A Supreme Court Bench of Justice Indira Banerjee and Justice AS Bopanna heard a Special Leave Petition against a judgment passed by the Bombay High Court, by which a petition seeking directions against SEBI to furnish documents relied upon them towards a Show Cause Notice was dismissed.

The Apex Court upheld the orders of the High Court and held that there is no rule which requires SEBI to furnish the opinion to the noticee in its entirety under Rule 3 of the Security and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.

Senior Counsel Sidharth Luthra appeared for the Petitioner. Chander Uday Singh appeared for SEBI.

In this case, the Petitioner had joined Religare Finvest Limited (RFL), a subsidiary entity of Religare Enterprises Ltd. (REL) as the President-Consumer Finance, to set up and manage its SME Lending business. Thereafter, he worked as the Managing Director (MD) and Chief Executive Officer (CEO) of RFL to represent the SME Lending Business.

The Respondent SEBI appointed a Forensic Auditor to conduct an investigation in the matter of REL and related entities for the alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (SEBI PFUTP Regulations).

SEBI issued a show cause notice to the Petitioner as to why appropriate directions for imposing a penalty, should not be passed against him. This was done 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.

Show Cause Notices were issued against 13 noticees, with the Petitioner being one of them (Noticee No. 12). The allegation in the Show Cause Notice was 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.

On receipt of the Show Cause Notice, the Petitioner filed a Settlement Application, proposing to settle the proceedings initiated by the Show Cause Notice, in terms of SEBI (Settlement Proceedings), Regulations, 2018 (Settlement Regulations). However, the Petitioner could not settle the proceedings.

The Petitioner sent an e-mail to SEBI, requesting it to afford him an opportunity to inspect the documents relied upon by them. According to the Petitioner, while some documents were supplied to him and the other notices, certain documents were denied on the ground of confidentiality.

The Petitioner submitted that as per SEBI Rules, it is mandatory on the part of SEBI to provide a copy of the opinion formed by SEBI for issuance of the Show Cause Notice to the noticee, before hearing the Show Cause Notice. It was further submitted that copies of all documents relied upon by SEBI at the time of issuing Show Cause Notice had to be provided to the Petitioner. It was contended that without getting access to those documents, it would not be possible for the Petitioner to reply to the Show Cause Notice.

On the other hand, SEBI made the case 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 and that SEBI is not required to furnish the noticee with a copy of the opinion.

SEBI further contended that in addition to physical inspection of all relevant documents, they had 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, and that the Petitioner was informed of the same through email.

The Supreme Court referred to Rules 3 and 4 of the Security and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 and observed that "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 have been caused to the Petitioner, it would be open to the Petitioner to approach the appropriate forum."

Therefore, the Court upheld its previous interim which permitted SEBI to hold the inquiry without relying on any documents that were not supplied by the Petitioner and dismissed the Special Leave Petition.

Cause Title - Kavi Arora v. Securities Exchange Board of India

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