Delhi High Court Orders SEBI to Submit HPAC Documents in Compounding Case: Ensures Transparency, Fair Trial Rights, and Judicial Oversight While Cautioning Against Substituting Judicial Wisdom for Market Impact Assessments

Court’s Decision

The Delhi High Court set aside the order of the Additional Sessions Judge, Tiz Hazari, which had rejected the petitioner’s request under Section 91 CrPC for disclosure of documents relied upon by the High Powered Advisory Committee (HPAC) in rejecting the compounding application. The High Court directed the Securities and Exchange Board of India (SEBI) to submit these documents before the trial court in a sealed cover, allowing the trial court to decide whether the petitioner should be granted access.

The Court emphasized that SEBI’s opinion on compounding is important but not binding, and courts must consider all relevant materials when deciding such applications. The decision ensures transparency and fairness in regulatory proceedings while maintaining judicial oversight.

Facts of the Case

1. Criminal Complaint Filed by SEBI:
   • SEBI filed Criminal Complaint No.12/2016 against the petitioner and another accused under Section 11C(6) read with Section 27 of the SEBI Act, 1992.
   • The allegations included involvement in market manipulation in the stock of “Padmini Technologies.”
   • SEBI accused the petitioner of:
     • Facilitating irregular preferential allotment to manipulate share prices.
     • Creating artificial price hikes in stock value.
     • Forging documents to support these activities.
     • Failing to respond to SEBI summons.
2. Compounding Application Filed by Petitioner:
   • The petitioner sought compounding of offences under Section 24A of the SEBI Act, which allows for settlement of criminal proceedings.
   • The High Powered Advisory Committee (HPAC), formed under SEBI (Settlement Proceedings) Regulations, 2018, reviewed the application.
   • The HPAC rejected the compounding request, and SEBI’s Whole Time Members (WTM) upheld this decision.
3. Petitioner’s Request for SEBI Documents:
   • The petitioner filed an application under Section 91 CrPC to obtain:
     • Statements, findings, and documents relied upon by HPAC while rejecting the compounding request.
   • The Trial Court rejected the application on 26.11.2021, citing Regulation 29(2) of the SEBI Settlement Regulations, 2018, which restricts the use of settlement materials as evidence.
   • The petitioner challenged this order in the Delhi High Court.

Issues Before the Court

1. Can SEBI refuse to disclose documents relied upon by HPAC when rejecting a compounding application?
2. Did the trial court err in denying the petitioner’s request for these documents under Section 91 CrPC?
3. Does confidentiality under SEBI’s Settlement Regulations override an accused’s right to access documents affecting their case?

Petitioner’s Arguments

• Right to Know SEBI’s Basis for Rejecting Compounding:
  • The petitioner argued that SEBI must disclose the documents considered by HPAC in the rejection decision.
  • The Supreme Court in T. Takano v. SEBI (2022) held that SEBI must disclose investigative materials relevant to proceedings.
• Lack of Transparency & Arbitrary Decision-Making:
  • The petitioner claimed the HPAC’s decision was arbitrary.
  • Without disclosure of documents, the petitioner could not challenge the fairness of the rejection.
• SEBI’s Inconsistent Approach:
  • The petitioner cited Vasant Jagivandas Kotak v. SEBI (Bombay HC, 2021), where SEBI had previously disclosed HPAC documents in a similar case.
  • SEBI was taking a contradictory stand in this case by refusing disclosure.
• Judicial Precedents Mandate Disclosure:
  • The Supreme Court in Prakash Gupta v. SEBI (2021) ruled that:
    • SEBI’s opinion on compounding is important but not binding on the court.
    • Courts must consider SEBI’s reasoning before deciding on compounding applications.
  • Since SEBI’s opinion influences the trial court, the petitioner had a right to access HPAC’s findings.

Respondent’s (SEBI’s) Arguments

• HPAC’s Decision Was Already Explained:
  • SEBI argued that reasons for rejecting compounding were already provided in its reply before the trial court.
  • There was no need for additional documents.
• Confidentiality Under Regulation 29(2):
  • SEBI cited Regulation 29(2) of the SEBI Settlement Regulations, which states that:
    • Settlement discussions and documents cannot be used as evidence in court.
  • Releasing HPAC materials would violate SEBI’s regulatory confidentiality.
• SEBI Will Provide Documents Only If Court Demands:
  • SEBI stated that if the court deemed it necessary, the documents could be submitted in a sealed cover for judicial review.

Court’s Analysis of the Law

1. Section 24A of SEBI Act (Compounding of Offences):
   • SEBI’s recommendation is not binding.
   • Courts must consider SEBI’s views but retain discretion.
2. Section 91 CrPC (Summoning Documents):
   • This provision empowers courts to call for documents necessary for a just decision.
   • Trial courts can summon HPAC records to ensure a fair hearing.
3. Regulation 29(2) of SEBI Settlement Regulations (Confidentiality Clause):
   • Confidentiality is not absolute.
   • Courts can override SEBI’s confidentiality claims if the documents are essential for adjudication.
4. Judicial Precedents:
   • Prakash Gupta v. SEBI:
     • SEBI’s opinion is advisory, not mandatory.
     • Courts must give due consideration to SEBI’s expert assessment but retain independent decision-making power.
   • T. Takano v. SEBI:
     • SEBI must disclose investigative materials to ensure procedural fairness.
   • Vasant Jagivandas Kotak v. SEBI:
     • SEBI had previously disclosed similar documents, making its refusal in this case questionable.

Court’s Reasoning

• Judicial Review of SEBI’s Decision Is Necessary:
  • Courts cannot blindly rely on SEBI’s recommendations.
  • SEBI’s confidentiality claim cannot override the right to a fair hearing.
• HPAC Documents Are Crucial for Fair Adjudication:
  • The trial court must consider the factors outlined in Prakash Gupta before deciding on compounding.
  • SEBI’s reasons for rejecting compounding must be scrutinized.
• Sealed Cover Submission to Balance Interests:
  • SEBI must submit the documents in sealed cover.
  • The trial court will decide whether the petitioner should be granted access.

Conclusion

1. The Delhi High Court set aside the trial court’s order rejecting the petitioner’s application under Section 91 CrPC.
2. SEBI was directed to submit all HPAC documents in a sealed cover to the trial court.
3. The trial court was given discretion to decide if the petitioner should access these documents.
4. The petition was disposed of with these directions.

Implications of the Judgment

• Enhances Transparency in SEBI Proceedings:
  • SEBI’s regulatory decisions will now be subject to greater judicial scrutiny.
  • Accused parties in SEBI cases can demand access to key documents.
• Strengthens Fair Trial Rights:
  • Courts can override SEBI’s confidentiality claims to ensure procedural fairness.
  • The judgment protects the right of accused persons to challenge regulatory decisions.
• Potential Impact on SEBI’s Settlement Process:
  • SEBI may need to adopt a more transparent approach in compounding cases.
  • The decision reinforces judicial oversight in securities regulation.

This ruling marks a landmark judgment in balancing regulatory confidentiality with judicial accountability in SEBI-related criminal proceedings.

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