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2012 SCC OnLine Del 5765 : (2013) 112 CLA 55

In the High Court of Delhi

(BEFORE S. RAVINDRA BHAT AND S.P. GARG, JJ.)

DLF Ltd. … Appellant;

Versus
Securities & Exchange Board of India and Others …
Respondents.
LPA 100/2012 & CM Nos. 2380-2382/2012
Decided on November 20, 2012
Advocates who appeared in this case:
Soli J. Sorabjee, Sr. Advocate with Ms. Ritu Bhalla, Mr. Dhruv Dewan,
Ms. Ananya Ghosh, Mr. Anand Misra and Mr. Mehznaz Mehta, Advocates,
for the Appellant;
Parag P. Tripathi, Sr. Advocate with Mr. Neeraj Malhotra, Ms. Mahima
Gupta, Mr. Shaurijyo Mukherjee, Advocates for Resp-1/SEBI.
Amit Sibal with Ms. Priyanka Kalra, Mr. Gaurav Mitra, Mr. Vinay
Tripathi and Mr. A. Mitra, Advocates for Resp-2.
Arvind Kr. Nigam, Sr. Advocate with Ms. Ranjana Roy Gawai, Mr.
Krishna Keshav and Mr. Shailesh Suman, Advocate for Resp-3.
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.:— The present appellant (hereafter “DLF”)
challenges an order of the learned Single Judge, dated 03.01.2012
dismissing W.P. (C) 8128/2011, a proceeding under Article 226 of the
Constitution. DLF was aggrieved by an order dated 20.10.2011 made
by a whole time member of the Securities and Exchange Board of India
(SEBI). The order of SEBI held that investigations would be made by it
(i.e. SEBI) into the complaints dated 04.06.2007 and 19.07.2007 made
by the second respondent, Kimsuk Krishna Singha, (hereafter called
“complainant”) against DLF, and Sudipti Estates Private Limited, the
third respondent (hereafter “Sudipti”). SEBI's order indicated that
investigations would be made into transactions and the alleged
violations of the erstwhile SEBI (Disclosure and Investor Protection)
Guidelines 2000 (“the Guidelines”) read with the relevant provisions of
the Companies Act, 1956. SEBI also indicated that an investigating
authority would look into the matter, without being prejudiced by any
observations made in the SEBI's order, and would complete
investigations expeditiously, and if any violations were found, they are
to be proceeded with in accordance with law.
BRIEF OVERVIEW
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2. The brief facts are that the second Respondent claimed having
entered into business transactions with Sudipti, in 2006; that concern
was controlled by DLF Home Developers Ltd. (DHDL) and DLF Real
Estate Developers Ltd. (DREDL). The latter, in turn were wholly owned
subsidiaries of DLF - the petitioner. Sudipti was incorporated on
24.03.2006. Its promoter companies, according to the second
respondent were part of the DLF group. DLF, proposing a public issue,
had filed a Draft Red Herring Prospectus (“DRHP”) with SEBI on
12.05.2006. In that document, DLF claimed that Sudipti was its joint
venture. However, the prospectus was later withdrawn by the DLF's
bankers and a fresh prospectus was submitted on 02.01.2007, which
omitted mention of Sudipti as an associate entity of DLF. In this
background, the complainant alleged that DLF and Sudipti had
ensnared and cheated him of Rs. 31,09,50,000/- towards sale proceeds
of certain lands. A First Information Report (FIR) under Section 420 IPC
was registered on 26th April, 2007 (at PS Connaught Place, New Delhi)
at the instance of the complainant; it contained allegations against
Sudipti and others. The final draft prospectus of DLF, issued on 25-5-
2007 omitted mention of Sudipti as a joint venture/associate of DLF.
Later, DLF'S public issue opened (and also closed) and its shares were
subscribed.
3. The complainant wrote a letter on 04.06.2007 to SEBI; the latter
forwarded this communication on 25.06.2007 to Sudipti and DLF,
seeking response. DLF, by letter dated 11.07.2007 denied the
allegations; it claimed that it had no connection with Sudipti on that
date. Apparently, DLF's bankers explained to SEBI that Sudipti's
shares, held by DHDL and DREDL, (the wholly owned subsidiaries of
DLF), had been sold in 2006. It was, therefore, stated that Sudipti
ceased to be an associated company of DLF by the time the revised
prospectus was filed in January 2007. In the meanwhile, the FIR lodged
by the complainant was investigated and a final report (which the
complainant says was challenged by him, in proceedings under Section
482, Cr. PC) was filed by the police. Subsequent to this, the
complainant filed a private criminal complaint. Apparently that
complaint is pending before a court.
4. Alleging deliberate inaction by SEBI in the matter, the
complainant approached this Court, under Article 226 of the
Constitution, (by filing W.P(C) 7976/2007 titled Kimsuk Krishna Sinha
v. Securities Exchange Board of India). In those proceedings, SEBI filed
a reply, defending its position; the complainant filed additional
affidavits. The learned Single judge after considering the materials, and
hearing the parties, by judgment dated 09.04.2010, allowed the writ
petition and directed SEBI to investigate into the complaints (of the
second respondent). While doing so, the single judge also took into
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consideration averments in the affidavits and additional affidavits filed

