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TMI Blog2022 (9) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... g of shares listed under the Securities and Exchange Board of India (for short 'SEBI'). According to the respondents in the SEBI, the persons engaged in buying and selling of the shares also indulges in buying of a particular share of a listed company and immediately thereafter, sell the purchased share at a price which would be lower than the price at which the shares were purchased, and the time gap between the purchase and sell of the shares at times may also be a fraction of a second. It came to the notice of the authorities of the SEBI that such manner of purchases and sell of shares were prevalent under the SEBI which came to be called by the authorities to be reversal trading. 3. The concept of reversal trading came under the consideration of the Supreme Court in Securities and Exchange Board of India Vs. Rakhi Trading Private Ltd. reported in (2018) 13 SCC 753. In Rakhi Trading (Supra), certain decisions of the Adjudicating Officer were assailed before the Securities Appellate Tribunal (for short, SAT), which also included a decision of an Adjudicating Officer in respect of Rakhi Trading Pvt. Ltd. The SAT by its respective orders had set aside the decisions of the Adjudica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, the Senior Counsel has sought to distinguish Ketan Parekh [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221] as it pertained to dealings in the cash segment whereas the present case deals with the F&O segment. The learned Senior Counsel has strenuously argued that no rules of the game have been violated. 30. We are unable to agree with the arguments of the learned Senior Counsel appearing for Rakhi Trading. Regulation 4(1) in clear and unmistakable terms has provided that "no person shall indulge in a fraudulent or an unfair trade practice in securities". In SEBI v. Kanaiyalal Baldevbhai Patel [SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1] , it has been held by this Court that a trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between the parties engaged in business transactions. To quote: (SCC pp. 22 & 31, paras 31 & 60) "31. Although unfair trade practice has not been defined under the regulations, various other legislations in India have defined the concept of unfair trade practice in different contexts. A clear-cut generalised definition of the "unfair trade practice" may not be possible to be culled out from the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctices in trade. The SEBI Act, 1992 was enacted to protect the interest of the investors in securities. Protection of interest of investors should necessarily include prevention of misuse of the market. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects the market integrity. 32. Ordinarily, the trading would have taken place between anonymous parties and the price would have been determined by the market forces of demand and supply. In the instant case, the parties did not stop at synchronised trading. The facts go beyond that. The trade reversals in this case indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in these trades. The fact that when the trade was not synchronising, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market. 33. We also find it difficult to appreciate the stand of SAT that the rationale of change of beneficial ownership does not arise in the derivatives segment. No doubt, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket players from full participation. The repeated reversals and predetermined arrangement to book profits and losses respectively, made it clear that the parties were not trading in the normal sense and ordinary course. Resultantly, there has clearly been a restriction on the free and fair operation of market forces in the instant case. 35. Regulation 2(1)(c) defines "fraud". Under Regulation 2(1)(c)(2) a suggestion as to a fact which is not true while he does not believe it to be true is fraud. Under Regulation 2(1)(c)(7), a deceptive behaviour of one depriving another of informed consent or full participation is fraud. And under Regulation 2(1)(c)(8), a false statement without any reasonable ground for believing it to be true is also fraud. In a synchronised and reverse dealing in securities, with predetermined arrangement to book loss or gain between prearranged parties, all these vices are attracted. 37. According to SAT, only if there is market impact on account of sham transactions, could there be violation of the PFUTP Regulations. We find it extremely difficult to agree with the proposition. As already noted above, SAT has missed the crucial factors affecting the marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of which we have discussed hereinabove. 39. The traders thus having engaged in a fraudulent and unfair trade practice while dealing in securities, are hence liable to be proceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) of the PFUTP Regulations. Appeals Nos. 1969 of 2011, 3175 of 2011 and 3180 of 2011 are hence allowed. The orders of the Securities Appellate Tribunal are set aside and that of SEBI are restored to the extent indicated above. 41. Before concluding, we would like to reiterate the observations made by this Court in Kishore R. Ajmera [SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368] and Kanaiyalal Patel [SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1] regarding the need for a more comprehensive legal framework governing the securities market. As the market grows, ingenuous means of manipulation are also employed. In such a scenario, it is essential that SEBI keeps up with changing times and develops principles for good governance in the stock market which ensure free and fair trading. Synchronised Trading: 55. As per Oxford Dictionary, the word "synchronise" means "cause to occur at the same time; be simultaneous". A synchronised trade is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute the transaction outside the market and then report the same to the exchange. These are also called negotiated transactions.... It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It would, therefore, follow that a synchronised trade or a trade that matches off market is per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronised transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations." (emphasis supplied) 58. A synchronised transaction will become illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and with a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Pvt. Ltd. at a low price. The transactions wherein the "buy and sell" orders entered almost simultaneously and the transactions matched in time and quantity with significant price variation and the respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade taking place repeatedly over a period of time only indicates that there was prearrangement between the parties before the trade was executed. The transactions involving only the same two parties within few seconds with huge difference in "buy and sell" value, though there is no difference in the underlying security, can take place only with prior understanding between the two parties. The Board who is the regulator of the market, can always lift the veil of such transactions to show the non-genuineness of such transactions. 