Supreme Court Upholds SEBI’s Right to Withhold Confidential Documents in Inquiry: Kavi Arora vs. SEBI (2022)

Date of the Judgment: 14 September 2022

Citation: [Not Available in Source]

Judges: Indira Banerjee, J., A. S. Bopanna, J.

Can a regulatory body like the Securities and Exchange Board of India (SEBI) withhold certain documents, citing confidentiality, from an individual facing an inquiry? The Supreme Court of India recently addressed this critical question in a case involving Kavi Arora and SEBI. The core issue revolved around the extent of SEBI’s obligation to disclose all documents relied upon in a show cause notice, even those deemed confidential, to the noticee during an inquiry. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice A. S. Bopanna.

Case Background

Kavi Arora was the President of Consumer Finance at Religare Finvest Limited (RFL), a subsidiary of Religare Enterprises Ltd. (REL), where he was responsible for setting up and managing the retail lending business. He later became the Managing Director (MD) and Chief Executive Officer (CEO) of RFL, representing the SME Lending Business. SEBI appointed M/s MSA Probe Consulting to investigate alleged violations of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 by REL and related entities.

A Show Cause Notice (SCN) was issued to Kavi Arora by SEBI on 17th November 2020, under Section 15HA of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and Rule 3 of the SEBI Adjudication Rules, 1995. The notice alleged that funds amounting to ₹2315.66 crores were diverted from RFL through various entities for the benefit of the promoters of REL and RFL. Kavi Arora was one of the 13 noticees in this matter.

Arora sought to settle the proceedings through a settlement application dated 22nd February 2021, under the SEBI (Settlement Proceedings) Regulations, 2018, but this attempt was unsuccessful. He then requested SEBI to provide him with the documents relied upon for issuing the Show Cause Notice. While some documents were provided, certain others were withheld on the grounds of confidentiality.

Timeline:

Course of Proceedings

The Petitioner, Kavi Arora, filed a Writ Petition (L) No. 19352 of 2021 before the High Court of Judicature at Bombay, seeking directions against SEBI to furnish the documents relied upon in the Show Cause Notice. He also sought a copy of the opinion formed under Rule 3 of the SEBI Adjudication Rules, 1995, for constituting an Adjudicating Authority to issue the Show Cause Notice. The High Court dismissed the Writ Petition, leading to the current Special Leave Petition before the Supreme Court.

Legal Framework

The case involves several key legal provisions:

• Sections 11(1), 11(4), 11B(1), 11B(2), and 11(4A) of the Securities and Exchange Board of India Act, 1992 (SEBI Act): These sections empower SEBI to regulate the securities market, prevent fraudulent practices, and issue directions to protect investors’ interests.
• Sections 12A(1) and 12A(2) of the Securities Contract (Regulation) Act, 1956 (SCR Act): These sections deal with the prohibition of fraudulent and unfair trade practices in the securities market.
• SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (SEBI Adjudication Rules 1995): These rules outline the procedure for conducting inquiries and imposing penalties by SEBI’s Adjudicating Officer. Specifically, Rule 3 deals with the appointment of an adjudicating officer and Rule 4 deals with the procedure for holding an inquiry.
• Securities Contract (Regulation) (Procedure for holding inquiry and imposing penalties) Rules, 2005 (SCR Penalties Rules 2005): These rules specify the procedure for holding inquiries and imposing penalties under the SCR Act.

The legal framework aims to ensure fair and transparent proceedings while safeguarding the integrity of the securities market.

Arguments

Petitioner’s Arguments (Kavi Arora):

• The Petitioner argued that the Show Cause Notice was issued under Section 15HA of the SEBI Act and Rule 3 of the SEBI Adjudication Rules, which requires the formation of an opinion before appointing an Adjudicating Authority.
• The Petitioner contended that he was entitled to all documents relied upon by SEBI, including the opinion formed under Rule 3, and the MSA Probe Consulting report, to effectively respond to the Show Cause Notice.
• The Petitioner submitted that SEBI had withheld crucial documents such as the index of bank statements, calendars of evidence (oral and documentary), and soft copies of emails and communications, citing confidentiality without adequate justification.
• The Petitioner relied on the principles of natural justice, asserting that he could not defend himself without access to all relevant documents.
• The Petitioner cited cases such as T. Takano v. SEBI, Natwar Singh v. Directorate of Enforcement, and Indian Commodity Exchange Limited v. Neptune Overseas Limited to support his claim for disclosure of all relied upon documents.
• The Petitioner argued that the Adjudicating Authority had failed to follow the two-tier adjudication process under Rule 4 of the SEBI Adjudication Rules, which requires the formation of an opinion on whether an inquiry should be continued after considering the reply to the Show Cause Notice.

