RIL v. SEBI: A chilling effect on SEBI enforcement

The Supreme Court's decision in RIL v. SEBI (2026) setting aside the ₹447.27 crore disgorgement order against Reliance Industries Limited (RIL) may well be correct on the evidence before it.

The doctrinal architecture constructed to reach that result warrants scrutiny and its consequences for securities enforcement will outlast this litigation considerably.

RIL, as 75% promoter of Reliance Petroleum Limited (RPL), resolved in March 2007 to divest 22.50 crore RPL shares. Prices had quadrupled from the IPO price of ₹60 to ₹247.90, with Goldman Sachs, Morgan Stanley and Kotak Institutional Equities each flagging significant overvaluation. RIL entered agency agreements with 12 independent entities to take short futures positions aggregating 9.92 crore shares in the November 2007 RPL futures segment, where liquidity was nearly four times that of the cash segment.

Under Clauses 1.2 and 3.2, all transactions required RIL's prior approval and all profits accrued exclusively to RIL. On settlement date (November 29, 2007), RIL sold 1.95 crore RPL shares within the last 8 minutes and 20 seconds of trading. The whole time member (WTM) held this a pre-planned scheme to depress the settlement price and directed disgorgement. The Securities Appellate Tribunal (SAT) majority affirmed this by 2:1. The Supreme Court reversed the finding on fraud while upholding a penalty for disclosure violations under the 2001 SEBI Circular.

The correction of SEBI's position limit methodology is unimpeachable. The 2001 SEBI Circular requires limits to apply to "the combine position in all derivative contracts on an underlying stock at an exchange." SEBI calculated concentration only on the November 2007 series, producing 93.60%. RIL's all-series calculation across December 2007, January 2008 futures and options yielded 40.10%, which SEBI did not refute. A per-series calculation creates precisely the arbitrage the Circular was designed to foreclose.

The hedging analysis is also defensible. No formal policy existed in 2007; SEBI and NSE introduced hedging policies only in 2016 and exclusively for commodity derivatives. The Gujarat High Court in Pankaj Oil Mills v. CIT (1976) held that hedges must not exceed total underlying stock; 9.92 crore futures positions against 22.50 crore underlying shares satisfies that test. On the last-minute sales, RIL never sold below ₹210, consistent with its established floor; the price unexpectedly spiked to ₹224.70 in the final window; 1.06 crore shares were simultaneously sold by other participants whom SEBI never investigated; and as a 70% promoter, RIL had a structural disincentive to depress its own subsidiary's price.

The enduring significance of the judgment lies not in these case-specific conclusions but in what the Court did to Regulation 2(1)(c) of the PFUTP Regulations in reaching them.

The provision defines fraud as including any act, expression, omission or concealment "committed whether in a deceitful manner or not... in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss." The Court correctly extracted that mala fide intention is not required, inducement is necessary and actual injury need not be proved. It then characterised the provision as "inelegant legislative drafting" and at paragraph 175 constructed, through purposive interpretation, a two-scenario framework: where injury is established, no proof of deceitful intention is required, but "where injury is impossible to be proved, the requirement of wrongful intention becomes mandatory"; and where deceitful intention is clear from blatant misconduct, injury need not be proved. It further held that where SEBI proceeds without separately establishing inducement on the Rakhi Trading dispensation, "the standard of proof to be discharged is a higher degree of the preponderance of probabilities."

Nothing in this framework appears in the statutory text. Parliament's express choice of "whether in a deceitful manner or not" is the textual foundation for excluding intent. The Court read it back in through purposive construction without statutory compulsion. That act, by a two-judge bench, raised four questions that made a reference strongly warranted.

The first is whether the paragraph 175 framework is consistent with the three-judge bench in SEBI v. Kanhaiyalal Baldevbhai Patel (2017). That bench held, in terms the 2026 judgment quotes approvingly: "mens rea is not an indispensable requirement"; "no element of dishonesty or bad faith in the making of the inducement would be required"; and "a mere inference, rather than proof, of inducement is sufficient."

