Court’s decision
The Delhi High Court partly allowed cross-appeals arising from a long-pending SEBI enforcement action, holding that the appointment of an Adjudicating Officer under the SEBI Adjudication Rules is a purely administrative step and does not require prior recording of a reasoned opinion on liability. Setting aside the Single Judge’s finding that the Show Cause Notice was without jurisdiction, the Court revived SEBI’s adjudication proceedings, while simultaneously affirming that no prior order under insider trading regulations is required before invoking penalty proceedings under the SEBI Act .
Facts
The controversy arose from SEBI’s initiation of adjudication proceedings against a shareholder of a listed company for alleged failure to make mandatory disclosures under insider trading regulations. Based on information received from the stock exchange, SEBI conducted an internal examination of trading data over several years. Internal committees recommended adjudication proceedings, following which a Whole Time Member approved appointment of an Adjudicating Officer. A Show Cause Notice was issued calling upon the noticee to explain why an inquiry should not be held for alleged disclosure violations.
The noticee challenged the proceedings before the Delhi High Court, contending that the appointment of the Adjudicating Officer was without jurisdiction as no prior opinion was formally recorded by SEBI as mandated under the Rules. The Single Judge accepted this contention and quashed the Show Cause Notice, leading to cross-appeals by both SEBI and the noticee .
Issues
The principal issues before the Division Bench were whether Rule 3 of the SEBI Adjudication Rules mandates a prior recorded opinion by the SEBI Board before appointing an Adjudicating Officer, whether the appointment itself involves any quasi-judicial determination affecting rights of the noticee, and whether SEBI was required to pass a separate order under insider trading regulations before initiating adjudication proceedings under the penalty framework of the SEBI Act.
Petitioner’s arguments
The noticee supported the Single Judge’s ruling, arguing that the formation of an opinion under Rule 3 was a jurisdictional precondition and its absence rendered the entire adjudication void. It was contended that insider trading regulations constitute a self-contained code and that SEBI could not bypass regulatory mechanisms by directly initiating penalty proceedings. The noticee further argued that no market harm or investor prejudice had been demonstrated, and that he did not fall within the statutory definition triggering disclosure obligations, thereby rendering the Show Cause Notice legally unsustainable .
Respondent’s arguments
SEBI assailed the Single Judge’s reasoning as fundamentally flawed, submitting that the appointment of an Adjudicating Officer is an administrative act that merely initiates inquiry and does not determine liability. It was argued that the learned Single Judge conflated the preliminary step of appointment with the adjudicatory stage under Rule 5, where findings on contravention and penalty are recorded. SEBI emphasized that detailed procedural safeguards exist during inquiry and that requiring a reasoned opinion even before issuance of a Show Cause Notice would defeat the statutory scheme and paralyze regulatory enforcement .
Analysis of the law
The Court undertook a detailed examination of the SEBI Act and the Adjudication Rules, particularly Rules 3, 4, and 5. It held that Rule 3 only requires the Board to be “of the opinion” that grounds exist for adjudication, without mandating a formal or reasoned order at that stage. The Court clarified that Rule 4 governs issuance of Show Cause Notice and initiation of inquiry, while Rule 5 is the stage at which the Adjudicating Officer determines whether a violation has occurred and whether penalty is warranted. Reading these provisions harmoniously, the Court held that the statutory architecture does not contemplate a quasi-judicial determination at the appointment stage.
Precedent analysis
The Division Bench relied on Supreme Court jurisprudence clarifying the distinction between administrative and quasi-judicial functions in regulatory enforcement. Referring to earlier decisions upholding SEBI’s adjudication framework, the Court emphasized that procedural fairness is ensured through the inquiry process itself, and that preliminary administrative steps cannot be subjected to standards applicable to final adjudicatory orders. The Court found that the Single Judge’s approach overlooked this settled distinction, leading to an erroneous jurisdictional conclusion.
Court’s reasoning
The Court held that the Show Cause Notice in question was not issued for imposing penalty but for determining whether any contravention existed at all. The learned Single Judge, according to the Division Bench, misapprehended the statutory sequence by assuming that penalty adjudication had commenced without jurisdiction. The Court further agreed with the Single Judge on a separate issue, holding that insider trading regulations do not require SEBI to pass prior remedial orders before invoking penalty proceedings under Chapter VIA of the Act. Thus, while SEBI succeeded in reviving the adjudication, the noticee’s appeal was dismissed on ancillary grounds .
Conclusion
Allowing SEBI’s appeal, the Delhi High Court restored the Show Cause Notice and adjudication proceedings, holding that the appointment of an Adjudicating Officer was valid and within jurisdiction. At the same time, it dismissed the cross-appeal filed by the noticee, affirming that SEBI’s power to initiate adjudication is independent of regulatory directions under insider trading regulations. No costs were imposed, and all pending applications were disposed of .
Implications
This judgment is a significant reaffirmation of SEBI’s enforcement powers. By clarifying that the appointment of an Adjudicating Officer is an administrative step, the Court has insulated early-stage regulatory actions from premature judicial interference. The ruling strengthens SEBI’s ability to investigate and prosecute disclosure violations while preserving procedural safeguards at the inquiry stage. For market participants, it underscores that technical objections cannot derail regulatory scrutiny at inception, particularly in matters concerning transparency and investor protection.
Case law references
- Kavi Arora v. Securities and Exchange Board of India (2022)
Held that appointment of an Adjudicating Officer and issuance of show cause notice do not suffer from procedural infirmity where statutory steps are followed. Relied upon to distinguish administrative initiation from adjudicatory determination.
FAQs
1. Is SEBI required to record a detailed opinion before appointing an Adjudicating Officer?
No. The Delhi High Court has clarified that appointment of an Adjudicating Officer is an administrative step and does not require a detailed or reasoned opinion.
2. Does issuance of a Show Cause Notice amount to imposition of penalty?
No. A Show Cause Notice only initiates inquiry to determine whether a violation exists; penalty can be imposed only after inquiry under Rule 5.
3. Must SEBI pass orders under insider trading regulations before initiating penalty proceedings?
No. The Court has held that SEBI can directly invoke penalty proceedings under the SEBI Act without first exhausting regulatory directions.