"Regulator Has To Act Fairly" : Supreme Court Directs SEBI To Disclose To Reliance Documents Used For Filing Complaint

A regulator like the Securities and Exchange Board of India(SEBI) has a duty to act fairly, while conducting proceedings or initiating any action against the parties, stated the Supreme Court in a judgment delivered on Friday while allowing the plea of Reliance Industries Limited (RIL) to access certain documents relied on by the SEBI to file a criminal complaint against the company.

"It is expected that parties in such proceedings are transparent, more so for Regulators like SEBI, who are expected to share all the documents, which are necessary for understanding the issue", a bench led by the Chief Justice of India observed in the judgment(Reliance Industries Ltd versus Securities and Exchange Board of India).

Background facts

The issue relates back to certain share transactions of RIL in 1994, whereby around 12 crore equity shares of RIL were "fraudulently" allotted to its promoters and group companies. Based on a complaint filed by S Gurmurthy in 2002, the regulator initiated probe into the alleged irregularities.  The SEBI sought the opinion of former Supreme Court judge Justice BN Srikrishna twice and also the opinion of a Chartered Accountant named YH Malegam.

The RIL requested for disclosure of these opinions and related internal documents. When SEBI turned the request, RIL filed a writ petition before the Bombay High Court, which was dismissed in February 2019.

In 2020, the SEBI lodged a criminal complaint before Special Judge, Mumbai against RIL alleging offences punishable under SEBI Act and Regulations. The complaint was rejected by the Court as time-barred. The regulator filed a revision petition before the Bombay High Court challenging the dismissal of the complaint. In SEBI's revision petition, RIL filed an interlocutory application seeking the disclosure of the documents. On March 28, 2022, the High Court adjourned RIL's application, saying that it can be considered only along with the main revision petition. This led to the filing of the special leave petition before the Supreme Court.

Supreme Court's analysis

Observing that the matter touched upon "important aspects of criminal jurisprudence", the Supreme Court decided to examine the issue in detail. The bench comprising CJI NV Ramana, Justices JK Maheshwari and Hima Kohli stressed upon the duty of the regulator to act fairly.

"SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties. Being a quasi­judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law. The role of a Regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions. There is a substantive duty on the Regulators to show fairness, in the form of public co­operation and deference", the judgment authored by CJI NV Ramana stated.

"The duty to act fairly by SEBI, is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself", the judgment stated.

Keeping a party abreast of the information that influenced the decision promotes transparency of the judicial process, the Court added.

The judgment referred to the recent decision SP Velumani versus Arappoor Iyakam 2022 LiveLaw (SC) 507 in which the Court directed the sharing of vigilance preliminary enquiry report with an accused. Relying on SP Velumani, the Court rejected the argument of SEBI that the documents can be sought only under Section 207 CrPC after the criminal court takes cognizance of the complaint.  

"The approach of SEBI, in failing to disclose the documents also raises concerns of transparency and fair trial. Opaqueness only propagates prejudice and partiality. Opaqueness is antithetical to transparency. It is of utmost importance that in a country grounded in the Rule of Law, institutions ought to adopt procedures that further the democratic principles of transparency and accountability. Principles of fairness and transparency of adjudicatory proceedings are the cornerstone of the principles of open justice", the Court stated.

Rejects arguments of privilege

The SEBI placed reliance on Section 129 of the Indian Evidence Act which prohibit compulsion to disclose confidential communications with legal advisors. The Court opined that legal privilege is not applicable in the instant case, as the legal opinion was part and parcel of the investigation.

Due to the following facts, the question of legal privilege does not arise.

i. The investigation report was inconclusive, as admitted by SEBI itself.

ii. Instead of SEBI referring the issue to an expert, it could have undertaken the exercise of further investigation by itself, which was not done.

iii. SEBI ultimately took further steps, only because of the first opinion of Justice (retd.) B. N. Srikrishna.

iv. The first opinion of Justice (retd.) B. N. Srikrishna is a part and parcel of the investigation and documents connected therewith.

v. Moreover, certain documents have already been disclosed to the appellant herein.

"The simple test in this case is whether SEBI has launched the prosecution on the basis of the investigation report alone. The answer seems to be 'No' by SEBI's own admission in its reply where it states that the investigation report was inconclusive and hence further scrutiny of the transactions by experts was called for. That being the case, further Reports and opinions obtained, from whomsoever it may be, are only an extension of the investigation to help SEBI as a Regulator to ascertain the facts and reach conclusions for prosecution or otherwise", the Court stated.

The technical argument of res judicata raised by SEBI on the ground of High Court dismissing the writ petition of RIL was also not accepted by the Supreme court.

Frivolous criminal litigation against large corporations affect economic health of the country

The Court also added a word of caution against launching frivolous criminal litigation against large corporations.

"Initiation of criminal action in commercial transactions, should take place with a lot of circumspection and the Courts ought to act as gate keepers for the same. Initiating frivolous criminal actions against large corporations, would give rise to adverse economic consequences for the country in the long run. Therefore, the Regulator must be cautious in initiating such an action and carefully weigh each factor", the Court stated.

The Court allowed RIL's appeal directing SEBI to furnish a copy of the following documents to RIL forthwith:­

(i) First opinion of Justice (Retired) B.N. Srikrishna

(ii) Report of Y.H. Malegam

(iii) Second opinion of Justice (Retired) B.N. Srikrishna

Senior Advocate Harish Salve appeared for RIL and Senior Advocate Arvind P Datar argued for SEBI.

Case Title : Reliance Industries Ltd versus Securities and Exchange Board of India

Citation : 2022 LiveLaw (SC) 659

Headnotes

Summary : Supreme Court directs Securities and Exchange Board of India (SEBI) to disclose to Reliance Industries Ltd the documents relied on by the SEBI to filed a criminal complaint against RIL over alleged irregularities in a share transaction in 1994.

Regulators should avoid frivolous criminal actions against large corporations - Initiation of criminal action in commercial transactions, should take place with a lot of circumspection and the Courts ought to act as gate keepers for the same. Initiating frivolous criminal actions against large corporations, would give rise to adverse economic consequences for the country in the long run. Therefore, the Regulator must be cautious in initiating such an action and carefully weigh each factor (Para 29).

Regulators should act fairly - SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties. Being a quasi­judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law. The role of a Regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions. There is a substantive duty on the Regulators to show fairness, in the form of public co­operation and deference (Para 42)

Principles of natural justice - The duty to act fairly by SEBI, is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself (Para 43)

Fair Trial - The approach of SEBI, in failing to disclose the documents also raises concerns of transparency and fair trial. Opaqueness only propagates prejudice and partiality. Opaqueness is antithetical to transparency. It is of utmost importance that in a country grounded in the Rule of Law, institutions ought to adopt procedures that further the democratic principles of transparency and accountability. Principles of fairness and transparency of adjudicatory proceedings are the cornerstone of the principles of open justice (Para 46)

Indian Evidence Act - Section 129 - Privilege over legal advise- Legal privilege not applicable to legal opinion used by SEBI to initiate prosecution, as such opinion is part of investigation (Para 53-55)

Code of Criminal Procedure - Section 207 - Sec 207 of CrPC cannot be read as a provision etched in stone to cause serious violation of the rights of the accused as well as to the principles of natural justice - Can't always insist that documents can be shared only after court takes cognizance of the complaint- Follows dicta in SP Velumani versus Arappoor Iyakam 2022 LiveLaw (SC) 507 - Para 56

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