[RIL-SEBI Litigation] Regulator should not circumvent rule of law for getting successful convictions: Supreme Court

While noting that the Security Exchange Board of India (SEBI) is a regulator and has a duty to act fairly while conducting proceedings or initiating any action against the parties, the Supreme Court on Friday held that,

"Being a quasi-judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law. The role of a regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions. There is a substantive duty on the regulators to show fairness, in the form of public cooperation and deference."

The Supreme Court bench headed by Chief Justice of India Justice NV Ramana made such observations while allowing a petition by Reliance Industries Limited (RIL) seeking a direction to the SEBI to permit it to access certain documents that were relied upon by the regulator in a probe pertaining to the company acquiring its own shares between 1994-2000.

SEBI had alleged against RIL that it had funded purchase of its own shares by 38 related entities and thereby violated Section 77 (2) of the Companies Act, 1956 and consequently, violated regulations 3, 5 and 6 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.

RIL had then requested for copies of the documents while submitting that the issue concerning violation of Section 77 was examined by the Ministry of Corporate Affairs which had concluded that the transaction was compliant with the applicable law.

While examining the maintainability of the appeal before it, the top Court said,

"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 bench also consisting of Justice Krishna Murari and Justice Hima Kohli further opined that the duty to act fairly by SEBI is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself.

Furthermore, while noting that the investigation report by SEBI in 2005 was inconclusive about the alleged offence and there existed a communique by the MCA recommending closure of the case as they found nothing to further the prosecution under Section 77, Court held that 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.

Referring to SEBI's approach in failing to disclose the documents, the CJI led bench said,

"Opaqueness only propagates prejudice and partiality. Opaqueness is antithetical to transparency. It is of utmost importance that in a country grounded in the rule of law, institutions ought to adopt procedures that further the democratic principles of transparency and accountability. Principles of fairness and transparency of adjudicatory proceedings are the cornerstone of the principles of open justice."

Case Title: RELIANCE INDUSTRIES LIMITED vs. SECURITIES AND EXCHANGE BOARD OF INDIA & ORS.