SEBI vs Mega Corporation - Supreme Court Case 2022

SEBI vs Mega Corporation - Supreme Court Case 2022

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

 

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2104 of 2009

SECURITIES AND EXCHANGE BOARD OF INDIA ....APPELLANT(S)

VERSUS

MEGA CORPORATION LIMITED .…RESPONDENT(S)

J U D G M E N T

PAMIDIGHANTAM SRI NARASIMHA, J.

1. This is a statutory appeal under Section 15Z of the Securities and

Exchange Board of India Act, 19921

against the final order of the Securities

Appellate Tribunal2

, by which the Tribunal has set aside the order passed by

the Securities and Exchange Board of India3

restricting the respondentcompany from accessing the capital market for one year and further restraining

the promoter directors from buying, selling or otherwise dealing with securities

for India. While dismissing the appeal, we have explained that the jurisdiction

of the Supreme Court under Section 15Z is confined to question of law.

1 hereinafter referred to as the ‘Act’.

2 hereinafter referred to as the ‘Tribunal’.

3 hereinafter referred to as ‘SEBI’ or ‘the Board’.

Page 2 of 24

2. M/s Mega Corporation Limited, listed in the Bombay Stock Exchange in

1996, is engaged in the business of radio taxi service, coupled with trading of

shares in a small measure till 2004. The attention of the share market regulator,

SEBI, was drawn to the unusual price movement of the scrip of the Company

between January 2005 to September 2005. The Company's shares traded

between Rs. 4.25/- to Rs. 43.85/-. This upward spurt resulted in an increase in

the average monthly volume of shares to 1,56,22,583 shares. Having observed

this activity, the SEBI directed investigation while passing an ex parte ad

interim order under Section 11B, 11(4) (b) and 11(D) of the Act against 56

entities, being the Company, its promoter-directors, some of its clients,

stockbrokers and depositors. After hearing the objections, the interim orders

were confirmed, and a show-cause notice for violation of Regulations 3(a), (b),

(c)&(d) and 4(1), 4(2)(k) & 4(2)(r) of the SEBI (Prohibition of Fraudulent and

Unfair Trade Practices Relating to Securities Market) Regulations, 20034 was

issued on 10.10.2007.

3. The show cause notice was premised on the information obtained after

investigation on the following:

3.1 The Company made huge profits from undeclared business and

sale of scrips and there is uncertainty about the source of income.

It is not known whether the Company had amended its

4 hereinafter referred to as ‘PFUTP Regulations’.

Page 3 of 24

Memorandum and Articles for undertaking the activity of trading.

The surge in the profits is unusual, and there is no reasonable

explanation for the same. This is violative of Regulation 3 of the

PFUTP Regulations.

3.2 Between April 2005 to September 2005, the Company and other

noticees issued public statements in the form of advertisements

and other notifications to lure the public in investing in the

Company. This activity was undertaken to create an artificial

demand knowing fully well that this is not the truth of the matter.

This is in violation of Regulation 4(2)(k) and 4(2)(r) of the PFUTP

Regulations.

3.3 The Company manipulated its profits by selling shares through

orchestrated deals which were detected in the investigation. The

manipulations led to an artificial increase of the scrip to a

phenomenal extent sub-serving the fraudulent intention of the

Company, and this is again violative of Regulation 3 of the PFUTP

Regulations.

4. The Company and other noticees filed their responses. After hearing all

parties, the SEBI passed the final order dated 28.02.2008 holding that the

Company has violated the provisions of the Act and the PFUTP Regulations.

In the exercise of its powers under Sections 11 and 11B read with Section 19

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of the Act and the PFUTP Regulations, SEBI restrained the Company from

accessing the capital market in any manner and its directors from dealing in

securities for one year. The operative portion of the order is as follows:

“4.1 Now, therefore, I in exercise of powers conferred

upon me under Section 11 and 11B read with Section 19 of

the SEBI Act, 1992 further read with PFUTP Regulations

2003, hereby restrain Mega Corporation Limited (PANAAC-CM-9506-E) from accessing the capital market in any

manner whatsoever for a of period of one year (1 year) and

Shri Kunal Lalani (PAN-AAG-OPL-0992-C), Shri Himanshu

Mehta (PAN-AAL-PM-5750-F) and Shri Surendra Chhalani

(PAN-ACI-PC2863-K) Directors of the company are hereby

restrained from buying, selling or otherwise dealing in

securities, in any manner, for a period of one year

(1 year).”

