The Supreme Court, after hearing a batch of appeals arising from protracted litigation between Securities and Exchange Board of India ("SEBI") and Vital Communications Ltd ("VCL"), on account of alleged misleading advertisements and price manipulation by VCL held that the principle of Res Judicata bars SEBI from passing multiple orders on the same cause of action. Since SEBI's 2014 order under Sections 11 & 11B of SEBI Act, 1992, went unchallenged, and attained finality, the subsequent disgorgement order issued in 2018 on the same grounds and under the same provisions was deemed impermissible. The Court affirmed that res judicata applies to quasi-judicial SEBI proceedings and that SEBI is prohibited from reopening a case on which it has already passed an order.
Introduction
This case engages the question of whether the Securities and Exchange Board of India ("SEBI") acted ultra vires in issuing a second disgorgement order dated 28.09.2018, thereby reopening proceedings predicated upon a cause of action that had already culminated in a final adjudication by an earlier order in 2014. At the heart of the dispute lies the applicability of the doctrine of res judicata to regulatory adjudication, and whether such re-initiation of proceedings is impermissible in law.
Facts of the Case
Vital Communications Limited ("VCL"), a publicly listed company on the BSE, NSE, and DSE, was issued a show-cause notice by SEBI in 2005 under Sections 11(4), 11, and 11B of the SEBI Act, 1992. The notice alleged that VCL had issued misleading advertisements relating to buyback of shares, bonus shares, and preferential allotments to 15 companies which companies were VCL's suppliers. SEBI accused VCL of manipulating its share price through such misleading advertisements, indirectly funding repurchases of its own shares, and enabling promoter-related entities to make unwarranted share sales all of that allegedly violated various provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 and Section 77 of the Companies Act, 1956.1
Following its investigation, SEBI in 2008 penalized several VCL directors and imposed restrictions on accessing the capital market from periods of six months to two years. However, the Securities Appellate Tribunal ("SAT") later set aside SEBI's order and remanded the matter for fresh consideration. Meanwhile, two investors, Ram Kishori Gupta and Harishchandra Gupta, who had bought shares influenced by the misleading advertisements, sought compensation before SEBI for their losses. SEBI declined, and SAT held that there was no statutory provision under Section 11(2) empowering SEBI to grant compensation directly to investors, though SEBI was directed to continue its investigation.2
In a subsequent review, SAT clarified that SEBI could impose penalties or issue refund directions only if fraud and unjust enrichment were established. Acting on these directions, SEBI issued show-cause notices to 24 entities in 2014, including VCL, and confirmed that misleading information had been disseminated. SEBI imposed restrictions such as freezing shares but again concluded that no quantifiable ill-gotten gains were identified, thereby ruling out disgorgement or compensation for third party investors.3
SEBI gave a personal hearing to the investors and in 2016, acknowledged the presence of fraud and ordered a reassessment of ill-gotten gains, initiation of disgorgement proceedings and indicated that investor claims would be considered in that context. Eventually, in 2018, SEBI passed an order directing VCL and others to disgorge ₹4.55 crore with interest.4
This led to fresh rounds of litigation, and in Appeal No. 44/2019, the SAT directed SEBI to pay ₹18.25 lakh in compensation to the complainants, though the Supreme Court later stayed this order. Finally, in its decision dated 20.12.2021, SAT struck down SEBI's 2018 disgorgement order, holding that the matter had already been settled in 2014 and SEBI could not reopen the issue. The Tribunal emphasized the applicability of res judicata even in regulatory proceedings, highlighting the need for finality in adjudication.5 This order passed by the Tribunal was the subject matter of the appeal before the Supreme Court of India.
Critical Analysis of the Ruling
The ruling of the Supreme Court dwelled on several aspects before finally deciding to set aside the second disgorgement order issued by SEBI in 2018.
Firstly, the Court clarified that Section 11B of the SEBI Act, 1992, as amended through the 2013 Explanation, was always intended to include within its ambit the power to order disgorgement of ill-gotten gains. This retrospective clarification signified that SEBI had the authority, even prior to the amendment, to pass such directions in the interest of investors and market integrity6.
