TaxTMI 
TaxTMI 
2022 (2) TMI 907
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....l ...................................................... 23 C.3. Exceptions to the Duty to Disclose ............................................................ 43 D. Conclusion ...................................................................................................... 47 A. Factual Background 1 By a judgment dated 29 September 2020, a Division Bench of the Bombay High Court dismissed the petition instituted by the appellant under Article 226 of the Constitution for challenging a show cause notice which was issued by the first respondent "SEBI" or the "Board" alleging a violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003 "PFUTP Regulations". A petition seeking a review of the judgment of the Division Bench was disposed of by an order dated 22 October 2020. The appellant moved a Special Leave Petition against the judgment in the writ petition and the order in review. The principal issue is whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued. 2 The appellant was employed as the Managing Director"MD" and Chief Exec....
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....to restrain PwC from examining the transactions of the previous years and thereby ring-fence the earlier MD & CEO, T. Takano." 4 Based on the investigation, it was noted that the financial misstatements commenced from 2012-13 and the Company suffered a loss due to, inter alia, transfers to third parties, write-offs and a sale made to Fourth Dimension Solutions Limited "FDSL" without inventory. It was further noted that the share price of the Company had gone up due to the misstatements. Hence, it was observed that the appellant, along with five others, has prima facie violated the provisions of Section 12A(a), 12(A)(b) and 12A(c) of the Securities and Exchange Board of India Act 1992 "SEBI Act" read with Regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(k) and 4(2)(r) of the PFUTP Regulations. Hence, the first respondent issued the following directions under Sections 11(1), 11(4) and 11B of the SEBI Act and Regulation 11 of the PFUTP Regulations: (i) The appellant and the other five key managerial persons were restrained from accessing the securities market or buying, selling or otherwise dealing in the securities market ; (ii) An independent audit firm was appointed for condu....
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....llate Tribunal "Tribunal", Mumbai. The appeals were allowed and the order against the appellant was quashed on 29 January 2020 on the grounds that: (i) The confirmatory order is based on a suspicion about the role of the appellant; (ii) The submissions of the appellant were not dealt with appropriately; (iii) Since the company is in liquidation, the appellant is not in a position to influence decisions; and (iv) The appellant cannot be prevented from dealing in the securities market when the appellant is held to be vicariously liable due to the position he held as MD/CEO. The tribunal, however, directed that the first respondent is at liberty to issue a fresh show cause notice if the evidence against the appellant is made available through the forensic report or through the first respondent's investigation. 8 A fresh show cause notice was issued to the appellant on 19 March 2020 under the provisions of Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) and 15HA of the SEBI Act and Section 12A(2) read with Section 23H of the Securities Contracts (Regulation) Act 1956 "SCRA" based on the forensic audit report and investigation conducted by the first respondent. With regard to....
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.... show cause notice was sought. The appellant submitted before the High Court that to non-disclosure of all relevant documents relied on to issue the show cause notice violated the principles of natural justice. 12 By its judgment dated 29 September 2020, the High Court held that the investigation report prepared under Regulation 9 of PFUTP Regulations is solely for internal purposes. In concluding that the investigation report need not be furnished while issuing a show cause notice, the High Court has relied on the decision of this Court in Natwar Singh v. Director of Enforcement (2010) 13 SCC 255. In sum and substance, the High court has held that the report does not form the basis of the show cause notice and therefore need not be disclosed. The review petition challenging the judgment of the Division Bench of the High Court was rejected. B. Submissions of Counsel 13 Mr Ashim Sood, learned Counsel appearing for the appellant made the following submissions: (i) Regulation 10 has two synchronous requirements - (i) consideration of the investigation report and satisfaction on such consideration that there is a violation of the PFUTP Regulations; and (ii) a hearing. The purpose ....
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....aterial should be disclosed to the opposite party. This principle has been followed in multiple contexts, including proceedings under the Companies Act 1956 and Special Courts Act 1979; (viii) If the entire investigation report is not provided, it would be difficult to come up with a metric for determining which parts of the report are relevant to the noticee; (ix) Permitting the respondent to selectively disclose portions of the investigation report carries with it the risk of conferring unfettered discretion upon the first respondent. The first respondent will attempt to disclose the least possible information in an adversarial proceeding, undermining the mandate of Regulation 10; (x) Without having access to the entirety of the investigation report, the noticee will be incapable of effectively challenging the decision of the first respondent. It will result in the adoption of an opaque process where SAT or the High Courts would receive the report in sealed covers and make ex parte determinations of whether the redactions made by the first respondent are justified, impacting the transparency of the judicial process; (xi) Regulation 9 imposes a qualitative requirement in r....
