Kavi Arora Versus Securities & Exchange Board of India

Kavi Arora  Versus Securities & Exchange Board of India

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



 REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPEALLATE JURISDICTION
SPECIAL LEAVE PETITION (CIVIL) NO. 15149 OF 2021
Kavi Arora Petitioner (s)
Versus
Securities & Exchange
Board of India  Respondent (s)
J U D G M E N T
Indira Banerjee, J.
This present special leave petition is against the impugned
judgment and final order dated 15th September 2021, passed by the
Division Bench of the High Court of Judicature at Bombay,
dismissing Writ Petition (L) No. 19352 of 2021, filed by the
Petitioner under Article 226 of the Constitution of India, whereby
the Petitioner had sought directions against the Respondent,
Security and Exchange Board of India (SEBI), to forthwith furnish to
the Petitioner documents relied upon by the Respondent-SEBI, in
Show Cause Notice No. SEBI/HO/IVD/ID2/OW/P/2020/19435/1 dated
17th November 2020 issued to the Petitioner to show cause why
1
appropriate directions should not be taken against him under
Sections 11(1), 11(4), 11B(1) 11B(1), 11B(2), and 11(4A) of the
Securities and Exchange Board of India Act, 1992 (hereinafter
referred to as “the SEBI Act”) and Section 12A(1) and 12A(2) of the
Securities Contract (Regulation) Act, 1956 (hereinafter referred to
as “SCR Act 1956”) read with SEBI (Procedure for Holding Inquiry
and Imposing Penalties by Adjudicating Officer) Rules, 1995
(hereinafter referred to as, as "SEBI Adjudication Rules 1995") and
Securities Contract (Regulation) (Procedure for holding inquiry and
imposing penalties) Rules, 2005 (hereinafter referred to as “SCR
Penalties Rules 2005”). The Petitioner had also sought orders for
supply of a copy of the opinion formed under Rule 3 of the SEBI
Adjudication Rules 1995, for constituting an Adjudicating Authority
to issue Show Cause Notice dated 17th November 2020 to the
Petitioner.
2. The Petitioner joined Religare Finvest Limited (RFL), a
subsidiary entity of Religare Enterprises Ltd. (REL) as the PresidentConsumer Finance, to set up and manage its retail lending business
i.e. SME Lending business. Thereafter, he worked as the Managing
Director (MD) and Chief Executive Officer (CEO) of RFL to represent
the SME Lending Business.
3. Respondent SEBI appointed a Forensic Auditor, M/s MSA Probe
Consulting Private Limited (hereinafter referred to as “MSA Probe
Consulting”) to conduct an investigation in the matter of M/s
2
Religare Enterprises Private Ltd. (REL) and related entities for
alleged violation of the provisions of the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 (hereinafter referred to as "the SEBI PFUTP
Regulations").
4. Show Cause Notice (SCN) No.
SEBI/HO/IVD/ID2/OW/P/2020/19435/1 dated 17.11.2020 was issued
by Respondent SEBI to the Petitioner under Section 15HA of the
SEBI Act and Rule 3 of the Adjudication Rules pertaining to Section
11(1), 11(4), 11B(1), 11B(2), and 11(4A) of the SEBI Act along with
Section 12A(1) and 12A (2) of the SCR Act 1956 read with SEBI
Adjudication Rules 1995 and SCR Penalties Rules 2005 as to why
appropriate directions for imposing penalty, should not be passed
against him.
5. Show Cause Notices were issued against 13 noticees, the
Petitioner being one of them (Noticee No. 12). The allegation in the
Show Cause Notice is that funds to the tune of Rs. 2315.66 crores
were diverted from RFL through several layers of conduit entities
for the ultimate benefit of promoters of REL and RFL.
