Delhi HC sets aside adjudication by SEBI in the absence of ‘opinion’ by Board

The Delhi High Court has recently struck down proceedings initiated by the SEBI against certain persons for violations of insider trading regulations. The proceedings have been struck down on procedural grounds..This ruling by Justice Vibhu Bhukru highlights a procedure habitually followed by SEBI, which has now been declared as void by the Delhi High Court. As a consequence of this ruling, several adjudication proceedings pending before the SEBI may stand vitiated..The petitioner, in this case, Amit Jain, along with two others, bought shares in Himalaya Granites Limited. It was observed by the Group of Assistant General Managers at SEBI that the said transaction had violated provisions of the Takeover Regulations and the PIT Regulations..This observation made by the Group was then considered by the Committee of Division of Chiefs at SEBI who then recommended to the Whole Time Member (WTM) that the adjudication proceedings under Section 15A(b) of the SEBI Act be initiated against all three, including the petitioner..The power to appoint an Adjudication Officer (AO) which vests with the SEBI Board has been, by a general order, delegated to the WTM. While the WTM is required to pass an order after forming an opinion, in this case, the WTM merely accepted the recommendations made by the Chiefs and approved the appointment of AO, without the necessary application of mind. Subsequently, the AO levied penalties on petitioner, which also became came to be challenged in this writ petition..The petitioners’ grievances were twofold:.First, it was submitted that the proceedings for imposing penalty could not be initiated without a prior order under the PIT Regulations. The petitioners argued that the process in the PIT Regulations suggests that AO can only initiate inquiry once the Board (through the WTM) has formed an opinion that levying penalty is the right option to exercise; given that the Board has several options in terms of enforcement measures whereas an AO can only levy a penalty..It was submitted that as per the process laid down in the PIT Regulations, the Board was required to undertake an investigation if it suspects any violation of the PIT Regulations..The first question before the Court was – if penalty could be imposed only after the WTM (as a representative of the Board) had formed a firm opinion for adjudicating penalty?.On this point, the Court did not support the arguments put forth by the petitioner and ruled that it is not necessary for the Board to exhaust the procedure as specified in the PIT Regulations before initiating any independent action..It further said that the procedure followed in this case does not in any way impinge or dilute the powers of the Board to otherwise take action under the provisions of Chapter VIA of the SEBI Act. It said that the Board is not precluded from directing criminal prosecution or initiating an action under Chapter VI of the SEBI Act because proceedings by the AO have been initiated..Secondly, the petitioner submitted that the WTM alone (as a representative of the Board) was vested with the power to form an opinion before an AO could be appointed to adjudicate the question of any violation..He submitted that in the present case, the Board/WTM had not recorded any opinion and, therefore, the appointment of the AO was without jurisdiction..Thus the second question before the Court was – whether the WTM had formed an ‘opinion’ that there were grounds for adjudging penalty under Section 15A(b) of the SEBI Act?.The Court ruled that the noting made by the WTM could not be read as an expression of his opinion that there are grounds for adjudging under Chapter VIA of the SEBI Act, which is a precondition for the appointment of an AO. The WTM merely appointed the AO based on recommendation made by the Chiefs, without recording his own opinion..While the Court was of the view a detailed order by the WTM is not necessary for this purpose, it also said that the least that is required of the WTM is to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VIA of the SEBI Act before proceeding to appoint an AO. The Court held,.“ …he as a delegate of the Board is required to examine the allegations made and independently form and express an opinion that there are grounds for adjudging under Chapter VIA of the Act. The formation of an opinion that there are grounds for adjudging under Chapter VIA of the Act is the necessary pre-requisite for the Board to exercise its jurisdiction. Absent such opinion, the Board would have no jurisdiction to appoint an Adjudicating Officer.”.In view of the above reasoning, the Court set aside the proceedings initiated against the petitioner as well as the impugned notice which was served on the petitioner..The Court, however, clarified that the Board/WTM may examine the file and if they are of the view that there are grounds for adjudging under Chapter VIA of the SEBI Act, an AO may be appointed for holding an inquiry and pass an order in terms of the Rules..Advocate Rishabh Jain appeared for the petitioner, whereas Senior Advocate Neeraj Malhotra along with Advocates Sandhya Kohli, Harshita Agarwal, Rupal Luthra and Abhinandana appeared for SEBI..(Read the judgment)