64. Buying and selling of equal quantities within the day may not be wrong but the trades with ulterior purpose are not genuine for sure. In the present case, every time one party is making profit and other party is facing loss. Further, there was proximity in the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adopt to arrive at a conclusion." (emphasis supplied) 68. There was no possibility of such perfect matching of quantity, timing, prices, etc. between the same parties unless there was prior meeting of minds or a specific understanding/arrangement between the parties. After referring to Ketan Parekh [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221] and Nirmal Bang [Nirmal Bang Securities (P) Ltd. v. SEBI, 2003 SCC OnLine SAT 37 : (2004) 49 SCL 421] cases, in Accord Capital Markets Ltd., In re [Accord Capital Markets Ltd., In re, 2007 SCC OnLine SEBI 181] , SEBI held as under: (Accord Capital case [Accord Capital Markets Ltd., In re, 2007 SCC OnLine SEBI 181] , SCC OnLine SEBI para 4): "4.12. I note that most of the synchronised trades executed by the Broker were perfectly matched with the counter-party orders even with respect of the price to the extent of two decimal points. The proximity in placing the orders at the same price and for the same quantity almost at the same time (in majority of the cases) resulted in the matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. The time difference (betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s muster in all circumstances, more so when such intentions are in the special/peculiar knowledge of the parties to the transactions. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else." 69. Applying the test laid down in Kishore R. Ajmera case [SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368] to the present case, I find that by cumulative analysis of the reversal transactions between the respondent and Kasam Holding, quantity, time and significant variation of prices, without major variation in the underlying price of the securities clearly indicate that the respondent's trades are not genuine and had only misleading appearance of trading in the securities market, without intending to transfer beneficial ownership. 75. Once the reversal transactions are shown to be non-genuine or shown to be fictitious creating a false or misleading appearance in the market for ulterior purpose and that the stock market was misused by such manipulative device, this is in clear violation of the provisions of the PF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cur in a variety of ways. Manipulations/unfair trade practices reduce the market efficacy. Section 11 of the SEBI Act, 1992 provides for the functions of the Board, as per which it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development and to regulate the securities market by such measures as it thinks fit. Main function of SEBI in this regard is to make inquiry, investigation and to give directions, to promote the orderly and healthy growth of the securities market. With a view to curb unfair trade practices, market manipulation, price rigging and other frauds in securities market, SEBI is empowered to make inquiries and inspection. 84. The capital market regulator, SEBI has a significant role to play in safeguarding the interest of investors and to ensure strict compliance of all the relevant SEBI Rules and Regulations targeting at safeguarding the interest of small investors. In order to protect the interests of the investors and the integrity of the markets, as a regulator, SEBI has to make the marketplace efficient and clean, wherein all the participants play their role diligently and professionally within the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ethical standards and good faith dealings between the parties engaged in the business transactions. ii. As the dealings in the stock exchange are governed by the principles of fair play and transparency, one does not have to labour much on the meaning of unfair trade practices in securities. In other words, it means a practice which does not conform to the fair and transparent principles of trades in the stock market. In a case where one party booked a gain and another party booked a loss, where in a situation, nobody intentionally trades for loss, an intentional trading for loss, per se, would not be a genuine dealing in securities. Trading in securities is always with the aim to make profits, but if one party consistently makes loss and that too in a pre-planned rapid reverse trades, it would be not genuine, but an unfair trade practice. iii. Protection of interest of investors should necessarily include prevention of misuse of the market. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects the market integrity. The trade reversals indicate that the parties did not intend to transfer beneficial ownership and through these orches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions to show the non-genuineness of such transactions. ix. In the case before the Supreme Court, every time one of the parties was making profit and the other was facing loss. It seemed improbable that one of the parties namely Kasam Holding who was facing loss in each transaction by trading with the other party was still eager to trade with the same repeatedly for about four days, which was not in consonance with the market trend and human conduct. x. In a quasi judicial proceeding before the SEBI, the standard of proof was preponderance of probability and further that there would be no possibility of such perfect matching of quantity, timing, prices, etc., between the same parties unless there was prior meeting of minds or a specific understanding/arrangement between the parties. xi. Reversal transactions are shown to be non-genuine or fictitious creating false or misleading appearance in the market for ulterior purpose and it is construed to be a clear violation of the provisions of Regulations 3(a), 4(1) and 4(2) (a) of the PFUTP Regulations. xii. The smooth operation of the securities market and its healthy growth and development to a large extent depends on the qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et activities, but also defeated the basic premises of screen based electronic trading system and price discovery mechanism by repeated execution of pre-decided reversal trades at irrational/arbitrary prices. Accordingly, a view was formed that the abuse of such financial instruments which were made available to the investors for the purpose of protection of their investment portfolios or the reasons of adverse price movement, cannot be tolerated and needs to be dealt with. In view of the prevalence of the pre-decided reversal trades at irrational/arbitrary prices in respect of 59 such entities, in paragraph 5 of the said order, the authorities in the SEBI was also of the view that a detailed investigation of the entire scheme employed in that case was necessary to find out the rationale behind the entities to have indulged in such suspicious/artificial trades, including the tracing of fund trails and the role of the intermediaries in allowing such fictitious trades to enter the system. Accordingly, a view was formed that the investigation to be done shall also cover the examination of any other entity executing similar fictitious trades in the stock option segment. In the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eview. 