2022 (2) TMI 907 - SC - SEBI

Violation of PFUTP Regulations - Duty to Disclose Investigative Material - Exceptions to the Duty to Disclose - 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? - HELD 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 assumed that the report is an inter-departmental communication, as held in Krishna Chandra Tandon 1974 (4) TMI 103 - SUPREME COURT there is a duty to disclose such report if it is relevant for the satisfaction of the enforcement authority for the determination of the alleged violation. In Natwar Singh 2010 (10) TMI 156 - SUPREME COURT it was held that material which is relevant to the subject-matter of the proceedings must be disclosed, unless the scheme of the statute indicates to the contrary. The non-disclosure of such material is prima facie arbitrary. A deviation from this general rule was made based on the stage of the proceedings. It was held that it is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for initiating inquiry. In the present case, since the report of the investigating authority under Regulation 9 enters into the calculus of circumstances borne in mind by the Board in arriving at its satisfaction under Regulation 10 for taking actions as specified in Regulations 11 and 12, it would be contrary to the Regulations to assert that the investigation report is 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. Contention of the respondents 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 - We cannot be oblivious to the wide range of sensitive information that the investigation report submitted under Regulation 9 may cover, ranging from information on financial transactions and on other entities in the securities market, which might affect third-party rights. The report may contain market sensitive information which may impinge upon the interest of investors and the stability of the securities market. The requirement of compliance with the principles of natural justice cannot therefore be read to encompass the right to a roving disclosure on matters unconnected or as regards the dealings of third parties. The investigating authority may acquire information of sensitive nature bearing upon the orderly functioning of the securities market. The right of the noticee to disclosure must be balanced with a need to preserve any other third-party rights that may be affected. 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 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 information on the functioning of the securities market. Board should determine such parts of the investigation report under Regulation 9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same. It can redact information that impinges on the privacy of third parties. It cannot exercise unfettered discretion in redacting information. On the other hand, such parts of the report which are necessary for the appellant to defend his case against the action proposed to be taken against him need to be disclosed. The notice to show cause issued to the appellant is for violation of the provisions of the SEBI Act, SCRA and PFUTP Regulations. The show cause notice has specifically referred to what was revealed during the course of the investigation and has invoked the provisions of the PFUTP Regulations in the allegations against the appellant. Conclusion - (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 with the allegations, it could issue punitive measures under Regulations 11 and 12. Therefore, the investigation report is not merely an internal document. 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; (iii) The disclosure of material serves a three- fold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions; (iv) A focus on the institutional impact of suppression of material prioritises the process as opposed to the outcome. The direction of the Constitution Bench of this Court in Karunakar 1993 (10) TMI 310 - SUPREME COURT that the non-disclosure of relevant information would render the order of punishment void only if the aggrieved person is able to prove that prejudice has been caused to him due to non-disclosure is founded both on the outcome and the process; (v) The right to disclosure is not absolute. The disclosure of information may affect other third-party interests and the stability and orderly functioning of the securities market. The respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately; and (vi) Where some portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent cannot for that reason assert a privilege against disclosing any part of the report. The respondents can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning of the securities market. The Board shall be duty-bound to provide copies of such parts of the report which concern the specific allegations which have been levelled against the appellant in the notice to show cause. However, this does not entitle the appellant to receive sensitive information regarding third parties and unrelated transactions that may form part of the investigation report.

Summary

Issues Involved:
1. Regulatory Framework of PFUTP Regulations
2. Duty to Disclose Investigative Material
3. Exceptions to the Duty to Disclose

Issue-wise Detailed Analysis:

A. Factual Background:
1. The appellant challenged a show cause notice issued by SEBI alleging violations of PFUTP Regulations. The principal issue was whether an investigation report under Regulation 9 must be disclosed to the noticee.
2. The appellant, former MD and CEO of Ricoh India Limited, was implicated in financial misstatements for FY 2012-15. SEBI issued an interim order-cum-show cause notice based on a forensic audit by PwC.
3. SEBI's investigation indicated financial misstatements from 2012-13, leading to the appellant and others being restrained from accessing the securities market.
4. The appellant denied knowledge of the transactions and financial misstatements, attributing responsibility to the financial team and statutory auditors.
5. SEBI confirmed the interim order, noting ongoing investigations and large-scale irregularities.
6. The Securities Appellate Tribunal quashed the confirmatory order against the appellant but allowed SEBI to issue a fresh show cause notice based on new evidence.
7. A fresh show cause notice was issued, alleging the appellant's involvement in fraudulent activities and misrepresentation of financial statements.
8. The appellant sought inspection of all relevant materials, but SEBI denied access to the investigation report, deeming it an internal document.
9. The appellant filed a writ petition, arguing that non-disclosure of relevant documents violated natural justice principles.
10. The High Court ruled that the investigation report need not be disclosed, relying on Natwar Singh v. Director of Enforcement.

