2022 (9) TMI 544 - HC - SEBI

Offence under SEBI - reasonable grounds to believe - Whether the grounds to believe which is a condition precedent of initiating an investigation under section 11C did exist in the facts and circumstance of the present case? - whether the two expressions i.e. has reasonable ground to believe as appearing in Section 11C of the SEBI Act, 1992 and has reason to believe as appearing in Section 34 (1) (a) of the Income Tax Act, 1922 have the same meaning? - HELD THAT - Reasonable ground is understood to mean the information that establishes sufficient articulable fact that gives a reasonable basis to believe. In other words, to be a reasonable ground, it would have to be based on certain information that establishes sufficient articulable fact to make it a basis to believe whereas existence of cause, explanation or justification would be sufficient in order to constitute a reason. Accordingly, we have to understand that to have a reason to believe, the basis for the belief may be any cause, explanation or justification whereas for having a reasonable ground to believe the basis for the belief would have to be the information, in other words, comparable to knowledge. Knowledge is defined in the Blacks Law Dictionary to be an awareness or understanding of a fact or circumstance; a state of mind in which the person has no substantial doubt about the existence of a fact. Belief is regarding the existence of something which is likely or relatively certain whereas knowledge is the absence of any substantial doubt in the mind of the person about its existence. In other words, in order to be knowledge, the element of unlikely or uncertainty of the existence of the fact is absent and there would remain no substantial doubt about its existence. Supreme Court in its pronouncement in Collector of Customs, New Delhi v. Ahmadalieva Nodira 2004 (3) TMI 70 - SUPREME COURT had held that the expression reasonable grounds mean something more than prima facie grounds and it contemplates substantial probable causes for believing. Accordingly, we will have to understand that the test of certainty to arrive at a reasonable ground to believe , of there being material available on record, would comparably be more than the test of certainty that would be required for arriving at has reasons to believe . Any enquiry that may be required to be made under the SEBI Act, 1992, would be of a broader compass than that of an enquiry to be made under the Income Tax Act either of 1922 or 1961. Correspondingly, the requirement of having a reasonable ground to believe for initiating an enquiry under Section 11C of the SEBI Act, 1992 would also have to be on the basis of a broader spectrum as regards the activities that the SEBI is required to regulate, promote or develop. As the enquiry may be in respect of a broader spectrum of the circumstances and activities, the element of higher certainty required for having a reasonable ground to believe under Section 11C would also have to be based on a broader spectrum of activities that are required to be regulated or promoted. If we proceed on the aforesaid premises, the materials produced by the respondents in the SEBI by referring to the interim order dated 20.08.2015 to form a view that a detailed investigation of the entire scheme as regards the reversal trades and illiquid stocks options where the involvement of more number of persons in such reversal trades and illiquid stocks options cannot be ruled out, we are of the view that it cannot be said that there was no reasonable ground to believe that an enquiry is required to be conducted under Section 11C of the SEBI Act, 1992. Whether the opinion to be formed under Rule 3 of the PR-1995 is an individual opinion in respect of the person specific against whom the notices under Rule 4(1) are to be issued and if yes, whether any such individual opinion had been formed? - We have perused the records produced by the respondent SEBI in respect of the opinion required to be formed under Rule 3 of the PR-1995. The records produced contain materials which may be a basis to form an opinion, but the records do not indicate the formation of any such opinion by the respondent SEBI. Whether Notices under Rule 4(1) of the PR-1995 can be assailed in a proceedins under Article 226 of Constitution of India?- We are of the view that the question on the procedural aberration of Rule 4(1) raised in these writ petitions can also be adjudicated in a proceeding under Article 226 of the Constitution of India rather than requiring the noticee to give a wholesome and composite reply to all such allegations that may be made in the notice and thereafter take a decision as to whether the procedural requirements were duly followed. From such point of view, we reject the objections raised by the respondents SEBI as regards the maintainability of the writ petition on the ground that the issues raised could also have been answered by the writ petitioner noticees in the proceeding before the adjudicating officer itself. Whether notices impugned have been issued by authorities other than a person in the rank of a Division Chief and nor such Division Chiefs have been appointed by the Board to be the adjudicating officers? - A reading of the materials produced and the statements made by the petitioners and the authorities in the SEBI, in respect of the writ petitioner Ankita Didwania, it can be noticed that the notices under Rule 4(1) of the PR- 1995 had been issued by the Division Chief. Instead of venturing into examining the factual aspect as to whether in respect of the other writ petitions, the authorities issuing notices under Rule 4(1) of the PR-1995 are Division Chief or not, in the light of the analysis made hereinabove, the Executive Director of the SEBI is required to look into the individual notices and arrive at his own satisfaction as to whether the respective authorities who have issued the notices do satisfy the requirement of being the Division Chiefs. If the Executive Director upon examining the records arrive at any conclusion that the