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 SEBI cannot rely upon any documents not supplied to the petitioner

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The Supreme Court of India yesterday while dismissing a writ petition has passed an order holding that the formation of an ‘opinion’ under the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (Adjudication Rules) for the purpose of appointing an Adjudicating Officer is not a formal inquiry, and it is essentially different from the decision of holding an Inquiry which only commences with the Show Cause Notice (SCN).

Rule 3 and 4 of  the Adjudication Rules governs the process for formation of SEBI opinion to appoint an Adjudicating Officer to adjudge the penalty under Chapter VIA of the SEBI Act, 1992.

The Petitioner, Kavi Arora, the Managing Director (MD) and Chief Executive Officer (CEO) of Religare Finvest Limited (a subsidiary of Religare Enterprises Limited) was issued a SCN along with 12 other noticees for the allegation that funds to the tune of Rs. 2315.66 crores were diverted from RFL through several layers of conduit entities for the ultimate benefit of promoters of REL and RFL.

Subsequent to the receipt of the SCN, the petitioner had filed a Writ Petition at the Bombay High Court to obtain copies of certain documents including justification / opinion formed by SEBI under Rule 3 of the Adjudication Rules. However, the Bombay High Court declined to interfere with the proceedings at the stage of Show Cause Notice.

Challenging the “two-tiered” adjudication process against the Bombay High Court order the petitioner approached the Supreme Court of India, which essentially held the below:

1. Since this opinion of SEBI under Rule 3 has nothing to do with the outcome of the Inquiry the noticee is not required to be heard personally or through a lawyer before taking decision to proceed with the inquiry in respect of contraventions alleged in the Show Cause Notice.

2. Once it is decided to proceed with the inquiry, an opportunity of personal hearing is mandatory. The inquiry has to be conducted in accordance with law, in compliance with the principles of natural justice.

3. The High Court rightly did not interfere with the proceedings at the stage of the SCN. The Petitioner has apparently been permitted to inspect the opinion formed under Rule 3 of the SEBI Adjudication Rules. There is apparently no rule which requires SEBI to furnish the opinion under Rule 3 to the noticee in its entirety. The documents relied upon for formation of opinion under Rule 3, are not required to be disclosed to the noticee unless relied upon in the inquiry.

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A copy of the order is enclosed hereinbelow.

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