India: Delhi High Court On SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995

Case1 snippets:

  • SEBI issues show cause notice to the Petitioner & others for violating insider-trading norms ;
  • Hon'ble High Court sets aside SEBI's order in the Himalaya Granite matter;
  • Directs SEBI board to re-examine the case if required and pass fresh order;
  • The Hon'ble Court observed that adjudicating proceedings were not followed under prescribed norms;
  • The Hon'ble Court held that the Whole-Time Member (WTM) has not formed an independent opinion required to adjudging the matters

The Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (the "Rules"), were promulgated under the Securities and Exchange Board of India Act, 1992 (the "Act"), for cases where the Board is of the opinion that there are grounds for adjudging under any of the provisions in Chapter VI-A2 of the Act; the Board may appoint any of its officers not below the rank of Division Chief to be the adjudicating officer for holding an inquiry for the said purpose.

As per Rule 4 of the Rules, for the purpose of holding an enquiry, following procedure is required to be followed:

  1. For holding an inquiry for the purpose of adjudging, under sections of Chapter VI-A of the Act, whether any person has committed contraventions as specified in any of such sections, the adjudicating officer shall, in the first instance, issue a notice to such person requiring him to show cause within such period as may be specified in the notice (being not less than 14 days from the date of service thereof) why an inquiry should not be held against him;
  2. Every notice, as stated above, to any such person shall indicate the nature of offence alleged to have been committed by him;
  3. After considering the cause, if any, shown by such person, the adjudicating officer is of the opinion that an inquiry should be held, he shall issue a notice fixing a date for the appearance of that person before the adjudicating officer, either personally or through his lawyer or other authorized representative;
  4. On the date fixed, the adjudicating officer shall explain to the person proceeded against or his lawyer or authorized representative, the offence, alleged to have been committed by such person indicating the provisions of the Act, rules or regulations in respect of which contravention is alleged to have taken place;
  5. The adjudicating officer shall then give 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 adjudicating officer shall not be bound to observe the provisions of the Evidence Act, 1872;

    Provided that the notice and the personal hearing, referred to above may, at the request of the person concerned, be waived.
  6. While holding an inquiry under this rule 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 the opinion of 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 before the adjudicating officer, the adjudicating officer may proceed with the inquiry in the absence of such person after recording the reasons for doing so. Further, the Board can (if required) in its discretion, appoint a presenting officer in an inquiry;

Upon consideration of the evidence produced before the adjudicating officer, if the officer is satisfied that the person has become liable to penalty under any of the sections specified in section 15-I(1)3, he may, by order in writing, impose such penalty as he thinks fit in accordance with the provisions of the relevant section or sections specified in section 15-I. However, while adjudging the quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; and (c) the repetitive nature of the default. Further, every order (dated and signed by the adjudicating officer) made under sub-rule (1) shall specify the provisions of the Act in respect of which the default has taken place and shall contain brief reasons for such decisions.4

The adjudicating officer is required to send a copy of every order made by him under the Rules  to the person concerned and to the Board.5

Further, Rule 7 of the Rules prescribes the manner in which a notice or an order issued under the Rules has to be served on the person. These include:

  1. by delivering or tendering it to that person or his duly authorized agent;
  2. by sending it to the person by fax or electronic mail6 or courier or speed post with acknowledgement due or registered post with acknowledgement due to the address of his place of residence or his last known place of residence or the place where he carried on, or last carried on, business or personally works, or last worked, for gain;
  3. if it cannot be served as per (a) or (b) above, then by affixing it on the outer door or some other conspicuous part of the premises in which that person resides or is known to have last resided, or carried on business or personally works or last worked for gain and that written report thereof should be witnessed by two persons; or
  4. if it cannot be affixed on the outer door, by publishing the notice in at least two newspapers, one in an English daily newspaper having nationwide circulation and another in a newspaper having wide circulation published in the language of the region where that person was last known to have resided or carried on business or personally worked for gain.

As it can be seen from above, the Rules prescribe a robust and a clear roadmap on how an inquiry is to be made and its outcome is to be handled.

