2025 (12) TMI 888 - HC - SEBI

HC clarifies u/r 5(1) and Section 15-I that show cause notice valid without prior contravention opinion

The HC set aside the Single Judge's finding that the Show Cause Notice was invalid for want of a prior opinion on violation before imposition of penalty. ... Validity of an appointment of the Adjudicating Officer [AO] for holding inquiry - Opinion under Rule 3 - absence of a prior formation of opinion before imposition of penalty - Insider - Compliance with the precondition for invoking insider-trading-related disclosure obligations - requirement of passing an order under Regulation 14 of the PIT Regulations prior to initiating steps for the appointment of an AO or for undertaking any adjudicatory exercise under Section 15A(b) - HELD THAT:- A plain and unembellished reading of the question framed makes it evident that 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 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. 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. We are, therefore, of the considered view that the learned Single Judge fell into clear error in concluding that the Show Cause Notice dated 14.11.2013 had been issued for the purpose of adjudging penalty. As elaborated hereinbefore, the inquiry was directed, in the first instance, towards determining whether any violation under Section 15A(b), constituting the initial procedural exercise required to be undertaken prior to carrying out the remaining exercises, inter alia, the determination on imposition of a penalty, and if found warranted, the quantum of such 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. SEBI's powers under Chapter VI-A of the SEBI Act - The learned Single Judge has, in our view correctly, held that the PIT Regulations operate without prejudice to the Board’s independent statutory power to proceed under Chapter-VIA. 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. We therefore concur with the learned 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. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, under Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, a prior, expressly recorded opinion by the Board as to the existence of grounds for adjudication is a condition precedent for appointing an Adjudicating Officer and issuing a show cause notice, and whether such appointment and notice are without jurisdiction in its absence. 1.2 Whether the inquiry scheme under Rules 3, 4 and 5 of the SEBI Adjudication Rules was correctly understood, in particular the stage at which the Adjudicating Officer must form a satisfaction regarding commission of a violation and liability to penalty under Section 15A(b) read with Section 15-I of the SEBI Act. 1.3 Whether the Board is required, as a condition precedent, to pass an order under Regulation 14 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 before initiating adjudication under Chapter VI-A of the SEBI Act and appointing an Adjudicating Officer for alleged violations of the PIT Regulations. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Opinion under Rule 3, nature of appointment of Adjudicating Officer, and stage of quasi-judicial satisfaction under Rules 3, 4 and 5 Legal framework (as discussed) 2.1 The Court examined Rules 3, 4 and 5 of the SEBI Adjudication Rules, and Sections 15A(b) and 15-I of the SEBI Act. Rule 3 authorises the Board to appoint an officer not below the rank of Division Chief as Adjudicating Officer 'whenever the Board is of the opinion that there are grounds for adjudging under any of the provisions in Chapter VI-A of the Act'. Rule 4 prescribes the procedure for issuance of a show cause notice, consideration of cause shown, fixing of hearing, and conduct of inquiry. Rule 5(1) requires the Adjudicating Officer, upon consideration of the evidence, to be 'satisfied that the person has become liable to penalty' under the sections specified in Section 15-I, and then to impose such penalty by written order with reasons under Rule 5(3). 2.2 Section 15A(b) prescribes penalty for failure to file returns or furnish information within the time specified in the regulations. Section 15-I(1) empowers the Board to appoint an officer not below Division Chief as Adjudicating Officer 'for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty'. Section 15-I(2) empowers the Adjudicating Officer to summon evidence and, if satisfied of failure to comply with the specified provisions, to impose penalty. Interpretation and reasoning 2.3 The Court held that an 'analytical reading' of Rule 3 shows that the statutory trigger for appointment of an Adjudicating Officer is the Board's formation of an opinion that there are grounds for adjudging a contravention under Chapter VI-A. However, the appointment of an Adjudicating Officer under Rule 3 was characterised as an administrative step that merely initiates the process and does not at that stage involve any quasi-judicial determination or cause prejudice to the noticee. 2.4 The Court emphasised that Rules 4 and 5 delineate a sequential adjudicatory scheme following such appointment. Under Rule 4, once appointed, the Adjudicating Officer must, in the first instance, issue a notice requiring the person to show cause why an inquiry should not be held, indicating the nature of the alleged offence. Thereafter, upon considering the cause shown, if the Adjudicating Officer is of the opinion that an inquiry should be held, a further notice fixing a date of appearance is issued and the alleged offences and applicable provisions are explained, with opportunity to produce documents and evidence. 2.5 The Court identified Rule 5 as the critical stage at which the Adjudicating Officer is required to undertake a substantive quasi-judicial assessment. Rule 5(1) obliges the Adjudicating Officer, 'upon consideration of the evidence produced', to reach a satisfaction on: (i) whether a violation of any of the provisions specified in Section 15-I(1) (including Section 15A(b)) has occurred; (ii) whether the person has thereby 'become liable to penalty' under the corresponding penal provisions; and (iii) what penalty should be imposed, by written order, in accordance with the relevant section(s). Hence, the determination of violation and liability to penalty is placed at the Rule 5 stage, not at the stage of appointment under Rule 3. 