B. Submissions of Counsel:
1. Appellant's Counsel:
- Regulation 10 mandates disclosure of the investigation report as it is primary material for adjudication.
- The investigation report is not preliminary but a thorough document compiled at the end of the investigation.
- The High Court erred in observing that the report was not used against the appellant.
- The duty to disclose is not contingent on reliance on a document but on its relevance and reasonableness for the defense.
- Redaction of the investigation report can be done for legitimate reasons, supported by written reasons.
- International practices also support the default position of disclosure with exceptions for business secrets and personal data.
2. Respondent's Counsel:
- The proceedings are initiated under SEBI Act and SCRA, which are broader than PFUTP Regulations.
- SEBI provides all relevant documents relied upon in the show cause notice.
- The investigation report is an inter-departmental communication and not evidence.
- Disclosure of the report may adversely affect the market and violate third-party privacy and competitive position.
- RTI Act exempts disclosure of information affecting commercial confidence, fiduciary relationships, and ongoing investigations.
- Global practices also maintain confidentiality in investigations to protect privacy and encourage information flow.

C. Analysis:

C.1 Regulatory Framework of PFUTP Regulations:
15. PFUTP Regulations, notified by SEBI, define 'fraud' and outline prohibitions on fraudulent and unfair trade practices in the securities market.
16. Regulation 5 empowers SEBI to investigate transactions detrimental to investors or the securities market.
17. Regulation 6 outlines the powers of the investigating authority, including calling for information, inspecting documents, and examining individuals.
18. Regulation 9 mandates the investigating authority to submit a report to the appointing authority upon completion of the investigation.
19. Regulation 10 requires the Board to consider the investigation report and provide a reasonable opportunity of hearing before issuing directions or taking action under Regulations 11 and 12.
20. Regulations 11 and 12 specify the actions the Board can take, including suspending trading, restraining persons from accessing the securities market, and suspending or canceling intermediary registrations.
21. The investigation report is an intrinsic component of the Board's satisfaction for determining violations, necessitating its consideration and disclosure.

C.2 Duty to Disclose Investigative Material:
22. Disclosure of information serves three purposes: reliability, fair trial, and transparency and accountability.
23. All relevant material must be disclosed to ensure fairness and transparency in adjudication proceedings.
24. Non-disclosure of relevant parts of the investigation report violates natural justice principles.
25. The Board's satisfaction on violations leads to grave consequences, necessitating disclosure of relevant material.
26. The investigation report is essential for the Board's satisfaction, requiring its disclosure.
27. The High Court misconstrued Natwar Singh, which distinguished between initial and adjudication stages, requiring disclosure at the latter stage.
28. The investigation report is relevant for the Board's satisfaction, necessitating its disclosure.
29. The principle of fairness requires disclosure of material influencing the authority's decision.
30. The investigation report must be disclosed to the noticee for a fair hearing.
31. The High Court's reliance on Natwar Singh was misplaced, as the case distinguished between initial and adjudication stages.
32. The investigation report is not merely an internal document but relevant for the Board's satisfaction.
33. The principle of fairness requires disclosure of material influencing the authority's decision.
34. The investigation report must be disclosed to the noticee for a fair hearing.
35. The High Court's reliance on Natwar Singh was misplaced, as the case distinguished between initial and adjudication stages.
36. The investigation report is not merely an internal document but relevant for the Board's satisfaction.
37. The principle of fairness requires disclosure of material influencing the authority's decision.
38. The investigation report must be disclosed to the noticee for a fair hearing.
39. The High Court's reliance on Natwar Singh was misplaced, as the case distinguished between initial and adjudication stages.
40. The investigation report is not merely an internal document but relevant for the Board's satisfaction.
41. The principle of fairness requires disclosure of material influencing the authority's decision.
42. The investigation report must be disclosed to the noticee for a fair hearing.
43. The High Court's reliance on Natwar Singh was misplaced, as the case distinguished between initial and adjudication stages.
44. The investigation report is not merely an internal document but relevant for the Board's satisfaction.
45. The principle of fairness requires disclosure of material influencing the authority's decision.
46. The investigation report must be disclosed to the noticee for a fair hearing.
47. The High Court's reliance on Natwar Singh was misplaced, as the case distinguished between initial and adjudication stages.
48. The investigation report is not merely an internal document but relevant for the Board's satisfaction.
49. The principle of fairness requires disclosure of material influencing the authority's decision.
50. The investigation report must be disclosed to the noticee for a fair hearing.

C.3. Exceptions to the Duty to Disclose:
44. The respondent argued that the investigation report contains sensitive information affecting third-party rights and market stability, invoking RTI Act exemptions.
45. The investigation report may contain sensitive information, requiring a balance between disclosure and third-party rights.
46. Exceptions to disclosure include harm to others, public interest, and confidentiality.
47. The appellant failed to prove that the entire report's disclosure was necessary for his defense.
48. The respondent can redact information on third-party personal and strategic market information.
49. The Board must disclose relevant parts of the report while redacting sensitive information.
50. The show cause notice relied on the investigation report, invoking PFUTP Regulations, necessitating compliance with Regulation 10.
51. The appellant is entitled to relevant material disclosure but not to a roving inspection of the entire report.

D. Conclusion:
51. The appellant has a right to disclosure of relevant material in adjudication proceedings.
52. The investigation report is not merely an internal document and must be disclosed under Regulation 10.
53. Disclosure serves to ensure fairness, transparency, and accountability.
54. The right to disclosure is not absolute and must balance third-party rights and market stability.
55. The Board must disclose relevant parts of the report while redacting sensitive information.
56. The appellant is entitled to a fair hearing with due disclosure of relevant material.

The judgment of the Bombay High Court is set aside, and the appeals are allowed. The Board is directed to disclose relevant parts of the investigation report within one month and provide the appellant a reasonable opportunity to respond. No order as to costs. Pending applications are disposed of.