Regulatory Framework of PFUTP Regulations
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Dr. Dhananjaya Y. Chandrachud; Sanjiv Khanna, JJ.
Civil Appeal Nos. 487-488 of 2022; February 18, 2022
T. Takano Versus Securities and Exchange Board of India & Anr.
The two judge bench held as below
Principles of Natural Justice - Quasi Judicial Authority - A quasi-judicial
authority has a duty to disclose the material that has been relied upon
at the stage of adjudication - An ipse dixit of the authority that it has
not relied on certain material would not exempt it of its liability to
disclose such material if it is relevant to and has a nexus to the action
that is taken by the authority. In all reasonable probability, such
material would have influenced the decision reached by the authority -
The actual test is whether the material that is required to be disclosed
is relevant for purpose of adjudication. If it is, then the principles of
natural justice require its due disclosure. (Para 39)
Principles of Natural Justice - Quasi Judicial Authority - 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. (Para
51)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 - Regulation 9, 10 - Consideration of the report of the
investigating authority which is submitted under Regulation 9 is one of
the components guiding the Board's satisfaction on the violation of the
regulations - the investigation report is not merely an internal
document - The Board forms an opinion regarding the violation of
Regulations after considering the investigation report prepared under
Regulation 9. (Para 21, 51)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 - Regulation 9 - 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 ? - The Board shall
be duty-bound to provide copies of such parts of the report which
concern the specific allegations which have been levelled in show
cause notice. (Para 52)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 - Where some portions of the enquiry report involve
information on third parties or confidential information on the
securities market, the Board cannot for that reason assert a privilege
against disclosing any part of the report - Board 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. (Para 51)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 - 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. It should
prima facie established 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 noticee to prove that the
information is necessary to defend his case appropriately. (Para 51)
A. Factual Background
1. By a judgment dated 29 September 2020, a Division Bench of the Bombay
High Court dismissed the petition instituted by the appellant under Article
226 of the Constitution for challenging a show cause notice which was issued
by the first respondent [SEBI or the Board] alleging a violation of the provisions
of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
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Regulations 2003 [PFUTP Regulations]. A petition seeking a review of the
judgment of the Division Bench was disposed of by an order dated 22
October 2020. The appellant moved a Special Leave Petition against the
judgment in the writ petition and the order in review. The principal issue is
whether an investigation report under Regulation 9 of the PFUTP
Regulations must be disclosed to the person to whom a notice to show cause
is issued
.....
8. A fresh show cause notice was issued to the appellant on 19 March 2020
under the provisions of Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) and
15HA of the SEBI Act and Section 12A(2) read with Section 23H of the
Securities Contracts (Regulation) Act 1956 [SCRA] based on the forensic
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audit report and investigation conducted by the first respondent. With regard
to the appellant, it was alleged that :
Mr. T. Takano, during whose tenure the business transactions with FDSL started by virtue of
his position as MD & CEO of Ricoh during FY 2012-13 to FY 2014-15, was actively involved in
committing the fraud and had knowingly restricted the mandate given to PwC to six month so as
to succeed in hiding his role in the commission of fraud of publishing untrue financial statements
of Ricoh which resulted in misleading the investors about the financial performance of the
company and thereby resulted in inducement to trades in the scrip. The said acts of the Noticee
no. 2 are alleged to be in violation of regulations 3 (b), (c), (d), 4(1) and 4(2)(e), (f), (k) and (r) of
SEBI (PFUTP) Regulations, 2003 and clause 49(V) read with 41(Il)(a) of the erstwhile Listing
Agreement.
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 soft copies of the annexures
to the forensic report and called upon the appellant to submit a reply. The
appellant reiterated the demand to inspect the investigation report. By an
email dated 4 September 2020, the appellant was informed that the
investigation report of SEBI was not relied on to issue the show cause notice
and hence, would not be provided.
11. The appellant filed a writ petition before the Bombay High Court
challenging the show cause notice which was issued on 19 March 2020. In
the alternative, inspection of all documents relied on to issue the show cause
notice was sought. The appellant submitted before the High Court that to
non-disclosure of all relevant documents relied on to issue the show cause
notice violated the principles of natural justice
12. By its judgment dated 29 September 2020, the High Court held that the
investigation report prepared under Regulation 9 of PFUTP Regulations is
solely for internal purposes. In concluding that the investigation report need
not be furnished while issuing a show cause notice, the High Court has relied
on the decision of this Court in Natwar Singh v. Director of Enforcement,
(2010) 13 SCC 255. In sum and substance, the High court has held that the report
does not form the basis of the show cause notice and therefore need not be
disclosed. The review petition challenging the judgment of the Division
Bench of the High Court was rejected
....