6. On receipt of the Show Cause Notice, the Petitioner filed a
Settlement Application dated 22.02.2021, proposing to settle the
proceedings initiated by the Show Cause Notice, in terms of SEBI
(Settlement Proceedings), Regulations, 2018 (hereinafter referred
3
to, in short as "the Settlement Regulations"). The Petitioner could
not settle the proceedings.
7. The Petitioner sent an e-mail to the Respondent SEBI,
requesting Respondent SEBI to afford him an opportunity to inspect
the documents relied upon by the Respondent SEBI. Ms. Sneha
Jalan, Assistant General Manager, SEBI, offered some documents for
inspection of the Petitioner, on 15th January 2021.
8.The Petitioner submits that from time to time, the Petitioner
asked the Respondent SEBI to provide for inspection to the
Petitioner, the documents relied upon, for the issuance of Show
Cause Notice.
9. According to the Petitioner, some documents were supplied to
the Petitioner and other noticees. However, certain documents
were denied on the ground that those were confidential documents.
10. The Petitioner submits that, as per SEBI Rules, it is
mandatory on the part of Respondent SEBI to provide a copy of the
opinion formed by Respondent SEBI for issuance of the Show Cause
Notice to the noticee, before hearing the Show Cause Notice. It is
further submitted that copies of all documents were relied upon by
the Respondent SEBI at the time of issuing Show Cause Notice have
to be provided to the Petitioner. It is contended that without getting
4
access to those documents, it would not be possible for the
Petitioner to reply to the Show Cause Notice.
11. On the other hand, it is the case of Respondent SEBI, that as
per the SEBI Adjudication Rules, the Board has to form an opinion,
to decide whether the Show Cause Notice is required to be issued
or not. The Respondent SEBI is not required to furnish the noticee
with a copy of the opinion. It is further, the case of Respondent
SEBI, that in addition to physical inspection of all relevant
documents. Respondent SEBI has provided the Petitioner with a
Compact Disc containing voluminous records, except those which
contain internal confidential documents or documents which affect
the confidentiality of third parties. By a letter dated 24th March
2021, the Petitioner was informed that the documents mentioned in
paragraphs 3, 4 and 5 of his e-mail dated 23rd March 2021 were
confidential documents. The Petitioner, however, made an
application to SEBI to supply the documents relied upon to form an
opinion as per the SEBI Adjudication Rules, to commence inquiry.
12. Mr. Sidharth Luthra, learned Senior Counsel appearing on
behalf of the Petitioner submitted that Show Cause Notice had been
issued to the Petitioner by Respondent SEBI, inter alia, under
Section15HA of SEBI Act (Chapter VI-A) and Rule 3 of the SEBI
Adjudication Rules which requires formation of opinion for
appointing an Adjudicating Authority, before proceeding under
Chapter VIA.
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13. Mr. Luthra submitted that that on 17th November 2020, Show
Cause Notice was issued to the Petitioner. The Petitioner filed his
preliminary reply on 28th December 2020, reserving his right to file
a detailed reply after inspection of documents.
14. By an order dated 6th January 2021, the Adjudicating
Authority adjourned the hearing for inspection of documents.
Inspection of documents was conducted on 15th January 2021.
Many documents relied upon in the Show Cause Notice were not
shown to the Petitioner.
15. By an email dated 23rd March 2021, the Petitioner through his
Advocate requested for all documents relied upon by the
Respondent SEBI.
16. On 24th March 2021, only some of the documents relied upon
were supplied and other documents refused on the ground of
confidentiality.
17. The Petitioner’s Advocate again requested for supply and
inspection of relied upon documents on 12th April 2021 and 4th May
2021. On 12th May 2021 & 14th May 2021, online inspection was
made by Advocate of the Petitioner. According to the Petitioner,
documents relied upon were neither shown, nor supplied to the
Petitioner.
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18. On 27th May 2021, illegible copies of some documents
identified by the Petitioner were supplied but not the remaining
ones.
