2025 (7) TMI 1212 - HC - SEBI

Petitions challenging SEBI show cause notices for market manipulation dismissed for delaying tactics

The Bombay HC dismissed petitions challenging SEBI show cause notices (SCNs) for alleged PFUTP violations. Petitioners argued the SCNs were barred by res ... Jurisdictional Challenge to the Impugned Show Cause Notices (SCNs) - breach of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations or the making of disproportionate gains or securing unfair advantage - earlier issued SCNs concerning the same allegations were adjudicated - impugned SCNs, based on the same allegations, are barred by the principles of res judicata or issue estoppel - challenges/issues as preliminary issues? - HELD THAT:- It is reasonable to believe that the very institution of these Petitions and now, the insistence that the objections to the impugned SCN be decided as preliminary issues, is merely an attempt to unduly delay the proceedings pursuant to the impugned SCN. The aim is to stall or postpone adjudication in the impugned SCN by employing various stratagems. The pressure on the Court’s docket is fully exploited. Often, there is an insistence on interim relief to stay further proceedings or to bring the matter up earlier, fully aware that the arguments may be lengthy and that the courts genuinely cannot allocate early dates and ample times for such matters, given more pressing matters. Even if interim relief is not granted, postponement is sought by citing pending issues. The equitable and discretionary jurisdiction under Article 226 of the Constitution cannot support such strategies or attempts simply because the Petitioners may have the means and the wherewithal to sustain the same. Admittedly, the ISB reports, or the further Deloitte or E&Y reports were not available when the earlier show cause notices were disposed of. Since, we wish to leave the challenges to the impugned SCN open to be decided by the QJA, we refrain from making any observations on the contentions raised on behalf of the Petitioners or for that matter, the SEBI. However, the limited and prima facie reference is only to support our reasoning that in the facts of the present case, there is no warrant for even treating the issue of res judicata or the alleged absence of the jurisdictional facts, as preliminary issues, thereby, delaying the adjudication in the impugned SCN, when such delay is not in public interest. Thus, even Order XIV Rule 2(2) mainly applies to treating an issue as a preliminary issue where such issue is of law only. There are several decisions which take the view that a mixed question of law or fact should normally not be decided as a preliminary issue (see Nusli Neville Wadia V/s. Ivory Properties [2019 (10) TMI 1314 - SUPREME COURT], Mongia Realty And Buildwell Pvt. Ltd. V/s. Manik Sethi [2022 (1) TMI 1364 - SUPREME COURT] and Prem Kishor And Ors. V/s. Brahm Prakash And Ors. [2023 (3) TMI 1589 - SUPREME COURT] These decisions hold that where the plea of res judicata involves mixed questions of law and fact, there is no obligation to decide such issue as a preliminary issue. From the chronology of the events, it does seem that the Petitioners are aiming to delay and stall the proceedings, citing various reasons. These reasons are presented successively rather than simultaneously, leading to delays. The plea to treat the issues now raised as preliminary issues appears to be a plea to establish a scope for further delay if the preliminary issues are decided against them. It is noteworthy that these petitions were filed nearly two years after the impugned SCNs were issued and after the proceedings on the impugned SCNs had substantially progressed. However, we clarify that the observations in this Judgment and Order on merits or demerits of the challenges are prima facie and for the limited purpose of addressing the Petitioners’ contention that their objections to the impugned SCN must be decided as preliminary issues. Without such observations, it was not possible to address the Petitioners’ insistence that the issues which they have now raised must be treated as preliminary issues. Therefore, we clarify that none of the observations in this Judgment and Order need to influence the QJA in deciding all the issues that arise in the impugned SCN, including the issues now raised by the Petitioners in these Petitions. All such issues must be decided simultaneously, expeditiously and without being influenced by the observations in this Judgment and Order. In fact, the observations are not intended to reflect on the merits of the matter. The core legal questions considered by the Court in these petitions revolve around the validity and maintainability of the impugned Show Cause Notices (SCNs) issued under the Securities and Exchange Board of India Act, 1992 ('SEBI Act'). The principal issues are:(i) Whether the impugned SCNs suffer from lack of jurisdiction, particularly due to the absence of essential jurisdictional facts such as breach of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations or the making of disproportionate gains or securing unfair advantage;(ii) Whether the issuance of the impugned SCNs is barred by the principles of res judicata or issue estoppel, given that earlier SCNs on the same allegations were adjudicated and penalties imposed;(iii) Whether the Petitioners' prior participation in the proceedings before the Quasi-Judicial Authority (QJA) estops them from raising these jurisdictional and res judicata challenges at this stage, or whether fundamental rights preclude any such waiver;(iv) Whether the objections raised by the Petitioners should be treated as preliminary issues for determination before proceeding further with adjudication of the impugned SCNs;(v) The appropriateness of entertaining writ petitions challenging SCNs issued by SEBI at an advanced stage of adjudication proceedings.Issue-wise Detailed Analysis1. Jurisdictional Challenge to the Impugned SCNsThe Petitioners contend that the impugned SCNs were issued without jurisdiction because the essential jurisdictional facts-namely, violation of PFUTP Regulations and the making of disproportionate gains or unfair advantage-were absent. They rely on prior adjudication orders where penalties were imposed for minor breaches unrelated to PFUTP violations or disproportionate gains, and no findings were made against them under the PFUTP Regulations or regarding unfair advantage.The relevant legal framework includes the SEBI Act and the PFUTP Regulations, which empower SEBI to issue SCNs and impose penalties only upon satisfaction of certain jurisdictional facts. The Petitioners rely on precedent emphasizing the necessity of jurisdictional facts for valid issuance of SCNs.The Court observed that while the Petitioners