5. The Company filed an appeal under Section 15T of the Act being Appeal

No. 60 of 2008 before the Tribunal. The Tribunal re-examined the three

circumstances which became the basis of SEBI decision and finally allowed the

appeal, by its judgment dated 15.10.2008. The Tribunal held:

5.1 The unusual profits, if any, made during the year 2004-05 by itself

cannot constitute any transgression of law. The powers vested in

the Board are only to ensure that investors are not misled in

making investments based on fraud and allurement and that there

is nothing unusual about investors being attracted when the

Company comes with positive annual reports. The Tribunal held

that extraordinary profits in itself cannot be the basis for

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concluding that the Company's accounts are manipulated with a

specific objective to mislead the investors.

5.2 On the issue of public statements in the form of advertisements

and notifications dated 07.04.2005 and 20.04.2005, the Tribunal

concluded that there is nothing wrong in the advertisements issued

for entering into the business of foreign exchange with the launch

of ‘Mega Forex Brand’ and also the announcement relating to tour

services based on the agreement with Gems Tours and Travels

Private Limited. The Tribunal found that these announcements

were in the ordinary course of business, and there was sufficient

evidence to that effect. Having considered facts in detail, the

Tribunal reversed the findings of the SEBI.

5.3 Finally, the Tribunal also examined the allegation relating to

manipulation. It considered the findings of the SEBI that the

transactions were orchestrated through entities that had links with

the Company. On reappreciation the Tribunal found that the

alleged links were not established and that the Board had

unnecessarily read into certain activities, a meaning which could

not be inferred in the ordinary course of events.

It is in this context that the Tribunal proceeded to accept the

submission made on behalf of the Company that the Board could

Page 6 of 24

not have relied on the letter of the stockbroker contradicting the

stand taken by it without giving an opportunity of crossexamination. Because such an opportunity was not granted, the

Tribunal held that the principles of natural justice stood violated.

6. The present appeal under Section 15Z of the Act is against this judgment

of the Tribunal. We heard Shri C.U. Singh, Senior Advocate, assisted by Shri

Pratap Venugopal for SEBI and Shri Vaibhav Gaggar, appearing on behalf of

the Company.

7. On behalf of the Board, Shri C.U. Singh, Senior Advocate, submitted

that:

7.1 The Tribunal examined the order passed by SEBI in a disjointed

manner by taking each incident as a standalone event and gave its

finding as if they were separate events. In its approach to examine

the events as independent episodes, the Tribunal misled itself in

coming to the wrong conclusions. Shri Singh took us through the

orders passed by SEBI and the final judgment of the Tribunal and

submitted that the findings of SEBI are correct and that the

Tribunal is wrong in each of its conclusions. He also submitted

that the events depicting manipulation are correctly identified, and

they are based on the evidence available on record and, therefore,

Page 7 of 24

the Tribunal was not justified in interfering with findings of

manipulation.

7.2 Disapproving the principle adopted by the Tribunal about the right

of cross-examination, he submitted that such an approach would

virtually disable SEBI from performing its functions. Reliance was

placed on the judgments of this Court in K.L Tripathi5

, Tara

Chand Vyas6

and Jah Developers7

.

8. Shri Vaibhav Gaggar, in his reply, submitted that:

8.1 The appeal has to be dismissed as there is no question of law

involved in the case.

8.2 The approach adopted by SEBI in focusing on the sudden spurt in

profit of the Company, is itself, is wrong approach. He sought to

demonstrate that there is no unusual income in the profit of the

Company.