19. On 13th July 2021, the Petitioner filed two applications for
supply of opinion formed under Rule 3 of the SEBI Adjudication
Rules 1995 and for supply of documents relied upon. However,
without supplying the documents relied upon the Adjudicating
Authority fixed the matter for final hearing on 26th August 2021.
20. On 26th July 2021, the Petitioner’s Advocate sent an email
showing that the proceedings could not be fixed for final hearing in
terms of Rule 4(1), 4(2), 4(3) 4(4) and 4(5) of SEBI Adjudication
Rules 1995 which provide for two-tier adjudication process.
21. On 26th August 2021, the Petitioner sought permission to
address arguments on the two applications but the Adjudicating
Authority refused to hear them and it was observed by the
Adjudicating Authority that documents not supplied would not be
relied upon in the final order.
22. It was argued that the Petitioner had sought inspection of the
opinion under Rule 3, by an email dated 4th May 2021. The
proceedings before the Adjudicating Authority were listed on 29th
September 2021. The Adjudicating Authority, without hearing the
Petitioner sent the Record of the proceedings dated 29th September
2021 to the Petitioner on 30th September 2021, incorrectly
recording that the arguments were heard by the Adjudicating
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Authority on the Applications filed by the Petitioner. In the record of
proceedings, it was inter-alia stated that an opportunity to inspect
the opinion, would be provided to the Petitioner.
23. Counsel argued that after numerous requests, an opportunity
to inspect the opinion was given to the Advocate of the Petitioner
on 10th December 2021, under Rule 3 of the SEBI Adjudication Rules
1995. According to the Petitioner, only redacted opinion was
supplied to the Petitioner. In the circumstances, Petitioner sought
the complete opinion formed under Rule 3 of the SEBI Adjudication
Rules 1995 by the Adjudicating Authority.
24. It is argued that Show Cause Notice relies heavily on the
probe conducted by an independent agency called MSA Probe
Consulting. The said MSA Probe Consulting submitted a report
upon completion of investigation, along with all supporting
documents. The said Report along with its enclosures was made
Annexure 1 to the Show Cause Notice.
25. Mr. Luthra argued that while deciding whether or not to issue
Show Cause Notice, SEBI relied upon the MSA Probe Report and its
enclosures, but refused to supply the same once the Petitioner
entered appearance, on the contention that it would not rely on the
said documents. It is contended that Respondent SEBI withheld the
following documents:-
“i. Index of bank statements.
ii. Calendar of evidence (oral) consisting of gist of
interviews conducted.
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iii. Calendar of evidence (documentary) consisting of
emails/ letters/ hardcopies,
 iv. Calendar of evidence (documentary) consisting of
soft copies of emails/communications/ bank
statements & certain supporting documents in CDs.”
26. Mr. Luthra submitted that while Respondent SEBI has taken a
stand that documents are confidential without giving reasons, the
Adjudicating Authority had on 26th August 2021 taken a stand that
documents would not be relied upon. He stated that the
documents at (i), (iii) & (iv) mentioned above, were stated to be
confidential documents.
27. Mr. Luthra submitted that the documents relied upon by the
Respondent SEBI the Show Cause Notice, could not be denied to
the Petitioner. In support of his submission Mr. Luthra cited T.
Takano v. SEBI
1
, Natwar Singh v. Directorate of Enforcement
and Another
2 and Indian Commodity Exchange Limited v.
Neptune Overseas Limited
3
.
28. In Natwar Singh v. Directorate of Enforcement and
Others
4
, this Court held:-
“31. 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. To this extent, the
principles of natural justice and concept of fairness are
required to be read into Rule 4(1) of the Rules. Fair
procedure and the principles of natural justice are in1 2022 SCC Online SC 210
2 (2010) 13 SCC 255
3 2020 SCC Online SC 967
4 (2010) 13 SCC 255
9
built into the Rules. A noticee is always entitled to
satisfy the adjudicating authority that those very
documents upon which reliance has been placed do
not make out even a prima facie case requiring any
further inquiry. In such view of the matter, we hold
that all such documents relied on by the authority are
required to be furnished to the noticee enabling him to
show a proper cause as to why an inquiry should not
be held against him though the Rules do not provide
for the same. Such a fair reading of the provision
would not amount to supplanting the procedure laid
down and would in no manner frustrate the apparent
purpose of the statute.