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.... notice. The appellant is not entitled to any other documents; (iii) The quasi-judicial proceedings that are initiated by SEBI proceed on the basis of the allegations that are mentioned in the show cause notice and the documents that are annexed to it. No other material, document or investigation is considered for adjudication by the competent authority. Orders are passed only after an opportunity to file a reply is given and a personal hearing is provided to comply with the principles of natural justice; (iv) Regulation 9 of PFUTP Regulations requires the Investigating Authority to submit the report, after completion of the investigation, to the appointing authority. However, the provision does not require the furnishing of the report to the noticee. The report is only in the nature of an inter-departmental communication between officers investigating the matter and the authority who decides if any enforcement action is to be taken against an entity based on any prima facie grounds. It is not a piece of evidence but is rather a culmination of documents that the investigating authority relies upon or comes across during the investigation; (v) This Court in several similar cas....
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....aling in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true. (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And....
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....ese regulations; (3) to require any intermediary or any person associated with securities market in any manner to furnish such information to, or produce such books, or registers, or other documents, or record before him or any person authorized by him in this behalf as he may consider necessary if the furnishing of such information or the production of such books, or registers, or other documents, or record is relevant or necessary for the purposes of the investigation; (4) to keep in his custody any books, registers, other documents and record produced under this regulation for a maximum period of one month which may be extended upto a period of six months by the Board : Provided that the Investigating Authority may call for any book, register, other document or record if the same is needed again : Provided further that if the person on whose behalf the books, registers, other documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, he shall give certified copies of such books, registers, other documents and record to such person or on whose behalf the books, registers, other d....
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....rn the same to the person, the company or the other body corporate, or, as the case may be, to the managing director or the manager or any other person from whose custody or power they were seized : Provided that the Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof; (d) save as otherwise provided in this regulation, every search or seizure made under this regulation shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code. , the investigating authority may exercise certain specified powers after obtaining the specific approval of the Chairman or Members of the Board. Regulation 8 8. (1) It shall be the duty of every person in respect of whom an investigation has been ordered under regulation 7- (a) to produce to the Investigating Authority or any person authorized by him such books, accounts and other documents and record in his custody or control and to furnish such statements and information as the Investigating Authority or the person so authorized by him may ....
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....appointing authority upon the completion of its investigation in the course of which all relevant facts have to be taken into account. The investigating authority may even submit an interim report, if necessary, in the interest of investors and the securities market or, if directed by the appointing authority. 19 Regulation 10 deals with the Board's power of enforcement. According to Regulation 10: "10. The Board may, after consideration of the report referred to in regulation 9, if satisfied that there is a violation of these regulations and after giving a reasonable opportunity of hearing to the persons concerned, issue such directions or take such action as mentioned in regulation 11 and regulation 12 : Provided that the Board may, in the interest of investors and the securities market, pending the receipt of the report of the investigating authority referred to in regulation 9, issue directions under regulation 11: Provided further that the Board may, in the interest of investors and securities market, dispense with the opportunity of pre-decisional hearing by recording reasons in writing and shall give an opportunity of post-decisional hearing to the persons concerned a....
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....r censure (b) suspend the registration of the intermediary; or (c) cancel of the registration of the intermediary Provided that no final order of suspension or cancellation of an intermediary for violation of these regulations shall be passed unless the procedure specified in the regulations applicable to such intermediary under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 is complied with." 21 Regulation 10 empowers the Board to either issue a direction or take action as is specified in Regulations 11 and 12. Before issuing directions or taking action under Regulations 11 and 12, three steps have to be traversed by the Board. The first stage is the consideration of the report of the investigating authority which has been referred to in Regulation 9. The second is the furnishing of a reasonable opportunity of being heard. The third is the satisfaction of the Board that there is a violation of the regulations. Regulation 10 indicates in clear terms that the report which has been submitted by the investigating authority under Regulation 9 is an intrinsic component of the Board's satisfactio....
