Cherry picking by SEBI . Cherry picking by SEBI derogates fair trial, says SC, asks it to provide docs to Reliance Industries

The Supreme Court Friday came down heavily on market regulator SEBI for the “disconcerting” aspect of its attempt to “cherry¬pick” documents for disclosure relating to its probe in a share acquisition matter involving Reliance Industries Ltd (RIL) and directed it to share the opinion of experts with the Mukesh Ambani-promoted group.

Observing that “initiating frivolous criminal actions against large corporations would give rise to adverse economic consequences for the country in the long run”, the top court said the regulator has a duty “to act fairly” while conducting proceedings or initiating any action against the parties.

A Bench comprising Chief Justice N V Ramana and Justices J K Maheswari and Hima Kohli allowed the appeal of the RIL against the Bombay High Court’s order and directed the Securities and Exchange Board of India (SEBI) to forthwith furnish the copy of documents of “First opinion of Justice (Retired) B.N. Srikrishna, (ii) Report of Y H Malegam (iii) Second opinion of Justice (Retired) B.N. Srikrishna”.

The opinions of Justice Srikrishna, a former SC judge, and Malegam, a chartered accountant, were sought by the market regulator which was probing alleged irregularities by the Reliance Industries in acquisition of its own shares from 1994 to 2000.

The case had arisen from a complaint by S Gurumurthy, an RSS ideologue, journalist and chartered accountant, to SEBI.

The CJI, writing the 42-page judgement for the Bench, dealt in detail with various aspects of criminal trial such as condonation of delay and the claim of privilege by SEBI over legal opinions sought by it.

“Initiation of criminal action in commercial transactions should take place with a lot of circumspection and the courts ought to act as gatekeepers for the same. Initiating frivolous criminal actions against large corporations would give rise to adverse economic consequences for the country in the long run. Therefore, the Regulator must be cautious in initiating such an action and carefully weigh each factor,” it said.

The top court said the duty of the SEBI to act fairly is inextricably tied to the principles of natural justice in which a party cannot be condemned without having been given an adequate opportunity to defend itself. The verdict termed as a “disconcerting aspect” the SEBI’s attempt to cherry-pick the documents it proposes to disclose.

There was a dispute over the fact that certain excerpts of the opinion of Justice Srikrishna were disclosed to RIL, the Bench said, adding it was the allegation of the company that the parts which were disclosed, vaguely point to its culpability.

“...SEBI is refusing to divulge the information which exonerates 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, agreed to disclose some parts. Such selective disclosure cannot be countenanced in law as it clearly amounts to cherry picking,” it said.

SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties, it said, adding that 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,” it said.

The court said the facts of the case were “unique” as the impugned action of RIL dated back to 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,” it said.

In this light, SEBI’s action to initiate a criminal complaint without providing RIL an adequate opportunity to defend by releasing necessary reports and other documents cannot be appreciated as it is in gross violation of its right to natural justice, the apex court said.

The fresh series of litigation started after SEBI special court of Greater Mumbai, on September 30, 2020 refused to issue process on the criminal complaint of the market regulator against RIL and others in the matter on the ground of unexplained delay.

SEBI moved the Bombay High Court against the special court’s order.

RIL also filed a plea in the high court seeking copies of certain documents relied upon by the market regulator.

The high court on March 28, 2022 adjourned the hearing, saying it would hear the pleas of SEBI and RIL and kept the issue of maintainability of the complaint open. RIL then moved the top court and sought the documents.

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