8.3 On the issuance of advertisements, Shri Gaggar showed us the

factual background leading to the advertisements and stated that

there is no indication of any intention to mislead the public or lure

the investors on the statements made therein. He submitted that the

findings of the Tribunal that the advertisements were not in

5 K.L. Tripathi v. State Bank of India and Ors. (1984) 1 SCC 43.

6 Tara Chand Vyas v. Chairman & Disciplinary Authority and Ors. (1997) 4 SCC 565.

7 State Bank of India v. Jah Developers Private Limited and Ors. (2019) 6 SCC 787.

Page 8 of 24

violation of the Regulations are based on the correct facts as

evidenced by the material placed before the Board. Reliance was

placed on the judgment of the Tribunal in M/s Vijay Textile.8

8.4 Shri Gaggar submitted that the conclusions drawn by the Board on

the assumption that the sales were orchestrated through artificial

purchase and sale are incorrect. He endeavoured to establish that

the assumed link between the parties is non-existent and only

imaginary. Reliance was placed on the decision of this Court in

Rakhi Trading9

and Kishore Ajmera10

.

8.5 A final submission was made on the ground that principles of

natural justice would be violated if an opportunity to crossexamine is not granted in a case where a material adverse to the

party is taken cognisance by SEBI. In support of this, decisions of

this Court in the judgments in Meenglas11

, Bareilly

Electricity12and Swadeshi Cotton Mills13 were relied on.

9. In his rejoinder, Shri Singh has distinguished the cases cited by

Shri Gaggar and referred to precedents to establish that there is no right to

8 M/s Vijay Textile v. Securities and Exchange Board of India (2011) SCC Online SAT 50.

9 Securities and Exchange Board of India v. Rakhi Trading Private Limited (2018) 13 SCC 753.

10 Securities and Exchange Board of India v. Kishore R. Ajmera (2016) 6 SCC 368.

11 Meenglas Tea Estate v. Workmen (1964) 2 SCR 165.

12 Bareilly Electricity Supply Co. Ltd v. Workmen and Ors. (1971) 2 SCC 617.

13 Swadeshi Cotton Mills v. Union of India (1981) 1 SCC 664.

Page 9 of 24

cross-examination of a witness and the principles of natural justice would not

require granting a right of cross-examination. He reiterated that the functioning

of the SEBI will be hampered if this formality is to be followed in every case.

10. The following issues arise for consideration:

10.1 What is the scope and ambit of statutory appeal to the Supreme

Court under Section 15Z of the Act against an order passed by

the Securities Appellate Tribunal?

10.2 Whether the advertisements dated 07.04.2005 and 20.04.2005,

are in violation of Regulations 3 (a), (b), (c), (d) read with

Regulation 4 (1), (2) (k) and (r) as amounting to misleading and

defrauding the investors?

10.3 Whether the Company has violated Regulations 3(a), (b), (c) and

(d) and Regulation 4(1), 4(2)(k) and 4(2) (r) of the SEBI (PFUTP)

Regulations, 2003 by manipulating the share prices and

accounts?

10.4 Whether there is a right to cross-examine the author of a

document if SEBI seeks to rely on that document which is against

the interest of the company?

11. Before we consider the rival contentions based on the issues, as

formulated above, it is necessary to take note of certain statutory provisions.

Page 10 of 24

Section 11 of the Act enumerates the functions of the SEBI and empowers it to

take measures for protecting the interests of investors in securities.

Section 11B empowers SEBI to issue necessary directions. In exercise of its

powers under Section 30 the SEBI made the PFUTP Regulations, of which, we

are concerned with Regulations 3(a), (b), (c), (d) and Regulations 4(1), 4(2)(k)

and 4(2)(r).

ISSUE 1: What is the scope and ambit of statutory appeal to the Supreme Court

under Section 15Z of the Act against an order passed by the Securities

Appellate Tribunal?

12. The power and jurisdiction of the Supreme Court to consider the

decisions of the Tribunal is provided in Section 15Z of the Act. The said

provision is as under:

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.