by the petitioner in the writ petition (i.e. the complainant). DLF, Sudipti
and SEBI challenged the judgment of the Single Judge and filed Letters
Patent Appeals (LPAs, being Nos. 436/2010, 441/2010 and 488/2010).
All these appeals were heard and disposed of by a common order of the
Division Bench, dated 21.07.2011. The order of the Division Bench
contained the following observations and directions:
“4. In course of hearing of the appeals, it is accepted that two
complaints were made to the SEBI on 4th June, 2007 and 19th July,
2007, but no decision or outcome was communicated to the
respondent. Thus, in the obtaining factual matrix the only
mandamus that could have been issued to the SEBI is to take a
decision on the basis of the complaints filed and communicate the
decision to the complainant respondent. Needless to say, an appeal
would lie from such a decision.
5. In view of the aforesaid, the order passed by the learned single
Judge is set aside in entirety. SEBI shall examine the complaints and
take a decision and communicate it to the parties. Needless to
emphasize, SEBI, if so advised in law, can always call for documents.
We hope and trust, the SEBI shall act with utmost objectivity regard
being had to the law in the field and without being influenced by the
counter affidavit filed by it in the writ petition. The decision shall be
taken after hearing the parties within a period of three months from
the date of receipt of the order passed today. It needs no special
emphasis to mention that we have not expressed any opinion, even
remotely, on the merits of the case. The appeals are accordingly
disposed of without any order as to costs.”
5. Acting in compliance with the directions of the Division Bench,
SEBI granted hearing to the parties before its whole time member, Sh.
Prashant Saran; this culminated in the SEBI's order of 26-11-2012.
SEBI's impugned order inter alia, stated that it decided to act on the
complainant's letters dated June 4, 2007 and July 19, 2007, and
investigate into the allegations leveled by the complainant, in respect
of DLF Limited and Sudipti. SEBI indicated that the investigation would
focus on the violations, if any, of the provisions of the erstwhile
Guidelines, read with the relevant provisions of the Companies Act.
SEBI also stated that it had decided to issue a formal order appointing
the investigating authority to investigate the matter without prejudice
to observations made in its order.
6. DLF challenged the SEBI's aforesaid order, contending that it was
made in flagrant violation of principles of natural justice and in violation
of the previous order of the Division Bench, because the hearing given
in the case was flawed, inasmuch as the complainant was first granted
opportunity to make submissions in its (DLF's) absence, and it (DLF)
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was asked to make its submissions on a separate hearing date, without

the benefit of knowing what had transpired in the first hearing. DLF had
also contended that an order directing investigation (as done by SEBI)
seriously affected its business and reputation, and having regard to the
facts and circumstances, could not have been made on the basis of
allegations leveled by the complainant. It had been argued that SEBI
could legitimately direct such investigations only if it had, under
Section 11 (of the Securities and Exchange Board of India Act, 1992,
hereafter called “the SEBI Act”) “reasonable grounds” to believe that
such a step was essential. To arrive at such a prima facie
determination, it is necessary that there is some tangible basis for the
allegations which can in turn lead to a reasonable opinion regarding the
grounds which may exist, calling for investigation. SEBI's stand was
that writ proceedings were not an appropriate remedy, and that DLF
ought to have availed its statutory right of appeal against the order
under Section 15-T. SEBI and the complainant had contended that DLF
could not have claimed a right to hearing as a prelude to the issuance
of an investigation order, as such a step was not mandated under the
SEBI Act. The argument, in the writ petition, that DLF was not heard,
was resisted.
7. In the impugned judgment, the learned single judge held that
judicial review power under Article 226 of the Constitution of India,
enabled exercise of restricted jurisdiction in such cases and did not
enable the Court to examine the adequacy or sufficiency of the reasons
which have weighed with the authority concerned in coming to the
belief (of the need to investigate); yet at the same time, the court
could examine if the reasons are relevant, and germane to the issues or
matters that the authority has to exercise its mind while forming its
opinion in that regard. If there is no nexus between the reasons, and
that no reasonable man would entertain the belief that such action (i.e.
investigation) is warranted, then the Court would intervene.
Conversely, if there are reasonable grounds for the authority concerned
to believe that there exist facts, which could have a material bearing on
the question of breach of the relevant rules/regulations, that would be
sufficient to give jurisdiction to it to an investigation. A person
aggrieved by the investigation can challenge the opinion formation on
these grounds, primarily dealing with existence, but not sufficiency of
the reasons.
8. It is argued by DLF in its appeal, and urged on its behalf by Mr.
Soli Sorabjee, learned senior counsel that the learned single judge
proceeded on a mis-appreciation of the correct state of law as regards
the nature of the hearing, and the unfair procedure adopted in this
case, whereby SEBI first heard the complainant, in the absence of DLF,
and asked the latter to address its contentions. It was submitted that
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though the decision of the Supreme Court, in Payyavula Vengamma v.