The 2026 two-judge bench neither overrules nor formally distinguishes Kanhaiyalal, yet constructs a framework where wrongful intention "becomes mandatory" where injury cannot be proved. A defender may argue that Kanhaiyalal only said intent is not indispensable and that paragraph 175 merely identifies circumstances where intent assumes greater evidentiary weight. That reading deserves acknowledgment. The language nevertheless remains difficult to reconcile with a three-judge bench holding that mens rea is not an indispensable requirement for the very same Regulations. A two-judge bench cannot accomplish through purposive construction what it cannot accomplish by express overruling. The prudential course was to formulate the tension and refer it forward.

The second question concerns the alter ego problem within the definition itself. Regulation 2(1)(c) uses "by his agent" on both the doing-side and the inducing-side. The Court correctly attributed the acts of the 12 entities to RIL through the principal-agent relationship, then separately asked whether "another person" was induced to deal, answering that in a cash-settlement system "no inducement to deal in securities follows the settlement." This locates inducement at settlement rather than at contract formation. Counterparties who took long positions against RIL's agents were induced at the moment of entering those contracts, without knowledge that one undisclosed directing mind controlled between 40% and 93% of open interest. A market participant entering a buy position would not have done so on the same terms had the identity and scale of the counterparty-principal been disclosed. Whether inducement falls at contract formation or at settlement and whether counterparties dealing against an undisclosed principal's agents constitute "another person" within the provision, are questions the judgment does not engage with.

The third question concerns Regulation 3(d), which independently prohibits any "act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in securities...in contravention of the provisions of the Act or the rules and the regulations made thereunder." It does not require inducement of an identifiable third party. The Court upheld a penalty on the principle that what cannot be done directly cannot be done indirectly through 12 agency arrangements, thereby conceding a regulatory contravention. That same contravention engages Regulation 3(d) on its plain terms. The provision appears once in the submissions, dismissed in a single line. The Court's own analysis never addresses it independently. Whether Regulation 3(d) constitutes a separate head of PFUTP liability not requiring inducement in the same terms as Regulation 2(1)(c) is a question of importance to every future enforcement proceeding.

The fourth question concerns the "higher degree of the preponderance of probabilities" applied to find that SEBI failed to discharge its burden. The judgment nowhere states what operationally distinguishes this from the ordinary civil standard. Lord Denning's formulation in Bater v. Bater, cited in support, provides only that the degree of probability depends upon the subject matter; it offers no metric. The Rakhi Trading dispensation was designed precisely for cases where induced parties cannot be identified in anonymous screen-based trading. Requiring an elevated standard of proof of manipulation at the very point where inducement is dispensed with compounds the evidentiary burden in the cases that dispensation was meant to address.

Underlying all four questions is a premise that overstates the position before this judgment. SEBI's enforcement was never genuinely unconstrained; it required inducement to be proved or inferred, manipulation established on preponderance of probabilities, findings to survive Article 14 scrutiny and orders to face independent review before SAT and the Supreme Court under Section 15Z of the SEBI Act. A broad statutory definition does not equate to unchecked administrative power. The Court's concern about unfettered discretion is legitimate, but the answer lies in legislative amendment or larger bench guidance, not in a two-judge bench introducing a new essential element, leaving an independent regulatory provision unaddressed, locating inducement at the wrong juridical moment and producing a proof standard without operational content.

Every WTM must now prove either identifiable inducement - which Rakhi Trading acknowledged is near-impossible in anonymous screen-based trading - or manipulation to a standard the judgment does not define, precisely when a sophisticated accused produces a commercially plausible alternative explanation. The more structured the manipulation, the more readily that explanation is available.

The conflict with Kanhaiyalal, the unaddressed alter ego question, the silence on Regulation 3(d) and the undefined elevated proof standard each independently warranted a reference. Together, they made it the prudent course. The questions remain and they will return.

Prasanth Raju is an advocate practising in the Bombay High Court.