C.1 Regulatory Framework of PFUTP Regulations
15. The PFUTP Regulations have been notified by SEBI in exercise of
powers conferred by Section 30 of the SEBI Act. Regulation 2(c) defines the
expression fraud in the following terms:
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2(c) fraud includes any act, expression, omission or concealment committed whether in a
deceitful manner or not by a person or by any other person with his connivance or by his agent
while dealing in securities in order to induce another person or his agent to deal in securities,
whether or not there is any wrongful gain or avoidance of any loss, and shall also include
(1) a knowing misrepresentation of the truth or concealment of material fact in order that another
person may act to his detriment;
(2) a suggestion as to a fact which is not true by one who does not believe it to be true;
(3) an active concealment of a fact by a person having knowledge or belief of the fact;
(4) a promise made without any intention of performing it;
(5) a representation made in a reckless and careless manner whether it be true or false;
(6) any such act or omission as any other law specifically declares to be fraudulent,
(7) deceptive behaviour by a person depriving another of informed consent or full participation,
(8) a false statement made without reasonable ground for believing it to be true.
(9) the act of an issuer of securities giving out misinformation that affects the market price of the
security, resulting in investors being effectively misled even though they did not rely on the
statement itself or anything derived from it other than the market price.
And fraudulent shall be construed accordingly; Nothing contained in this clause shall apply to
any general comments made in good faith in regard to
(a) the economic policy of the government
(b) the economic situation of the country
(c) trends in the securities market;
(d) any other matter of a like nature
whether such comments are made in public or in private;
16. Chapter II of the Regulations relates to the prohibition of fraudulent and
unfair trade practices relating to the securities market. This includes
Regulation 3 which deals with Prohibition of certain dealings in securities
and Regulation 4 which deals with Prohibition of manipulative, fraudulent
and unfair trade practices. Chapter II pertains to the power of the Board to
order an investigation. Regulation 5 is extracted below:
5. Where the Board, the Chairman, the member or the Executive Director (hereinafter referred
to as appointing authority) 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 these regulations;
(b) any intermediary or any person associated with the securities market has violated any of the
provisions of the Act or the rules or the regulations, it may, at any time by order in writing, direct
any officer not below the rank of Division Chief (hereinafter referred to as the Investigating
Authority) specified in the order to investigate the affairs of such intermediary or persons
associated with the securities market or any other person and to report thereon to the Board in
the manner provided in section 11C of the Act.
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Regulation 6 enunciates the powers of the investigating authority.*
*6. Without prejudice to the powers conferred under the Act, the Investigating Authority shall have the
following powers for the conduct of investigation, namely :
(1) to call for information or records from any person specified in section 11(2)(i) of the Act;
(2) to undertake inspection of any book, or register, or other document or record of any listed public
company or a public company (not being intermediaries referred to in section 12 of the Act) which intends
to get its securities listed on any recognized stock exchange where the Investigating Authority has
reasonable grounds to believe that such company has been conducting in violation of these regulations;
(3) to require any intermediary or any person associated with securities market in any manner to furnish
such information to, or produce such books, or registers, or other documents, or record before him or any
person authorized by him in this behalf as he may consider necessary if the furnishing of such information
or the production of such books, or registers, or other documents, or record is relevant or necessary for the
purposes of the investigation;
(4) to keep in his custody any books, registers, other documents and record produced under this regulation
for a maximum period of one month which may be extended upto a period of six months by the Board :
Provided that the Investigating Authority may call for any book, register, other document or record if the
same is needed again :
Provided further that if the person on whose behalf the books, registers, other documents and record are
produced requires certified copies of the books, registers, other documents and record produced before
the Investigating Authority, he shall give certified copies of such books, registers, other documents and
record to such person or on whose behalf the books, registers, other documents and record were produced;
(5) to examine orally and to record the statement of the person concerned or any director, partner, member
or employee of such person and to take notes of such oral examination to be used as an evidence against
such person :
Provided that the said notes shall be read over to, or by, and signed by, the person so examined;
(6) to examine on oath any manager, managing director, officer or other employee of any intermediary or
any person associated with securities market in any manner in relation to the affairs of his business and
may administer an oath accordingly and for that purpose may require any of those persons to appear before
him personally.
