The Supreme Court on Monday ruled that the Securities Exchange Board of India (SEBI) cannot reopen concluded proceedings against a party without sufficient grounds a cause.
A Bench of Justices Sanjay Kumar and KV Vishwanathan ruled principles of res judicata apply to the market regulator as well.
“It is not open to SEBI to claim that it could pass multiple final orders on the same cause of action. Having undertaken the exercise pursuant to its show-cause notices issued in 2012, SEBI passed the order dated 31.07.2014, in exercise of power under Section 11B of the Act of 1992, with certain directions which attained finality and were given full effect to. That being so, SEBI could not have reopened the entire exercise without just cause so as to pass a fresh order under Section 11B, once again, 4 years later," the Court stated.
The dispute dates back to 2002 when VCL (Vital Communications Ltd), a publicly listed company, allegedly issued misleading advertisements about buyback offers, bonus shares and preferential allotments, artificially inflating its share price.
SEBI’s investigation revealed that:
1) VCL had funnelled funds through shell companies to buy its own shares, creating a false market demand;
2) Promoter-linked entities dumped 71.14 lakh shares in the open market, exploiting the artificially inflated prices;
3) Small investors, including Ram Kishori Gupta and her husband, suffered heavy losses after purchasing shares based on these fraudulent claims;
In 2005, SEBI issued a show-cause notice to VCL and its directors, alleging violations of the SEBI Act, 1992, and fraudulent trade practices.
In 2008, SEBI imposed a two-year market ban on VCL and its directors. However, the Securities Appellate Tribunal (SAT) set aside this order, directing SEBI to re-examine the case afresh.
After fresh proceedings, SEBI passed a final order in 2014, again banning VCL and its associates from the securities market for three years. Notably, SEBI did not order disgorgement (recovery of illegal profits) at this stage.
Meanwhile, Ram Kishori Gupta and Harishchandra Gupta, who lost Rs18.25 lakh investing in VCL’s shares, approached SEBI and later SAT, seeking compensation. In 2013, SAT ruled that SEBI had no power to award compensation but left open the possibility of restitution if fraud was proven.
In 2016, SEBI reopened the case and, in 2018, ordered VCL and others to disgorge Rs4.55 crore with 10% interest for "ill-gotten gains." This was challenged before SAT, which quashed the order in 2021 on the ground that it was barred by res judicata.
This prompted an appeal before the Supreme Court.
Key Findings of the Supreme Court
SEBI Cannot Reopen Concluded Cases - Res Judicata Applies
The Court rejecting SEBI's contention that the principle of res judicata under Section 11 of the Code of Civil Procedure does not apply to its proceedings. The Court held that this principle is based on public policy and justice so as to prevent parties from litigating the same question multiple times.
The Court cited precedents establishing that principles of res judicata apply not only to litigants but also to adjudicating authorities, whether judicial, quasi-judicial, or administrative.
The Supreme Court held that once SEBI’s 2014 order (imposing only a market ban) attained finality, the regulator could not later impose disgorgement on the same facts.
The Court noted that SEBI had ample opportunity in 2014 to order disgorgement but chose not to, making the 2018 order an afterthought.
“No doubt, the illegalities committed by VCL and the other entities had financial implications which may have warranted a direction for disgorgement, but once the SEBI did not choose to issue such a direction in the first instance and was satisfied with lesser penalties in its order dated 31.07.2014, the question of permitting SEBI, without just cause, to revisit the said final order and pass fresh directions does not arise. Doing so would be violative of public policy, which attaches great value and sanctity to the finality of judicial determinations and the principle of res judicata,” the Court stated.
SEBI has no power to compensate investors
“Viewed thus, we are of the opinion that the entire exercise undertaken by SEBI after the passing of the final order dated 31.07.2014, resulting in the disgorgement order dated 28.09.2018, was unsustainable in law.
Further, as the compensation claim of Ram Kishori Gupta and Harishchandra Gupta against SEBI stood decided by the Tribunal’s order dated 30.04.2013, which also attained finality, it was not open to them to reopen the same and seek to pin such liability upon SEBI once again," the Court held.
SEBI’s Delay Criticized
The Court slammed SEBI for its "unconscionable delay", noting:
• The 2016 direction to examine disgorgement was followed by a two-year delay in issuing notices.
• The 2018 order came four years after the original penalty, making enforcement ineffective and unjust.
"Such laidback and indolent approaches do not augur well for a regulator tasked with protecting investors in a volatile market,” the judgment noted
SAT’s Rs2 lakh cost struck down
While upholding SAT’s quashing of the disgorgement order, the Court set aside the 2 lakh costs imposed on SEBI, noting that VCL and its associates were not innocent parties.
“However, given the fact that VCL and the other entities, who were the appellants before the Tribunal, were held to have indulged in fraudulent acts and transactions and were not innocent or guileless, by any stretch of imagination, the direction of the Tribunal practically rewarding them with costs of Rs2,00,000/- each was entirely unjustified on facts,” the judgment said.
The Court thus dismissed the appeal filed by SEBI.