Payyavula Kesanna, (1952) 2 SCC 323 : AIR 1953 SC 21, was referred
in the impugned judgment, the learned Single Judge did not follow the
ruling. In that judgment, the Supreme Court dealt with regularity of an
arbitration proceeding and had commented as follows:
“8. There is thus no doubt that the arbitrator heard defendant 1 in
the absence of the plaintiff. No notice of this hearing was given by
the arbitrator to the plaintiff nor had she an opportunity of having
the evidence of the defendant 1 taken in her presence so that she
could suggest cross-examination or herself cross-examine defendant
1 and also be able to find evidence, if she could, that would meet
and answer the evidence given by the defendant 1. As was observed
by Lord Langdale M.R. in Harvey v. Shelton (1844) 7 Beav. 455 462,
“It is so ordinary a principle in the administration of justice, that
no party to a cause can be allowed to use any means whatsoever to
influence the mind of the Judge, which means are not known to and
capable of being met and resisted by the other party, that it is
impossible, for a moment, not to see, that this W.P. (C) 8128/2011
Page 8 of 61 was an extremely indiscreet mode of proceeding, to say
the very least of it. It is contrary to every principle to allow of such a
thing, and I wholly deny the difference which is alleged to exist
between mercantile arbitrations and legal arbitrations. The first
principles of justice must be equally applied in every case. Except in
the few cases where exceptions are unavoidable, both sides must be
heard, and each in the presence of the other. In every case in which
matters are litigated, you must attend to the representations made
on both sides, and you must not, in the administration of justice, in
whatever form, whether in the regularly constituted Courts or in
arbitrations, whether before lawyers or merchants, permit one side
to use means of influencing the conduct and the decisions of the
Judge, which means are not known to the other side.”
9. This case of Harvey v. Shelton (1844) 7 Beav. 455 at p. 462, is
the leading case on this point and it has been followed not only in
England but in India. (See Ganesh Narayan Singh v. Malida Koer
(1911) 13 CLJ 399 at pages 401, 402.) She had also no opportunity
to have her say in the matter of the settlement of the 1st May, 1927.
The course of proceeding adopted by the arbitrator was obviously
contrary to the principles of natural justice”.
9. Learned senior counsel also emphasized that the previous Division
Bench had specifically directed in the order dated 21.07.2011 that SEBI
should arrive at its decision “after hearing the parties” within three
months. Yet, SEBI did not grant a hearing to the petitioner, as the
complainant was heard first in the absence of DLF, which was later
called for a hearing, when the complainant was not present, thus
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depriving it of the advantage of knowing what had been submitted by

the complainant. This was a breach of the principles of natural justice.
It was also argued that the written submissions of the complainant
were not provided to DLF, a contention raised specifically before SEBI.
Mr. Sorabjee contended that the act of ordering an investigation under
Section 11C seriously impacts on the reputation and good name of DLF.
Reliance was placed on the judgments of the Supreme Court reported
as Rohtas Industries v. S.D. Agarwal, (1969) 1 SCC 325. In that case,
the Court had held that the action of the Central Government in
ordering an investigation into affairs of company, under Sections 235
and 236 of the Companies Act, is a very serious matter and it should
not be ordered except on good grounds which will have a likely impact
on the reputation and goodwill of the company, as there is possibility of
adverse press publicity. It is argued that an investigation by SEBI
under Section 11C would have serious consequences for DLF as its
reputation would be marred, and the confidence of the investors in the
petitioner company would be shaken.
10. DLF argued that the precondition for directing investigation
under Section 11-C is the existence of circumstances which suggest
that either the transaction in securities are being dealt with in a
manner detrimental to the investors, or the securities market, or that
any intermediary or person associated with the securities market has
violated any of the provisions of the SEBI Act or the rules or the
regulations made or directions issued by the Board thereunder. In the
absence of a proper opinion formation about existence of objective
circumstances relating those facts, invoking the power under Section
11-C would be without jurisdiction and unjustified. Counsel relied on S.
Ganga Saran and Sons (Pvt.) Ltd., Calcutta v. Income Tax Officer,
(1981) 3 SCC 143 where the Supreme Court observed that:
“6. The important words under Section 147(a) are “has reason to
believe” and these words are stronger than the words “is satisfied”.
The belief entertained by the Income Tax Officer must not be
arbitrary or irrational. It must be reasonable or in other words it
must be based on reasons which are relevant and material. The
Court, of course, cannot investigate into the adequacy or sufficiency
of the reasons which have weighed with the Income Tax Officer in
coming to the belief, but the Court can certainly examine whether
the reasons are relevant and have a bearing on the matters in regard
to which he is required to entertain the belief before he can issue
notice under Section 147(a). If there is no rational and intelligible
nexus between the reasons and the belief, so that, on such reasons,
no one properly instructed on facts and law could reasonably
entertain
the belief, the conclusion would be inescapable that the Income
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Tax Officer could not have reason to believe that any part of the
income of the assessee had escaped assessment and such
escapement was by reason of the omission or failure on the part of
the assessee to disclose fully and truly all material facts and the
notice issued by him would be liable to be struck down as invalid”.
11. Reliance was also placed on S. Narayanappa v. Commissioner of
Income Tax, Bangalore, (1967) 1 SCR 590, where the Supreme Court
had underlined the same proposition as follows:
“the existence of the belief can be challenged by the assessee but
not the sufficiency of the reasons for the belief. Again the expression
“reason to believe” in section 34 of the Income-tax Act does not
mean a purely subjective satisfaction on the part of the Income-tax
Officer. The belief must be held in good faith : it cannot be merely a
pretence. To put it differently it is open to the Court to examine the
question whether the reasons for the belief have a rational
connection or a relevant bearing to the formation of the belief and
are not extraneous or irrelevant to the purpose of the section.”
12. It was argued that the learned single judge fell into error in not
appreciating that while issuing the impugned order, SEBI looked into
several documents and materials furnished by the complainant which
were not part of the original complaints made by him. Counsel
highlighted the fact that the previous Division Bench direction only
required consideration of the two complaints; consideration of the
complainants' additional affidavits filed by the complainant-
consideration of which was directed by the earlier single judge decision,
had been set aside by the Division Bench. SEBI's order based itself on
irrelevant materials, which were part of the additional documents which
had to be kept out of its consideration. Lastly, counsel submitted that
the existence of an alternative remedy, in the form of an appeal cannot
preclude the court, under Article 226 of the Constitution of India, from
entertaining a proceeding. Reliance was placed on the Supreme Court
ruling in Whirlpool Corporation v. Registrar of Trade Marks, (1998) 8
SCC 1.
13. SEBI opposed the appeal, arguing that the impugned judgment
does not disclose any error, or much less a serious error, warranting
interference by the Division Bench. It was argued that the writ petition
itself was not maintainable, by reason of an alternative remedy to the
SEBI's under Section 15T, which allows any person aggrieved by an
order of the Board (SEBI) to appeal to the Securities Appellate Tribunal
(SAT). SEBI's counsel, Mr. Parag Tripathi, submitted that the single
judge was aware of the fact that it performed multifarious activities,
including those which were investigative and quasi-judicial. SEBI
issued the order impugned under Article 226 in exercise of its
investigative power to look into complaints made to it. That order did
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not determine or adjudicate upon any dispute, or lis resulting in any