The powers of the investigating authority include:
(i) Calling for information or records;
(ii) Undertaking inspection of books, registers and documents or records of
any public company;
(iii) Requiring the disclosure of information, documents or records by any
person associated with the securities market or by an intermediary;
(iv) Reservation and custody of books, registers, documents and records for
a stipulated period;
(v) Examination of and recording the statement of directors, partners,
members or employees; and
(vi) Examination on oath.
17. Under Regulation 7*, the investigating authority may exercise certain
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specified powers after obtaining the specific approval of the Chairman or
Members of the Board. Regulation 8* imposes a duty to cooperate upon
every person in respect of whom an investigation has been ordered under
Regulation 7.
*7. The Investigating Authority may, after obtaining specific approval from the Chairman or Member also
exercise all or any of the following powers, namely :
(a) to call for information and record from any bank or any other authority or board or corporation established
or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities
which are under investigation;
(b) to make an application to the Judicial Magistrate of the first class having jurisdiction for an order for the
seizure of any books, registers, other documents and record, if in the course of investigation, the
Investigating Authority has reasonable ground to believe that such books, registers, other documents and
record of, or relating to, any intermediary or any person associated with securities market in any manner
may be destroyed, mutilated, altered, falsified or secreted;
(c) to keep in his custody the books, registers, other documents and record seized under these regulations
for such period not later than the conclusion of the investigation as he considers necessary and thereafter
to return the same to the person, the company or the other body corporate, or, as the case may be, to the
managing director or the manager or any other person from whose custody or power they were seized :
Provided that the Investigating Authority may, before returning such books, registers, other documents and
record as aforesaid, place identification marks on them or any part thereof;
(d) save as otherwise provided in this regulation, every search or seizure made under this regulation shall
be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974) relating
to searches or seizures made under that Code.
*8. (1) It shall be the duty of every person in respect of whom an investigation has been ordered under
regulation 7
(a) to produce to the Investigating Authority or any person authorized by him such books, accounts and
other documents and record in his custody or control and to furnish such statements and information as the
Investigating Authority or the person so authorized by him may reasonably require for the purposes of the
investigation;
(b) to appear before the Investigating Authority personally when required to do so by him under regulation
6 or regulation 7 to answer any question which is put to him by the Investigating Authority in pursuance of
the powers under the said regulations.
(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act, 1956 (1 of 1956), it
shall be the duty of every manager, managing director, officer and other employee of the company and
every intermediary referred to in section 12 of the Act or every person associated with the securities market
to preserve and to produce to the Investigating Authority or any person authorized by him in this behalf, all
the books, registers, other documents and record of, or relating to, the company or, as the case may be, of
or relating to, the intermediary or such person, which are in their custody or power.
(3) Without prejudice to the generality of the provisions of sub-regulations (1) and (2), such person shall
(a) allow the Investigating Authority to have access to the premises occupied by such person at all
reasonable times for the purpose of investigation;
(b) extend to the Investigating Authority reasonable facilities for examining any books, accounts and other
documents in his custody or control (whether kept manually or in computer or in any other form) reasonably
required for the purposes of the investigation;
(c) provide to such Investigating Authority any such books, accounts and records which, in the opinion of
the Investigating Authority, are relevant to the investigation or, as the case may be, allow him to take out
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computer outprints thereof.
18. Regulation 9 upon which the controversy in the present case turns is extracted below:
9. The Investigating Authority shall, on completion of investigation, after taking into account all
relevant facts, submit a report to the appointing authority:
Provided that the Investigating Authority may submit an interim report pending completion of
investigations if he considers necessary in the interest of investors and the securities market or
as directed by the appointing authority.
Regulation 9 envisages that the investigating authority must submit a report
to the appointing authority upon the completion of its investigation in the
course of which all relevant facts have to be taken into account. The
investigating authority may even submit an interim report, if necessary, in the
interest of investors and the securities market or, if directed by the appointing
authority.