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. 9. The appellant claims that he received the show cause notice by email on 4 August 2020. The appellant responded to the show cause notice on 6 August 2020 stating that though he had received the forensic audit report submitted by Pipara & Co. LLP, he had not received the report of the investigation conducted by SEBI. The appellant sought an opportunity to inspect the following records: "[...] including but not limited to all material on which reliance was placed Pipara & Co. LLP for the purpose of preparing the forensic audit report, all material on which reliance has been placed while issuing the Show Cause Notice, and on which reliance is intended to be placed while making any adjudication on the Show Cause Notice ("material")." 10. By its communication dated 13 August 2020, the first respondent stated that the investigation report is an 'internal document' which cannot be shared. The appellant was provided time until 9 August 2020 to inspect the other documents. The first respondent enclosed sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 every judgement or order it passes. However, the duty to be transparent in the adjudicatory process does not begin and end at providing a reasoned order. Keeping a party bereft of the information that influenced the decision of an authority undertaking an adjudicatory function also undermines the transparency of the judicial proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e why an enquiry should not be held against him. The stage of the notice under Rule 4(1) is not for adjudication but is for the purpose of deciding whether an enquiry should be held. If after considering the cause which is shown, the adjudicating authority is of the opinion that an enquiry should be held, thereupon under Rule 4(3), a notice is issued for the appearance of the person. Sub-Rule (4) provides that on the date fixed, the adjudicating authority shall explain the contravention 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. 34. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t inflict serious harm on the person directly concerned or other persons or where disclosure would be breach of confidence or might be injurious to the public interest because it would involve the revelation of official secrets, inhibit frankness of comment and the detection of crime, might make it impossible to obtain certain clauses of essential information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H [[1995] Q.B. 43 : [1994] 3 WLR 1110 : (1995) 1 All ER 479 (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 inbuilt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y person acquainted with the facts of the case to give evidence or to produce any document which in its opinion may be useful for or relevant to the subject-matter of the inquiry. It is no doubt true that natural justice often requires the disclosure of the reports and evidence in the possession of the deciding authority and such reports and evidence relevant to the subject-matter of the inquiry may have to be furnished unless the scheme of the Act specifically prohibits such disclosure." 39. The issue in Natwar Singh (supra) was whether the authority was bound to disclose to the noticee all the documents in its possession before forming an opinion on whether an enquiry is required to be held into the alleged contravention by the noticee. The Court held that at that stage there was no requirement of furnishing all such documents to the noticee since the only purpose of the notice under Rule 4(1) was for deciding whether an enquiry should be held. Rule 4(1), in other words, was not a final adjudication and consequently the requirement of a disclosure of all materials in the possession of the authority was not attracted. At that stage, it was sufficient that only documents that hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 interdepartmental 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 case here that either the Enquiry Officer or the CIT relied on the report of Shri R.N. Srivastava or any other officer for his finding against the appellant. Therefore, there is no substance in this submission." (emphasis supplied) 42. However, merely because the investigating authority has denied placing reliance on the report would not mean that such material cannot be disclosed to the noticee. The court may look into the relevance of the material to the proposed action and its nexus to the stage of adjudication. Simply put, this entails evaluating whether the material in all reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Khan . 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 . 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 reasonable opportunity at the first stage and also a principle of natural justice is that the findings recorded by the enquiry officer form an important material before the disciplinary authority which along with the evidence is taken into consideration by it to come to its conclusions. It is difficult to say in advance, to what extent the said findings including the punishment, if any, recommended in the report would influence the disciplinary authority while drawing its conclusions. The findings further might have been recorded without considering the relevant evidence on record, or by misconstruing it or unsupported by it. If such a finding i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 with back-wages in all cases is to reduce the rules of justice to a mechanical ritual. The theory of reasonable opportunity and the principles of natural justice have been evolved to uphold the rule of law and to assist the individual to vindicate his just rights. They are not incantations to be invoked nor rites to be performed on all and sundry occasions. Whether in fact, prejudice has been caused to the employee or not on account of the denial to him of the report, has to be considered on the facts and circumstances of each case. Where, therefore, even after the furnishing of the report, no different consequence would have followed, it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not rely on the investigation report. The ipse dixit of the authority that it was not influenced by certain material would not suffice. If the material is relevant to and has a nexus to the stage at which satisfaction is reached by an authority, such material would be deemed to be important for the purpose of adjudication. The written submissions of the Board clearly state that the findings of the investigation report are important for the authority to decide whether there are any prima facie grounds to initiate enforcement proceedings under Regulation 10. The relevant extract of the submissions is reproduced below: "It is submitted that Regulation 9 of PFUTP Regulations require the Investigating Authority to submit the report after completion of the investigation to the appointing authority. However, the provision does not require furnishing of the report to the Noticee. Further, the investigation report is merely a culmination of documents which the investigating authority relies on/come across while conducting the investigation 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erdict and punishment, the court must also look into the possible uses of the undisclosed information for purposes ancillary to the outcome, but that which might have impacted the verdict. 