Appointment Of SEBI’s Adjudicating Officer Is Administrative Step; Doesn’t Entail Any Quasi-Judicial Determination: Delhi High Court

The Delhi High Court held that the appointment of an Adjudicating Officer (AO) of Securities and Exchange Board of India (SEBI) is an administrative step and the same doesn’t entail any quasi-judicial determination.

The Court held thus in two cross Letters Patent Appeals (LPAs) preferred against the Judgment of the Single Judge, by which a show-cause notice (SCN) and consequential proceedings were set aside on the ground that the appointment of AO in the absence of a recorded opinion was without jurisdiction.

A Division Bench of Justice Anil Kshetarpal and Justice Harish Vaidyanathan Shankar observed, “Viewed in this light, we entertain no manner of doubt that the appointment of an AO under Rule 3 is an administrative step, one that merely initiates the process and does not, at that stage, entail any quasi-judicial determination or cause any prejudice to the Noticee, Mr. Amit Jain/Petitioner.”

The Bench elucidated that Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 makes it evident that the statutory trigger for appointment of an AO is the formation of an opinion by the Board that there appear to be grounds for adjudging a contravention under any provision of Chapter VIA of the SEBI Act, 1992 and upon such satisfaction, the Board may appoint an officer not below the rank of Division Chief to act as the AO for conducting the inquiry.

Senior Advocates Pratap Venugopal and Neeraj Malhotra appeared for the Appellant-SEBI, while Advocate Rishabh Jain appeared for the Respondent.

Case Background

The Respondent was a shareholder of Himalaya Granites Ltd., a listed company and in 2011, the Bombay Stock Exchange (BSE) addressed a communication to SEBI reporting certain transactions undertaken in the shares of the said company. In that communication, BSE indicated that mandatory disclosures required under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and the SEBI (Prohibition of Insider Trading) Regulations, 1992 appeared to have been violated by certain entities, including the Respondent. SEBI undertook an internal examination of the said information and the transaction statements of the concerned entities, including that of the Respondent for the period 01.01.2009 to 15.03.2012, were reviewed. Upon such examination, it was noted that disclosures contemplated under Regulations 13(3) and 13(5) of the PIT Regulations had allegedly not been made by the Respondent.

These observations, along with similar findings against other entities, were placed before the Group of Assistant General Managers and in its meeting held on 20.06.2012, the GAGMs recommended that adjudication proceedings be initiated for the alleged violations. The recommendations of the GAGMs were thereafter placed before the Committee of Division Chiefs of Surveillance (CDCS), which advised initiation of adjudication proceedings under Section 15A(b) of the SEBI Act. Subsequently, AO was appointed who issued an SCN to the Respondent. This was challenged before the Single Judge, who held that in terms of Rule 3 of the Adjudication Rules, the formation of an opinion by the Board that there exist grounds for adjudication under Chapter VI-A of the Act is a mandatory prerequisite for appointing an AO. Hence, the case was before the Division Bench.

Reasoning

The High Court in view of the facts and circumstances of the case, said, “… the learned Single Judge proceeded on the erroneous premise that the notice issued was solely for the purpose of imposing a penalty, without first undertaking the requisite appraisal as to whether the foundational jurisdictional fact - namely, the commission of a violation warranting such penalty - had at all been established by the formation of an opinion by the Appellant-Board.”

The Court noted that the language of Rule 5(1) unambiguously clarifies that it is at this stage that the AO is required to assess and conclude whether a violation under Section 15(I), inter alia, Section 15A(b) has occurred and the impugned Judgment, however, appears to have omitted to appreciate these statutory prescriptions.

“The scheme of the Rules makes it abundantly clear that the inquiry envisaged thereunder is a sequential exercise: first, to ascertain whether any contravention of the provisions enumerated in Section 15-I, including Section 15A(b), has occurred; next, to determine whether such contravention renders the Noticee liable to penalty; and only thereafter, to adjudicate the quantum and modality of such penalty”, it added.

The Court was of the view that the Single Judge fell into clear error in concluding that the Show Cause Notice had been issued for the purpose of adjudging penalty.

“The concern expressed by the learned Single Judge regarding the absence of a prior formation of opinion before imposition of penalty thus, appears to have been on a misapprehension and therefore, misconceived. We also note that this aspect does not seem to have been lucidly set out before the Learned Single Judge, which may have resulted in his entertaining such a misapprehension”, it observed.

Conclusion

The Court, however, remarked that the Single Judge correctly held that the PIT Regulations operate without prejudice to the Board’s independent statutory power to proceed under Chapter-VIA and this position is evident from a plain reading of Regulation 14.

“Any violation of the Regulations may attract the issuance of directions by the Board under Regulation 11; however, such directions are expressly stipulated to be in addition to - and not in substitution of - remedial or penal measures available under Chapter-VIA. This necessarily implies that the invocation of the adjudicatory mechanism under Chapter-VIA does not require the Board first to traverse or exhaust the remedial framework under the Regulations”, it concluded.

Accordingly, the High Court concurred with the Single Judge that no requirement can be culled out from the PIT Regulations mandating a prior determination thereunder as a condition precedent to the initiation of proceedings under Chapter-VIA of the Act.

Cause Title- Securities and Exchange Board of India v. Amit Jain (Neutral Citation: 2025:DHC:11162-DB)

Appearance:

Appellant: Senior Advocates Pratap Venugopal, Neeraj Malhotra, Advocates Sandhya Kohli, and Nimish Kumar.

Respondent: Advocate Rishabh Jain

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