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....s made before it. The court would be able to perform this function accurately only if both parties have access to information and possess the opportunity to address arguments and counter-arguments related to the information; (ii) Fair Trial: Since a verdict of the Court has far reaching repercussions on the life and liberty of an individual, it is only fair that there is a legitimate expectation that the parties are provided all the aid in order for them to effectively participate in the proceedings; (iii) Transparency and accountability: The investigative agencies and the judicial institution are held accountable through transparency and not opaqueness of proceedings. Opaqueness furthers a culture of prejudice, bias, and impunity - principles that are antithetical to transparency. It is of utmost importance that in a country grounded in the Rule of Law, the institutions adopt those procedures that further the democratic principles of transparency and accountability. The principles of fairness and transparency of adjudicatory proceedings are the cornerstones of the principle of open justice. This is the reason why an adjudicatory authority is required to record its reasons for ....
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....ection not to dispose of or alienate an asset forming part of a fraudulent and unfair transaction; (vi) Prohibit the disposal of any of the securities acquired in contravention of these regulations; and (vii) Directing the disposal of any securities in accordance with the mandate of the Board. Under Regulation 11(2), a press release has to be issued by the Board in respect of a final order which is passed under Regulation 11(1). 26 Regulation 12 empowers the Board to suspend or cancel the registration of an intermediary among other things. The provisions of Regulations 11 and 12 indicate that the consequences of the satisfaction which is arrived at by the Board under Regulation 10, if there is a violation of the Regulations, are grave. 27 The submission of Mr C U Singh, learned senior counsel is that only those materials which are relied upon should be disclosed to the first respondent. Regulation 10, as we have noted earlier, stipulates that the satisfaction of the Board whether there has been a violation of the regulations has to be arrived at: (i) after considering the report of the investigating authority referred to in Regulation 9; and (ii) after giving a reasonabl....
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....ntion alleged to have been committed and under sub-Rule (5) an opportunity of producing documents or evidence has to be given. Under sub-Rule (8), the adjudicating authority is empowered to impose a penalty if it is satisfied, upon considering the evidence produced that there has been a contravention. 29 Now in this backdrop, Justice B. Sudarshan Reddy speaking for the two-judge Bench of this Court interpreted Rule 4 as follows: "23. The Rules do not provide and empower the Adjudicating Authority to straightaway make any inquiry into allegations of contravention against any person against whom a complaint has been received by it. Rule 4 of the Rules mandates that for the purpose of adjudication whether any person has committed any contravention, the Adjudicating Authority shall issue a notice to such person requiring him to show cause as to why an inquiry should not be held against him. It is clear from a bare reading of the rule that show cause notice to be so issued is not for the purposes of making any adjudication into alleged contravention but only for the purpose of deciding whether an inquiry should be held against him or not. Every such notice is required to indicate the....
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....CA)] ). 31. The concept of fairness may require the adjudicating authority to furnish copies of those documents upon which reliance has been placed by him to issue show-cause notice requiring the noticee to explain as to why an inquiry under Section 16 of the Act should not be initiated. To this extent, the principles of natural justice and concept of fairness are required to be read into Rule 4(1) of the Rules. Fair procedure and the principles of natural justice are in-built into the Rules. A noticee is always entitled to satisfy the adjudicating authority that those very documents upon which reliance has been placed do not make out even a prima facie case requiring any further inquiry. In such view of the matter, we hold that all such documents relied on by the authority are required to be furnished to the noticee enabling him to show a proper cause as to why an inquiry should not be held against him though the Rules do not provide for the same. Such a fair reading of the provision would not amount to supplanting the procedure laid down and would in no manner frustrate the apparent purpose of the statute." (emphasis supplied) 30 The decision of this Court distinguishes betw....
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....osure." (emphasis supplied) This Court further noted that the documents which the appellant wanted were documents upon which no reliance was placed by the authority for setting the law into motion. Consequently, this Court concluded that: "48. On a fair reading of the statute and the Rules suggests that there is no duty of disclosure of all the documents in possession of the adjudicating authority before forming an opinion that an inquiry is required to be held into the alleged contraventions by a noticee. Even the principles of natural justice and concept of fairness do not require the statute and the Rules to be so read. Any other interpretation may result in defeat of the very object of the Act. Concept of fairness is not a one-way street. The principles of natural justice are not intended to operate as roadblocks to obstruct statutory inquiries. Duty of adequate disclosure is only an additional procedural safeguard in order to ensure the attainment of the fairness and it has its own limitations. The extent of its applicability depends upon the statutory framework." 32 The issue in Natwar Singh (supra) was whether the authority was bound to disclose to the noticee all the d....