In Videocon International14 this Court had an occasion to deal with

Section 15Z. Having considered the amendment to the Section, the Court

observed as under:

14 Videocon International Ltd. v. Securities Exchange Board of India (2015) 4 SCC 33.

Page 11 of 24

“38. …..A right of appeal may be absolute, i.e., without any

limitations. Or, it may be a limited right. The above position

is understandable, from a perusal of the unamended and

amended Section 15-Z of the SEBI Act. Under the unamended

Section 15-Z, the appellate remedy to the High Court, against

an order passed by the Securities Appellate Tribunal, was

circumscribed by the words “...on any question of fact or law

arising out of such order”. The amended Section 15-Z, while

altering the appellate forum from the High Court to the

Supreme Court, curtailed and restricted the scope of the

appeal, against an order passed by the Securities Appellate

Tribunal, by expressing that the remedy could be availed of

"...on any question of law arising out of such order.". It is,

therefore apparent, that the right to appeal, is available in

different packages, and that, the amendment to Section 15-Z,

varied the scope of the second appeal provided under the

SEBI Act.”

13. Though the Court observed that the appellate jurisdiction is curtailed to

determining only a question of law, the question still remains as to which issues

qualify as questions of law and which issue do not. We will examine this.

14. On a ‘textual’ interpretation, the expression ‘question of law’ is defined

in the Black’s Law Dictionary as follows:

“1. An issue to be decided by the judge, concerning the

application or interpretation of the law;

2. A question that the law itself has authoritatively answered,

so that the Court may not answer it as a matter of discretion;

3. An issue about what the law is on a particular point; an

issue in which parties argue about, and the court must decide

what the true rule of law is;

4. An issue that, although it may turn on a factual point, is

reserved for the court and excluded from the jury; an issue

that is exclusively within the province of the judge and not the

jury”15

15 Black’s Law Dictionary, 10th Edition p. 1442.

Page 12 of 24

15. Reference to Law Dictionary for the meaning of the expression ‘question

of law’ is not to overlook the difficulty in drawing boundaries between

questions of law and fact. Under the subject, the malleable boundaries between

law and fact, H.W.R Wade has commented:

“Much of the discussions of this chapter proceeds on the

basis that the distinction between a question of law and a

question of fact is self-evident. But this is not so; the

boundary is often elusive.”16

16. Phrases such as, ‘question of law’, are open textual expressions, used in

statutes to convey a certain meaning which the legislature would not have

intended to be read in a pedantic manner. When words of the Sections allow

narrow as well as wide interpretations, courts of law have developed the art and

technique of finding the correct meaning by looking at the words in their

context. In Reserve Bank of India v. Peerless General Finance Investment

Company Ltd. & Ors.

17

, Justice O. Chinnappa Reddy, observed:

“33. Interpretation must depend on the text and the context.

They are the bases of interpretation. One may well say if the

text is the texture, context is what gives the colour. Neither

can be ignored. Both are important. That interpretation is

best which makes the textual interpretation match the

contextual. A statute is best interpreted when we know why it

was enacted. With this knowledge, the statute must be read,

first as a whole and then section by section, clause by clause,

phrase by phrase and word by word. If a statute is looked at,

in the context of its enactment, with the glasses of the statute16 H.R.W. Wade & C.F Forsyth, Administrative Law, Chapter 8 (Oxford University

Publication, United Kingdom, 11th Edn, 2014).