2.6 The Court found that the learned Single Judge had proceeded on an erroneous premise that the show cause notice under Rule 4(1) was issued solely for the purpose of adjudging penalty, and that a prior, reasoned opinion by the Board, establishing commission of a violation warranting penalty, was required before initiating adjudication. The Court held that this approach conflated the administrative step of appointing an Adjudicating Officer with the later adjudicatory satisfaction under Rule 5. 2.7 The Court noted that the challenge before the Single Judge pertained specifically to the notice issued under Rule 4(1), which, on a plain reading, was a detailed and comprehensive communication clearly setting out the alleged violations and calling upon the noticee to show cause as to why an inquiry should not be held and penalty not imposed under Section 15A(b) for alleged contraventions of the PIT Regulations. The Court held that this notice conformed to the requirements of Rule 4(1)-(2). 2.8 The Court reiterated that, at the time of appointment under Rule 3, there is no statutory requirement that the delegate of the Board record detailed reasons or a formal, reasoned opinion akin to a quasi-judicial order. The learned Single Judge's assumption that such a prior, reasoned opinion, anterior to issuance of the show cause notice, was a jurisdictional precondition was found to rest on a misapprehension of the scheme of Rules 3, 4 and 5. 2.9 The Court concluded that the learned Single Judge had overlooked the centrality of Rule 5 and had incorrectly assumed that the 'inquiry' thereunder pertained only to quantification of penalty, rather than to the foundational determination of whether a violation attracting penalty had occurred. Properly construed, the satisfaction regarding violation and liability to penalty under Section 15A(b) is to arise only after evidence is considered at the Rule 5 stage, not at the stage of appointment under Rule 3. Conclusions on Issues 1 & 2 2.10 The Court held that the appointment of the Adjudicating Officer under Rule 3 is an administrative act which does not, at that point, entail quasi-judicial determination or prejudice to the noticee, and that a detailed, reasoned order by the Board recording a concluded finding of violation is not a jurisdictional prerequisite for such appointment or for issuance of a show cause notice under Rule 4. 2.11 The Court held that the formation of an opinion contemplated under Rule 3 is only a threshold administrative satisfaction enabling appointment of an Adjudicating Officer, while the binding quasi-judicial satisfaction on (i) commission of a violation under Section 15A(b) read with Section 15-I and (ii) consequent liability to penalty arises at the Rule 5 stage, upon consideration of evidence and after following the procedure under Rule 4. 2.12 On this basis, the Court concluded that the learned Single Judge erred in setting aside the show cause notice dated 14.11.2013 and the consequential adjudication proceedings on the ground that no opinion as required under Rule 3 had been recorded and that the appointment of the Adjudicating Officer was without jurisdiction. The findings of the Single Judge on this issue were set aside and SEBI's appeal on this aspect was allowed. Issue 3 - Necessity of an order under Regulation 14 of the PIT Regulations before invoking adjudication powers under Chapter VI-A of the SEBI Act Legal framework (as discussed) 2.13 The Court considered Regulation 14 of the PIT Regulations in the context of SEBI's powers under Chapter VI-A of the SEBI Act, particularly Section 15A(b) and Section 15-I. Regulation 14 provides that action under the PIT Regulations operates 'without prejudice' to the powers of the Board to issue directions or take action under the Act, including Chapter VI-A. Interpretation and reasoning 2.14 The Court agreed with the learned Single Judge that the PIT Regulations do not constitute an exclusive or exhaustive mechanism displacing SEBI's independent statutory powers under Chapter VI-A of the Act. On a plain reading of Regulation 14, any violation of the PIT Regulations may attract directions under Regulation 11, but such directions are expressly 'in addition to' and not 'in substitution of' the remedial or penal measures available under Chapter VI-A. 2.15 The Court held that this textual formulation necessarily implies that invocation of the adjudicatory mechanism under Chapter VI-A-by way of appointment of an Adjudicating Officer and initiation of proceedings under Section 15A(b) read with Section 15-I-does not require SEBI first to traverse, exhaust, or base itself upon a prior order under Regulation 14 of the PIT Regulations. Conclusions on Issue 3 2.16 The Court upheld the finding of the learned Single Judge that there is no requirement, express or implied, in the PIT Regulations for SEBI to pass an order under Regulation 14 as a condition precedent to invoking its adjudicatory jurisdiction under Chapter VI-A of the SEBI Act. 2.17 The Court concluded that SEBI is entitled to proceed directly under Chapter VI-A, including Section 15A(b), for alleged violations of the PIT Regulations without first issuing directions or making a prior determination under Regulation 14. The conclusion of the Single Judge on this issue was affirmed and the cross appeal on this aspect was dismissed. Overall disposition 2.18 SEBI's appeal was allowed to the extent of setting aside the learned Single Judge's conclusion that the show cause notice and adjudication proceedings were without jurisdiction for lack of a prior recorded opinion under Rule 3; the notice and proceedings were held to be validly initiated within the scheme of Rules 3, 4 and 5 read with Sections 15A(b) and 15-I. 2.19 The cross appeal challenging the Single Judge's conclusion that an order under Regulation 14 of the PIT Regulations is not a prerequisite to proceedings under Chapter VI-A was dismissed, with the Court affirming that SEBI's powers under Chapter VI-A operate independently and cumulatively with its powers under the PIT Regulations.