Appointment Of SEBI Adjudicating Officer To Conduct Inquiry Is An Administrative Step, Not Finding Of Guilt: Delhi High Court

The Delhi High Court has recently held that the appointment of an adjudicating officer by the Securities and Exchange Board of India (SEBI) is only an administrative step to initiate an inquiry and does not amount to finding of guilt at that stage.

A Division Bench of Justices Anil Kshetarpal and Harish Vaidyanathan Shankar overturned a Single Judge's decision that had halted SEBI's action against Amit Jain, a significant shareholder of Himalaya Granites Ltd., for allegedly not disclosing his shareholding and changes in it as required under securities law.

The court, however, agreed with the Single Judge on a separate issue that SEBI is not required to first pass orders under the insider trading regulations before initiating penalty proceedings under the SEBI Act.

“The appointment of an adjudicating officer is an administrative step which merely initiates the process and does not, at that stage, entail any quasi-judicial determination or cause prejudice to the noticee,” the bench observed.

The case arose from SEBI's scrutiny of trading in the shares of Himalaya Granites Ltd. Acting on information from the stock exchange, SEBI examined Amit Jain's transactions over a period when he held more than five per cent of the company's shares that is between January 2009 to March 2012.

Such shareholders are required to disclose their shareholding and any changes in it to the company and the stock exchange so that the market is aware of significant movements by large investors. SEBI alleged that Jain failed to make these mandatory disclosures.

To begin adjudication, SEBI appointed an adjudicating officer and issued a show-cause notice in November 2013 asking Jain to explain why an inquiry should not be held and why penalties should not be imposed for the alleged non-disclosure.

Jain challenged this action in 2014, and the Single Judge set aside the notice and the proceedings in July 2018, holding that SEBI could not even appoint an adjudicating officer unless it first formally recorded an opinion that a violation had occurred.

Disagreeing, the division bench said this approach misunderstood the step-by-step structure of the law. The court explained that the initial notice is only meant to start an inquiry into possible violations. Whether a violation actually occurred, and whether it attracts a penalty, can be decided only after evidence is examined during the inquiry.

The show-cause notice is issued to begin the inquiry, not to adjudge penalty, the court said, adding that the requirement to reach a conclusion on liability arises only at a later stage.

The court also rejected Jain's argument that SEBI was required to first act under the insider trading regulations before starting penalty proceedings. It held that SEBI's power to initiate penalty proceedings is independent and does not depend on prior action under those regulations, which operate in addition to statutory penalties.

Allowing SEBI's appeal and dismissing Jain's cross-appeal, the High Court restored the adjudication proceedings.

Case Title: SEBI vs Amit Jain

Case Number: LPA 412/2018 & LPA 550/2018

For SEBI: Senior Advocate Pratap Venugopal with Advocates Sandhya Kohli in LPA 412/2018; Senior Advocate Neeraj Malhotra with Sandhya Kohli and Nimish Kumar in LPA 550/2018

For Amit Jain: Advocate Rishabh Jain

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