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....the charge-sheet was served on the appellant had not been made available to the appellant. It appears that on complaints being received about his work the CIT had asked the Inspecting Assistant Commissioner Shri R.N. Srivastava to make a report. He made a report. It is obvious that the appellant was not entitled to a copy of the report made by Mr Srivastava or any other officer unless the enquiry officer relied on these reports. It is very necessary for an authority which orders an enquiry to be satisfied that there are prima facie grounds for holding a disciplinary enquiry and, therefore, before he makes up his mind he will either himself investigate or direct his subordinates to investigate in the matter and it is only after he receives the result of these investigations that he can decide as to whether disciplinary action is called for or not. Therefore, these documents of the nature of inter-departmental communications between officers preliminary to the holding of enquiry have really no importance unless the Enquiry Officer wants to rely on them for his conclusions. In that case it would only be right that copies of the same should be given to the delinquent. It is not the cas....
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.... is not disclosed to the detenu, the order of detention would be vitiated, both on the ground that all the basic facts and materials which influenced the subjective satisfaction of the District Magistrate were not communicated to the detenu as also on the ground that the detenu was denied an opportunity of making an effective representation against the order of detention." (emphasis supplied) The principle that the material that may influence the decision of a quasi-judicial authority to award a penalty must be disclosed to a delinquent was affirmed by this Court in Union of India and Ors. v. Mohd. Ramzan Khan (1991) 1 SCC 588. In that case, this Court laid down that a delinquent officer is entitled to receive the report of the enquiry officer which has been furnished to the disciplinary authority. This principle was affirmed by a Constitution Bench of this Court in Managing Director, ECIL, Hyderabad v. B. Karunakar (1993) 4 SCC 727. The rationale behind the right to receive the report of the enquiry officer was explained by this Court in the following terms: "26. The reason why the right to receive the report of the enquiry officer is considered an essential part of the reaso....
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....ve an opportunity to reply to the enquiry officer's findings. The disciplinary authority is then required to consider the evidence, the report of the enquiry officer and the representation of the employee against it." (emphasis supplied) For the purpose of determining if prejudice has been caused by a non-disclosure, this Court held that the report must be furnished to the aggrieved person and the employee must shoulder the burden of proving on facts that his case was prejudiced - either the outcome or the punishment - by the non-disclosure: "30. [v] ] The next question to be answered is what is the effect on the order of punishment when the report of the enquiry officer is not furnished to the employee and what relief should be granted to him in such cases. The answer to this question has to be relative to the punishment awarded. When the employee is dismissed or removed from service and the inquiry is set aside because the report is not furnished to him, in some cases the non-furnishing of the report may have prejudiced him gravely while in other cases it may have made no difference to the ultimate punishment awarded to him. Hence to direct reinstatement of the employee ....
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....ne if the insufficient disclosure caused prejudice. This Court observed: "28. The decisions cited above make one thing clear, viz., principles of natural justice cannot be reduced to any hard and fast formulae. As said in Russell v. Duke of Norfolk [(1949) 1 All ER 109 : 65 TLR 225] way back in 1949, these principles cannot be put in a strait-jacket. Their applicability depends upon the context and the facts and circumstances of each case. (See Mohinder Singh Gill v. Chief Election Commr. [(1978) 1 SCC 405 : (1978) 2 SCR 272] ) The objective is to ensure a fair hearing, a fair deal, to the person whose rights are going to be affected. (See A.K. Roy v. Union of India [(1982) 1 SCC 271 : 1982 SCC (Cri) 152] and Swadeshi Cotton Mills v. Union of India [(1981) 1 SCC 664] .) As pointed out by this Court in A.K. Kraipak v. Union of India [(1969) 2 SCC 262] , the dividing line between quasi-judicial function and administrative function (affecting the rights of a party) has become quite thin and almost indistinguishable - a fact also emphasised by House of Lords in Council of Civil Service Unions v. Minister for the Civil Service [(1984) 3 All ER 935 : (1984) 3 WLR 1174 : 1985 AC 374, HL....
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.... 1984 SCC (L&S) 62] ) it would be a case falling in the latter category - violation of a facet of the said rule of natural justice - in which case, the validity of the order has to be tested on the touchstone of prejudice, i.e., whether, all in all, the person concerned did or did not have a fair hearing. It would not be correct - in the light of the above decisions to say that for any and every violation of a facet of natural justice or of a rule incorporating such facet, the order passed is altogether void and ought to be set aside without further enquiry. In our opinion, the approach and test adopted in B. Karunakar [(1993) 4 SCC 727 : 1993 SCC (L&S) 1184 : (1993) 25 ATC 704] should govern all cases where the complaint is not that there was no hearing (no notice, no opportunity and no hearing) but one of not affording a proper hearing (i.e., adequate or a full hearing) or of violation of a procedural rule or requirement governing the enquiry; the complaint should be examined on the touchstone of prejudice as aforesaid." (emphasis supplied) 37 In State of Uttar Pradesh v. Ramesh Chandra Mangalik (2002) 3 SCC 443, it was held that the duty to disclose is confined only to materi....