17 Reserve Bank of India vs. Peerless General Finance Investment Company Ltd. &

Ors. (1987) 1 SCC 424

Page 13 of 24

maker, provided by such context, its scheme, the sections,

clauses, phrases and words may take colour and appear

different than when the stature is looked at without the

glasses provided by the context. With these glasses we must

look at the Act as a whole and discover what each section,

each clause, each phrase and each word is meant and

designed to say as to fit into the scheme of the entire Act. No

part of a statute and no word of a statute can be construed in

isolation. Statutes have to be construed so that every word

has a place and everything is in its place……”

17. The jurisdiction of the Supreme Court under Section 15Z to consider

any question of law arising from the orders of the Tribunal should therefore be

seen in the ‘context’ of the powers and jurisdiction of the Tribunal under

Sections 15K, 15L, 15M, 15T, 15U and 15Y of the Act. It is in the functioning

of the Tribunal to re-examine all questions of fact at the appellate stage while

exercising jurisdiction under Section 15T of the Act. In Clariant18 and National

Securities Depository19

, this Court had an occasion to examine the jurisdiction

of the Tribunal and explain that the Tribunal has wide powers. Being a

permanent body, apart from acting as an appellate Tribunal on fact, the Tribunal

routinely interprets the Act, Rules and Regulations made thereunder and

evolves a legal regime, systematically developed over a period of time. The

advantage and benefit of this process is consistency and structural evolution of

the sectorial laws.

18

 Clariant International Ltd. and Anr. v. Securities and Exchange Board of India

(2004) 8 SCC 524, para 73, 74

19

 National Securities Depository Ltd. v. Securities Exchange Board of India

(2017) 5 SCC 517, para 9.

Page 14 of 24

18. It is in the above-referred context that the Supreme Court while

exercising appellate jurisdiction under Section 15Z of the Act would be

measured in its approach while entertaining any appeal from the decision of the

Tribunal. This freedom to evolve and interpret laws must belong to the

Tribunals to subserve the regulatory regime for clarity and consistency and it is

with this perspective that the Supreme Court will consider appeals against

judgment of the Tribunals on questions of law arising from its orders.

19. It is in this very context that the UK Supreme Court in the case of Jones

v. First Tier Tribunal,

20 formulated certain principles for appellate courts to

interfere against the orders of Tribunals on the ground of existence of questions

of law. The Court held as under:

“16 … It is primarily for the tribunals, not the appellate

courts, to develop a consistent approach to these issues [of

law and fact], bearing in mind that they are peculiarly well

fitted to determine them. A pragmatic approach should be

taken to the dividing line between law and fact, so that the

expertise of tribunals at the first tier and that of the Upper

Tribunal can be used to best effect. An appeal court should

not venture too readily into this area by classifying issues as

issues of law which are really best left for determination by

the specialist appellate tribunals.”

20 Jones v. First Tier Tribunal [2013] UKSC 19. Para 16; followed in Regina (Privacy

International) v. Investigatory Powers Tribunal [2019] UKSC 22, para 134; See also,

Administrative Law by Paul Craig (8th Ed. 2016 at p.492 and H.R.W. Wade & C.F

Forsyth, Administrative Law, Chapter 8 (Oxford University Publication, United

Kingdom, 11th Edn, 2014).

Page 15 of 24

20. The scope of appeal under Section 15Z may be formulated as under:

20.1 The Supreme Court will exercise jurisdiction only when there is

a question of law arising for consideration from the decision of

the Tribunal. A question of law may arise when there is an

erroneous construction of the legal provisions of the statute or the

general principles of law. In such cases, the Supreme Court in

exercise of its jurisdiction of Section 15Z may substitute its

decision on any question of law that it considers appropriate.

20.2 However, not every interpretation of the law would amount to a

question of law warranting exercise of jurisdiction under Section

15Z. The Tribunal while exercising jurisdiction under Section

15T, apart from acting as an appellate authority on fact, also

interprets the Act, Rules and Regulations made thereunder and

systematically evolves a legal regime. These very principles are

applied consistently for structural evolution of the sectorial laws.

This freedom to evolve and interpret laws must belong to the

Tribunal to subserve the Regulatory regime for clarity and

consistency. These are policy and functional considerations

which the Supreme Court will keep in mind while exercising its

jurisdiction under Section 15Z.

Page 16 of 24

21. We will now examine the other issues in the context of the scope and

ambit of the appellate jurisdiction of the Supreme Court under Section 15Z as

discussed herein above.