adverse order against any party. The impugned order discussed the
existence of facts which gave reasonable ground to (SEBI) to believe
the existence of circumstances in Clauses (a) and/or (b) of Section 11C
of the SEBI Act, necessitating an investigation under Section 11C of the
Act. That order was a step-in aid of the proceedings, and not the final
decision. Reliance is placed upon the decision of the Supreme Court in
Competition Commission of India v. Steel Authority of India Ltd.,
(2010) 10 SCC 744. He submits that in this case, while dealing with
the provisions of the Competition Act, the Court drew a distinction
between the administrative/inquisitorial functions of the commission,
and its adjudicatory function. The Supreme Court held that:
“(2) Neither any statutory duty is cast on the Commission to issue
notice or grant hearing, nor can any party claim, as a matter of right,
notice and/or hearing at the stage of formation of opinion by the
Commission, in terms of Section 26(1) of the Act that a prima facie
case exists for issuance of a direction to the Director General to
cause an investigation to be made into the matter. However, the
Commission, being a statutory body exercising, inter alia, regulatory
jurisdiction, even at that stage, in its discretion and in appropriate
cases may call upon the concerned party(s) to render required
assistance or produce requisite information, as per its directive. The
Commission is expected to form such prima facie view without
entering upon any adjudicatory or determinative process. The
Commission is entitled to form its opinion without any assistance
from any quarter or even with assistance of experts or others. The
Commission has the power in terms of Regulation 17(2) of the
Regulations to invite not only the information provider but even
‘such other person’ which would include all persons, even the
affected parties, as it may deem necessary. In that event it shall be
‘preliminary conference’, for whose conduct of business the
Commission is entitled to evolve its own procedure”.
14. The Court also discussed the scope of Section 26 of the
Competition Act, in the following terms:
“63. It is difficult to state as an absolute proposition of law that in
all cases, at all stages and in all events the right to notice and
hearing is a mandatory requirement of principles of natural justice.
Furthermore, that non-compliance thereof, would always result in
violation of fundamental requirements vitiating the entire
proceedings. Different laws have provided for exclusion of principles
of natural justice at different stages, particularly, at the initial stage
of the proceedings and such laws have been upheld by this Court.
Wherever, such exclusion is founded on larger public interest and is
for compelling and valid reasons, the Courts have declined to
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entertain such a challenge. It will always depend upon the nature of

the proceedings, the grounds for invocation of such law and the
requirement of compliance to the principles of natural justice in light
of the above noticed principles.
***********
****************
86. We may also notice that the scope of duty cast upon the
authority or a body and the nature of the function to be performed
cannot be rendered nugatory by imposition of unnecessary directions
or impediments which are not postulated in the plain language of the
section itself. ‘Natural justice’ is a term, which may have different
connotation and dimension depending upon the facts of the case,
while keeping in view, the provisions of the law applicable. It is not a
codified concept, but are well defined principles enunciated by the
Courts. Every quasi-judicial order would require the concerned
authority to act in conformity with these principles as well as ensure
that the indicated legislative object is achieved. Exercise of power
should be fair and free of arbitrariness.
*********** ****************
91. The jurisdiction of the Commission, to act under this
provision, does not contemplate any adjudicatory function. The
Commission is not expected to give notice to the parties, i.e. the
informant or the affected parties and hear them at length, before
forming its opinion. The function is of a very preliminary nature and
in fact, in common parlance, it is a departmental function. At that
stage, it does not condemn any person and therefore, application of
audi alteram partem is not called for. Formation of a prima facie
opinion departmentally (the Director General, being appointed by the
Central Government to assist the Commission, is one of the wings of
the Commission itself) does not amount to an adjudicatory function
but is merely of administrative nature. At best, it can direct the
investigation to be conducted and report to be submitted to the
Commission itself or close the case in terms of Section 26(2) of the
Act, which order itself is appealable before the Tribunal and only
after this stage, there is a specific right of notice and hearing
available to the aggrieved/affected party. Thus, keeping in mind the
nature of the functions required to be performed by the Commission
in terms of Section 26(1), we are of the considered view that the
right of notice of hearing is not contemplated under the provisions of
Section 26(1) of the Act”.
15. It is argued that SEBI's procedure, in this case, is the same as
in other cases when considering whether to direct investigation or not.
It is argued that there is no statutory compulsion for SEBI to grant
personal hearing. Reliance is placed on Bhoruka Financial Services Ltd.
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v. Securities and Exchange Board of India, in (Appeal No. 18/2006

