SEBI settlement revocation quashed for violating natural justice principles and denying hearing opportunity

Bombay HC quashed SEBI's revocation order of a settlement agreement, finding it violated natural justice principles. SEBI had issued notices to entities for misrepresenting shareholding and non-compliance with minimum public shareholding requirements. After 14 months of correspondence where SEBI entertained the entities' explanations, SEBI revoked the settlement through a one-line unreasoned order without hearing. The court held SEBI, as a regulator, must act fairly and follow audi alteram partem principles. The revocation order was unsustainable due to absence of reasons and denial of hearing opportunity, causing prejudice to petitioners despite their consistent compliance efforts.

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The core legal questions considered in this matter revolve around the validity and propriety of the Securities and Exchange Board of India's (SEBI) revocation of a previously passed settlement order involving multiple entities, including Bharat Nidhi Limited (BNL) and associated companies and individuals. The principal issues include: (1) Whether SEBI was justified in revoking the settlement order under Regulation 28 of the SEBI (Settlement Proceedings) Regulations, 2018, on grounds of alleged non-compliance; (2) Whether the procedure followed by SEBI in revoking the settlement order adhered to principles of natural justice, including the requirement of a reasoned order and opportunity of hearing; (3) Whether the settlement order was composite and if non-compliance by one party could lead to revocation affecting all; (4) The interpretation of the non-monetary terms of the settlement order, particularly regarding the obligation of BNL to provide an exit offer to its public shareholders; (5) The effect of interim court orders restraining BNL's buy-back offer on its ability to comply with the settlement order; (6) The authority and delegation of powers exercised by SEBI in revoking the settlement order; and (7) The role and rights of minority shareholders in challenging the settlement and revocation orders.

Issue-wise detailed analysis:

1. Justification for Revocation under Regulation 28
The legal framework governing settlement and its revocation is primarily the SEBI (Settlement Proceedings) Regulations, 2018. Regulation 28 permits revocation of a settlement order if the applicant fails to comply with the settlement order or is found to have made untrue disclosures or violated undertakings. SEBI contended that BNL failed to comply with the non-monetary terms of the settlement order, specifically the obligation to provide an exit offer to all public shareholders for a period of three months at the same exit price as offered in 2019. The investigation and correspondence revealed that BNL initiated a buy-back offer limited to 1.067% of shares, constrained by statutory limits under the Companies Act, and sought to provide exit to other shareholders through third-party purchasers for an additional period. However, the buy-back was restrained by interim court orders filed by minority shareholders, and BNL was unable to complete the exit offer as originally envisaged. SEBI argued that despite these efforts, BNL's partial compliance amounted to failure under Regulation 28, justifying revocation. The Petitioners disputed this, asserting that the statutory and judicial impediments rendered full compliance impossible, invoking the legal maxim "lex non cogit ad impossibilia" (the law does not compel the impossible). They contended that BNL took all reasonable steps and kept SEBI informed, which tacitly accepted the compliance approach until the sudden revocation. The Court noted that the settlement order was composite, covering all applicants jointly, and that failure by BNL could affect the entire group. However, the Court found that the breach was not wilful and that BNL's efforts to comply, though incomplete, were substantial and acknowledged by SEBI for over a year.

2. Adherence to Principles of Natural Justice and Procedural Fairness
The impugned revocation order was a brief communication lacking detailed reasons and was passed without affording the Petitioners an opportunity of hearing. The Petitioners relied on settled jurisprudence that administrative actions with civil consequences must comply with the audi alteram partem principle, requiring notice and a reasoned order. The Court referenced authoritative Supreme Court decisions emphasizing that fairness and transparency are integral to regulatory actions, especially those affecting civil rights. SEBI contended that no prejudice was caused as facts were admitted and that the settlement order itself contemplated automatic revocation on non-compliance without hearing. The Court rejected SEBI's contention, holding that even if facts are admitted, the sudden revocation after prolonged acquiescence and extensive correspondence necessitated a reasoned order and hearing. The Court emphasized that the absence of reasons and hearing rendered the revocation order arbitrary and unsustainable. It also held that the authority cannot dispense with natural justice by presuming no prejudice would result from non-hearing, as only a court can determine prejudice.

3. Interpretation of Non-Monetary Terms and Compliance by BNL
The settlement order required BNL to provide an exit offer to public shareholders for three months at the 2019 exit price, without specifying the mode of exit. BNL chose a buy-back mechanism compliant with the Companies Act, which limited buy-back to 25% of paid-up capital and free reserves, effectively restricting buy-back to 1.067% of shares. To comply with the broader exit obligation, BNL arranged for three shareholders to provide exit offers to others post buy-back. This two-step approach was communicated to and tacitly accepted by SEBI. However, minority shareholders obtained interim injunctions restraining the buy-back finalization, which impeded BNL's ability to fully comply. The Court observed that BNL's approach was reasonable and consistent with the settlement order's terms and statutory constraints. SEBI's later revocation based on non-compliance with the exit offer timeframe and extent was therefore questionable, especially given the absence of objections during the extensive period of compliance efforts.

