Reliance Industries Limited vs Securities and Exchange Board of India & Ors.

Role of Regulator – Duty to act fairly – SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties – Being a quasi-judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law – The role of a Regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions – There is a substantive duty on the Regulators to show fairness, in the form of public cooperation and deference – The duty to act fairly by SEBI, is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself.

Doctrines/Principles – Principles of Natural Justice – Discussed.

Company Law – Criminal action – Initiation of criminal action in commercial transactions – It should take place with a lot of circumspection & Courts ought to act as gate keepers for the same – Initiating frivolous criminal actions against large corporations would give rise to adverse economic consequences for the country in the long run – Regulator must be cautious in initiating such an action and carefully weigh each factor.

Trial – Transparency and fair trial – Opaqueness only propagates prejudice and partiality – Opaqueness is antithetical to transparency – In a country grounded in the Rule of Law, institutions ought to adopt procedures that further the democratic principles of transparency and accountability – Principles of fairness and transparency of adjudicatory proceedings are the cornerstone of the principles of open justice.

Evidence Act, 1872 – s.129 – Litigation Privilege – Legal privilege not applicable to legal opinion used by SEBI to initiate prosecution, as such opinion is part of investigation.

Code of Criminal Procedure, 1973 – Condonation of delay – Sec 473 is categorical in stating that any limitation prescribed u/s. on 468 of CrPC can be overlooked if sufficient cause is made out in the facts and circumstances of the individual case in the interest of justice – The provision while trying to balance public interest in initiating criminal prosecutions, has been restricted to peculiarities of individual case while clothing the Court with discretionary power – Such a discretion vested in the Court ought to be a principled exercise, wherein the facts and circumstances portrayed justify such an exercise – The intention of the aforesaid provision is to make the inquiry a question of fact and not of untrammelled discretion as to whether in a particular case, the Court should condone the delay. Doctrines/Principles – Cherry picking principle – Selective disclosure is countenanced in law as it amounts to cherry-picking. Criminal Law – Difference between Legal advice privilege and litigation privilege – Discussed.

Allowing the appeal, the Court

HELD: 1.1 SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties. Being a quasi-judicial body, the constitutional mandate of SEBI is to act fairly, in accordance with the rules prescribed by law. The role of a Regulator is to deal with complaints and parties in a fair manner, and not to circumvent the rule of law for getting successful convictions. There is a substantive duty on the Regulators to show fairness, in the form of public co-operation and deference. [Para 42][751-C-D]

1.2 The duty to act fairly by SEBI, is inextricably tied with the principles of natural justice, wherein a party cannot be condemned without having been given an adequate opportunity to defend itself. [Para 43][751-D-E]

2. The appellant has pressed into service the ratio laid down by this Court in Takano case,to seek document disclosure. On the other hand, the respondents have tried to distinguish the present case by stating that the present case is not one of disclosure which is being sought during investigation by SEBI under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Although the Court agree with the respondents that the Takano Case was rendered under the aforesaid Regulations, however, the Court was of the opinion that the reasoning of this Court alludes to a general obligation of disclosure on the part of SEBI. This Court has held in the Takano Case that three fundamental purposes of disclosure of information are (i) reliability, i.e., the Court will be able to perform its function accurately only if both parties have access to information and possess opportunity to address arguments and counter arguments; (ii) fair trial, i.e., this will enable the parties to effectively participate in the proceedings; and (iii) transparency and accountability, i.e., the investigative agencies are held accountable through transparency and not opaqueness. [Para 44][752-B-E]

3. The impugned action of the appellant hails back to the year 1994, and almost three decades have gone by without there being any light at the end of the tunnel. The investigation report by SEBI in 2005 was inconclusive about the alleged offence. There is even a communique by the Minister of Corporate Affairs, Union of India recommending closure of the case as they found nothing to further the prosecution under Section 77 of the Companies Act, 1956. In this light, SEBI’s action to initiate a criminal complaint without providing the appellant an adequate opportunity to defend itself by releasing necessary Reports and other documents, cannot be appreciated by this Court as it is in gross violation of the appellant’s right to natural justice. [Para 45][764-B-D]

