Escrow Account Release Does Not Bar SEBI Fraud Inquiry: Supreme Court

The Supreme Court has held that the release of an escrow amount under the Buyback Regulations does not automatically bar the Securities and Exchange Board of India (SEBI) from initiating or continuing proceedings for fraud under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) (PFUTP) Regulations, 2003.

A Bench of Justices J B Pardiwala and K V Vishwanathan said the inquiry into whether an escrow amount should be released is distinct from an inquiry into fraudulent conduct. Therefore, satisfaction of the conditions for release of the escrow cannot by itself prevent an independent finding of fraud under the PFUTP Regulations.

The Bench clarified that the conditions governing the forfeiture or release of an escrow amount under the Buyback Regulations cannot be treated as a finding on whether the PFUTP Regulations have been violated.

“The fact that the conditions governing the forfeiture or release of an escrow have been satisfied, by itself, cannot be treated as a finding on whether the PFUTP Regulations have been violated or not,” Court said.

Court was dealing with an appeal filed by SEBI against a common judgment of the Securities Appellate Tribunal (SAT), Mumbai, dated October 5, 2023. The SAT had allowed the appeals filed by Vedanta Ltd, formerly Cairn India Limited, and others and set aside the May 19, 2021 order passed by SEBI’s Adjudicating Officer.

The AO had imposed a penalty of Rs 5.25 crore on respondent no. 1 and Rs 15 lakh each on respondent nos. 2, 3 and 4 under Sections 15HA and 15HB of the SEBI Act, 1992. The penalties were imposed over an alleged misleading announcement of a buyback of shares without any intent to fulfil it.

The alleged conduct was stated to violate Regulations 3(a), (b), (c), (d), 4(1), 4(2)(k) and 4(2)(r) of the PFUTP Regulations, 2003, as well as Regulation 19(1)(a) of the SEBI (Buyback of Securities) Regulations, 1998.

What was the dispute over Vedanta's buyback?

Vedanta Limited had, through a special resolution in 2013, decided to buy back 17.09 crore equity shares at a maximum price of Rs 335 per share, involving a total investment of Rs 5,725 crore, through the open market in accordance with the Buyback Regulations.

In 2016, the escrow amount was released in favour of the respondents. However, an investigation into a possible violation of the PFUTP Regulations was undertaken separately.

The issue before the Supreme Court was whether the release of the escrow amount under the exceptions provided in Regulation 15B(8) of the Buyback Regulations precluded or otherwise barred an independent allegation, inquiry or finding of fraud under the PFUTP Regulations.

The Bench rejected the respondents’ submission that satisfaction of the conditions under Regulation 15B(8) necessarily ruled out allegations of fraud under the PFUTP Regulations.

It said accepting such an interpretation would mean that release of the escrow amount would provide immunity from an altogether distinct prohibition contained in the PFUTP Regulations. “There is, however, no warrant in the statutory scheme for such an interpretation,” Court held.

How should fraud under PFUTP Regulations be established?

The Bench said fraud must be established on the touchstone of the principle of balance of probabilities through an objective assessment of the evidence.

Where an authority is unable to prove inducement of third parties, the evidence must show that the device or tactic adopted admitted of no explanation other than fraud, Court said.

At the same time, the Bench found that the 2016 investigation report itself had clearly recorded that the escrow amount was exempted from forfeiture under clause 15B(8)(a) of the Buyback Regulations. It also recorded that the suspected violations of the PFUTP Regulations were being investigated separately.

Court further noted that even in SEBI’s communication to the respondents or third parties, there was no finding of fact establishing fraud under the PFUTP Regulations.

Why did the Supreme Court remand the case?

The Supreme Court remanded the matter to the SAT for fresh adjudication on the question of fraud alone, directing it to complete the exercise within six months.

The Bench also directed that, in exercise of its powers under Section 15U(2) of the SEBI Act, the SAT may summon and examine on oath officers of the respondent company, the merchant bankers engaged by it and any other person acquainted with the facts of the matter.

The SAT may also require the discovery and production of relevant documents to ascertain the true and complete facts concerning the placement of buy orders during the buyback period, the court said.

Case Title: Securities and Exchange Board of India Vs Vedanta Ltd & Ors

Bench: Justices J B Pardiwala and K V Vishwanathan

Date of Judgment: September 10, 2026