Respondent’s Arguments (SEBI):

• SEBI argued that under the SEBI Adjudication Rules, it is not required to furnish the noticee with a copy of the opinion formed under Rule 3.
• SEBI contended that it had provided the Petitioner with a Compact Disc containing voluminous records, except for internal confidential documents or documents affecting the confidentiality of third parties.
• SEBI stated that the documents withheld were confidential and not directly relied upon for the inquiry.
• SEBI submitted that the formation of opinion under Rule 3 is not a formal inquiry and does not require the participation of the person against whom the inquiry is contemplated.
• SEBI argued that the Adjudicating Authority had followed the procedure by issuing a Show Cause Notice, considering the preliminary reply, and then fixing a date for appearance.
• SEBI relied on the principle that documents not relied upon by the authority need not be supplied, as held in Natwar Singh v. Directorate of Enforcement.

The core of the dispute was whether SEBI was obligated to disclose all documents, including those deemed confidential, to the Petitioner.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether SEBI is obligated to disclose all documents relied upon in a show cause notice, including those considered confidential, to the noticee during an inquiry.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• T. Takano v. SEBI, 2022 SCC Online SC 210, Supreme Court of India: This case reiterated the principle that relevant material must be disclosed to the noticee to ensure a fair hearing. The court emphasized that the investigating authority’s report is an essential ingredient for the Board to arrive at a satisfaction, and it requires due disclosure.
• Natwar Singh v. Directorate of Enforcement and Another, (2010) 13 SCC 255, Supreme Court of India: This case held that the concept of fairness requires the adjudicating authority to furnish copies of documents relied upon to issue a show cause notice. However, it also clarified that there is no duty to disclose all documents in possession of the authority, only those relied upon.
• Indian Commodity Exchange Limited v. Neptune Overseas Limited, 2020 SCC Online SC 967, Supreme Court of India: [Brief on the case is not available in the source].
• Shashank Vyankatesh Manohar v. Union of India, 2014(1) MahLJ 838, High Court of Bombay: This case dealt with the two-tier adjudication process under the SEBI Adjudication Rules, emphasizing the need for the Adjudicating Authority to form an opinion before proceeding with an inquiry.
• Amit Jain v. Securities and Exchange Board of India and Another, 2018 SCC Online Del 9784, Delhi High Court: This case held that the formation of an opinion by the Board is a precondition for appointing an Adjudicating Officer.
• Rule 3 of the SEBI Adjudication Rules 1995: This rule pertains to the appointment of an adjudicating officer for holding an inquiry.
• Rule 4 of the SEBI Adjudication Rules 1995: This rule outlines the procedure for holding an inquiry, including the issuance of a show cause notice and the subsequent steps.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Natwar Singh v. Directorate of Enforcement [CITATION], to reiterate that only relied upon documents need to be disclosed.
• The Court cited T. Takano v. SEBI [CITATION], to emphasize that relevant material must be disclosed, but clarified that this does not mean all documents must be disclosed.
• The Court considered the other cases and provisions to clarify the procedure under the SEBI Adjudication Rules.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the principles of natural justice with the practicalities of regulatory investigations. The Court recognized that while transparency is essential, regulatory bodies like SEBI must also be able to maintain confidentiality to protect the integrity of their investigations and the interests of third parties. The Court emphasized that the opinion formed under Rule 3 of the SEBI Adjudication Rules is a preliminary step and not part of the formal inquiry. It also highlighted that the noticee is not required to be heard at this stage. The Court’s reasoning was also influenced by the fact that the Adjudicating Authority had stated that it would not rely on any documents not supplied to the Petitioner. The Court also noted that the Petitioner would have recourse to the appropriate forum if he was prejudiced by any adverse order based on materials not supplied to him.

Fact:Law Ratio

The Court’s reasoning was more heavily influenced by legal considerations (70%) than factual aspects of the case (30%).

Logical Reasoning

The court considered alternative interpretations, such as the argument that all documents should be disclosed to ensure a fair hearing. However, it rejected this interpretation, emphasizing that the principles of natural justice do not require the disclosure of documents not relied upon by the authority. The court also considered the argument that the Adjudicating Authority had failed to follow the two-tier adjudication process but found no procedural irregularity. The final decision was reached by balancing the need for transparency with the practicalities of regulatory investigations and the need to maintain confidentiality.

The Supreme Court held that SEBI is not obligated to disclose all documents relied upon in a show cause notice, particularly those considered confidential and not directly relied upon for the inquiry, at the stage of forming an opinion under Rule 3. The Court emphasized that the opinion under Rule 3 is a preliminary step to decide whether to initiate an inquiry, and the noticee’s participation is not necessary at this stage. Documents not relied upon in the inquiry need not be supplied. The Court also noted that the Petitioner would have recourse to the appropriate forum if he was prejudiced by any adverse order based on materials not supplied to him.

The Court’s reasoning included the following points:

• The opinion formed under Rule 3 of the SEBI Adjudication Rules is a preliminary step to decide whether to initiate an inquiry.
• The noticee’s participation is not necessary at the stage of forming the opinion under Rule 3.
• The principles of natural justice do not require the disclosure of all documents, only those relied upon by the authority.
• The Adjudicating Authority had stated that it would not rely on any documents not supplied to the Petitioner.
• The Petitioner would have recourse to the appropriate forum if he was prejudiced by any adverse order.

