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Show and Tell: The regulator has a Duty to Disclose

Sandeep Parekh

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Co-authored with Raghuvamsi Meka, senior associate, Finsec Law Advisors

A constant tussle for the past several years between noticees to show cause proceedings initiated by SEBI and the regulator has been surrounding access to documents, especially investigation reports. Being a quasi-judicial body, SEBI has demarcated and allocated investigation and adjudication to separate departments. Unless speed is needed, SEBI passes directions or imposes penalty after undertaking an investigation and analysing the  report. Thus, given the importance of the same, noticees request SEBI to share a copy for effectively defending the allegations made against them. However, SEBI has been reluctant to share this report with the noticees. In denying noticees’ requests, SEBI noted the reasons were that the relevant contents of the investigation report already form part of the notice and it has not relied on anything which is not provided as part of the show cause notice, or that the report is an internal document and cannot be disclosed to the noticee. In the past, the Securities Appellate Tribunal (SAT) had concurred with this contention of SEBI. In cases such as Shruti Vora, relying on the SC decision in the matter of Natwar Singh vs Director of Enforcement, SAT had held that only the documents relied upon by SEBI are required to be provided. Noticees argue that they require all the documents relevant to the proceedings to effectively defend the allegations.

This matter once again reached the SC in the matter of T Takano vs SEBI. In a win for fairness, the SC held that all information relevant to the proceedings must be disclosed by the regulator in adjudication proceedings. In this case, the appellant had received a show cause notice issued by SEBI alleging violation of provisions, namely Prohibition of Fraudulent and Unfair Trade Practices Regulations 2003 (PFUTP Regulations) when the appellant was the MD and CEO of Ricoh India Ltd. This notice was issued based on a forensic audit and investigation by SEBI. Upon not receiving the investigation report, the appellant approached the Bombay HC,which held that the investigation report prepared by the investigating authority under Regulation 9 of PFUTP Regulations is solely for internal purposes. It held that the report doesn’t form the basis of the show cause notice and thus need not be disclosed. Once again, it had relied on the judgment of the SC in Natwar Singh.

Analysing the regulatory framework provided under the PFUTP Regulations, the SC noted that before issuing directions or taking action under Regulations 11 and 12 of PFUTP Regulations, three stages have to be traversed by SEBI—consideration of the report of the investigating authority; furnishing of reasonable opportunity of being heard; and satisfying itself that there is a violation of PFUTP Regulations. The SC noted that, as provided in Regulation 10, the investigation report is an intrinsic component to determine whether a violation has been committed. Thus, it held that SEBI’s submission that the investigation report is part of internal deliberations and need not be disclosed omits to take into account a crucial part of Regulation 10. The SC has analysed the very concept of ‘duty to disclose’ investigative material. It has clearly laid down that theregulator is not only required to disclose materials it has ‘relied on’, but there is a duty to disclose ‘all relevant’ materials. The SC stated that disclosure of information served three purposes: ensuring reliability in determining truth of contentions, fair trial, and transparency and accountability. As disclosure targets both outcome (reliability) and process(fair trial and transparency), SC stated that it would be insufficient if only the material relied on is disclosed. Since the probe report is essential for SEBI before issuing directions, it too needs disclosure.

Various courts have relied on the Natwar Singh judgement to deny access to investigation report. Therefore, the SC has painstakingly analysed the judgement to distinguish the same. In Natwar Singh, the court reviewed the FEMA adjudication rules, similar to the SEBI adjudication rules, to hold that documents not relied upon by the authority need not be disclosed. The SC noted that, in Natwar Singh, the court distinguishes between the initial stage of adjudication, only for deciding whether an inquiry is to be held, and the subsequent stage of adjudication proceedings. The SC noted that there was no requirement to furnish all the documents was only applicable to this initial stage. Pursuant to reviewing various cases cited by the counsels, the SC held that the assertion of the quasi-judicial authority that it has not relied on certain material would not exempt it from disclosing the same if it is relevant to and has a nexus to the action taken. In the present case, SEBI has clearly stated that the findings of the investigation report were important for it to decide on initiating enforcement proceedings under PFUTP Regulations. The SC held that even if the report is treated as internal communication, there is a duty to disclose it if it relevant for determining the alleged violation, while also noting that there are exceptions to this duty to disclose. If SEBI could prima facie establish that disclosure would affect third party rights, then the appellant has to prove that the information is necessary to defend his case. In the present matter, SEBI stated that the report contains information on the volatile nature of markets, personal information of various stakeholders, and strategic information. The appellant was not able to sufficiently prove that the non-disclosure of the report would affect his defendability. However, it also noted that because a few portions have confidential information, SEBI cannot withhold the entire report. The court also gave guidance on the kind and extent of redactable information.

The SC has comprehensively settled the question of ‘duty to disclose’. By holding that all relevant information needs to be disclosed while providing sufficient safeguards, the SC has clarified the process that a quasi-judicial authority has to follow. This clarity, to both noticees and SEBI, would go a long way in avoiding time consuming litigation. SEBI’s rigid policy was not conducive for effective compliance with natural justice principles. Observing the steady increase in litigation surrounding access to the investigation report, SEBI itself should have taken a proactive stance to make it available to noticees.As the SC noted in Kashinath Dikshita vs UoI, “If only the disciplinary authority had asked itself the question: “What is the harm in making available the material?…”  While a criticism of the judgment may lead to an increase in dilatory tactics by the noticees, that outcome may not follow. Contrarily, it can be argued that by abolishing information asymmetry, the SC has reduced the corresponding time and litigation by noticees to procure relevant information. Further, this also reduces the possibility of an appellate body setting aside the SEBI order for not providing relevant information.

(This article was first published in Financial Express)

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