SEBI Intermediaries
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This article is written by Jitesh Maheshwari. Jitesh is an Associate at Mindspright Legal, Mumbai.

Introduction

In a recent order of Phillip Commodities India Pvt. Ltd. (See here) SEBI has granted an opportunity of personal hearing with respect to the issue of inspection of documents. It was the first case in which the Ld. Whole Time Member (WTM) had granted an opportunity of personal hearing on the issue of whether inspection of documents must be provided to the Noticee for certain documents or not. Although in normal practice, SEBI addressed the issues of inspection by way of administrative notices/letters, in this case, the outcome of the issue of personal hearing was decided by granting the Noticee an opportunity of personal hearing as an impasse was created between the conflicting stands of SEBI and the Noticee.

However, the WTM held that the order should not be cited as a precedent in every matter where inspection is sought by the parties. The passing of formal orders on every objection/issues raised by each Noticee would lead to a multiplicity of orders in the same proceeding resulting in the delay of the dispensation of justice. It would also clog-up the quasi-judicial and appellate forum with unwarranted litigations. This may help the entities which don’t have substantive submissions to make on merit to engage in dilatory tactics.

Issue involved

The stand of SEBI was that the inspection of all the documents relied upon in the Show Cause Notice had been granted to the Noticee and so no further opportunity of inspection could be granted in the matter. However, the stand of the Noticee was that it is entitled to get the additional documents. Hence, the issue involved in the present case was whether the inspection of the documents has to be provided for all the documents or the documents relied upon by SEBI in the issuance of the Show Cause Notice.

The Investigating Authority investigates a case and collects some documents in the course of the investigation. Out of the documents collected during the investigation, some, and not all are relied upon by SEBI to form a case against the person and the Show Cause Notice is issued. Due to this, the issue raised in various cases is whether the Noticee is entitled to the inspection of only those documents relied on by the authority in the Show Cause Notice or all the documents collected by the Investigating Authority in the course of the Investigation?

Price Waterhouse Case

The Hon’ble Supreme Court of India in its order in Securities and Exchange Board of India v. Price Waterhouse (see here) directed SEBI to provide all the statements recorded during the course of the investigation to the respondents and further directed SEBI to permit the inspection of all the documents collected during the investigation to the respondents.

Ramalinga Raju Case

Post the order of the Apex Court in the Price Waterhouse case, it was the perception in the market that the position regarding the issue of inspection is settled and it is mandatory for SEBI to provide the inspection of all the documents collected by the Investigating Authority during the Investigation. However, the Hon’ble Securities Appellate Tribunal made the observations in the matter of Shri B. Ramalinga Raju v. SEBI (see here) that the directions given in the facts of Price Waterhouse case cannot be said to be the ratio laid down by the Apex Court and applicable to all other cases. While observing the same it was held by the Hon’ble Tribunal that:

There can be no dispute that while determining the rights and obligations of the parties the quasi-judicial authority must adhere to the principles of natural justice which inter alia, includes the obligation to furnish requisite documents on the basis of which charges are framed and permit cross-examination of the persons whose statements are relied upon.” (emphasis supplied)

Hence, it can be observed that although the Apex Court in the Price Waterhouse case directed SEBI to provide the inspection of all the documents collected during the inspection, the SAT observed the directions of the Apex court to be case specific and held that the inspection of the documents on the basis of which the charges are framed has to be provided.

The WTM in the Phillip Commodities case applying the reasoning of the SAT in Ramalinga Raju case refused to accede to the request of the Noticee of granting inspection of all the documents collected during the examination. It observed that it is only obligatory for SEBI to grant the inspection of relied upon documents, which has already been granted to the Noticee.

Smitaben Case

In the matter of dealings in the shares of Nissan Copper Limited (see here) it was held by the then WTM that SEBI is not under an obligation to arrange and provide all the records and documents that the accused may need. There was no need to defend itself as the tests of natural justice are met if the records relied upon are provided. It was observed that the obligation of SEBI is only to provide the relied upon documents, and even if certain documents can help the Noticees to defend their case SEBI has no obligation to provide the same. The order was set aside at the appellate stage in the matter of Ms. Smitaben N. Shah v.  SEBI (see here) wherein the Hon’ble Tribunal in Para 7 of the order had clearly stated that:-

“If the documents asked for are relevant and may help the delinquent to prepare his/her defence they have to be furnished and it is not correct to say that only the documents relied upon in the show cause notice alone are to be supplied to meet the ends of the justice”

Hence, in this case, the SAT observed that it cannot be said that SEBI will only provide the documents which have been relied upon by SEBI in the Show Cause Notice and if need be, the documents required by the delinquent for his / her defence should be furnished.

Conclusion

In the opinion of the Authors, the stance of SEBI on the issue of inspection of documents in the Phillip Commodities case and stance of SAT in Ramalinga Raju case is wrong, as SEBI being a statutory authority is not at the liberty to withhold information, on the basis of what it has relied upon while preparing the SCN or otherwise, and should allow an entity to inspect and take copies of all the information which it has collected during the course of investigation.

It may be possible that there are certain documents collected by the Investigating Authority during the investigation but the same are not relied upon in the Show Cause Notice as it actually defends the case of the Noticee. In such a circumstance, it is imperative that the inspection must be granted to the Noticee on all the documents collected during the investigation and may be under the exclusive possession of SEBI. The Apex Court in Price Waterhouse case directed SEBI to grant inspection of all the documents collected during investigation instead of granting the inspection of the relied upon documents. Therefore, the observation of SAT in Smitaben case was good and must be followed by SEBI. In order to prevent the entities from engaging in any dilatory tactics, SEBI must formulate some guidelines. It is also imperative that, in the light of the contradictory orders of SAT, the Supreme Court decides the issue of inspection by making it a precedent and settle the position.

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