58. The appellant did not sufficiently discharge his burden by proving that the nondisclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on thirdparties 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. 59. Therefore, the 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 informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra) 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e PFUTP-2003 is in respect of the submission of a report of investigation done in exercise of the powers under Regulation 5 of the said Regulations. Regulation 5 of the PFUTP-2003 provides for an investigation, where the Board, the Chairman, the member or the Executive Director has reasonable ground to believe that- (a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market in violation of the regulations; (b) any intermediary or any person associated with the securities market has violated any of the provisions of the SEBI Act of 1992 or the Rules or the Regulations, framed thereunder and further to report thereon to the Board in the manner provided under Section 11C of the SEBI Act. 12. Primarily it appears that the provisions of Section 11C of the SEBI Act of 1992 and the provisions of Regulations 5 of the PFUTP-2003 are perimateria . 13. From paragraph 9 of the judgment of the Supreme Court in T Takano(supra) it transpires that the allegation raised by the petitioner therein was that they were not provided with the report of the investigation conducted by the SEBI under Regulations 9 of the PFUTP-2003. In paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000 (for short 'the FEMA Rules, 2000') which is pari materia to Rule 4(1) of the PR-1995. In respect of Rule 4(1) of the FEMA Rules, 2000, the Supreme Court observed that the stage of the notice under Rule 4(1) is not for adjudication, but it is for the purpose of deciding whether an enquiry should be held. By referring to the interpretation of Rule 4(1) of the FEMA Rules, 2000 in Natwar Singh (supra) , wherein it was held that the adjudicating authority is required to form an opinion as to whether an enquiry is required to be held into the allegations of contravention and it is only thereafter the substantial enquiry into the allegations of contravention begins. Accordingly, in paragraph 35, it was held that the show cause notice under Rule 4(1) is not for the purpose for making adjudication into the alleged contravention but only for deciding whether an enquiry must be conducted. The stage when an enquiry is held is subsequent to the initial stage contemplated under Rule 4(1). Accordingly, by referring to the interpretation of Rule 4(1) of the FEMA Rules, 2000, wherein it was held that the right to fair hearing is a guaranteed right and if relevant material is not disclosed to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular person to whom the notice had been issued and therefore, there would be a requirement of the respondents in the SEBI to show it from the records that the opinion formed under Rule 3 are in existence in respect of the individual petitioner noticees. (iii). The report of the investigation under Section 11(C) of the SEBI Act and the individual opinions formed by the Board in respect of the petitioner noticees are required to be provided to the petitioner noticees along with the notice under Rule 4(1) of the PR-1995. (iv). The adjudicating officers appointed by the Board as provided under Section 15-I read with Rule 3 of the PR-1995 were not appointed by following the procedure of appointment and persons who are ineligible to be appointed as adjudicating officers have been appointed and that the adjudicating officers who were appointed are not the respective Division Chiefs. (v). By referring to the impugned notices under Rule 4(1) of the PR-1995, Dr. Ashok Saraf, learned senior counsel for the petitioners point out that the notices required the noticees to show cause as to why an enquiry should not be held against them and also, as to why the penalties provided under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 11C. 21. With regard to the contention that persons ineligible have also been appointed as adjudicating officers, meaning thereby that the persons so appointed are not the respective Division Chiefs, it is the submission of Ms. M Hazarika, learned senior counsel for the authorities in the SEBI that all such persons who were appointed as adjudicating officers are the respective Division Chiefs of the Divisions from where the individual notices were issued and further the records would show that the required procedure for appointing the adjudicating officers have been duly followed. 22. With regard to the contention that the opinion to be formed under Rule 3 of the PR-1995 would have to be individual opinions against the respective noticees, it is the submission of Ms. M Hazarika, learned senior counsel for the authorities in the SEBI that materials implicating the individual noticees are available on record and the individual opinions do exist and are formed on the basis of such materials. 23. With regard to the contention that the impugned notices under Rule 4(1) are composite notices for the purpose of arriving at a conclusion as to whether an enquiry is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided to the noticees and in the present case, whether it had been provided. (vii) Whether a notice under Rule 4(1) of the PR-1995 can be a composite notice requiring the noticee to respond as to whether an enquiry should be held under Rule 4(1) and also requiring the noticee to respond under Rule 4(3) as to why any of the penalties contemplated under section 15A to Section 15HB should not be imposed. 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: 26. Dr. Ashok Saraf learned senior counsel refers to the pronouncement of the Supreme Court rendered in the case of Madhya Pradesh Industries Ltd. Vs. Income-Tax Officer reported in (1965) 57 ITR 637, wherein in paragraph 7 it had been held that in the absence of reasons to believe, the Income Tax Officer has no jurisdiction to issue a notice under Section 34 of the Income Tax Act. Accordingly, the contention raised is that in order to embark upon an investigation under Section 11C of the SEBI Act, if the Board does not have reasonable grounds to believe that the transactions in securities are being dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the respondent SEBI in different writ petitions, in response to the contention of Dr. Ashok Saraf learned senior counsel for the petitioners as regards the interpretation and requirements of Section 11C of the SEBI Act, 1992 as well as, as to whether any materials were available before the respondent SEBI to embark upon an investigation under Section 11C have raised a counter contention that in the instant case, the authorities in the SEBI while enquiring certain regulation matters had noticed that large scale tradings were taking place, whose nature thereof would indicate that such tradings amounted to reversal trades. For the purpose, reference is made to an ex-parte ad-interim order dated 20.08.2005 bearing No. WTM/RKA/ISD/106/2015, which was passed by the authorities in the SEBI under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992 in the matter of illiquid stock options. 