***
33. In this regard, the learned Senior Counsel for the
appellant pressed into service the doctrine of duty of
adequate disclosure which according to him is an
essential part of the principles of natural justice and
doctrine of fairness. A bare reading of the provisions of
the Act and the Rules do not support the plea taken by
the appellants in this regard. Even the principles of
natural justice do not require supply of documents
upon which no reliance has been placed by the
authority to set the law into motion. 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. No court can compel the
authority to deviate from the statute and exercise the
power in altogether a different manner than the
prescribed one.
34. As noticed, a reasonable opportunity of being
heard is to be provided by the adjudicating authority
in the manner prescribed for the purpose of imposing
any penalty as provided for in the Act and not at the
stage where the adjudicating authority is required
merely to decide as to whether an inquiry at all be
held into the matter. Imposing of penalty after the
adjudication is fraught with grave and serious
consequences and therefore, the requirement of
providing a reasonable opportunity of being heard
before imposition of any such penalty is to be met. In
contradistinction, the opinion formed by the
adjudicating authority whether an inquiry should be
held into the allegations made in the complaint are
not fraught with such grave consequences and
therefore the minimum requirement of a show-cause
notice and consideration of cause shown would meet
the ends of justice. A proper hearing always include,
no doubt, a fair opportunity to those who are parties in
the controversy for correcting or contradicting
anything prejudicial to their view.”
10
29. In Shashank Vyankatesh Manohar v. Union of
India
5
, the High Bombay Court interfered with the Show Cause
Notice impugned, even though the Court found that there was
nothing on record to indicate that the Adjudicating Authority
had considered certain aspects adverted to by the noticee,
before forming the opinion to proceed further with the inquiry.
However, a communication calling the Petitioner in that case
for a personal hearing was set aside and the Special Director
was directed first to form his opinion after recording reasons,
whether to proceed against the Petitioner with regard to the
impugned 11 Show Cause Notices.
30. In Amit Jain v. Securities and Exchange Board of
India and Another
6
, the Delhi High Court held:-
“33. It is apparent from the above that the formation of an
opinion by the Board that there are grounds for adjudging
under any of the provisions of Chapter VIA of the Act is a
pre-condition for appointment of an Adjudicating
Officer. It follows that in absence of such an opinion, an
Adjudicating Officer cannot be appointed and any
such appointment would be without jurisdiction. The
respondent also does not dispute the above proposition. It
claims that the Board has formed an opinion that there are
grounds for adjudging under the provisions of
Chapter VIA of the Act and, therefore, the
appointment of the Adjudicating Officer cannot be
faulted. In its counter affidavit, the respondent has averred
as under:-
 “It is submitted that SEBI had examined into
the alleged irregularities in the trading in
shares of Himalayan Granites Ltd. and into possible
violation of the provisions of the SEBI Act and PIT
Regulations. Further, the adjudication proceedings
were initiated in the matter after the Whole Time
5 2014(1) MahLJ 838
6 2018 SCC Online Del 9784
11
Member was prima-facie satisfied that there are
sufficient grounds to enquire into the affairs
and adjudicate upon the alleged violations under
the SEBI Act and PIT Regulations. It is submitted
that the same can be seen from Page no.66 (Annexure
10) of the writ petition containing the file noting.”
31. Mr. Luthra pointed out that Rule 4 of the SEBI Adjudication
Rules 1995 provides for a two-tier adjudication process. The said
Rule is in pari materia with Rule 4 of the Foreign Exchange
Management (Adjudication Proceedings and Appeal) Rules, 2000.