Case-at-hand before Hon'ble Delhi High Court7

The case pertains to a showcause notice issued by SEBI to the petitioner, who held over 5% stake in a listed-company named Himalaya Granites (the 'Company'), but failed to make disclosures under the Prohibition of Insider Trading (PIT) norms. The petitioner contested the move on the ground that the SEBI Board didn't follow the prescribed procedure provided under the Rules. It was averred by the Petitioner that the group of assistant managers of SEBI recommended proceedings against the entities without taking WTM's opinion and therefore, the appointment of adjudicating officer was without jurisdiction. Further, the penalty was imposed without a prior order under the PIT regulations.

Ruling by the Hon'ble Court

After deliberating upon the merits of the case in light of the applicable laws, the Hon'ble Court set aside SEBI's impugned order and asked the SEBI board or a WTM to examine the case as per the laws and accordingly pass a fresh order. The Hon'ble Court held that:

  1. A WTM had not formed "independent opinion' on whether there are grounds for adjudication in the said matter;
  2. As per the mandate of the Rules, it is apparent that formation of an opinion by the board is a pre-condition for the appointment of the adjudicating officer. In other words, in absence of such an opinion, an adjudicating officer cannot be appointed and any such appointment will be without jurisdiction;
  3. Typically, a whole-time member independently takes a call whether the case is fit for the adjudication, irrespective of the suggestion expressed by his juniors;
  4. If the board/member is of opinion that there are grounds for adjudging, then accordingly it appoints an adjudicating officer to hold an inquiry.
  5. While the SEBI pleaded that the adjudication was initiated after the member was prima facie satisfied that there are sufficient grounds to inquire into the matter and adjudicated upon the alleged violations; the Hon'ble Court held that there was no scope for inferring formation of such opinion merely for reason that an adjudicating officer has been appointed and other officers have forwarded their recommendations for such an action.
  6. The Hon'ble Court held8 that:

    "The formation of an opinion that there are grounds for adjudging under Chapter VIA of the Act is the necessary pre-requisite for the Board to exercise its jurisdiction. Absent such opinion, the Board would have no jurisdiction to appoint an Adjudicating Officer. There is no dispute as to the above proposition. The only controversy is whether the fact that the Board (Whole Time Member) had formed such opinion can be inferred from appointment of the Adjudicating Authority. Plainly, there is no scope for inferring formation of such opinion merely for the reason that an Adjudicating Officer has been appointed and other officers have forwarded their recommendations for such an action. As stated above, the Board has to form an independent opinion that there are grounds for adjudging under Chapter VIA of the Act. It is not necessary for the Board to elaborate its opinion or to provide reasons for the same. However, the least that is required for the Board is to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VIA of the Act before proceeding to appoint an Adjudicating Officer. It is necessary that the record clearly bears out that there is an application of mind on the part of the Board. The power to appoint an Adjudicating Officer has been delegated to the Whole Time Member. Therefore, it was necessary for him to have formed such opinion before proceeding further."

The judgment, if seen in the right perspective, is worthy of appreciation as it confirms the position that prescribed procedures need to be followed to ensure that authorities exercise their statutory powers carefully and consciously after satisfying themselves that the necessary conditions allowing exercise of powers have been met.

Footnotes

1. Amit Jain Vs. Securities and Exchange Board of India and Ors. ( MANU/DE/2408/2018 )

2. Chapter under the Act for Penalties and Adjudication

3. Power to Adjudicate

4. Rule 5 (Order of the adjudicating officer) of the Rules

5. Rule 6 (Copy of the Order) of the Rules

6. Provided that a notice sent by Fax shall bear a note that the same is being sent by fax and in case the document contains annexure, the number of pages being sent shall also be mentioned. Provided further that a notice sent through electronic mail shall be digitally signed by the competent authority and bouncing of the electronic mail shall not constitute valid service.

7. Amit Jain (supra) – Order dated 09.07.18

8. Para 36 of order dated 09.07.18

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