authorities who have issued the notice would be not a Division Chief of the Division which had issued the notices, appropriate steps be taken to ensure that only the person who would be the Division Chief of the Division issuing the notices be appointed as the adjudicating officer. In such event, the notices that may have been issued, if any, by an authority otherwise than that of a Division Chief be recalled and necessary corrective measures be taken. Appointments of an Officer not below rank of a Division Chief to be an adjudicating officer for holding an enquiry in the prescribed manner - We are in agreement with Dr. Ashok Saraf, learned senior counsel of the petitioners to that extent that the authorities in the SEBI while undertaking the process of appointing the adjudicating officers had not meticulously followed the procedure as suggested by the petitioners, but going by the steps adopted as per the note-sheet as well as the order dated 06.07.2021, we are of the view that there is a substantial compliance of the requirement of the Board through its delegated authority in appointing the Division Chiefs as adjudicating officers in view of the conclusion which has been arrived hereinbefore. In order to avoid such issues, it is the suggestion by Dr. Ashok Saraf, the learned senior counsel for the writ petitioners, that the ED (law)/ED-EFD may be more careful in exercising his powers. Individual opinions formed against the person specific with reference to RULE 3 OF THE PR-1995 - Board is of the opinion that there are grounds for adjudging under any of the provisions of Chapter VIA of the SEBI Act of 1992, it may appoint any of its officers not below the rank of Division Chiefs to be an adjudicating officer - The opinion to be formed under Rule 3 of the PR-1995 against the person specific is in the nature of a disclosure of an investigation report. Therefore, from the point of view of fulfilling the larger institutional purpose of fair trial and transparency, as enunciated by the Supreme Court in T Takano 2022 (2) TMI 907 - SUPREME COURT , we are of the view that there would be a requirement for the respondents in the SEBI to provide the noticees the opinion formed against the individual noticee under Rule 3 of PR-1995 along with any such notice that may be issued under Rule 4(1) of the PR-1995. Notice u/r 4(1) of procedural rules of 1995 can be composite notice requiring the notice to respond as to whether an enquiry should be held u/r 4(1) - why the penalties prescribed under section 15HA should not be inflicted? - As notice under Rule 4(1) of the PR-1995 would be a notice only for the purpose as to whether an enquiry should be held and such notice cannot embark into an actual adjudication being made which ultimately may lead to any of the penalties under sections 15A to 15HB. Only upon forming such opinion that an enquiry is required to be held, the subsequent process of fixing a date of appearance for explaining the person concerned as to the alleged offence that had been committed by indicating the provisions of the Acts, Rules or Regulations that were contravened, can be carried forward. When we examine the impugned notice in respect of the writ petitioner noticee Ankita Didwania it is noticed that the noticee is called upon to show cause not only as to why an enquiry should not be held against her under Rule 4, but also why penalty should not be imposed under the provisions of Section 15HA of the SEBI Act, 1992 in terms of Rule 5 of the PR-1995. In other words, the notice dated 19.09.2021 in respect of petitioner noticee Ankita Didwania is a composite notice comprising of a notice as to why an enquiry should not be held and also why the adjudication proceeding be not carried forward and brought to its end by referring to the penalty. Accordingly, we are to arrive at a conclusion that the impugned notice dated 17.09.2021 in respect of petitioner noticee Ankita Didwania is a notice defective in form, although we may not have had arrived at any conclusion nor expressed any view on the substance of the notice dated 17.09.2021. Had the appropriate procedure of separating the two stages would have been followed by issuing the notice under Rule 4(1) of PR-1995 by confining it on the issue as to whether an enquiry should be held or not, the noticees would have had the opportunity not to give any reply with regard to the further issue on the penalty which would be a part of the subsequent stage of the proceeding. Therefore, it cannot be wholly agreed upon that no prejudice of any kind was caused to the petitioner noticees because of the composite notice of requiring to show cause both against as to why an enquiry should not be held and also on the adjudication proceedings which may result in the penalty to be imposed. By following the propositions laid down in Natwar Singh 2010 (10) TMI 156 - SUPREME COURT and T. Takano 2022 (2) TMI 907 - SUPREME COURT as well as taking note of the procedural requirements of Rule 4 of the PR-1995, we are of the view that the impugned notice dated 17.09.2021 in respect of the petitioner noticee Ankita Didwania in WP and other similar notices in respect of the petitioner noticees of the other writ petitions would not be sustainable in the present form and accordingly, they are all set aside. As we have interfered with the notices issued by the adjudicating officers of the respondent SEBI on the technical ground of it not conforming to the requirements of the Rule 4 of PR-1995, we further provide that the delegated authority of the Board who is required to form the opinion before appointing the adjudicating officer to look into the records on the opinion being formed against the persons specific against whom the adjudication process is sought to be initiated and ensure that the required opinion referred under Rule 3 of PR-1995 is duly formed. The opinion to be formed under Rule 3 of the PR-1995, which would have to be person specific to the individual noticees, be also served on the noticees along with the de-novo notice that may be issued under Rule 4(1) of the PR-1995.