32. Rule 4 of the SEBI Adjudication Rules 1995 contemplates
that the Adjudicating Authority is first required to form an opinion
on the basis of the reply to the Show Cause Notice, as to whether
an inquiry should be conducted against the noticee or not. Even
after forming the opinion, the Adjudicating Authority cannot
proceed to the stage of final hearing, without first issuing notice to
the Petitioner for explaining the charges against him and then
giving him an opportunity to produce documents and examine
witnesses.
33. It is submitted that, in this case, the Adjudicating Authority
has not followed the procedure, and instead fixed the case for final
hearing without forming an opinion, as required under Rule 4(3) of
the SEBI Adjudication Rules 1995. In the context of his argument.
Mr. Luthra relied on the decision of the High Court at Bombay in
Shashank Vyankatesh Manohar (supra) upheld by this Court in
SLP (C) No. 017104/2014 titled Union of India v. Shanshank
12
Vyankatesh Manohar. In Shashank Vyankatesh Manohar
(supra), the High Court held:-
“10. It is true that ordinarily this Court would not
entertain a Writ Petition against a show cause notice
as the noticee would get an opportunity to submit his
reply and of hearing before the adjudicating authority.
However, the scheme of the Adjudication Rules in
question is different from the other inquiries where an
authority issues a show cause notice, the noticee
submits his reply, the authority then hears the
complainant and the noticee for taking a decision in
the matter. Ordinarily, inquiries are not divided into
different stages, unlike the inquiry for which procedure
is laid down in Rule 4 of the Adjudication Rules. In
ordinary inquiries, the inquiry officer is not required to
form any opinion before conclusion of the inquiry. On
the other hand, the scheme of Rule 4 of the
Adjudication Rules is quite different and the same is
required to be examined both for the purpose of
considering the last alternative submission of the
petitioner about breach of Rule 4 of the Adjudicating
Rules and also for considering the aforesaid
preliminary objection raised by the learned Additional
Solicitor General about maintainability of the Writ
Petition.
***
12. On reading the above Rule, particularly sub-rules
(1) and (3) thereof, it is clear that on the issue of show
cause notice, a noticee is permitted to submit his
reply to the same. In terms of the above Rule, the
Adjudicating Authority has to consider the objections
raised by the noticee and only if he forms an opinion
that an inquiry should be continued further that the
Adjudicating proceedings can be proceeded with, by
issuing a notice for personal hearing. However, if the
Adjudicating Authority is satisfied that the objections
raised to the notice are valid, he may drop the show
cause notice. The provision as found in Rule 4 of the
Adjudication Rules is a unique provision. The Counsel
for the parties were not able to point out any similar
rules under which a two tier adjudication of a show
cause notice is provided for in any other statute.
Normally, once a show cause notice has been issued,
the Adjudicating Authority deals with all the objections
of the noticee, be it preliminary as well as any other
defence, by passing one common order of
adjudication. The fact that the legislature has provided
in Rule 4 of the Adjudication Rules that on issue of
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notice, the noticee can object to the same and this
objection has to be considered by the Adjudicating
Authority for forming an opinion to proceed further
with the show cause notice would require giving some
meaning to it, otherwise it would be rendered otiose.”
34. In T. Takano (supra), cited by Mr. Luthra, this Court relying
upon its decision in Natwar Singh (supra) held:-
“30. The submission of Mr. C U Singh, learned senior
counsel is that only those materials which are relied
upon should be disclosed to the first respondent.
Regulation 10, as we have noted earlier, stipulates that
the satisfaction of the Board whether there has been a
violation of the regulations has to be arrived at:
(i) after considering the report of the investigating authority
referred to in Regulation 9; and
(ii) after giving a reasonable opportunity of hearing to the
person concerned.
31. Once the subordinate legislation mandates that the
investigating authority's report is an essential ingredient
for the Board to arrive at the satisfaction, it requires due
disclosure.
