In its judgment in the case of Securities and Exchange Board of India v. Ram Kishori Gupta, delivered on April 7, 2025 (“Judgment”), the Supreme Court of India (“SCI”) held that the principle of res judicata is applicable to proceedings before the Securities and Exchange Board of India (“SEBI”).
Background
The genesis of the case lies in alleged misleading advertisements issued by Vital Communications Limited (“VCL”) with regard to buyback of its shares, issue of bonus shares and preferential issue of shares.
The first show-cause notice was issued on May 24, 2005 by SEBI to VCL and others, resulting in the order dated February 20, 2008 (“First SEBI Order”). However, this order was invalidated vide the order of the Securities Appellate Tribunal (“SAT”) dated August 28, 2008, requiring SEBI to issue show cause notices afresh and decide the matter again. This remand resulted in the order dated July 31, 2014 passed by SEBI (“Second SEBI Order”). The Second SEBI Order was issued in exercise of SEBI’s powers under Sections 11 and 11B of the SEBI Act, 1992 (“SEBI Act”) read with relevant regulations. Vide the Second SEBI Order, SEBI directed the debarment of VCL and others from the securities market and the freezing of preferentially allotted shares of VCL, but ordered neither disgorgement nor compensation.
While the aforementioned developments were occurring, Mrs. Ram Kishori Gupta and her husband Mr. Harishchandra Gupta (“VCL Investors”), who had invested in the scrip of VCL, approached a series of forums including the National Consumer Dispute Redressal Commission, SEBI and ultimately SAT, seeking compensation. SAT disposed their appeal on April 30, 2013 (“First VCL Investor Order”), on the grounds that there was no directive or mandate in any of the measures under Section 11(2) of the SEBI Act which empowered SEBI to undertake the task of considering and granting compensation to investors for losses they may have suffered. Thus, SAT categorically rejected their claims. The aforementioned VCL Investors, then filed a review application before SAT, which was decided on December 19, 2013. In this regard SAT observed that consideration and imposition of penalties, or the direction to a company to refund an amount collected by that company against the law, is a matter that falls within the domain of SEBI and directed only the consideration of such an issue, if any, in accordance with the provisions of law and only if the circumstances so require. Pertinently, SAT only directed consideration of the matter and did not order any actions as to disgorgement.
The same led to a series of proceedings undertaken by SEBI culminating in a show-cause notice dated January 19, 2018 to VCL and other entities, leading to the order dated September 28, 2018 (“SEBI Disgorgement Order”). The SEBI Disgorgement Order was passed under Sections 11 and 11B of the SEBI Act, and directed disgorgement of unlawful gains by VCL and others, on pain of debarment from the securities market for 5 years. However, no order directing restitution to VCL Investors was passed.
Several appeals were filed before the SAT against the SEBI Disgorgement Order. While in its order dated August 2, 2019 (“First Disgorgement Appeal Order”), delivered on the appeal filed by the VCL Investors, the SAT directed SEBI to compensate the VCL investors to the tune of the amount invested by them in 2002 in VCL, without interest. However, vide the order dated December 20, 2021 (“Second Disgorgement Appeal Order”), delivered on the other appeals, the SAT set aside the Final Disgorgement Order on the principle of res judicata. SAT also noted its earlier order dated April 30, 2013, passed in the context of the prayer of the VCL Investors, and observed that no direction had been issued to SEBI therein to consider the feasibility of quantifying ill-gotten gains or to initiate proceedings for disgorgement against the appellants and the other entities.
The Judgment
The First and Second Disgorgement Appeal Orders were appealed by SEBI, and the former was also appealed by the VCL Investors, before the SCI, leading to the Judgment. In the Judgment, the SCI held that res judicata is a principle of public policy and binds adjudicating authorities, including judicial, quasi-judicial, and administrative authorities. Further, the SCI held that Section 15U(1) of the SEBI Act only exempts the SAT from compliance with the Code of Civil Procedure, 1908 (“CPC”) and does not cover proceedings before SEBI. The SCI also observed that SEBI was empowered to order disgorgement under Section 11B of the SEBI Act at the time it passed the Second SEBI Order; however, it chose not to exercise that power.
Based on the same, the SCI decided that, having passed directions that had attained full finality and effect in the Second SEBI Order, 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. Given that the penalties in the Second SEBI Order had already been enforced against the noticees, issuing a fresh order on the same cause of action was seen as undermining and reversing the finality of the earlier order. Thus, the entire exercise after the Second SEBI Order, leading up to the SEBI Disgorgement Order, was set aside by the SCI. Further, the First Disgorgement Appeal Order by the SAT was set aside for reinterpreting and giving a different colour to the First VCL Investor Order. While the costs granted to VCL and other noticees in the Second Disgorgement Appeal Order were set aside by the SCI in view of their indulgence in fraudulent activities, the challenge to the Second Disgorgement Appeal Order was otherwise dismissed.
The Judgment is highly welcome, insofar as it clarifies that the principle of res judicata is fully applicable to SEBI proceedings. Therefore, once a certain SEBI order has attained finality and is given full effect to, SEBI cannot revisit the order or pass new directions/orders on the same cause of action without just cause. However, the Judgment has also opened new questions around the extent of applicability of the CPC to SEBI proceedings, which will remain to be clarified in further jurisprudence.
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