Summary

Issues Involved:
1. Reasonable Grounds for Investigation under Section 11C of SEBI Act
2. Formation of Opinion under Rule 3 of PR-1995
3. Maintainability of Writ Petition against Show Cause Notice
4. Appointment of Adjudicating Officers
5. Composite Nature of Notices under Rule 4 of PR-1995
6. Disclosure of Investigation Report and Opinion

Detailed Analysis:

1. Reasonable Grounds for Investigation under Section 11C of SEBI Act:
The court examined whether the SEBI had "reasonable grounds to believe" that transactions in securities were being dealt in a manner detrimental to investors or the securities market. The court concluded that the materials produced by SEBI, including the interim order dated 20.08.2015, provided sufficient basis for such belief. The court emphasized that the expression "reasonable ground to believe" is broader and requires more certainty than "reason to believe" under the Income Tax Act, 1922.

2. Formation of Opinion under Rule 3 of PR-1995:
The court agreed with the petitioners that the opinion to be formed under Rule 3 of PR-1995 must be specific to the individual against whom the notice is issued. The court found that the records produced by SEBI contained materials that could form the basis for such an opinion but did not indicate that such an opinion had been formed. The court emphasized that the opinion must be person-specific and not broad-based.

3. Maintainability of Writ Petition against Show Cause Notice:
The court held that a writ petition under Article 226 of the Constitution of India could be entertained against a show cause notice if it is issued with premeditation, without jurisdiction, or in abuse of process of law. The court found that the procedural aberrations in the notices justified judicial review.

4. Appointment of Adjudicating Officers:
The court examined whether the adjudicating officers appointed were of the rank of Division Chief as required under Section 15-I of the SEBI Act, 1992. The court found that the appointments were made by the Executive Director (Law)/Executive Director (EFD) and were substantially compliant with the requirement, although the process could have been more meticulously followed.

5. Composite Nature of Notices under Rule 4 of PR-1995:
The court held that the impugned notices were defective as they combined the stages of showing cause for holding an inquiry and for imposing penalties. The court emphasized that Rule 4(1) of PR-1995 requires a separate notice for deciding whether an inquiry should be held, and only after forming an opinion that an inquiry is required, can the subsequent process of adjudication and penalty imposition be initiated.

6. Disclosure of Investigation Report and Opinion:
The court referred to the Supreme Court's judgment in T. Takano (supra) and held that the investigation report and the opinion formed under Rule 3 of PR-1995 must be disclosed to the noticees to ensure fair trial and transparency. The court directed that the opinion formed against the individual noticees should be provided along with the de-novo notice under Rule 4(1) of PR-1995.

Conclusion:
The court set aside the impugned notices for not conforming to the procedural requirements of Rule 4 of PR-1995. The court allowed SEBI to proceed from the stage of issuing notices under Rule 4(1) of PR-1995, subject to compliance with the legal requirements. The court also directed SEBI to ensure that the opinion formed under Rule 3 of PR-1995 is person-specific and disclosed to the noticees.