***
51. The above extracts indicate that the findings of the
investigation report are relevant for the Board to arrive
at the satisfaction on whether the Regulations have been
violated. Even if it is assumed that the report is an interdepartmental communication, as held in Krishna
Chandra Tandon (supra), there is a duty to disclose such
report if it is relevant for the satisfaction of the
enforcement authority for the determination of the
alleged violation.”
35. As held by this Court in T. Takano (supra), it would be
fundamentally contrary to the principles of natural justice if the
relevant material were not disclosed to the noticee.
36. In T. Takano (supra), this Court approved and followed the
law laid down in Natwar Singh (supra) and reiterated that the
Adjudicating Authority had the duty to disclose the materials that
14
had been relied upon during the stage of adjudication. It is also
true that the Adjudicating Authority cannot exercise unfettered
discretion to redact documents necessary for the noticee to defend
his case.
36. The Respondent SEBI has, in this Case clearly stated that the
documents specified, namely, Index of bank statements, Calendar
of evidence (oral) consisting of emails/letters/hard copies, Calendar
of evidence (documentary) consisting of emails/ letters/ hardcopies,
Calendar of evidence (documentary) consisting of soft copies of
emails/communications/ bank statements & certain supporting
documents in CDs are confidential. Mr. Luthra submitted that the
Petitioner has been able to show that withholding of documents
containing exculpatory material would adversely affect the defence
of the Petitioner.
37. Mr. Chander Uday Singh, learned Senior Counsel appearing
on behalf of the Respondent SEBI submitted that SEBI had
conducted an investigation in the matter of Religare Enterprises
Ltd. (REL) and various related entities for alleged violation of the
provision of SEBI Act and/or SEBI PFUTP Regulations”, during the
period between 1st April 2011 to 31st March 2018.
38. Mr. Singh submitted that MSA Probe Consulting was
appointed Forensic Auditor on 10th May 2018 to examine alleged
diversion of funds from REL and/or its subsidiaries for the benefit of
the promoter/promoters and/or connected entities.
15
39. The Petitioner was apparently President, Consumer Finance of
Religare Finvest Ltd., a subsidiary of REL and a related entity from
15th May 2008. He was CEO from 2009 and Managing Director and
CEO till November 2017. Mr. Singh submitted that he was at the
helm of affairs of Religare Finvest Limited subsidiary of REL during
the period when funds were diverted from REL and Religare Finvest
Limited and other related entities.
40. The Petitioner along with 12 other entities had been issued
common Show Cause Notice dated 17th November 2020 along with
relevant documents relied upon by SEBI for issuance of the Show
Cause Notice. The Petitioner was required to show cause why an
inquiry should not be held against him. After considering the cause
shown, the Adjudicating Officer might issue notice under Rule 4(3)
fixing a date for appearance of the noticee either personally or
through a lawyer or authorised representative.
41. Mr. Singh submitted that having filed preliminary reply, the
Petitioner repeatedly sought and obtained inspection of various
records and documents. In addition to physical inspection, SEBI
provided a compact disc containing voluminous records of most of
the documents, except some documents which were internal or
confidential or affected the confidentiality of third parties and
hence could not be provided.
42. Mr. Singh submitted that the Petitioner did not submit his
reply to the Show Cause Notice but sent emails demanding to know
16
which documents were relied upon by SEBI and which documents
were not. Further, online inspection was granted as physical
inspection was not possible due to the Pandemic. The Petitioner
made an application for supply of the following documents:-
“(i) Enclosure (i) to the MSA Probe Report containing
index of bank statements;
(ii) Enclosure (iii) to the MSA Probe Report containing
calendar of oral evidence consisting of gist of interviews
conducted.
(iii) Complete set of Enclosure (iv) to MSA Report i.e.
Calendar of evidence (Documentary) consisting of emails/
letters/hard copies.
(iv) Complete set of enclosure (v) to the MSA Report i.e.
Calendar of Evidence (Documentary) consisting of soft
copies of emails/communications /bank statement and
certain supporting documents in CD.”