assert that no such jurisdictional facts exist, the prior adjudication orders did not conclusively resolve these issues, especially since the investigations and reports forming the basis of the impugned SCNs (notably by ISB, Deloitte, and E&Y) were not available at the time of earlier proceedings. The Court noted that the scope of earlier proceedings and the current SCNs differ, particularly with respect to disgorgement of unlawful gains, which was not addressed previously.The Court refrained from deciding the jurisdictional challenge on merits but held that these issues are mixed questions of law and fact best decided by the QJA during adjudication rather than as preliminary issues.2. Application of Res Judicata and Issue EstoppelThe Petitioners argued that the impugned SCNs are barred by res judicata or issue estoppel because the same allegations had been adjudicated earlier, resulting in penalties that were paid, thereby concluding the matter.Res judicata is a principle that prevents vexatious litigation on the same cause of action and requires finality in judicial decisions. The Court acknowledged that this principle applies to SEBI proceedings as held by the Supreme Court, but emphasized that the plea involves mixed questions of law and fact, including the identity of cause of action and scope of prior adjudication.The Court noted that the prior adjudication did not involve the new reports and findings that form the basis of the impugned SCNs and that the scope and jurisdiction of the adjudicating officer then and the Whole Time Member (WTM) now differ. Therefore, the Court found no prima facie bar in entertaining the impugned SCNs on res judicata grounds at this stage.Further, the Court referred to precedents stating that res judicata pleas can be waived if not raised timely and that such pleas are not jurisdictional bars but estoppel based on public policy.Consequently, the Court declined to treat the res judicata plea as a preliminary issue to avoid piecemeal adjudication and delay.3. Waiver and Estoppel by Participation in ProceedingsSEBI contended that the Petitioners' participation in the SCN proceedings, including cross-examination of witnesses and seeking documents, estops them from challenging the SCNs at this stage. The Petitioners countered that fundamental rights cannot be waived and that participation does not preclude raising jurisdictional or res judicata objections.The Court observed that the Petitioners had actively participated in the proceedings over an extended period and only after the hearings had substantially progressed did they file these petitions. While fundamental rights cannot be waived, the Petitioners failed to demonstrate which fundamental rights were at stake. The Court left the question of waiver to be addressed by the QJA along with other issues.4. Treatment of Challenges as Preliminary IssuesThe Petitioners sought directions to treat their objections, including jurisdictional and res judicata pleas, as preliminary issues to be decided before further hearings in the impugned SCNs. They relied on a coordinate bench decision where such directions were issued in a case involving exoneration in earlier proceedings followed by a fresh SCN on the same allegations.SEBI argued that the factual matrix in the present case differs significantly from the cited precedent and that the earlier proceedings and current SCNs differ in scope and jurisdiction. It submitted that treating these issues as preliminary would cause undue delay and is not warranted.The Court analyzed the procedural history, noting multiple adjournments, challenges to inspection proceedings, and attempts to delay cross-examination of expert witnesses. It found a pattern of delay tactics by the Petitioners, aimed at stalling adjudication.Legal principles from the Code of Civil Procedure (Order XIV) and Supreme Court precedents were considered, which generally discourage piecemeal adjudication unless the preliminary issue is purely legal and can dispose of the case expeditiously. Since the res judicata plea and jurisdictional challenges involve mixed questions of law and fact, the Court held that these should be decided together with other issues.The Court distinguished the facts from the coordinate bench decision and held that the present case does not justify treating these challenges as preliminary issues.5. Entertaining Writ Petitions Against Show Cause NoticesThe Court noted that ordinarily, challenges to show cause notices are not entertained under Article 226 of the Constitution unless there is a violation of natural justice, lack of jurisdiction, or the proceedings are wholly without authority.Here, the Court found that the Petitioners' contentions do not establish that the SCNs are wholly without jurisdiction or issued in abuse of process. The issues raised are contentious and require adjudication by the QJA. The Court relied on precedents emphasizing that interference at the SCN stage should be rare and only in exceptional cases.Significant Holdings'The interests of justice would be best served if all issues, including those related to the bar of res judicata or the alleged lack of jurisdictional facts, are considered and resolved by the QJA either in one comprehensive hearing or simultaneously without resorting to any piecemeal adjudication being insisted by the Petitioners.''The extraordinary jurisdiction of this Court under Article 226 cannot support strategies or attempts simply because the Petitioners may have the means and the wherewithal to sustain the same.''The normal rule is that all issues must be decided simultaneously and in one go.''The plea of res judicata, depending on the facts of a given case, is capable of being waived, if not properly raised at an appropriate stage and in an appropriate manner.''Challenges to a show cause notice must not ordinarily be entertained in Petitions under Article 226 of the Constitution except where there has been a violation of principles of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of the act is challenged.''We decline to order the QJA to treat such issues as preliminary issues. We are satisfied that this is a fit case where all the issues must be tried together instead of any piecemeal adjudication.'The Court's final determination was to dismiss the petitions without quashing the impugned SCNs, leaving it open to the Petitioners to raise all their objections, including jurisdictional and res judicata pleas, before the QJA. However, the Court refused to direct the QJA to treat these objections as preliminary issues, emphasizing the need to avoid undue delay and piecemeal adjudication in the public interest. The Court's observations on merits were expressly stated to be prima facie and not binding on the QJA in its adjudication.