decided on 10.05.2006). It is argued that in that case, investigation
was triggered by a telephone call. The Securities Appellate Tribunal, in
that case had held that
“Investigation by itself does not adversely affect any person or
intermediary and no civil consequences flow from such an order.”
16. The SAT also held that
“It is not the requirement of Section 11C that opportunity of
hearing is to be afforded to any intermediary of the market before
ordering such investigation. The reason is obvious. Investigation by
itself does not adversely affect any person or intermediary and no
civil consequences flow from such an order.”
17. Relying on that order, it is argued that Section 11(4) was
introduced by the Amending Act 59 of 2002; by the same Act the
Parliament inserted Section 11C, empowering SEBI, for the first time,
to investigate the affairs of any intermediary or persons associated with
the securities market and seek a report. The term ‘investigation’ in
Section 11(4) is also similar in terms to Section 11C; both provisions
were inserted simultaneously. Such being the case, the only statutory
requirement is that the order directing investigation should be in
writing; no further condition can be read into the statute. SEBI submits
that its responsibility to examine irregularities and violation of its
regulations, guidelines, etc. in regard to various matters prescribed by
it would be severely curtailed if pre-conditions as to the materials,
evidence and facts are set by Courts. It is submitted that in any case,
the impugned order did not take into consideration the additional
documents and information given by the complainant. They are not
adverted to in SEBI's order. If they are relevant, at the stage of
investigation, the power under Article 226 cannot preclude their
consideration.
18. The appeal was opposed on behalf of the complainant; its
counsel, Mr. Sibal argued that DLF should have availed its alternative
remedy under Section 15-T of the SEBI Act; he relied on the judgment
of the Calcutta High Court in Rose Valley Real Estates & Constructions
Ltd. v. Securities and Exchange Board of India, (2011) 3 Cal LT 86
(HC). To the same end, he relied on the judgment of the Madras High
Court in N. Narayanan v. Securities and Exchange Board of India,
(2009) 8 Mad LJ 960. It was submitted that the argument that
investigation report made under Section 11C by the investigating
authority may adversely affect DLF'S reputation and business of is
unfounded.
19. Mr. Sibal submitted that the Chapter VIA of the Act deals with
penalties and adjudication. He argues that the right to hearing arises
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only at the stage of action under that Chapter. Section 15-I, is relied
on, for this argument; it provides that:
“15-I. Power to adjudicate - (1) For the purpose of adjudging
under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15HA and 15HB,
the Board shall appoint any officer not below the rank of a Division
Chief to be an adjudicating officer for holding an inquiry in the
prescribed manner after giving any person concerned a reasonable
opportunity of being heard for the purpose of imposing any penalty”.
20. Therefore it is submitted that there is no right to be heard at the
stage of examination by SEBI about existence of “reasonable ground to
believe” that a case is made out under Section 11C(1)(a) and (b). It
was argued that the previous order of the Division Bench created no
special rights in DLF, which are not warranted by law. That order was
carefully phrased, and stated that:
“SEBI shall act with utmost objectivity regard being had to the
law in the field and without being influenced by the counter affidavit
filed by it in the writ petition”.
21. Mr. Sibal submitted that SEBI possesses exclusive jurisdiction to
deal with, inter alia, public companies which intend to have their
securities listed in any recognized Stock exchange in India. For this, he
places reliance on Section 55A and 63 of the Companies Act. The same,
to the extent they are relevant, are as follows:
“55A. Powers of Securities and Exchange Board of India.--
The provisions contained in sections 55 to 58, 59 to 84……………..
(a). in case of listed public companies;
(b) in case of those public companies which intend to get their
securities listed on any recognized stock exchange in India, be
administered by the Securities and Exchange Board of India; and
(c) In any other case, be administered by the Central
Government.
xxxxxxxxxx
63.Criminal liability for mis-statements in prospectus. -
(1) Where a prospectus issued after the commencement of this
Act includes any untrue statement, every person who authorised the
issue of the prospectus shall be punishable with imprisonment for a
term which may extend to two years, or with fine which may extend
to 1[fifty thousand rupees], or with both, unless he proves either
that the statement was immaterial or that he had reasonable ground
to believe, and did up to the time of the issue of the prospectus
believe, that the statement was true.”
Findings of the Learned single judge
22. The impugned judgment held that the argument on behalf of
SEBI that the writ petition was precluded by an alternative remedy was
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substantial and persuasive. However, the learned single judge

