Mere Release Of Escrow Doesn’t Create Automatic Statutory Bar To Proceedings Under PFUTP Regulations: Supreme Court

The Apex Court was considering two appeals arising from the common judgment passed by the Securities Appellate Tribunal, Mumbai (SAT) setting aside the order passed by the Adjudicating Officer (AO) of Securities and Exchange Board of India (first Appellant / SEBI) wherein the AO had imposed a penalty of Rs 5.25 crore on the first respondent and of Rs 15 Lakh each on four respondents under Sections 15HA and 15HB of the SEBI Act, 1992 on account of making misleading announcement of the buyback of shares without any intent to fulfil it, thereby violating Regulations 3(a), (b), (c), (d), and 4(1), 4(2)(k), and 4(2)(r) of (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and Regulation 19(1)(a) of the SEBI (Buyback of Securities) Regulations, 1998 (Buyback Regulations).

The Division Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan held, “Thus, the mere release of the escrow does not create an automatic statutory bar to proceedings under the PFUTP Regulations because the release of the escrow is not necessarily equivalent to absence of fraud. One must bear in mind that the fulfilment of the requirements for release of an escrow cannot, by itself, determine whether the ingredients of fraud under the PFUTP Regulations are made out. The fact that the escrow amount was released cannot be treated as creating a statutory bar against the initiation or continuation of proceedings under the PFUTP Regulations. In other words, the release of escrow, by itself, cannot preclude a finding of fraud if the material on record otherwise establishes the ingredients of such fraud under the applicable provisions of the PFUTP Regulations since the operation of the escrow mechanism is not an adjudication upon allegations levelled under the PFUTP Regulations.”

Senior Advocate Navin Pahwa represented the Appellant while Senior Advocate Rajiv Shakdher represented the Respondent.

Factual Background

The first respondent, Vedanta Limited (Formerly, Cairn India Limited, decided vide a special resolution to buy back 17.09 Crore equity shares at a maximum price of Rs. 335 per share (Price Cap) with a total investment of Rs 5725 Crore via the open market in accordance with the Buyback Regulations. Thereafter, the first respondent made a public announcement for the buyback of equity shares. By the time five months of the stipulated six-month period had elapsed, the respondent approached the appellant/SEBI seeking an extension of the buyback period on the ground that it was significantly falling short of achieving the targeted buyback. SEBI, however, rejected the request for extension of the buyback period on the ground that the SEBI Buyback Regulations contained no provision permitting such an extension.

The respondent then made an application to the appellant under Regulation 15B(8) of the Buyback Regulations to release the Cash Escrow, containing 2.5% of the buyback size amounting to Rs. 143.125 Crore. The IVD put up an investigation report before the Committee of InterDivisional Chiefs-II (CIDC) for consideration. Thereafter, the escrow amount came to be released in favour of the respondents. However, the investigation into a possible violation of PFUTP Regulations was undertaken separately. The Investigation Department concluded that the announcement of buyback of shares was a false announcement by the respondents without any intent to fulfil it. The respondents were thus alleged to have violated Regulations 3 (a), (b), (c), (d), 4(1), 4(2)(k), (r) of the PFUTP Regulations and Regulation 19(1)(a) of the Buyback Regulations.

The AO, after affording an opportunity of personal hearing, passed an Order (AO Order) holding that the respondent did not place enough buy orders towards completion of the buyback and had acted fraudulently. Penalties were imposed upon the respondent and the individual directors for alleged violations of the PFUTP Regulations and Buyback Regulations. Aggrieved by the said AO Order, the respondents preferred an Appeal. The SAT allowed both the appeals and set aside the AO’s Order holding that the violations of the PFUTP Regulations and Buyback Regulations were not proved against the respondents. Aggrieved thereby, the appellant approached the Apex Court.

Reasoning

On a perusal of the facts of the case, the Bench noted that even in SEBI’s communication to the respondents or the third parties, there was no finding of fact regarding the factum of fraud under the PFUTP Regulations, which had been established. The Bench explained that the scope of the enquiry contemplated by Regulation 15B (8) is confined to determining whether the escrow is liable to be forfeited in the circumstances contemplated by the provision. As per the Bench, the fact that the conditions governing the forfeiture or release of an escrow have been satisfied, by itself, cannot be treated as a finding on whether the PFUTP Regulations have been violated or not.

The Bench held that several proved facts corroborated the finding that the company MOH had indeed engaged in fraud. The Bench stated that the misleading buyback announcement, made without free reserves and at a price far removed from the prevailing market price, was followed by a consequent and disproportionate rise in both the price and the trading volume of MOH’s shares, an artificial movement which bore no relation to the underlying fundamentals or performance of the company. As pet the Bench, this was compounded by the subsequent offloading of shares by the promoters and the preferential allottees in the secondary market, an act which, occurring as it did in such close proximity to the announcement and its unpublicised withdrawal, could not be viewed as a matter of mere coincidence.

The Bench explained, “From the aforesaid decisions, it is clear that fraud cannot be said to be established based on mere allegation, conjectures and surmises. Fraud must be established on the touchstone of the principle of balance of probabilities, which requires an objective perusal of the evidence on record, whereupon the court must either believe such evidence to exist, or consider its existence to be so probable that a reasonable man ought, under the given circumstances, to act upon the supposition that it exists.”

The Bench was of the view that the satisfaction of the conditions governing forfeiture or release of an escrow under Regulation 15B(8) cannot, by itself, be treated as a finding on whether the PFUTP Regulations have been violated or not, as the two inquiries operating in entirely different fields. “This, in our view, is a disputed question of fact that goes to the very root of the finding of fraud. This Court, exercising jurisdiction under Section 15Z of the SEBI Act, is not the appropriate forum for such resolution. The scrutiny of such conflicting trading data, and the determination of which of the two versions is to be accepted, or whether the discrepancy admits of some explanation not presently apparent to us, is an exercise that properly belongs to SAT”, it added.

Thus, rejecting the respondents’ contention that the satisfaction of the conditions contemplated under Regulation 15B(8) necessarily negatives allegations of fraud under the PFUTP Regulations, the Bench partly allowed the appeals and remanded the matter to SAT for fresh adjudication on the question of fraud alone.

Cause Title: Securities and Exchange Board of India v. Vedanta Limited & Ors. (Neutral Citation: 2026 INSC 978)

Appearance

Appellant: Senior Advocate Navin Pahwa, AOR M/S. K Ashar & Co., Advocate Abhishek Singh

Respondent: Senior Advocate Rajiv Shakdher, Advocates Anuradha Dutt, Pawan Sharma, Rishabh Sharma, Vaishali Joshi, Karan Khetani, Raghav Dutt, AOR B. Vijayalakshmi Menon, AOR Amit Agrawal, Advocates Sumit Agrawal, Sana Jain, Akanksha Chauhan

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