29. Paragraph 1 of the aforesaid ex-parte ad-interim order provides that as a part of the ongoing surveillance, the SEBI came across several instances/internal alerts wherein a set of entities were consistently making loss by their trading in option on individual stocks which are listed on the Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suant to the said enquiry in connection with the ad-interim order dated 20.08.2015 is the basis of the SEBI authorities to arrive at a conclusion that the reasonable ground to believe exist in the instant case, so as to require the authorities in the SEBI to initiate an investigation under Section 11(C) of the SEBI Act, 1992. 31. We have considered the rival contentions raised on the issue as to whether the requirements of initiating an investigation under Section 11C of the SEBI Act, 1992 as well as the required conditions precedent thereof, did exist in the facts and circumstances of the present case. 32. It is the submission of Dr. Ashok Saraf, learned senior counsel for the petitioners by referring to the pronouncement of the Supreme Court in Madhya Pradesh Industries Limited (supra), which is reported in (1965) 57 ITR 637, (referred as Madhya Pradesh Industries Limited-I) and Madhya Pradesh Industries Limited (supra), reported in (1970) 2 SCC 32, (referred as Madhya Pradesh Industries Limited-II) that the expression 'has a reasonable ground to believe' would have the same meaning as the expression 'has reason to believe' appearing in Section 34(1)(a) of the Income Tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the writs claimed, for it is or the case of the Company that the facts which alone invest the Income Tax Officer with jurisdiction to issue the impugned notice did not exist. The Company has also submitted that the power under Section 34 was sought to be utilised as a mere cloak or pretence for making a "fishing enquiry or investigation with the object of reviewing the previous order". Whether the disclosure made by the Company was full and true in respect of all material facts necessary for the assessment cannot obviously be determined in the absence of an affidavit by the Income Tax Officer. Again the plea that the impugned notice was issued with a collateral object could not be rejected without an enquiry. 12. Jurisdiction of the Income Tax Officer obviously arises when he has reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income of the assessee has escaped assessment, or has been under-assessed, and when the party claiming relief challenges on oath the existence of the conditions which confer jurisdiction, and sets out facts which may, unless disproved, support hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition in Madhya Pradesh Industries Limited/(ii)(supra) provides the reason to believe is not purely a subjective satisfaction of the Income Tax Authority but predicates the existence of reason on which such belief is to be founded and that a mere suspicion cannot be the basis to have a reason to believe. 36. In the instant case, we are required to interpret 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. The expression 'has reason to believe' is based on the expressions 'reason' and 'belief'. As per the Black's Law Dictionary, the word 'belief' means a state of mind that regards the existence of something as likely or relatively certain. While, the word 'reason' as per the Oxford English Dictionary, amongst others, means a cause, explanation or justification for an action or event. Accordingly, the expression 'has reason to believe' would have to be understood to be a state of mind regarding the existence of something as likely or relatively certain on the basis of certain cause, explanation or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy and purpose of the respective statutes wherein the two expressions may have been used. The expression 'has reason to believe' is from Section 34(1)(a) of the Income Tax Act, 1922, whereas the expression 'has reasonable grounds to believe' is to be understood from the point of view of Section 11C of the SEBI Act, 1992. The Income Tax Act, 1922 or as a matter of fact, the Income Tax Act, 1961 are statutory provisions to regulate the payment of income tax, where income tax may be paid either by individuals or Hindu undivided families or corporates, as the case may be. In the circumstance, any enquiries that are required to be made by the Income Tax Authorities under the Income Tax Act would be either against an individual or a Hindu undivided family or any specified corporate entity. Therefore, the requirement of having reasons to believe for issuing a notice under Section 34 of the Income Tax Act, 1922 (as it was earlier), would have to be the formation of a believe with reasons for an enquiry against such specified individual, Hindu undivided family or corporate. The enquiries specific does not involve any other person or entity for that given particular enquiry. On the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued and therefore, the requirement of forming an opinion by the Board under Rule 3 would have to be in respect of such particular person specific to whom the notice may be issued. By referring to the said provision, it is the contention of Dr. Ashok Saraf that as a condition precedent to issue the notice under Rule 4(1) of the PR- 1995, the Board would necessarily have to form an opinion against the particular person specific that the material available on record leads to the formation of such an opinion. Accordingly, it is the contention that in order to satisfy the requirement of forming an opinion against the petitioners, it would be for the respondents to show it from the records that such materials do exist for formation of such an opinion. 