ISSUE 2: Whether the advertisements dated 07.04.2005, 20.04.2005, are in

violation of Regulations 3 (a), (b), (c), (d) read with Regulation 4 (1), (2) (k)

and (r) as amounting to misleading and defrauding the investors?

22. This issue should not detain us for long, as the facts involved in this issue

are relating to the merits of the case and, as such, do not qualify as a question

of law. We will however refer to the two instances as Shri C.U. Singh has made

detailed submissions before us.

23. As per the first advertisement dated 07.04.2005, it was alleged by SEBI

that in violation of Regulation 4 (2) (k) and 4 (r) of the PFUTP Regulations, the

Company proceeded to announce on 07.04.2005 the launch of the worldwide

outbound package tour services. These services were intended to operate across

25 cities in India and were expected to achieve a revenue of Rs. 1000 million

with a net profit of Rs.200 million in its first year. SEBI alleges that this

announcement was made for the sole purpose of misleading the investors. This

finding is reversed by the Tribunal based on an agreement between the

Company and M/s Gem Tours and Travels Private Limited to establish a

subsidiary company called ‘Mega Holidays Ltd.’ to handle the tour services.

The Tribunal also noted the bank statement supporting the Company's

transaction with M/s Gem Tours and Travels Private Limited.

Page 17 of 24

24. We are mentioning these facts only to indicate that the Tribunal has

reversed the findings of SEBI on the basis of its own inferences drawn from the

documents on record. The decision of the Tribunal is fact-based and does not

give rise to any question of law for invoking the jurisdiction of the Supreme

Court under Section 15Z. For this reason, we are not inclined to interfere with

the finding of fact, which must rest with the conclusions drawn by the Tribunal.

25. So far as the second announcement dated 20.04.2005 is concerned, it

relates to the allegation of announcing the commencement of business in

foreign exchange with the launch of ‘Mega Forex Brand’. It was alleged that

the Company made false statements such as that it is expected to grab 5-10%

of the market share in the forex market, “which is at 5-6 billion dollars” in a

span of one or two years. Here again, the Tribunal concluded that the

application for a license to deal with foreign exchange which is alleged to have

been made in September 2005 was only a revised application. The revised

application is said to have been made in as a reply to the queries of the Reserve

Bank of India on their original application, which was in fact made on

14.04.2005, that is even before the announcement. The Tribunal, therefore, was

of the opinion that the announcement is not imaginary but is based on specific

steps taken before the date of announcement, lending credence to the said

activity.

Page 18 of 24

26. The conclusion is drawn by the Tribunal, being factual, not giving rise

to any question of law, the jurisdiction of this Court under Section 15Z cannot

be invoked. For this reason, we affirm the finding of the Tribunal and there is

no occasion for this court to interfere with the decision of the Tribunal. The

issue is answered against the appellant.

ISSUE 3: Whether the company has violated Regulations 3(a), (b), (c) and (d)

and Regulation 4(1), 4(2)(k) and 4(2) (r) of the SEBI (PFUTP) Regulations,

2003 by manipulating the share prices and accounts?

27. The next submission relates to the allegation that the accounts are

manipulated for the year 2004-05 to show inflated profits to lure investors into

buying shares of the company. SEBI has referred to the efforts made by it to

trace the devise by which the shares of the Company were bought and sold in

the market. It was alleged that more than 2 crores shares were purchased by

certain entities in the physical form in ‘off-market’ deals and then transferred

those shares in subsequent ‘off-market’ deals to certain other outside entities

connected to the company. These allegations necessitated proof of such ‘offmarket’ transactions and the connectivity of the ‘outside entitles’ with the

Company.

28. The Tribunal in its appellate jurisdiction came to the conclusion that the

connectivity could not be established and that the conclusions drawn by the

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Board were insufficient. On the basis of the inferences drawn from the facts,

the Tribunal rendered the following findings:

“There is no evidence in support of any definite sustainable

link between the appellant company and any of the traders

who allegedly traded in the appellant company's scrip with

the purpose of generating volumes and thereby raising its

price. The charge of manipulative trading in its own shares

by the appellant company, therefore, fails.