4. Indian position seems to be different from England. Section 126 to 129 of the Evidence Act do not draw any distinction between adversarial and investigative litigation as such, and privilege is applicable all through. This aspect is crucial, as it touches on the foundations of the legal profession at large in India. This Court does not want to express any opinion in this regard as the case at hand is different and such an issue does not arise, for the following reasons:

i. The investigation report was inconclusive, as admitted by SEBI itself.

ii. Instead of SEBI referring the issue to an expert, it could have undertaken the exercise of further investigation by itself, which was not done.

iii. SEBI ultimately took further steps, only because of the first opinion of retired judge.

iv. The first opinion of retired judge is a part and parcel of the investigation and documents connected therewith. v. Moreover, certain documents have already been disclosed to the appellant herein. [Para 53][757-A-E]

5. The simple test in this case is whether SEBI has launched the prosecution on the basis of the investigation report alone. The answer seems to be ‘No’ by SEBI’s own admission in its reply where it states that the investigation report was inconclusive and hence further scrutiny of the transactions by experts was called for. That being the case, further Reports and opinions obtained, from whomsoever it may be, are only an extension of the investigation to help SEBI as a Regulator to ascertain the facts and reach conclusions for prosecution or otherwise. [Para 54][757-E-F]

6. This Court does not agree with the contention of the Senior Counsel for SEBI that the first opinion of retired judge is covered by ‘legal privilege’ under Section 129 of the Evidence Act. Same is the case with the second opinion of retired judge and the Report of Chartered Accountant, which are nothing but a continuation of the fact- finding exercise undertaken by SEBI to determine culpability. [Para 55][757-F-H]

7. The Senior counsel appearing for SEBI has pointed out that the present set of proceedings have emanated before Criminal Court, wherein the procedures must be strictly in accordance with the provisions of CrPC. He states that the stage of document production under the CrPC is provided under Section 207 and 208, which takes place after cognizance is taken by the Magistrate. Observing the facts and circumstances of this case, which have been adumbrated above, the Court was of the firm opinion that the defence taken by SEBI that they need not disclose any documents at this stage as such a request is pre-mature in terms of the CrPC, cannot be sustained. [Para 56][757-H; 758E]

8. Another disconcerting aspect of this case that comes to the fore is SEBI’s attempt to cherry-pick the documents it proposes to disclose. There is a dispute about the fact that certain excerpts of the opinion of retired judge, were disclosed to the appellant. It is the allegation of the appellant that while the parts which were disclosed, vaguely point to the culpability of the appellant, SEBI is refusing to divulge the information which exonerate it. Such cherry-picking by SEBI only derogates the commitment to a fair trial. In the case at hand, SEBI could not have claimed privilege over certain parts of the documents and at the same time, agreeing to disclose some part. Such selective disclosure cannot be countenanced in law as it clearly amounts to cherry-picking. [Paras 57 & 58][758-F-G; 759-C] 9.The Court allows the present appeal and direct the respondents to furnish a copy of the following documents to the appellant forthwith:(i) First opinion of the retired Judge

(ii) Report of Chartered Accountant

(iii) Second opinion of retired judge. [Para 59][759-D]

State Bank of Patiala v. SK Sharma (1996) 3 SCC 364 : [1996] 3 SCR 972; T. Takano v. Securities and Exchange Board of India 2022 SCC Online SC 2022

(3) SCALE 585; S. P. Velumani v. Arappor Iyakkam 2022 SCC Online SC 663 – relied on.

Three Rivers District Council and Others (Respondents) v. Governor and Company of the Bank of England (Appellants) [2004] UKHL 48; In Re K (Infants) [1965] AC; In Re E (S.A.) (a Minor) (Wardship: Court’s Duty) [1984] 1 WLR 156; Nea arteria Maritime Co Ltd v. Atlantic and Great Lakes Steamship Corporation [1981] Com LR 138 at 139 – referred to.