44. According to Dr. Ashok Saraf, learned senior counsel for the petitioners the requirement of Rule 4 of the PR-1995 is that the Board has to form the opinion that there are grounds for adjudging under any of the provisions of Chapter VIA of the SEBI Act of 1992 and such opinion be formed against the individual person concerned against whom the Board is of the view that there are grounds for adjudging. The said contention is of its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson specific. If any such transactions in securities are detected by the SEBI to have been dealt in a manner detrimental to the investors or the securities market, it would be for the Board to embark upon an investigation under Section 11C and such investigation may involve any further transactions that any securities that may have been undertaken against which the Board, the Board may have reasonable ground to believe to have been done in a manner detrimental to the investors or the securities market. The expression 'transactions in securities' appearing in Section 11C(1)(a) appears not to be person specific, but it being more broad based, which may involve any such transactions in securities wherein the Board has reasonable ground to believe to be detrimental to the investors or the securities market. Again with reference to the expression 'any intermediary or any person' appearing in Section 11C(1)(b), the provisions of Section 11C(1) provides that there may be an order in writing directing the investigating authority to investigate the affairs of such intermediary or persons associated with the securities market where the expression 'persons' also gives an indication that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplated thereunder would have to be against the person concerned against whom the Board intends to hold an enquiry, it has to be understood that the expression 'whenever the Board is of the opinion that there are grounds of adjudging' as appearing in Rule 3 of the Procedure and Rules of 1995 would have to be understood that the expression 'opinion' referred therein would be a formation of an opinion by the Board against the specific person concerned. 54. Accordingly, we are in agreement with Dr. Ashok Saraf, learned senior counsel for the petitioners that the requirement of forming an opinion as provided in Rule 3 of the Procedure and Rules of 1995 would be an opinion against the person specific against whom an enquiry is being contemplated and such opinion would not be a broad based opinion. 55. Having arrived at such conclusion, we take note of the submissions of Ms. M Hazarika, learned senior counsel appearing for the respondents in the SEBI who had by producing the records have referred to certain materials which shows that the Board do have the materials before it to form an opinion against the individual writ petitioners noticee of the present proceedings. We are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cursory glance, makes it apparent that such procedures have not been followed, a Court under Article 226 of the Constitution of India can always look into the aspect and decide the matter on the procedural proprieties as regards the notice. 59. In this respect, Dr. Ashok Saraf, learned senior counsel for the writ petitioners relies upon the pronouncement of the Supreme Court in paragraphs 9 and 11 of Siemens Ltd. v. State of Maharashtra, reported in (2006) 12 SCC 33 as extracted herein below: "9. Although ordinarily a writ court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a notice to show cause unless the same inter alia appears to have been without jurisdiction as has been held by this Court in some decisions including State of U.P. v. Brahm Datt Sharma [(1987) 2 SCC 179 : (1987) 3 ATC 319 : AIR 1987 SC 943] , Special Director v. Mohd. Ghulam Ghouse [(2004) 3 SCC 440 : 2004 SCC (Cri) 826] and Union of India v. Kunisetty Satyanarayana [(2006) 12 SCC 28 : (2006) 12 Scale 262] , but the question herein has to be considered from a different angle viz. when a notice is issued with premeditation, a writ petition would be maintainable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led out. 61. A reading of the aforesaid propositions of law as regards maintainability of a writ petition under Article 226 of the Constitution of India against the notice of show-cause, makes it discernible that it is not an invariable rule that no writ petition under Article 226 would be maintainable against a show cause notice and it would always be for the noticee to raise the objections in the proceedings itself. Certain circumstances are provided by the Supreme Court, i.e., when a notice is issued with premeditation, where the application of mind and formation of opinion as regards the liability or otherwise of the noticee had already been made, where the notice is issued without jurisdiction or in an abuse of process of law, an interference in respect of a notice even in a writ petition under Article 226 would be permissible. 62. In the instant case, the issues raised against the impugned notices are that the procedure prescribed under the statutory provisions for issuing such notices had not been followed and in the process certain formations of opinion in a premeditated manner had already been made and by not following the procedure prescribed under the statutory provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be noticed to show cause as to why an adjudication proceeding should not initiated and the second stage pertains to the actual penalty proceeding that may be undertaken. By referring to paragraph 14 of the notice dated 17.09.2021, Dr. Ashok Saraf, learned senior counsel for the writ petitioners points out that in the impugned notice, the two separate and distinct stages provided under the scheme of the procedure of the Rule 4 of the PR-1995 had been amalgamated and joined into a single proceeding which would be impermissible under the scheme of the procedure. It is the submission of the learned senior counsel that by amalgamating and joining the two separate stages under the scheme of the procedure under Rule 4 of the PR-1995, there is an aberration of the prescribed procedure under the Rules. Accordingly, it is submitted that as there is an aberration of the procedure provided under Rule 4(1) of the PR-1995, the said aspect would touch upon the jurisdiction of the authority issuing the impugned notices which under the law proposition indicated above would enable the Court under Article 226 to look into the matter. 66. Rule 4 of the PR-1995 under Rule 4(1) provides that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under Section 15-I of the SEBI Act 1992, it is for the Board to appoint any officer not below the rank of a Division Chief to be an adjudicating officer. But in the instant case, the 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. 71. Dr. Ashok Saraf, learned senior counsel for the petitioners by referring to the provisions of Section 15-I of the SEBI Act 1992 raises a contention that the adjudicating officers to be appointed for the purpose of adjudging under Section 15HA, amongst others, would have to be an officer not below the rank of a Division Chief and as a corollary if any officer other than a Division Chief is appointed as the adjudicating officer, the process initiated by such adjudicating officer would be without jurisdiction. To substantiate the contention, a reference is made to the provisions of Securities and Exchange Board of India (Delegation of Statutory and Financial Powers) Order, 2019 (for short, the Delegation Order 2019). As per the definition of Division Chief under Clause 2(1)(i), a Division Chief means an of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the competent authority in exercise of the power under Section 19 of the SEBI Act, read with Section 15-I (1) thereof and Rule 3 of the PR- 1995 appointed certain Division Chiefs as adjudicating officers as per Order dated 02.07.2021 to enquire and adjudicate under Section 15HA of the SEBI Act. Accordingly, Sri Rajesh Anand Gujjar had been appointed as the adjudicating officer in respect of the writ petitioner Ankita Didwania bearing Case ID No.20018267. Sri Rajesh Anand Gujjar is stated by the respondents SEBI to be the Deputy General Manager in the Division of Issues and Listing-1. Accordingly it is given to be understood that the notice under Rule 4(1) of the PR-1995 in respect of the writ petitioner Ms. Ankita Didwania had been issued by the Issues and Listing-1 Division, where Sri Rajesh Anand Gujjar being the Deputy General Manager is the Division Chief. 