Although right to disclosure is not absolute, however SEBI should prima facie establish that disclosure of enquiry report will affect third-party rights and orderly functioning of securities market: SC

Read Judgment: T. Takano vs. Securities and Exchange Board of India & Anr. 

Pankaj Bajpai

New Delhi, February 21, 2022: While hearing an appeal with respect to the violation of Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market (PFUTP) Regulations, 2003 alleging non-disclosure of enquiry report by SEBI, the Supreme Court has highlighted that a quasi-judicial authority has a duty to disclose the material that has been relied upon at the stage of adjudication, and an ipse dixit of the authority that it has not relied on certain material would not exempt it of its liability to disclose such material if it is relevant to and has a nexus to the action that is taken by the authority. 

A Division Bench of Justice Dr. D.Y. Chandrachud and Justice Sanjiv Khanna observed that the actual test is whether the material that is required to be disclosed is relevant for the purpose of adjudication, and in affirmation, the principles of natural justice require its due disclosure. 

The observation came pursuant to an appeal by T. Takano (Appellant) challenging the judgment, whereby the Bombay High Court dismissed the petition filed by appellant challenging a show cause notice issued by the Securities and Exchange Board of India (Respondent) on the ground of violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003. 

As per the Appellant, an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued. Whereas, as per the Respondent, only materials which have been relied upon by the Board, merits disclosure. 

After considering the submissions, the Top Court noted that disclosure of material serves a three-fold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions. 

Considering Regulations 9 & 10 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, the Court said that consideration of the report of the investigating authority which is submitted under Regulation 9 is one of the components guiding the Board’s satisfaction on the violation of the regulations, as the investigation report is not merely an internal document, and the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9. 

Speaking for the Bench, Justice Chandrachud while answering the issue  whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued, observed that the Board shall be duty-bound to provide copies of such parts of the report which concern the specific allegations which have been levelled in show cause notice. 

Where some portions of the enquiry report involve information on third parties or confidential information on the securities market, the Board cannot for that reason assert a privilege against disclosing any part of the report, added the Bench.

However, Justice Chandrachud clarified that the Board can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning of the securities market. 

While highlighting that the right to disclosure is not absolute, the Top Court noticed that the disclosure of information may affect other third-party interests and the stability and orderly functioning of the securities market. 

However, the Board should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market, and then the onus shifts to the noticee to prove that the information is necessary to defend his case appropriately, added the Top Court.  

Accordingly, the Apex Court allowed the appeal and set aside the judgment of the High Court.