4. Effect of Interim Court Orders on Compliance
The interim orders passed by the Bombay High Court at the instance of minority shareholders restrained BNL from finalizing the buy-back offer, effectively preventing completion of the exit offer within the stipulated period. SEBI's affidavit before the High Court acknowledged this restraint and indicated that BNL was unable to proceed with the buy-back due to the court order. The Court recognized that these judicial orders created a legal impossibility for BNL to comply fully within the prescribed timeframe, reinforcing the Petitioners' argument invoking the doctrine of impossibility of performance. The Court found that SEBI's revocation disregarded this crucial context.

5. Composite Nature of Settlement and Impact on Petitioners
The settlement order was passed jointly against eight entities and one individual, following a show cause notice alleging concerted violations. SEBI contended that the settlement was composite and non-compliance by one party justified revocation affecting all. The Petitioners argued that the settlement terms and compliance were severable, particularly since only BNL had non-monetary obligations. The Court acknowledged the composite nature of the settlement but also noted that the enforcement proceedings and show cause notices were interlinked. The Court did not find it unreasonable that non-compliance by one party could impact the group, but emphasized that such a broad consequence required careful and fair adjudication, which was absent in the revocation order.

6. Authority and Delegation of Powers
SEBI's revocation order was signed by a Deputy General Manager, raising questions about the authority to pass such an order. SEBI relied on Section 19 of the SEBI Act, 1992, which permits delegation of powers, and the SEBI Delegation of Powers Order. The Court accepted that the power to revoke settlement orders was delegated to the panel of Whole Time Members and their delegates, and thus the authority exercised was valid. This point did not warrant interference.

7. Role of Minority Shareholders and Transparency
Minority shareholders, represented by the Ashok Shah and Pina Shah groups, had persistently challenged BNL's compliance with securities laws, alleging misrepresentation of promoter holdings and breach of minimum public shareholding norms. They filed writ petitions and sought disclosure of SEBI's internal documents relating to the settlement. The Court directed SEBI to furnish these documents, emphasizing the importance of transparency and investor protection. The Petitioners alleged SEBI revoked the settlement order as a reaction to this disclosure direction, but SEBI denied this. The Court did not find evidence to support claims of mala fide revocation but underscored the need for SEBI to act fairly and transparently.

Conclusions
The Court concluded that SEBI's revocation of the settlement order was premature and unjustified on the ground of non-compliance, given BNL's substantial efforts to comply and the legal impediments it faced. The revocation order was non-speaking, lacked reasons, and was passed without affording an opportunity of hearing, violating principles of natural justice. The Court held that such administrative actions with civil consequences require reasoned orders and fair procedures. The composite nature of the settlement justified collective consequences, but only if fair process was followed. The Court accepted the doctrine of impossibility of performance as applicable in this context. The authority exercised by SEBI was valid, but the manner of exercise was flawed. The Court therefore quashed and set aside the revocation order and remanded the matter to SEBI for reconsideration, directing SEBI to afford the Petitioners a fair hearing and pass a reasoned order within four months.

Significant holdings include the following verbatim excerpts:

"The principles of natural justice are not merely formalities but they constitute substantive obligations that need to be adhered to by the decision making and adjudicating authorities... The well known fundamental principles of natural justice cover a pivotal principal of audi alteram partem, meaning that a person affected must be heard before a decision he is visited with an adverse."

"The absence of reason has rendered the impugned order unsustainable, when such order is subject to challenge before the higher forum... the one line order revoking settlement, justly arrived, order definitely defeats the principles of natural justice."

"The law does not compel a man to do what he cannot possibly perform."

"The decision making authority itself cannot dispense with the requirement of natural justice on the ground that affording such opportunity will not make any difference... The opportunity of hearing will serve the purpose or not has to be considered at a later stage and such things cannot be presumed by the authority."

"In the present case, SEBI continued to entertain the Petitioners and specifically BNL, when it kept it informed about the steps taken for ensuring a compliance with the settlement order and at time also expressed, as to how it was placed in a difficult situation in the wake of the interim order passed by the High Court when it was unable to move ahead... What made SEBI suddenly adopt a 'U' turn and alleged failure of compliance of the directions as not fathomable."

"We quash and set aside the impugned order passed by SEBI, communicated to the Petitioners on 10.11.2023 and remand the proceedings of the settlement applications qua each of the Petitioner to SEBI for reconsideration, by affording an opportunity of hearing to the Petitioners within a time bound manner and we expect the order to be passed, to be reasoned order."

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