75. As per the organisation structure of SEBI referred by Dr. Ashok Saraf, learned Senior counsel for the writ petitioners Issues and Listing-1 Division is a Division and the Division Head is Sri Rajesh Anand Gujjar. 76. A reading of the materials produced and the statements made by the petitioners and the authorities in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I Act, 1992 which provides that the Board shall consist of a Chairman, two members from amongst the officials of the Ministry of the Central Government dealing with the finance and administration of Companies Act, one member amongst the officials of the Reserve Bank of India, five other members of whom at least three shall be whole time members to be appointed by the Central Government. 78. By referring to the provisions of Section 4 of the SEBI Act, 1992, it is the contention of Dr. Ashok Saraf, learned Senior counsel for the petitioner that the Board being a defined concept under the SEBI Act, 1992, the appointment of the adjudicating officer under Section 15-I can be made only by the said defined concept alone and not by any other authority. 79. Ms. M. Hazarika, learned Senior counsel for the respondents in the SEBI per contra refers to Section 19 of the SEBI Act, 1992, which provides for delegation of powers and functions under the Act. By referring to the delegation of powers at Entry 20(A), it is pointed out that for the purpose of appointing an adjudicating officer under Section 15-I, the delegated authority would be the Executive Director In-charge of EFD (in short referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of any appointment or any act or assigning a job or position to someone by an authority other than the authority assigning it. Going by the aforesaid difference in the concepts of 'appointment' and 'approval', we examine the note sheet produced by the respondents in the SEBI, wherein the endorsements indicated above are found, as well as the order communicating the appointment of adjudicating officer dated 06.07.2021 under the signature of Ms. Bhavana Ravikumar, GM, SEBI. A reading of the note sheet goes to show that the General Manager (SM) had put up a note providing for the names of the officials who can be appointed as adjudicating officers in respect of various adjudications to be made and to such note, the CGM(AB) gives the endorsement that the adjudicating officers as proposed by the GM(SM) may be appointed by the ED(Law) and thereafter, the ED(Law)/ED-EFD had given the endorsement, approved the name of the adjudicating officers as per the list provided. If we read the sequence of events from the note sheet, the GM(SM) had provided a list of officers who can be appointed as adjudicating officers for the various adjudications and the CGM(AB) had endorsed that whatever list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities 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. 87. 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. WHETHER THE INDIVIDUAL OPINIONS FORMED AGAINST THE PERSON SPECIFIC WITH REFERENCE TO RULE 3 OF THE PR-1995 ARE REQUIRED TO BE PROVIDED TO THE NOTICEES AND IN THE PRESENT CASE, WHETHER IT HAD BEEN PROVIDED. 88. Rule 3 of the PR-1995 provides that whenever the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for it, the combined show cause notices for the purpose of showing cause as to why the enquiry should not be held and as to why the penalty under section 15HA should not be inflicted would not be maintainable in law. 92. Dr. Ashok Saraf learned senior counsel for the petitioners has taken the Court to the notice dated 17.09.2021 issued by the adjudicating officer under Rule 4 of the Procedure Rules of 1995 read with Section 15-I of the SEBI Act of 1992. By referring to the said notice of 17.09.2021, it is pointed out by the learned senior counsel that it is a notice under Rule 4 of the PR-1995, meaning thereby, that the notice covers the requirements of the provisions of the entire Rule 4 and not specific to any of the sub-rules under Rule 4. The notice dated 17.09.2021 being made conjointly to be read with Section 15-I of the SEBI Act of 1992, it is pointed out that the notice covers the entire procedural requirements of arriving at a penalty under any of the Sections from 15A to 15HB. 93. By referring to paragraph 5 and 6 of the notice dated 17.09.2021, Dr. Ashok Saraf learned senior counsel contends that pursuant to the investigation under Section 11C of the SEBI Act 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e executed in the said contract. Noticee had executed 2 trades for 29,000 units in the said contract on 30/03/2015. (a) While dealing in the said contract on 30/03/2015, Noticee at 15:14:45 hrs entered into 1 buy trade with counterparty viz, OPEN FUTURES AND DERIVATIVES PRIVATE LIMITED for 14,500 units at rate of Rs. 4/- per unit. Thereafter, the Noticee at 14:14:51 hrs entered into 1 sell trade with the same counter party for 14,500 units at rate of Rs. 28/- per unit. (b) From the above, it is noted that while dealing in the said contract during the investigation period, Noticee executed total 2reversal trades (1buy trade + 1 sell trade) with same counterpart viz, OPEN FUTURES AND DERIVATIVES PRIVATE LIMITED on the same day and with significant price differential in buy and sell rate. (c) Thus, Noticee, through its dealing in the contract viz, "DIVI15APR1920.00CE" during the investigation period, executed 01(One) trade reversal through 2 non genuine trades which is 50% of the total trades from the market in the said contract during the investigation period, and thereby, Noticee generated artificial volume of 29,000 units which is 29.29% of the volume traded in the said contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By referring to the scheme of Rule 4, it is the submission of Dr. Ashok Saraf, learned senior counsel that the composite notice as discernible from paragraph 14 of the notice dated 17.09.2021 requiring the petitioner noticee to show cause as to why an enquiry should not be held against her and also as to why the penalties under Section 15HA of the SEBI Act of 1992 in terms of Rule 5 of the PR-1995 should not be imposed, would be not maintainable. It is the submission of the learned senior counsel for the petitioners that the scheme of Rule 4 of PR-1995 provides for two separate and distinct stages of the proceeding, one being a show-cause as to why an enquiry should not be held and only after arriving at an opinion that an enquiry is required to be held, the other notice as regards the penalty to be imposed can be made. The composite notice as discernible from paragraph 14 of the notice dated 17.09.2021 by which the two stages of the proceeding was amalgamated into one would not be maintainable as the second stage of issuing the notice for penalty requires the satisfaction of the condition precedent of there being an opinion formed that the enquiry is required to be held. 98. Ms. