Apex Court directs SEBI to disclose: Cherry-Picking not an option while adhering to the principles of natural justice

The Supreme Court of India has recently delivered a landmark decision, in the matter of Reliance Industries Limited v. Securities & Exchange Board of India (“SEBI”)[1], on the issue of whether SEBI can adopt a selective disclosure mechanism while complying with the principles of natural justice. The Supreme Court has reiterated that cherry-picking goes against the principles of natural justice and derogates the commitment to fair trial. The judgment which was delivered on August 05, 2022 is accessible here.

A background to the case

A complaint was filed in 2002 with SEBI alleging that Reliance Industries Limited (“RIL”), its associate companies and directors, had fraudulently allotted 12 crore equity shares of RIL to entities purportedly connected with the promoters, which were funded by RIL and other group companies, in 1994. SEBI sought various opinions from external experts upon the alleged violations committed by RIL, and thereby, issued a show-cause-notice (“SCN”) to RIL alleging violation of Regulation 11(1) of the SEBI Takeover Regulations (as it then stood).

In 2020, SEBI filed a criminal complaint in the Court of SEBI Special Judge, Mumbai seeking prosecution of RIL, which was rejected on grounds of limitation. The order of Special Judge was challenged before the Bombay High Court (“HC”) in a Criminal Revision Application, wherein RIL also filed an interim application seeking the complete copy of all the opinions/documents which have been relied upon by SEBI and which forms the basis of initiation of proceedings against RIL. Aggrieved by the order of the HC holding that the Interim Application will have to be heard on a later date along with the main Revision Application filed by SEBI, RIL approached the Apex Court.

Question of Law & Findings

One of the substantial questions of law raised before the Apex Court was whether SEBI is required to disclose documents in the present set of proceedings or not?

On the above question of law, the Hon’ble Court observed that keeping a party abreast of the information that influenced the decision promotes transparency of the judicial process. In this light, SC  noted the following:

“The impugned action of the appellant hails back to the year 1994, and almost three decades have gone by without there being any light at the end of the tunnel. The investigation report by SEBI in 2005 was inconclusive about the alleged offence. There is even a communique by the Minister of Corporate Affairs, Union of India recommending closure of the case as they found nothing to further the prosecution under Section 77 of the Companies Act, 1956. In this light, SEBI’s action to initiate a criminal complaint without providing the appellant an adequate opportunity to defend itself by releasing necessary Reports and other documents, cannot be appreciated by this Court as it is in gross violation of the appellant’s right to natural justice.”

The Court further held that in the case at hand, SEBI could not have claimed privilege over certain parts of the documents and at the same time, agreeing to disclose some part. Such selective disclosure cannot be countenanced in law as it clearly amounts to cherry-picking.

Analyses & Conclusion

The said judgment passed by the Hon’ble Apex Court goes a long way to reemphasize the law that when it comes to fulfilment of the principles of natural justice and fair trail, the Regulator has no option but to provide all the documents that were relied by it for initiating the investigation and/or initiating of prosecution against other party. The Apex Court’s decision will also set a precedent for parties arguing before various forums that selective furnishing of documents and/or submission of incomplete documents is also violative of principles of natural justice and the same will result in holding the proceedings to be non-est. The said decision also has reiterated the findings laid down by the Apex Court in another recent decision in case of T. Takano v. Securities and Exchange Board of India[2] wherein it was held the all the documents (including the investigation report) relied by SEBI on the basis of which the proceedings have been initiated, should be delivered to the other party so as to enable it to effectively put forth its defense in the case made against it by the Regulator.

The judgment also lays down law on an important proposition – that selective disclosure of a document is also not permissible under the law. The said judgement can be relied upon by parties in a case where the redacted form of documents, more particularly, in the nature of Investigation Reports are provided to parties where, while the findings against said parties are retained, the balance contents of the Investigation Report are redacted out. It would be interesting to see how this plays out in the future – if Regulators will adhere to the law reemphasized by the Apex Court in the instant case to ensure that the valuable time of the court is not wasted on hearing propositions which are absolute.

References:
[1] Criminal Appeal No. 1167 of 2022 [@ Special Leave Petition (CRL) No. 3417/2022].
[2] 2022 SCC Online SC 210. (Our earlier analyses on this case can be found by clicking here).