….

But it is another matter to say that a company has manipulated its

accounts with that specific object in view because there can be a

multitude of reasons why an unscrupulous management may want

to show inflated financial results in its accounts. In the present

case, no material has been produced by the Respondent to

establish that the manipulation is the annual accounts of the

appellant for the year 2004-05, if any, had been resorted to with

the objective of luring investors to buy the scrip of the company.

Given the lack of any definite evidence, this charge against the

appellant also fails.”

29. It is evident from the above that the findings are based on the Tribunal's

inferences drawn from the material available on record. The conclusions drawn

by the Tribunal do not give rise to any question of law warranting interference

of this court under Section 15Z of the Act. This issue is answered against the

appellant.

ISSUE 4: Whether there is a right to cross-examine the author of a letter if the

SEBI seeks to rely on that letter, adverse to the company?

30. The Board has, in its investigation, secured a letter from one of the

directors of M/S DPS Shares and Stock Brokers Pvt. Ltd., the stockbrokers of

the company. This letter contradicts the stand taken by the company in its

Page 20 of 24

defence. This happened in the following factual background. When asked to

explain the transaction relating to purchase and sale of scrip in somewhat

suspicious circumstances, the Company took refuge by stating that the

transactions were in the exclusive knowledge of the stockbroker company. The

Board, in its investigation, secured a letter from a stockbroker stating that their

two directors, one Shri Pratik Shah and one Shri Sujal Shah, had handled the

transactions in the alleged scrip by opening a current account by using dummy

resolutions without the knowledge of Shri Dinesh Masalia, the third director of

the stockbroker company. On this basis, it was concluded that the transaction

was fictitious. In defence, the Company sought permission to cross-examine

the said Shri Dinesh Masalia, but no permission was granted. SEBI proceeded

and gave its final orders on 07.01.2008. It is in this context that the Company

made its submission before the Tribunal that principles of natural justice were

violated because an opportunity to cross-examine is not presented.

31. There is no dispute that the Company and the directors were informed

about the letter elicited from Shri Dinesh Masalia. The show-cause notice

explicitly mentions it. The Company’s reply to the show-cause notice

evidences objections raised by the Company with respect to the stand taken by

Shri Dinesh Masalia. To this extent, opportunity was given to the Company, in

the sense that SEBI was relying on a document which was disclosed to the

Company. The only question is whether there is a right to cross-examine the

Page 21 of 24

author of a letter while SEBI is performing its regulatory role and deciding

upon the allegation of manipulation under Regulations 3 and 4 of the PFUTP

Regulations.

32. Shri C.U Singh arguing for the Board has denied any right to crossexamine while SEBI exercises its jurisdiction. In support of his submissions,

he has referred to the cases as indicated earlier. He has also argued that there is

no prejudice caused to the Company as an opportunity was given by handing

over the material relied on by the Board against which the Company gave its

reply. He also referred to judgments of this Court in Aligarh Muslim

University21 and A.S Motors22 to press the point that the Court will not insist on

examination of witnesses merely as an empty formality.

33. On the other hand, Shri Gaggar submitted that the ground that principles

of natural justice would clearly be violated if opportunity to cross-examine is

not granted.

34. Immediately after the parties were heard, and the judgment was reserved

on 17.02.2022, on the very next day, another Bench of this Court delivered its

judgment in T. Takano23

. The case relates to proceedings that arose under this

very same Act and in fact concerning allegations of fraudulent and unfair trade

21 Aligarh Muslim University v. Mansoon Ali Khan (2000) 7 SCC 529.

22 A.S Motors Private Limited v. Union of India (2013) 10 SCC 114.

23 T. Takano v. Securities and Exchange Board of India (2022) SCC OnLine SC 210

Page 22 of 24

practices adopted by the appellants therein under the PFUTP regulations. This

Court considered the issue as to the statutory obligation of SEBI to follow the

principles of natural justice. Having reviewed the entire case law on the subject,

this Court formulated the following principles:

“62. The conclusions are summarised below:

(i) The appellant has a right to disclosure of the material

relevant to the proceedings initiated against him. A deviation

from the general rule of disclosure of relevant information

was made in Natwar Singh (supra) based on the stage of the

proceedings. It is sufficient to disclose the materials relied on

if it is for the purpose of issuing a show cause notice for

deciding whether to initiate an inquiry. However, all

information that is relevant to the proceedings must be

disclosed in adjudication proceedings;

(ii) The Board under Regulation 10 considers the

investigation report submitted by the Investigating Authority

under Regulation 9, and if it is satisfied with the allegations,

it could issue punitive measures under Regulations 11 and

12. Therefore, the investigation report is not merely an

internal document. In any event, the language of Regulation

10 makes it clear that the Board forms an opinion regarding

the violation of Regulations after considering the

investigation report prepared under Regulation 9;

(iii) The disclosure of material serves a three-fold purpose of

decreasing the error in the verdict, protecting the fairness of

the proceedings, and enhancing the transparency of the

investigatory bodies and judicial institutions;

(iv) A focus on the institutional impact of suppression of

material prioritises the process as opposed to the outcome.

The direction of the Constitution Bench of this Court in

Karunakar (supra) that the non-disclosure of relevant

information would render the order of punishment void only

if the aggrieved person is able to prove that prejudice has

been caused to him due to non-disclosure is founded both on

the outcome and the process;

(v) The right to disclosure is not absolute. The disclosure of

information may affect other third-party interests and the

stability and orderly functioning of the securities market. The

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respondent should prima facie establish that the disclosure of

the report would affect third-party rights and the stability and

orderly functioning of the securities market. The onus then

shifts to the appellant to prove that the information is

necessary to defend his case appropriately; and

(vi) Where some portions of the enquiry report involve

information on third-parties or confidential information on

the securities market, the respondent cannot for that reason

assert a privilege against disclosing any part of the report.

The respondents can withhold disclosure of those sections of

the report which deal with third-party personal information

and strategic information bearing upon the stable and

orderly functioning of the securities market.”

35. As per the principles laid down in the above referred case, there is a right

of disclosure of the relevant material. However, such a right is not absolute and

is subject to other considerations as indicated under paragraph 62(v) of the

judgment above referred. In this judgment, there is no specific discussion on

the issue of a right to cross-examination but the broad principles laid down

therein are sufficient guidance for the Tribunal to follow. There is no need for

us to elaborate on this point any further.

36. Coming back to the facts of the present case, we have noticed that the

Tribunal has arrived at its conclusions based on independent facts concerning

(a) the allegations under Regulation 4 relating to the issuance of misleading

advertisements dated 07.04.2005 and 20.04.2005 as well as (b) allegations

relating to manipulation of scrip prices and profits to lure investors. As

indicated earlier, the Tribunal concluded that the allegations could be proved.

Page 24 of 24

As we are not interfering in the findings of fact arrived at by the Tribunal the

Company’s claim for cross-examining would pale into insignificance. This

question presents itself merely as an academic issue.

37. We are also of the opinion that, there was no necessity for the Tribunal

to lay down as an inviolable principle that there is a right of cross-examination

in all cases. In fact, the conclusion of the Tribunal based on evidence on record

did not require such a finding. We, therefore, set aside the findings of the

Tribunal to this extent while upholding its decision on all other grounds. We

would also leave the question of law relating to the right of cross-examination

open and to be decided in an appropriate case by this Court.

38. For the reasons stated above, while we dismiss Civil Appeal No. 2104 of

2009 against the judgment of the Securities Appellate Tribunal in Appeal

No. 60 of 2008 dated 15.10.2008, the general observations of the Tribunal that

there is a right of cross-examination is hereby set aside.

39. Parties to bear their own costs.

 ……………………J.

 [L. NAGESWARA RAO]

……………………J.

 [PAMIDIGHANTAM SRI NARASIMHA]

NEW DELHI.

MARCH 25, 2022