The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice A. S. Bopanna. There were no dissenting opinions.

The decision clarifies the extent of SEBI’s disclosure obligations during an inquiry. It establishes that while SEBI must disclose documents relied upon, it is not obligated to disclose all documents, particularly those deemed confidential and not directly relied upon for the inquiry. This ruling has implications for future cases involving regulatory inquiries, where the balance between transparency and confidentiality will be a key consideration.

“The concept of fairness may require the adjudicating authority to furnish copies of those documents upon which reliance has been placed by him to issue show-cause notice requiring the noticee to explain as to why an inquiry under Section 16 of the Act should not be initiated.”

“Supply of relied on documents based on which the law has been set into motion would meet the requirements of the principles of natural justice.”

“The documents relied upon for formation of opinion under Rule 3, are not required to be disclosed to the noticee unless relied upon in the inquiry.”

Key Takeaways

• SEBI is not obligated to disclose all documents at the stage of forming an opinion under Rule 3 of the SEBI Adjudication Rules.
• Only documents relied upon by SEBI in the inquiry must be disclosed to the noticee.
• Confidential documents, not directly relied upon, can be withheld by SEBI.
• The principles of natural justice do not require the disclosure of all documents, only those relied upon.
• The noticee has the right to approach the appropriate forum if prejudiced by any adverse order based on undisclosed materials.

This judgment clarifies the extent of SEBI’s disclosure obligations, providing a balance between transparency and the need to maintain confidentiality in regulatory investigations. It will likely influence future cases involving similar issues, setting a precedent for how regulatory bodies handle document disclosure during inquiries. The ruling also emphasizes the importance of procedural fairness while recognizing the practical challenges of regulatory investigations.

Directions

The Supreme Court’s interim order dated 27th September 2021, which permitted SEBI to hold the inquiry without relying upon any documents not supplied to the Petitioner, will govern the inquiry.

Specific Amendments Analysis

There are no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of this case is that regulatory bodies like SEBI are not obligated to disclose all documents in their possession to a noticee during an inquiry. Only those documents that are relied upon by the authority need to be disclosed. This ruling clarifies the extent of disclosure obligations in regulatory inquiries and balances the principles of natural justice with the need for confidentiality in investigations. There is no change in the previous position of law, but the judgment clarifies the interpretation of the existing law.

Conclusion

The Supreme Court dismissed the Special Leave Petition, upholding the High Court’s decision. The Court clarified that SEBI is not obligated to disclose all documents, particularly confidential ones not directly relied upon for the inquiry, at the stage of forming an opinion under Rule 3 of the SEBI Adjudication Rules. This judgment provides clarity on the extent of disclosure obligations in regulatory inquiries, balancing the principles of natural justice with the need for confidentiality and efficiency in regulatory investigations.

Category

Parent Category: Securities Law

Child Categories: Regulatory Adjudication, SEBI Act, 1992, Section 11, SEBI Act, 1992, Section 12A, SCR Act, 1956, Natural Justice

FAQ

Q: What was the main issue in the Kavi Arora vs. SEBI case?

A: The main issue was whether SEBI is obligated to disclose all documents relied upon in a show cause notice, including those considered confidential, to the noticee during an inquiry.

Q: What did the Supreme Court decide about the disclosure of documents?

A: The Supreme Court decided that SEBI is not obligated to disclose all documents, particularly those deemed confidential and not directly relied upon for the inquiry, at the stage of forming an opinion under Rule 3 of the SEBI Adjudication Rules. Only documents relied upon in the inquiry need to be disclosed.

Q: What is Rule 3 of the SEBI Adjudication Rules?

A: Rule 3 of the SEBI Adjudication Rules pertains to the appointment of an adjudicating officer for holding an inquiry. The opinion formed under this rule is a preliminary step to decide whether to initiate an inquiry.

Q: What is the significance of this judgment for individuals facing regulatory inquiries?

A: This judgment clarifies that while individuals have a right toaccess documents relied upon by SEBI, they are not entitled to all documents in SEBI’s possession, particularly those deemed confidential and not directly relevant to the inquiry.

Q: What does the judgment say about the principles of natural justice?

A: The judgment clarifies that while the principles of natural justice require the disclosure of documents relied upon by the authority, they do not require the disclosure of all documents, especially those not directly relied upon and those that are confidential.

Q: What is the two-tier adjudication process under the SEBI Adjudication Rules?

A: The two-tier adjudication process involves the formation of an opinion under Rule 3 to decide whether to initiate an inquiry, followed by the actual inquiry under Rule 4. The court clarified that the noticee’s participation is not necessary at the stage of forming the opinion under Rule 3.

Q: What recourse does an individual have if they believe they were prejudiced by undisclosed documents?

A: The court noted that the Petitioner would have recourse to the appropriate forum if he was prejudiced by any adverse order based on materials not supplied to him.