exercised his discretion and considered the merits of the submissions
made on behalf of the parties about the legality of the SEBI's order. It
was held, in connection with the nature of SEBI's power, and the
opportunity to be heard, that:
“The limited enquiry conducted by SEBI at this stage was merely
to examine whether or not the facts disclosed the entertainment of a
reasonable belief to cause an investigation under Section 11C of the
SEBI Act, which is an inquisitorial exercise, and not an adjudicatory
exercise conducted by SEBI.
53. I now turn to the primary submission of Mr. Sorabjee that the
impugned order has been passed in violation of principles of natural
justice and also that the respondent No. 1/SEBI did not have the
jurisdiction to pass the said order, as the jurisdictional facts did not
exist in the present case to reasonably conclude that SEBI had
reasonable ground to believe that the conduct in question, namely
the non-disclosure of the existence of a pending First Information
Report against Sudipti in the revised DRHP, was detrimental to the
investors or the securities market or that the petitioner had violated
any of the provisions of the SEBI Act or rules made or directions
issued by the respondent Board thereunder.
54. It is not in dispute that SEBI, before passing the impugned
order dated 20.10.2011, did not provide an opportunity to the
petitioner to hear the submissions of respondent No. 2, or to deal
with or respond to the written submissions of respondent No. 2.
Similarly, respondent No. 2 was not granted an opportunity to hear
and deal with or respond to either the oral submissions of the
petitioner or to their written submissions.
55. Reliance placed by Mr. Sorabjee on Rohtas Industries (supra),
in my view, does not advance the petitioner's case. All that the
Supreme Court has held in Rohtas Industries (supra) is that action
under Section 235 of the Companies Act can be taken by the Central
Government upon fulfillment of the statutory requirements and it
being a serious matter, it should not be ordered except on good
grounds. Pertinently, the Supreme Court notes that the investigation
report under Section 237(b) is of a fact finding nature and does not
bind anybody. The Government is not required to act on the basis of
that report, and the company has the right to have its say in the
matter. As the launching of an investigation may impact the
reputation and prospects of the company adversely, the investigation
should not be ordered except on satisfactory grounds.
56. However, this decision does not say, and it cannot be taken to
mean that even before launching an investigation under Section 235
of the Companies Act, the Central Government is required to hold a
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full-fledged hearing, by hearing all the persons concerned in the

presence of each other; granting each concerned person the right to
meet the case of the other; deciding issues of fact or law, or;
returning a finding of fact. If the Central Government were to be
expected to itself function in a quasi judicial capacity while
considering whether, or not, to order an investigation under Section
235 of the Companies Act, the purpose of directing an investigation
into the affairs of the company itself would get diluted, if not totally
defeated, and the same would also impact the rights of the parties in
the course of investigation, as any such investigation would be
influenced by the decision of the Central Government. The petitioner
has had its say in the matter, as it was made aware of the complaint
against it and heard by SEBI on the said complaints. The
submissions/case of the petitioner has been taken note of in the
impugned order.
**************
****************
58. Similarly, SEBI has also been invested with powers &
responsibilities to function in a dual capacity. It functions in an
inquisitorial capacity while examining the issue, whether reasonable
grounds exist to believe that the transactions in securities are being
dealt with in a manner detrimental to the investors or the securities
market or, whether any intermediary or any person associated with
the securities market has violated any of the provisions of the SEBI
Act or the rules & regulations made thereunder, or directions issued
by the Board. If it finds that reasonable grounds exist to believe the
existence of the aforesaid state of affairs, it can direct an
investigation by an investigating authority under Section 11C of the
Act. Once the investigation has been ordered under Section 11C and
an investigation report made, the SEBI while examining the said
report and acting upon it, functions in its quasi judicial capacity. This
is evident from Section 11(4) of the SEBI Act, which, inter alia,
reads:
….. ….. ….. ….. ….. ….. ….. …..
….. …..
59. The submission of Mr. Sorabjee that the petitioner ought to
have been granted a full-fledged hearing by the Board i.e, the Board
should have heard the respondent No. 2 complainant in the presence
of the petitioner, and the petitioner should have been provided with
the written submissions of respondent No. 2 and should also have
been provided opportunity to meet the case of respondent no. 2 at
the stage of consideration of the issue whether an investigation
should be ordered by appointing an investigating authority,
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therefore, cannot be accepted. If accepted, it would lead to a piquant

