under Section 15Z of the SEBI Act because there was no question of law involved.

• Sub-argument 2: They contended that the FMC had conceded before the Gujarat High Court that no show cause notice was served on NOL and NMCE.

• Sub-argument 3: They argued that the principles of natural justice were violated because NOL was not served a show cause notice, and Mr. Gupta was not given a reasonable opportunity to respond to the allegations.

• Sub-argument 4: They claimed that Mr. Gupta was given a 150-page show cause notice without the supporting documents. The documents were only provided later, and the proceedings were concluded within 14 days, denying him adequate time to respond.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issues addressed can be summarized as follows:

1. Whether the principles of natural justice were violated in the proceedings conducted by the FMC against NOL and Mr. Gupta.
2. Whether the order of the SAT was justified in setting aside the FMC order and directing a fresh hearing.
3. Whether the Supreme Court’s previous order dated 7 March 2018, had settled the issue of violation of natural justice.
4. Whether the appeals filed by ICEL and SEBI were maintainable under Section 15Z of the SEBI Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court, after considering the arguments and authorities, delivered the following judgment:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure a fair process and protect the principles of natural justice. The Court noted that while there was some attempt by Mr. Gupta to prolong the proceedings, the FMC’s actions raised concerns about the fairness of the process. The Court emphasized that an opportunity of hearing is not a mere formality but a valuable right.

The Court also considered the interconnected nature of NOL and Mr. Gupta, recognizing that they were essentially operating as a single entity. The Court noted that while a formal show cause notice was not served on NOL, it was understood to be addressed to both NOL and Mr. Gupta. However, the Court found that Mr. Gupta was not given adequate time to respond to the allegations and the voluminous documents.

The Court was also influenced by the fact that the whole enquiry was initiated based on a complaint by an “independent enterprising journalist,” which raised questions about the fairness of the process.

The Court rejected the argument that the previous Supreme Court order had settled the issue of natural justice. The Court clarified that the previous order had only directed the matter to the SAT for a hearing on merits, which includes the plea of lack of opportunity.

The Court also addressed the argument that a fresh show cause notice should be served on NOL. The Court found that while no formal notice was served on NOL, it was understood to be addressed to both NOL and Mr. Gupta. Therefore, the Court did not find it necessary to direct a fresh show cause notice.

The Court found that the FMC’s actions did not provide Mr. Gupta with a reasonable opportunity to defend himself. The Court highlighted the following points:

• The show cause notice was 150 pages long, and the supporting documents ran into 4,000 pages.
• The documents were supplied on 5 July 2011, and the proceedings were concluded within two weeks, which was not sufficient time to respond.
• The FMC had denied the request for adjournment without sufficient reason.

The Court concluded that the FMC’s actions raised serious doubts about whether a fair process and opportunity had been extended to Mr. Gupta. The Court emphasized that an opportunity of hearing is not a mere nicety but a valuable right.

The Court quoted the following from the judgment:

• “We fail to appreciate why there should have been a cussedness in handing over mere copies of documents when serious allegations and serious consequences which would flow to the respondents herein.”
• “An opportunity of hearing is not a mere nicety but a valuable right.”
• “The manner in which the proceedings were sought to be closed raises serious doubts in our mind that a fair process and opportunity has been extended to Respondent No.2 herein.”

Key Takeaways

The Supreme Court’s judgment in this case underscores the importance of adhering to the principles of natural justice in regulatory proceedings. Key takeaways include:

• Fair Hearing is Essential: Regulatory bodies must ensure that individuals and entities facing allegations are given a fair and reasonable opportunity to present their case. This includes sufficient time to review documents and prepare a defense.
• Substantial Compliance with Natural Justice: The principles of natural justice require substantial compliance, not just a mere formality. Regulatory bodies must provide all necessary documents and allow adequate time for response.
• Corporate Veil Can Be Pierced: The corporate veil can be pierced when it is evident that individuals are using corporate entities to shield themselves from liability or to engage in fraudulent activities.
• Opportunity of Hearing is a Valuable Right: An opportunity of hearing is not a mere formality but a valuable right that must be protected.
• Previous Orders are not Always Conclusive: Previous orders of a court do not always settle all aspects of a case. The scope of such orders must be carefully analyzed to determine their effect.

Conclusion

The Supreme Court’s judgment in the case of Indian Commodity Exchange Limited vs. Neptune Overseas Limited & Ors. highlights the critical importance of adhering to the principles of natural justice in regulatory proceedings. While the Court recognized the interconnected nature of NOL and Mr. Gupta, it emphasized that the FMC’s actions had not provided Mr. Gupta with a fair opportunity to defend himself. The Court modified the SAT’s order, directing the Securities and Exchange Board of India (SEBI), which had succeeded the FMC, to conduct a fresh hearing. This decision underscores that while regulatory bodies have the power to investigate and take action, they must do so in a manner that respects the fundamental principles of fairness and due process. The judgment serves as a reminder that an opportunity of hearing is not a mere formality but a valuable right.