43. According to Mr. Singh, the Petitioner had been provided with
all documents relied upon by SEBI which were relevant for the
Petitioner to reply to the Show Cause Notice.
44. Rules 3 and 4 of the Security and Exchange Board of India
(Procedure for Holding Inquiry and Imposing Penalties by
Adjudicating Officer) Rules, 1995 reads:-
“Appointment of adjudicating officer for holding
inquiry. 3. Whenever the Board is of the opinion that
there are grounds for adjudging under any of the
provisions in Chapter VI-A of the Act, it may appoint any
of its officers not below the rank of Division Chief to be
an adjudicating officer for holding an inquiry for the said
purpose.
Holding of inquiry.
4.(1) In holding an inquiry for the purpose of adjudging
under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G [15HA
and 15HB] whether any person has committed
contraventions as specified in any of sections 15A, 15B,
17
15C, 15D, 15E, 15F, 15G [15HA and 15HB] the
adjudicating officer shall, in the first instance, issue a
notice to such person requiring him to show cause within
such period as may be specified in the notice (being not
less than fourteen days from the date of service thereof)
why an inquiry should not be held against him.
(2) Every notice under sub-rule (1) to any such person
shall indicate the nature of offence alleged to have been
committed by him.
(3) If, after considering the cause, if any, shown by such
person, the adjudicating officer is of the opinion that an
inquiry should be held, he shall issue a notice fixing a
date for the appearance of that person either personally
or through his lawyer or other authorised representative.
(4) On the date fixed, the adjudicating officer shall
explain to the person proceeded against or his lawyer or
authorised representative, the offence, alleged to have
been committed by such person indicating the provisions
of the Act, rules or regulations in respect of which
contravention is alleged to have taken place.
(5) The adjudicating officer shall then give an
opportunity to such person to produce such documents
or evidence as he may consider relevant to the inquiry
and if necessary the hearing may be adjourned to a
future date and in taking such evidence the adjudicating
officer shall not be bound to observe the provisions of
the Evidence Act, 1872 (11 of 1872)
 Provided that the notice referred to in sub-rule (3), and
the personal hearing referred to in sub-rules (3),(4) and
(5) may, at the request of the person concerned, be
waived.
 (5A) The Board may appoint a presenting officer in an
inquiry under this rule.
 (6) While holding an inquiry under this rule the
adjudicating officer shall have the power to summon and
enforce the attendance of any person acquainted with
the facts and circumstances of the case to give evidence
or to produce any document which, in the opinion of the
adjudicating officer, may be useful for or relevant to, the
subject-matter of the inquiry.
(7) If any person fails, neglects or refuses to appear as
required by sub-rule (3) before the adjudicating officer,
the adjudicating officer may proceed with the inquiry in
the absence of such person after recording the reasons
for doing so.
1. Substituted for "and 15H" by the SEBI (Procedure for
Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Amendment Rules, 2006, w.e.f. 14-11-2006.
18
 2. Substituted for "and 15H" by the SEBI (Procedure for
Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Amendment Rules, 2006, w.e.f. 14-11-2006.
3. Inserted for "and 15H" by the SEBI (Procedure for
Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Amendment Rules, 2006, w.e.f. 14-11-2006.
45. At the stage of Rule 3, the Board appoints an Adjudicating
Officer if it is of the opinion that there are grounds for adjudication
under any of the provisions in Chapter VIA of the SEBI Act. At this
stage, the Board only decides whether adjudication proceedings
should be initiated or not. The formation of opinion is not a formal
inquiry proceeding involving any person or persons against whom
inquiry is contemplated. The participation of the person against
whom inquiry is contemplated is not necessary. The Board forms
its opinion, based on whether there are prima facie materials or
grounds for initiation of inquiry. The opinion of the Board under
Section 3 has nothing to do with the outcome of the enquiry.
