India: Supreme Court On Disclosure Of Documents Relied Upon For Issuance Of Show Cause Notice

Recently, a division bench of the Supreme Court Court of India [“SC”], in Kavi Arora v Securities Exchange Board of India,¹ allowed the non-disclosure of certain documents which were available with and may have been relied upon by Securities and Exchange Board of India [“SEBI”] for issuing a show cause notice [“SCN”] under section 15HA, Securities and Exchange Board of India Act, 1992 [“SEBI Act”] and SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 [“SEBI Rules”] to one Mr Kavi Arora ["petitioner”] along with other noticees.

Background

The petitioner was the Managing Director and Chief Executive Officer of Religare Finvest Limited, which is the subsidiary of Religare Enterprises Limited [“Religare”]. The SCN, issued on 17 November 2020, alleged that Rs. 2315.66 crores were diverted through various conduit entities to ultimately benefit the promoters of Religare, amounting to fraudulent and unfair trade practise. The petitioner repeatedly requested for inspection of all documents relied upon by SEBI for issuing the SCN. However, SEBI provided only those documents which it said would rely on for the purposes of the final order.²

The petitioner filed a writ petition before the Bombay High Court, praying for directions to SEBI for disclosure of the undisclosed documents. The writ petition got dismissed vide judgment dated 15 September 2021. Bombay High Court reasoned that the undisclosed documents were confidential and relied on the SEBI's counsel's submission that those documents would not be relied upon during the hearing of the SCN.  

The petitioner came before  SC with a special leave petition [“SLP”]. The petitioner requested for the documents which were relied on by SEBI to issue the SCN on the grounds of principle of natural justice. SEBI argued that the documents which were undisclosed to the petitioner were impacted by third party confidentiality and such documents would not be relied on by the authority in the final order. Vide an interim order dated 27 September 2021, SC permitted the SEBI inquiry, however, without relying on any document not being supplied to the petitioner. In the judgment dated 14 September 2022, SC dismissed the SLP, holding that documents relied upon before issuing the SCN, at the stage of appointment of the adjudicating officer, need not be disclosed, if they are not relied upon in the inquiry.

Issues and Analysis

A division bench of SC had clarified in Natwar Singh v Directorate of Enforcement,³ that only those documents which have been relied by the authority for issuance of a show cause notice need to be disclosed to the noticee.

Recently, in Takano v SEBI,⁴ [“Takano case”], a division bench of SC had held that all materials relied upon by the authority for the issuance of a show cause notice must be disclosed to the noticee. And, later in the adjudication proceedings, all relevant information can be disclosed. SC also stated that just because the authority has denied placing reliance on the undisclosed documents, it does not mean that such material cannot be disclosed to the noticee - in all reasaonable probability, such material influences the authority's decision. SC further stated that confidential documents can also be provided to the noticee after carefully redacting.

In the present matter, SEBI did not deny its reliance on the undisclosed documents for the issuance of the SCN .This could imply that SEBI may have relied on those documents before issuing the SCN. Whilst SEBI indicated that all relevant documents relied upon had been disclosed for the purpose of the final order, it may defeat the essence of principle of natural justice if relevant documents relied on for issuance of a show cause notice are not disclosed.

SC stated that it found the Bombay High Court right in not interfering with the proceedings at the stage of SCN. However, it remained silent on the fact whether all documents relied on by SEBI adjudicating officer for issuance of the SCN should be disclosed to the petitioner. Whilst SC indicated that the adjudication process begins with the issuance of a show cause notice, it did not clarify whether at the stage of the SCN, all documents relied on by SEBI should be disclosed to the petitioner. The judgment is restricted to disclosure of documents at the preliminary stage of deciding whether an adjudication proceeding should be initiated and an adjudicating officer is appointed.

Further, SC did not discuss the defence of confidentiality taken by SEBI for not disclosing the documents. On the other hand, in Takano case, SC had ordered SEBI to disclose the document after redacting information impinging upon privacy of third parties, despite the contention of confidentiality raised therein.

Significant to mention, recently, a three judge bench of SC, in Reliance Industries Limited v SEBI,⁵ stated that SEBI as a regulator and a quasi judicial body, should act fairly. The bench relied on the principles of disclosure laid down in Takano case. A legal opinion which formed the basis for issuance of the show cause notice was ordered to be disclosed to the noticee. However, this stated matter arose in a criminal appeal from compliant filed before the SEBI Special Judge, hence the judgment pertains to the disclosure requirements under the framework of criminal jurisprudence.

Comment

It is abundantly clear from the above cited jurisprudence, that documents relied upon by an authority for the issuance of a show cause notice, must be disclosed to the noticee. Especially in Takano case, SC favoured full disclosure of such documents and held that the mere statement by the authority of not relying on documents later during the inquiry would not exempt it from the liability of disclosure. In the present matter, SC refused to interfere with the Bombay High Court's dismissal of the writ, which effectively allowed non-disclosure of documents when SCN was already issued, which presents a direct dichotomy in views taken by SC in the recent past. Since, SC has not addressed the legal position as regards disclosure of documents relied on by an authority at the stage of issuance of the show cause notice, and dismissed the present SLP of the petitioner, it calls for a further judicial clarity on the earlier settled position of protection of principle of natural justice.

Footnotes

1. Kavi Arora v Securities and Exchange Board of India SLP (Civil) No. 15149 of 2021 [“Kavi Arora”].

2. Other documents, including index of bank statements, calendar of oral evidence, documentary evidence including emails and letters were denied on the ground of confidentiality.

3. Natwar Singh v Director of Enforcement and Others (2010) 13 SCC 255.

4. T Takano vSecurities and Exchange Board of India 2022 SCC Online SC 210 [“Takano”].

5. Reliance Industries Limited v Securities and Exchange Board of India Criminal Appeal No 1167 of 2022.

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