situation where the Board shall, only on the basis of a prima facie
assessment return its findings which would, in turn, impinge upon
the functions to be discharged by the investigating authority to be
appointed to investigate into the matter. Pertinently, an
investigating authority is extensively empowered to unearth facts
(see Section 11C(2) to 11C(9) of the SEBI Act), and cause a detailed
investigation into the matter. That exercise would get defeated if the
Board were to, on the basis of a prima facie view, return findings of
fact by itself holding a full fledged hearing. As in the case of
Competition Commission of India, in the present case as well, the
functions to be performed by SEBI cannot be rendered nugatory by
imposition of unnecessary directions or impediments which are not
postulated by the plain language of Section 11C.
23. The decision of the Supreme Court in Payyavula Vengamma was
distinguished. The learned single judge also kept in mind the decision
in Ganga Saran, and other cases, in regard to relevant considerations as
to what constitute “reasonable ground to believe” under Section 11C.
He noticed that DLF's position was that DHDL and DREDL were its
wholly owned subsidiaries. They had sold their entire share-holding to
Sudipti in the year 2006 and, consequently, ceased to be an associated
company of the petitioner-DLF at the time of filing of the revised DRHP
in January, 2007. He also noticed that SEBI had noted submissions of
the complainant as well as DLF and Sudipti (even though Sudipti did
not appear at the stage of hearing). The impugned judgment noted the
following observations of SEBI, in its order:
“—In the FIR (submitted alongwith the complaint dated June 4,
2007), it was stated that Mr. Praveen Kumar represented himself to
be a authorized signatory/director of Sudipti and related to the
promoters of DLF Group and was also in the board of many DLF
Group companies including DLF Estate Developers Limited, which
according to the complainant is one of the two shareholders of
Sudipti during the relevant period. During the course of hearing, it is
submitted that Mr. Praveen Kumar is the nephew of Mr. K.P. Singh,
the promoter/Chairman of the Company. In terms of the DRHP of the
Company filed in 2007, Mr. Praveen Kumar is also mentioned as one
of the key managerial persons in Company and reports to the board.
The complainant further stated that Sudipti was incorporated on
March 24, 2004 as a wholly owned subsidiary of the Company and
that during the period of his transaction, Sudipti was controlled by
the promoters through their key management personnel, namely,
Mr. Praveen Kumar, Mr. Jaiprakash Gaur and Mr. Pradeep Singh. It
was further stated by the complainant that Mr. Praveen Kumar and
Mr. Jaiprakash Gaur were the signatories to the bank account of
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Sudipti and that the entire transaction (from price negotiation,

payment of consideration for purchase of additional land till
execution of sale deeds for and on behalf of the Sudipti) was done by
Mr. Praveen Kumar and Mr. Pradeep Singh. The complainant has also
stated that as on the date of complained transaction, 100%
shareholding of Sudipti was owned by the two group companies of
the Company. He further submitted that the two signatories to the
bank account of Sudipti, i.e. Mr. Praveen Kumar and Mr. Jaiprakash
Gaur hold a position of authority and power in many other
subsidiaries/associate companies of the Company and therefore
stated that it was apparent that the directors of Sudipti as well as
the signatories to the bank account of the said entity were the senior
executives in the employment with the Company. Besides, the
complainant also submitted during the course of hearing that the
control over Sudipti was transferred (in the year 2006) ultimately to
the spouses of three employees of the company who were mentioned
in the DRHP of the Company, under the caption —Key Managerial
Persons”. The aforesaid facts could lead to an inference that the
company was aware of the FIR, prior to the receipt of the copy of the
complaint from SEBI.”
24. The impugned judgment also noticed observations of the Board
when it dealt with the question whether it was the petitioner's duty to
disclose the same in the prospectus, to the following effect:—
“—I note that, in terms of Clause VII(c) of Schedule II of
Companies Act, 1956, a duty is cast upon the issuer company to
disclose any material development which could impact performance
and prospects. For the said purpose, it would be necessary, in the
interest of justice, to determine as to how Sudipti was related to the
company at the relevant period. It is an admitted fact that Sudipti
was once an associate of the Company and ceased to be so since
November 2006. Sudipti was originally promoted by two of the DLF
group companies namely, DLF Home Developers Limited and DLF
Estate Developers Limited. The said two companies were holding
50% each of the equity of Sudipti. Further, Mr. Praveen Kumar, who
was disclosed as the key managerial person of the Company, was
one of the directors of Sudipti and was one of persons against whom
the FIR was registered.
Mr. Praveen Kumar, who was closely associated with the Company
through Sudipti and the DLF group companies before the Company's
dissociation with Sudipti, is also mentioned as a key managerial
person of the Company in its DRHP (filed in 2007). Thus, Mr. Praveen
Kumar continues to be closely associated with the Company even
after the alleged dissociation of Sudipti from the Company. As stated
above, the Complainant has alleged that Sudipti is now being
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indirectly controlled by the spouses of certain key managerial

persons of the company whose names were mentioned in the DRHP
of the Company filed during January 2007. The company has in its
written submission stated that three of its subsidiaries who were
holding shares in Felicite Builders and Constructions Private Limited
had transferred their holding to several persons who were
unconnected to the promoters of the Company. However, there is no
dispute to the fact that the spouses of the key managerial persons of
the Company are the shareholders in Felicite Builders and
Constructions Private Limited which in turn holds shares of Shalika
Estate Developers Private Limited. The entire shareholding of Sudipti
is being held by Shalika Estate Developers Private Limited. It is an
admitted fact that the erstwhile shareholders of Felicite Builders and
Constructions Private Limited, Shalika Estate Developers Private
Limited and Sudipti were the wholly owned subsidiaries of the
Company and were shown as entities under the control of the key
management personnel of the Company and their relatives in the
DRHP filed by the Company during May 2006, which DRHP was
subsequently withdrawn. In the DRHP filed in the year 2007, the
aforesaid companies were not shown as the entities under the
control of the key management personnel of the Company and their
relatives. The submission is that between the filing of the aforesaid
DRHPs, the Company had dissociated itself from the said companies
due to internal restructuring. It is also stated that in the DRHP filed
during 2006, 357 companies were mentioned as the associate
companies of the Company and that out of such companies, 336
companies (including Sudipti) ceased to be the associates of the
Company by time the Company filed its fresh DRHP dated January 2,
2007 with SEBI. Though, during the course of hearing, the Company
was specifically advised to submit the details of its dissociation with
the companies, no such details were submitted by the company in
the written submissions or thereafter.”
25. After analyzing the various facets of the transactions, the
impugned judgment held that:
“67. The Board notes the case of the respondent-complainant that
DLF used Sudipti along with a maze of intermediary companies to
purchase land which forms part of the land disclosed in the DRHP.
The case of the complainant is that the DLF purchases land through
a maze of intermediary companies controlled by it, through a series
of back to back purchases of debentures through which the purchase
money flows to an entity that purchases the land and that the
company enters into a series of back to back development rights
agreements whereby it acquires the development rights in the land
so purchased, by paying the same amount of money to the entity
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purchasing the land in lieu of the development rights, which money