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [the Board or the adjudicating officer] shall then aive an opportunity to such person to produce such documents or evidence as he may consider relevant to the inquiry and if necessary the hearing may be adjourned to a future date and in taking such evidence the [the Board or the adjudicating officer] shall not be bound to observe the provisions of the Evidence Act, 1872 (11 of 1872): Provided that the notice referred to in sub-rule (3), and the personal hearing referred to in sub-rules (3), (4) and (5) may, at the request of the person concerned, be waived. [(5-A) The Board may appoint a presenting officer in an inquiry under this rule.] (6) While holding an inquiry under this inquiry the [the Board or the adjudicating officer] shall have the power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which, in opinion of the [the Board or the adjudicating officer], may be useful for or relevant to, the subject-matter of the inquiry. (7) If any person fails, neglects or refuses to appear as required by sub-rule (3) before the [the Board or the adjudicating officer], the [the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the person and upon his appearance to explain him the offence that he has been alleged to have been committed by referring to the provisions of the Act, Rules or Regulations can take place only upon the opinion being formed that there is a requirement to hold an enquiry pursuant to the process under Rule 4(1) of PR- 1995. In other words, only upon a completion of the process of the notice issued under Rule 4(1) by forming an opinion that an enquiry is required to be held, the further processes under Rule 4(3) and 4(4) can be initiated. 105. In Natwar Singh Vs. Directorate of Enforcement, reported in (2010) 13 SCC 255, the Supreme Court examined the provisions of Rule 4 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, (in short FEMA Rules 2000) which is extracted as below:- 20. Rule 4 of the said Rules which prescribes the procedure for holding of inquiry which is material for our present purpose is as under: "4. Holding of inquiry.- (1) For the purpose of adjudicating under Section 13 of the Act whether any person has committed any contravention as specified in that section of the Act, the adjudicating authority shall, issue a notice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with provisions of Section 13 of the Act. (9) Every order made under sub-rule 8 of Rule 4 shall specify the provisions of the Act or of the rules, regulations, notifications, direction or orders or any condition subject to which an authorization is issued by the Reserve Bank of India in respect of which contravention has taken place and shall contain brief reasons for such decisions. (10) Every order made under sub-rule (8) shall be dated and signed by the adjudicating authority. (11) A copy of the order made under sub-rule (8) of Rule 4 shall be supplied free of charge to the person against whom the order is made and all other copies of proceedings shall be supplied to him on payment of copying fee @2 per page. (12) The copying fee referred to in sub-rule (11) shall be paid in cash or in the form of demand draft in form of the adjudicating authority. (emphasis supplied) 106. Rule 4 (1) of the FEMA Rules 2000 provides that for the purpose of adjudicating under section 13 of the Foreign Exchange Regulation Act, 1973, the adjudicating authority shall issue notice to such person requiring him to show cause within such period as to why an enquiry should not be held again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm an opinion as to whether any inquiry is required to be held into the allegations of contravention. It is only then the real and substantial inquiry into allegations of contravention begins. 108. While examining the provisions of Rule 4(1) of the PR-1995, the Supreme Court in T. Takano (supra), had in paragraph 34 referred to the proposition laid down in paragraph 23 of Natwar Singh (supra). In paragraph 35, the conclusion arrived was that the notice under Rule 4(1) of PR-1995 is not for the purpose of making an adjudication into the alleged contravention, but only for deciding whether an enquiry must be conducted. It was also held that the stage when an enquiry is held is subsequent to the initial stage contemplated by Rule 4(1). In paragraph 36 of T. Takano (supra), it had been held that the Court distinguishes between the initial stage under Rule 4(1) which is only for the purpose of deciding whether an enquiry has to be held and the subsequent stage of adjudication into the allegations of contravention. 109. Paragraphs 34, 35 and 36 of T. Takano (supra) are extracted below:- 34. Now in this backdrop, Justice B. Sudarshan Reddy speaking for the two-judge Bench of this Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during or after the hearing. The law is fairly well settled if prejudicial allegations are to be made against a person, he must be given particulars of that before hearing so that he can prepare his defence. However, there are various exceptions to this general rule where disclosure of evidential material might inflict serious harm on the person directly concerned or other persons or where disclosure would be breach of confidence or might be injurious to the public interest because it would involve the revelation of official secrets, inhibit frankness of comment and the detection of crime, might make it impossible to obtain certain clauses of essential information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H [[1995] Q.B. 43 : [1994] 3 WLR 1110 : (1995) 1 All ER 479 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an actual adjudication being made which ultimately may lead to any of the penalties under sections 15A to 15HB. As clearly provided under Rule 4(3) of PR-1995, upon the causes being shown to the notice as to whether an enquiry is to be held, the adjudicating authority is required to form an opinion that in the case at hand, an enquiry is required to be held. 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. 110. When we examine the impugned notice dated 17.09.2021 in respect of the writ petitioner noticee Ankita Didwania at paragraph 14, as per the aforesaid proposition of the law, 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 petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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. 115. By following the propositions laid down by the Supreme Court in Natwar Singh (supra) and T. Takano (supra), 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(C) No. 766 of 2022 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. 116. We also take note that some of the impugned notices provide for an opportunity to the noticees to avail certain conciliation process in respect of the penalties to be imposed. If any such petitioner noticees without intending to raise objection to any of the notices intends to avai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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