19. Regulation 10 deals with the Boards power of enforcement. According
to Regulation 10:
10. The Board may, after consideration of the report referred to in regulation 9, if satisfied that
there is a violation of these regulations and after giving a reasonable opportunity of hearing to the
persons concerned, issue such directions or take such action as mentioned in regulation 11 and
regulation 12 :
Provided that the Board may, in the interest of investors and the securities market, pending the
receipt of the report of the investigating authority referred to in regulation 9, issue directions under
regulation 11:
Provided further that the Board may, in the interest of investors and securities market, dispense
with the opportunity of pre-decisional hearing by recording reasons in writing and shall give an
opportunity of post-decisional hearing to the persons concerned as expeditiously as possible.
20. The directions or measures which can be adopted by the Board are
specified in Regulations 11 and 12 which read as follows: -
11. (1) The Board may, without prejudice to the provisions contained in subsections (1), (2), (2A)
and (3) of section 11 and section 11B of the Act, by an order, for reasons to be recorded in writing,
in the interests of investors and securities market, issue or take any of the following actions or
directions, either pending investigation or enquiry or on completion of such investigation or
enquiry, namely :
(a) suspend the trading of the security found to be or prima facie found to be involved in fraudulent
and unfair trade practice in a recognized stock exchange;
(b) restrain persons from accessing the securities market and prohibit any person associated with
securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self-regulatory organization from holding
such position;
(d) impound and retain the proceeds or securities in respect of any transaction which is in violation
or prima facie in violation of these regulations;
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(e) direct and intermediary or any person associated with the securities market in any manner not
to dispose of or alienate an asset forming part of a fraudulent and unfair transaction;
(f) require the person concerned to call upon any of its officers, other employees or
representatives to refrain from dealing in securities in any particular manner;
(g) prohibit the person concerned from disposing of any of the securities acquired in contravention
of these regulations;
(h) direct the person concerned to dispose of any such securities acquired in contravention of
these regulations, in such manner as the Board may deem fit, for restoring the status quo ante.
(2) The Board shall issue a press release in respect of any final order passed under sub-regulation
(1) in at least two newspapers of which one shall have nationwide circulation and shall also put
the order on the website of the Board.
12. (1) The Board may, without prejudice to the provisions contained in subsections (1), (2), (2A)
and (3) of section 11 and section 11B of the Act, by an order, for reasons to be recorded in writing,
in the interests of investors and securities market take the following action against an intermediary
:
(a) issue a warning or censure
(b) suspend the registration of the intermediary; or
(c) cancel of the registration of the intermediary
Provided that no final order of suspension or cancellation of an intermediary for violation of these
regulations shall be passed unless the procedure specified in the regulations applicable to such
intermediary under the Securities and Exchange Board of India (Procedure for
Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 is complied with.
21. Regulation 10 empowers the Board to either issue a direction or take
action as is specified in Regulations 11 and 12. Before issuing directions or
taking action under Regulations 11 and 12, three steps have to be traversed
by the Board. The first stage is the consideration of the report of the
investigating authority which has been referred to in Regulation 9. The
second is the furnishing of a reasonable opportunity of being heard. The third
is the satisfaction of the Board that there is a violation of the regulations.
Regulation 10 indicates in clear terms that the report which has been
submitted by the investigating authority under Regulation 9 is an intrinsic
component of the Boards satisfaction for determining whether there has
been any violation of the regulations. Regulation 10 contains a mandate for
the Board to consider the report which is referred to in Regulation 9. The
submission which has been urged on behalf of SEBI is to the effect that (i)
the investigation report is a part of the internal administrative deliberations of
the Board; (ii) it need not be disclosed; and that (iii) only those materials
which are relied on have to be disclosed misses a crucial part of Regulation
10. The language in which Regulation 10 is couched indicates that
consideration of the report of the investigating authority which is submitted
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under Regulation 9 is one of the components guiding the Boards satisfaction
on the violation of the regulations. The words of Regulation 10 indicate that
the Board after consideration of the report referred to in regulation 9, if
satisfied that there is a violation of these regulations and after giving a
reasonable opportunity of hearing to the persons concerned, takes action
under Regulations 11 and 12. As a result of the mandate of Regulation 10,
the Board has to consider the investigation report as an intrinsic element in
arriving at its satisfaction on whether there has been a violation of the
regulations