1. Court’s decision
The Bombay High Court refused to grant ad-interim protection to the petitioners challenging SEBI’s communications directing their company and its directors to undergo a forensic audit. The Court observed that the petitioners had raised multiple contentions—particularly jurisdictional objections and procedural infirmities—requiring a detailed response from SEBI. Since SEBI was still in the process of filing its reply, the Court held that this was not an appropriate stage to grant interim or blanket protection. Instead, the Court directed SEBI to file its reply within two weeks and granted the petitioners liberty to seek interim protection thereafter. All contentions were expressly kept open for final hearing.
2. Facts
The writ petitions were filed by a director and a related entity challenging SEBI’s letters dated 8 July 2024 and 30 August 2024 requiring them to appoint a forensic auditor. According to the petitioners, SEBI’s directions were issued without jurisdiction, without forming the statutory “reason to believe,” and without disclosing any material that justified the forensic audit. They asserted that the company had already furnished extensive financial and statutory disclosures and that forcing a forensic audit would cause commercial hardship. They therefore sought urgent interim relief staying the communications until the Court examined the legality of SEBI’s actions.
3. Issues
The principal issue before the Court was whether an ad-interim stay should be granted against SEBI’s directives ordering a forensic audit pending the filing of SEBI’s affidavit. subsidiary issues included:
• Whether SEBI must demonstrate formation of “reason to believe” before directing such an audit;
• Whether jurisdiction can be challenged at the interlocutory stage;
• Whether the balance of convenience favours immediate restraint on SEBI;
• Whether the petitioners’ commercial inconvenience overrides SEBI’s regulatory role.
4. Petitioner’s arguments
The petitioners argued that SEBI’s directions lacked statutory foundation and were therefore void. They claimed that SEBI issued the forensic audit instructions without recording reasons or sharing any material indicating wrongdoing. They contended that the power to order a forensic audit is an intrusive regulatory step that cannot be exercised casually and must strictly comply with the requirements of the SEBI Act and related regulations. They emphasised that SEBI’s communications reflected a pre-determined mind rather than a lawful inquiry. The petitioners also stressed possible reputational and commercial consequences of a forensic audit, arguing that interim restraint was essential until SEBI justified its jurisdiction.
5. Respondent’s arguments
SEBI requested time to file a comprehensive reply affidavit, stating that it must first place on record the factual basis and regulatory rationale behind the forensic audit directive. SEBI argued that the petitioners’ request for immediate interim relief was premature since adjudication of jurisdictional objections requires examination of regulatory records. SEBI asserted that forensic audits are an established supervisory mechanism used to protect investor interest and market integrity, and courts should not interfere at the threshold unless there is clear evidence of illegality. SEBI urged the Court not to create a precedent that would impede ongoing regulatory functions.
6. Analysis of the law
The Court examined the nature of SEBI’s powers and noted that supervisory directions such as forensic audits fall within SEBI’s broader mandate to regulate markets and protect investors. Whether SEBI complied with statutory requirements—including forming “reason to believe”—is a justiciable issue, but not one that can be decided without SEBI’s affidavit.
The Court stressed that interim orders must take into account institutional restraint, particularly where a specialised regulator is involved. The Court highlighted that SEBI’s actions cannot be stayed merely because they are inconvenient or commercially burdensome. The petitioners must demonstrate a prima facie case of illegality, which could only be evaluated after SEBI places the full factual record before the Court.
7. Precedent analysis
Although no specific case names appear in the order, the Court’s reasoning aligns with established principles in securities jurisprudence:
• Regulatory directions are ordinarily not interdicted at an interim stage unless ex facie without jurisdiction.
• The “reason to believe” standard is examinable but not presumed absent merely because the regulator has not yet filed a reply.
• Courts avoid restraining market regulators without a full factual matrix, preserving the balance between judicial review and regulatory autonomy.
These principles are consistent with earlier rulings where courts refused premature interference in SEBI investigations and supervisory actions.
8. Court’s reasoning
The Court held that granting interim protection at this stage would be inappropriate because:
• The petitions raised substantial jurisdictional and factual disputes requiring SEBI’s detailed response;
• SEBI had not yet filed its affidavit, making it premature to conclude that it acted without jurisdiction;
• Immediate restraint on SEBI may impede its regulatory functioning in a matter where its reasons had not yet been tested;
• The petitioners could renew their request for interim orders after SEBI filed its affidavit.
Thus, instead of granting relief, the Court set timelines for SEBI’s reply and preserved all rights and contentions.
9. Conclusion
The Court declined ad-interim relief but ensured an expedited schedule for adjudication. SEBI was directed to file its reply within two weeks, followed by the petitioners’ rejoinder one week later. If SEBI failed to file within time, the Court permitted the petitioners to revive their interim relief application. All issues—including jurisdiction, reason-to-believe formation, statutory authority, and procedural fairness—remain open for detailed determination at the final hearing. The writ petitions continue to remain pending.
10. Implications
This order signals judicial restraint in interfering with SEBI’s regulatory functions, especially at the interlocutory stage. It underscores that challenges to supervisory measures such as forensic audits must await full disclosure of the regulator’s basis. Corporates and directors facing forensic audits cannot assume automatic interim protection simply on commercial inconvenience. The ruling reinforces regulatory autonomy while ensuring that jurisdiction and procedural legality will be meaningfully scrutinized once the record is complete. The decision serves as a template for future securities litigation involving interim challenges to SEBI’s oversight measures.
CASE LAW REFERENCES
1. Judicial restraint doctrine in regulatory matters
Courts avoid granting interim injunctions against specialised regulators unless their actions are patently without jurisdiction or in bad faith. Reflected in numerous SEBI-related precedents.
2. “Reason to believe” jurisprudence
Courts may review whether a regulator formed and recorded reasons, but such review occurs only after affidavits and records are filed, not at the preliminary stage.
3. Supervisory powers of statutory regulators
Regulators may require audits, inquiries, and document disclosures as part of statutory oversight, and courts ordinarily do not obstruct these functions without compelling grounds.
FAQ SECTION
1. Did the Bombay High Court stay SEBI’s forensic audit direction?
No. The Court refused interim protection and directed SEBI to file its reply within two weeks. Petitioners may renew their request after SEBI places its material on record.
2. Can SEBI order a forensic audit without first proving wrongdoing?
SEBI must form a statutory basis such as “reason to believe,” but judicial review of that basis occurs only after SEBI files its affidavit and supporting material.
3. What happens next in the case?
SEBI must file its reply affidavit; petitioners may file rejoinder; interim relief may be reconsidered thereafter. All jurisdictional objections remain open.