46. After the Board forms its opinion to appoint an Adjudicating
Officer, comes the next stage, which is the stage under Rule 4 of an
inquiry for adjudging under Sections 15A, 15B, 15C, 15D, 15E, 15F,
15G, 15H, 15I, 15J and 15HB whether any person has committed
contraventions as specified in those sections. The inquiry
commences with a Show Cause Notice calling upon the noticee to
show cause why an inquiry should not be held against him. The
Show Cause Notice has to specify the nature of offence alleged to
have been committed and the penalty proposed, to enable the
noticee to effectively reply to the show cause. A reading of Section
4(3) makes it clear that, if after considering the cause, if any shown
19
by the noticee, the Adjudicating Officer is of the opinion that an
inquiry should be held, he shall issue a notice fixing a date for
appearance of that person either personally or through his lawyer
or other authorised representative. The noticee is not required to
be heard personally or through lawyer before taking a decision to
proceed with an inquiry in respect of the contraventions alleged in
the Show Cause Notice. Decision to proceed or not to proceed with
the inquiry may be taken on the basis of the reply of the noticee to
the Show Cause Notice. Once it is decided to proceed with the
inquiry, an opportunity of personal hearing is mandatory. The
inquiry has to be conducted in accordance with law, in compliance
with the principles of natural justice.
47. In this case, the Board was of the opinion that there were
grounds for adjudication and accordingly appointed Adjudicating
Officer. Adjudicating Officer issued Show Cause Notice to the
Petitioner to which the Petitioner gave a preliminary reply and
thereafter sought documents as observed above. Inspection of
some documents was permitted. After considering the reply, the
Adjudicating Officer was of the opinion that inquiry should be held.
Accordingly, a notice fixing a date for appearance was issued.
There was no procedural irregularity, at least till the stage of notice
fixing a date of hearing.
48. In Course of argument before the High Court, counsel for the
Respondent SEBI made a statement that SEBI would not rely on
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any document apart from those which had been provided to the
Petitioner.
49. It is well settled that the documents which are not relied
upon by the Authority need not be supplied as held in Natwar
Singh (supra) where this Court held:-
“48. On a fair reading of the statute and the Rules
suggests that there is no duty of disclosure of all the
documents in possession of the Adjudicating Authority
before forming an opinion that an inquiry is required to
be held into the alleged contraventions by a noticee.
Even the principles of natural justice and concept of
fairness do not require the statute and the Rules to be so
read. Any other interpretation may result in defeat of the
very object of the Act. Concept of fairness is not a one way
street. The principles of natural justice are not intended to
operate as roadblocks to obstruct statutory inquiries. Duty
of adequate disclosure is only an additional procedural
safeguard in order to ensure the attainment of the
fairness and it has its own limitations. The extent of its
applicability depends upon the statutory framework.”
50. The High Court rightly did not interfere with the proceedings
at the stage of the Show Cause Notice. The Petitioner has
apparently been permitted to inspect the opinion formed under
Rule 3 of the SEBI Adjudication Rules. There is apparently no rule
which requires SEBI to furnish the opinion under Rule 3 to the
noticee in its entirety. 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. In the event, the Petitioner is
prejudiced by reason of any adverse order, based on any materials
not supplied to the Petitioner, or any prejudice is demonstrated to
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have been caused to the Petitioner, it would be open to the
Petitioner to approach the appropriate forum.
51. This Court has by its interim order dated 27th September 2021
permitted Respondent SEBI to hold the inquiry, without relying
upon any documents, not supplied to the Petitioner. The interim
order will govern the inquiry.
52. In our view, there is no infirmity in the impugned judgment
and order of the High Court dismissing the writ petition filed by the
Petitioner.
53. In view of the foregoing reasons, the Special Leave petition is
dismissed.
….……………………………………. J.
 [INDIRA BANERJEE]
 ………..……………………………… J.
 [A. S. BOPANNA]
NEW DELHI
SEPTEMBER 14, 2022
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