Secondly, although SEBI's Whole Time Member ("WTM"), in its order dated 31.07.2014, expressly acknowledged the fraudulent conduct of VCL and others and the consequent financial loss caused to investors, it failed to exercise its statutory power to direct the disgorgement of unlawful gains. This omission was particularly significant because, following the 2013 amendments, Section 11B explicitly empowered SEBI to order disgorgement as a remedial measure. The failure to invoke this provision at the time, despite full knowledge of the misconduct and the legal authority to act, amounted to a lapse in regulatory enforcement.7
Thirdly, acting upon subsequent complaints filed by Ram Kishori Gupta and Harishchandra Gupta, notwithstanding the fact that their claims had already been dismissed by the Tribunal in 2013, SEBI reopened the matter and issued a fresh order in 2018. Through this order, SEBI directed disgorgement of ill-gotten gains and imposed additional penalties on VCL and associated entities, purportedly under the powers granted by Sections 11 and 11B of the SEBI Act, 1992. This re-initiation of proceedings, however, gave rise to substantial legal concerns regarding judicial finality and the bar against re-litigation on the same cause of action.8
Fourthly, the 2018 order contravened the principle of res judicata since the previous order of 2014 had attained finality and the penalties imposed in it were fully enforced. Thus, issuing a fresh order on the same cause of action undermined judicial sanctity. Moreover, the court invoked the doctrine of constructive res judicata stating that SEBI had the opportunity of ordering disgorgement in its 2014 order. Having failed to do so, it was barred from revisiting the issue in subsequent proceedings on the same offence.9
The Court relied on Hope Plantations Ltd. v. Taluk Land Board10, wherein the Supreme Court held that res judicata applies even outside the framework of the Civil Procedure Code, 1908 ("CPC") and applies to administrative and quasi-judicial authorities – and not just courts. Further in Amalgamated Coalfields Ltd. v. Janapada11and Devilal Modi v. State Tax Officer12, the court reaffirmed the doctrine of constructive res judicata holding that if a party is allowed to take one proceeding after another by changing or adding new grounds each time, it would violate public policy and result in endless litigation.
Fifthly, the Court refuted SEBI's argument that Section 15U(1) of the SEBI Act exempted its proceedings from the applicability of the principle of res judicata under Section 11 of the CPC, as such proceedings serve a distinct regulatory function. The court highlighted that Section 15U(1) pertains only to the Tribunal's procedure, allowing it to follow principles of natural justice instead of the CPC. It does not apply to SEBI or its WTMs, so SEBI cannot claim any exemption from the doctrine of res judicata under this provision.13
Lastly, the court pointed out SEBI's delayed and sluggish approach in initiating disgorgement proceedings. Despite the WTM passing an order in 2016 to begin the process, it took almost two years for SEBI to issue a show-cause notice in 2018, and another seven months before the final order was passed which reflected poorly on SEBI's duty to act efficiently in protecting investors and regulating the securities market.14
Implications of the Ruling on SEBI's Future Regulatory Approach
In the wake of this ruling, SEBI is expected to allocate more time and resources in drafting its final orders, ensuring that its initial decisions are thorough, comprehensive, and exhaustive addressing all potential violations and remedies, including disgorgement. While this approach will likely reduce errors, it may also result in a longer adjudication process. This ruling on one hand encourages legal finality and fosters market confidence while on the other limits SEBI's scope to revisit and rectify its critical oversights such as failing to order disgorgement in the first order.
The affirmation that the principle of res judicata applies to SEBI's proceedings imposes a significant constraint on the regulator. SEBI must be meticulous in its initial adjudications, knowing that it cannot revisit issues already decided. This places significance on the quality and completeness of SEBI's initial orders and may necessitate more rigorous internal review processes before taking final decisions.
By holding that SEBI cannot reopen final orders to impose disgorgement, the judgment delineates the boundaries of SEBI's disgorgement powers. SEBI must now ensure that any decision to disgorge ill-gotten gains is made at the earliest possible stage of the proceedings. This necessitates a more proactive and comprehensive initial investigation to avoid the pitfalls of later procedural bars.
Prior to 2019, it was common for SEBI to issue two separate orders: one by an Adjudicating Officer (for penalties) and another by a WTM (for remedial actions like disgorgement). Post 2019 amendment to the SEBI Act, WTMs can impose both penalties and remedies, significantly reducing duplication and preventing fragmentation of regulatory actions.
Finally, this judgment offers clarity that SEBI has no mandate to grant compensation to defrauded investors. It can only order disgorgement of unlawful gains in such cases. In cases where investors are dissatisfied with the financial relief by SEBI, their only remedy lies in approaching the civil courts.
Footnotes
1 Para 3
2 Paras 4-7
3 Paras 8-10
4 Paras 11 & 16
5 Paras 18 & 19
6 Para 22
7 Para 23
8 Para 24
9 Para 25 & 26
10 (1999) 5 SCC 590
11 AIR 1964 SC 1013
12 AIR 1965 SC 1150
13 Para 27
14 Paras 29 & 30
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