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.... cannot pass an order on the basis of material which is only known to the authorities. This Court held: "14. The statutory authorities under the Act exercise quasi-judicial function. By reason of the impugned order, the properties could be confiscated, redemption fine and personal fine could be imposed in the event an importer was found guilty of violation of the provisions of the Act. In the event a finding as regards violation of the provisions of the Act is arrived at, several steps resulting in civil or evil consequences may be taken. The principles of natural justice, therefore, were required to be complied with. 15. The Act does not prohibit application of the principles of natural justice. The Commissioner of Customs either could not have passed the order on the basis of the materials which were known only to them, copies whereof were not supplied or inspection thereto had not been given. He, thus, could not have adverted to the report of the overseas enquiries. A person charged with misdeclaration is entitled to know the ground on the basis whereof he would be penalised. He may have an answer to the charges or may not have. But there cannot be any doubt whatsoever that ....
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....stigation and is not a piece of evidence in itself. It is a report which is necessary for an authority, who orders an investigation, to decide as to whether there are prima-facie grounds to initiate enforcement proceedings or not. Therefore, before the authority makes up his mind, he will either himself investigate or direct his subordinates to investigate in the matter. It is only after the authority receives the report of the investigation that he can decide as to whether action is called for or not. Therefore, the investigation report is in the nature of inter-departmental communications between officers investigating the matter and authority who can decide any enforcement action against the entity. ..... The findings recorded in the investigation report against the Noticee are brought out in the SCN and the copies of all the documents that are relied upon by SEBI, while issuing the SCN are always shared with the concerned. The present case is no exception." (emphasis supplied) 41 The above extracts indicate that the findings of the investigation report are relevant for the Board to arrive at the satisfaction on whether the Regulations have been violated. Even if it is as....
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....s merely an internal document of which a disclosure is not warranted. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9. Thus, the investigation report has to be duly disclosed to the noticee. However, the right to disclosure is not absolute. It needs to be determined if the non-disclosure of the investigative report is protected by any of the exceptions to the rule. C.3. Exceptions to the Duty to Disclose 44 The contention of the respondents is that since the investigation report under Regulation 9 would also include information on "commercial and business interests, documents involving strategic information, investment strategies, rationale for investments, commercial information and information regarding the business affairs of the entities/persons concerned" affecting the privacy and the competitive position of other entities, it should not be disclosed. Buttressing this argument, the respondent referred to clauses (d), (e) and (h) of the sub-Section (1) of the RTI Act which states there shall be no duty to disclose information....
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....to defend his case appropriately. 47 Applying this test to the facts, we find that the appellant is unable to prove that the disclosure of the entire report is necessary for him to defend the case. The first respondent made the following arguments making a prima facie case that the disclosure of the report would violate third party rights: (i) Investigation reports contain information on the volatile nature of the market; (ii) The report also contains the personal information of various stakeholders. Disclosure will violate the right to privacy of the third party individuals; and (iii) It includes strategic information. 48 The appellant did not sufficiently discharge his burden by proving that the non-disclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent does not have a right to withhold the disclosure of the relevant portions of the report. The first respondent can only claim non-disclosure of those sections of the report which deal with third party personal information and strategic....
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....the investigation and invokes, inter alia, a violation of the PFUTP Regulations by the appellant, the mandate of Regulation 10 must be complied with. However, while directing that there should be a disclosure of the investigation report to the appellant, it needs to be clarified that this would not permit the appellant to demand roving inspection of the investigation report which may contain sensitive information as regards unrelated entities and transactions. D. Conclusion 51 The conclusions are summarised below: (i) The appellant has a right to disclosure of the material relevant to the proceedings initiated against him. A deviation from the general rule of disclosure of relevant information was made in Natwar Singh (supra) based on the stage of the proceedings. It is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for deciding whether to initiate an inquiry. However, all information that is relevant to the proceedings must be disclosed in adjudication proceedings; (ii) The Board under Regulation 10 considers the investigation report submitted by the Investigating Authority under Regulation 9, and if it is satisfied wit....