Frivolous Criminal Actions Against Large Corporations May Give Rise To Adverse Economic Consequences For Country: Supreme Court In Reliance vs SEBI

The Supreme Court of India held that initiation of criminal action in commercial transactions, should take place with a lot of circumspection. The bench stated that initiating frivolous criminal actions against large corporations would give rise to adverse economic consequences for India in the long run. Thus, it was opined that the Regulator must be cautious in initiating such an action and carefully weigh each factor. 

The Court made these observations while considering a petition filed by Reliance Industries Ltd against the SEBI seeking disclosure of documents relied on by the regulator in filing a criminal complaint against the company.

Background of the Case

A complaint was filed with the Securities and Exchange Board of India (SEBI) against Reliance Industries Ltd., its associate companies and its directors, alleging that they fraudulently allotted 12 crore equity shares of Reliance to entities connected with the promoters of Reliance, which were funded by Reliance and other group companies in 1994. It was alleged that the company and its directors were in violation of Section 77 of the Companies Act, 1956. Based on the said complaint, the SEBI appointed an investigating officer to inquire into the same. Pursuant to the investigation, SEBI prepared a note stating that there was a requirement of an opinion by an external expert on the possibility of initiating criminal proceedings against Reliance. Accordingly, Justice (Retd.) B.N. Srikrishna was approached. Reliance requested SEBI for copies of the documents, including the opinion received by SEBI by Justice (Retd.) B.N. Srikrishna. However, SEBI stated that the same could not be provided since it was confidential in nature.

In the year 2017­-18, the SEBI decided to re­examine the issue and accordingly sought advice of Justice Srikrishna for the second time. Justice Srikrishna suggested SEBI to take advice of Mr. Y.H. Malegam. On basis of Mr. Malegam's report, Justice Srikrishna was approached again. Reliance again requested SEBI to provide inspection and copies of all further material including the report of Mr. Malegam. SEBI rejected the request again.

Bombay High Court Proceedings 

Aggrieved by the refusal of SEBI to provide them with documents, Reliance approached the Bombay High Court which dismissed its Writ Petition. Pursuant to that, SEBI filed a complaint in the Court of SEBI Special Judge, Mumbai praying the court to issue the process against Reliance for offences under the SEBI Act. The SEBI Special Court dismissed the complaint filed by SEBI as being barred by limitation. The order was challenged by SEBI in The Bombay High Court. In these proceedings, Reliance filed an Interim Application seeking the documents. The court stated that the Interim Application could not be considered without hearing the main Revision Application.

Maintainability of the Appeal before the Supreme Court

Aggrieved by the order, Reliance filed the present appeal. The issue raised before the Supreme Court was whether the appeal was maintainable or not.

SEBI challenged the maintainability of the appeal on two grounds. First, that the impugned order was a mere adjournment order against which the Supreme Court should not exercise its jurisdiction and; second, that no criminal complaint existed to seek document disclosure as the trial Court had already dismissed SEBI's complaint on the ground of delay.

Per contra, Reliance argued that the Bombay High Court was not justified in adjourning a case after hearing the parties on more than two occasions on the application.

Court's Observations

The court noted that when the initial complaint was instituted to SEBI, the Legal Affairs Department of SEBI had closed the same. Further, the Ministry of Corporate Affairs had also clarified, that no violation of Section 77 of the Companies Act, 1956 was made out against Reliance. In this context, the court noted that re­examination of the complaint by SEBI had to happen only after providing adequate opportunity to Reliance to fully defend its case. 

Regarding the contention of SEBI that the Court should have considered Section 473 of CrPC to condone delay, the Court stated that Section 473 stated that any limitation prescribed under Section 468 of CrPC can be overlooked if sufficient cause is made out in the facts and circumstances of the individual case in the interest of justice. The court opined that the intention of the said provision was to make the inquiry a question of fact and not of unlimited discretion as to whether in a particular case, the Court should condone the delay.

In this context, the court stated that the approach of the Bombay High Court of adjourning adjudication of the interim application seeking disclosure of documents could not be appreciated. It held that the High Court should have considered the interim application before dealing with the limitation aspect.

The court opined that–

"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 further stated that in ordinary course, it would have remanded the matter for adjudication by the High Court. However, it stated that the arguments had been extensively advanced before the Court touching upon important aspects of criminal jurisprudence which required consideration.

The court also noted that the acts which are sought to be prosecuted go back to the year 1992-­1994, and over three decades had passed without there being any end to the litigation. In this regard, the Court stated that it intended to examine the issue and pass appropriate orders to ensure that the adjudication was not delayed unnecessarily.

Also read another report on the case : "Regulator Has To Act Fairly" : Supreme Court Directs SEBI To Disclose To Reliance Documents Used For Filing Complaint