Delhi HC order may force SEBI to review its adjudication procedure

SEBI may have to review its procedure for adjudication proceedings. Justice Vibhu Bakhru of the Delhi High Court set aside SEBI’s adjudication proceedings against one Amit Jain on grounds that its whole-time member (WTM) had ‘not independently formed any opinion’ on whether ‘there are grounds for adjudication’.

The order by the High Court may impact close to 1,500 adjudication cases pending with SEBI, legal experts say.

In adjudication proceedings, mostly, SEBI’s WTM, who is the next level officer after the Chairman, merely accepts the recommendations by his juniors and does not express ‘if he had formed any independent opinion on requirement of adjudication proceedings’.

Adjudication is a legal process where the judge or the arbitrator reviews evidence and arguments, including legal reasoning, to reach a conclusion.

The Delhi HC observed that “formation of an opinion that there are grounds for adjudging under Chapter VIA of the (SEBI) Act is a necessary pre-requisite for the Board to exercise its jurisdiction. Absent of such opinion, the Board would have no jurisdiction to appoint an adjudicating officer.”

The court further said that “there was no scope for inferring formation of such opinion merely for reason that an adjudicating officer has been appointed and other officers have forwarded their recommendations for such an action”.

According to Chapter VIA of SEBI Act, “(The) least that is required for the Board is to state in unequivocal terms that in its opinion, there are grounds for adjudging under the Act.” A WTM is a key representative of the SEBI board. “Pending cases wherever adjudicating officers have been appointed and where there is no independent and express recording of formation of opinion by the Board/WTM, would require reconsideration by the Board/WTM. Otherwise, the same would be vulnerable to challenge on the ground that the adjudication proceedings have been initiated without jurisdiction, in the light of the High Court’s ruling,” said Vinay Chauhan, Partner, Corporate Law Chambers India. “Adjudication is a vital power as it involves adverse civil consequences and, therefore, the same cannot be exercised mechanically and casually.”

SEBI had argued that adjudication was initiated after the Whole Time Member was prima facie satisfied that there were sufficient grounds to enquire into the affairs and adjudicate upon the alleged violations.

But the the court nudged SEBI to stop making mere ‘mechanical endorsements as indicative of expression of any opinion’, which in many cases are not even accepted by the Supreme Court. For its views, the high court cited an apex court ruling in the matter of Chhugamal Rajpal versus SP Chaliha wherein the Supreme Court had concluded that “(Income Tax) Commissioner had mechanically recorded his permission as he could not have come to such conclusion on the material placed before him”.

“This latter part could mean that the court does not want SEBI to give rubber stamp-like yes or no opinion for adjudication proceedings but give the grounds that makes it a requirement,” said a Mumbai-based lawyer dealing in SEBI matters.