is then used to redeem the back to back debentures.
68. The case of the complainant/Respondent No. 2 is that the DLF
did not, in its DRHP, disclose its modus operandi for the purchase of
lands and selectively avoided disclosure of information about the
intermediary companies it uses to purchase lands, so as to avoid
disclosure of any potential liability, civil or criminal proceedings that
have arisen or may arise in connection with land purchases.
69. The Board also takes note of the fact that DLF in its DRHP filed
in the year 2007 disclosed that out of the total land holdings of
approximately 10,000 acres, only 0.5% holding was held by the
company and the balance holding was held in the name of the
company's subsidiaries/associate/group company/companies under
the control and management of key management personnel of the
company.
70. The complainant produced before the Board additional
submission to support the allegation against the petitioner. The
Board observes that it does not deem it proper to disregard the same
without testing the veracity of such submissions in the interest of
justice and in the interest of the securities market and the investors.
The Board further observes that:
“Having considered the submissions and the fact that the first
DRHP (filed in May 2006) was withdrawn and a fresh DRHP was filed
in January, 2007 after the sale of state in Sudipti, an examination is
required as to whether Sudipti was dissociated for the purpose of
avoiding any relevant disclosures that could arise if the entity
continued to be part of the DLF group.”
71. While observing that the original complaints dated 4th June,
2007, 19th July, 2007 did not contain allegations of the petitioner
funding Sudipti indirectly through a series of transactions involving
its subsidiaries/associates and the manner of purchasing lands and
creating development rights on the land acquired by the company's
subsidiaries by indirect funding of such purchases, the Board
observes that in the interest of the securities market, the investors,
as also the interest of justice, it would not be proper on the part of
SEBI to dispose of the complaint by holding that those additional
submissions are extraneous to the original complaint filed by the
complainant/respondent no. 2.
72. The aforesaid observations of the Board leave no manner of
doubt that the Board has not per se relied upon the additional
documents filed by Respondent No. 2 before it. This is clear from a
bare perusal of the impugned order. All that the Board has said is
that “the said material cannot be relied upon to find out whether
there was any contravention of the provisions of the securities law.
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The same need to be examined and if the allegations are made out,
the company should be the petitioner company should be afforded
an opportunity to make its submission in respect of such allegations
and material. While passing the impugned order, the Board has
made it clear that no observation is made.” Pertinently, the Division
Bench has also observed in its order “Needless to emphasize, SEBI,
if so advised in law, can always call for documents.
73. There is no bar or impediment cast on the Board by the SEBI
Act, to say that it would not entertain or look into evidence that the
complainant may rely upon in support of his complaint earlier made,
while considering whether, or not, to direct an investigation. There is
no reason to put any such fetters on the powers of the Board or to
read such restrictions into the statute, which are clearly not there.
The Board is the Sole authority created by law to deal with complex
issues which arise in the management and supervision of the
securities markets. Any such restrictions, artificially introduced
would denude the Board of its powers and hamper its functioning. It
appears, the Division Bench was conscious of this position when it
made its aforesaid observations.
74. I do not agree with the petitioner's submission that the
Division Bench in its judgment had precluded the Board from looking
into any additional information/documents that Respondent No.
2/Complainant may produce in support of his complaints. Reading
and understanding of the petitioner of the judgment of the Division
Bench in the three LPAs does not appear to be correct. A perusal of
the order of the Division Bench in the three LPAs shows that the
Division Bench set aside the judgment of the learned Single Judge
because the learned Single Judge had himself directed investigation
into the complaints of respondent No. 2, rather than requiring SEBI
to examine the two complaints of respondent No. 2, and discharge
its statutory duty under Section 11C of the SEBI Act. This is clear
from reading of para 4 of the order of the Division Bench. I,
therefore, reject the submission of the petitioner that the Board has
taken into consideration the extraneous or irrelevant material while
passing the impugned order.
75. A perusal of the impugned order shows that it certainly cannot
be said that it has been passed arbitrarily or irrational. The
impugned order is clearly based on reasons which are relevant and
material. The adequacy or sufficiency of the reasons which weighed
with the Board in entertaining the reasonable belief with regard to
the possible existence of circumstances mentioned in Clauses (a)
and (b) of Section 11C(1) cannot be gone into. However, it cannot
be said that the reasons are not relevant, or have no bearing on the
matters in regard to which the Board had formed its belief. It also
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cannot be said that there is no rational or intelligible nexus between

the reasons contained in the impugned order, and the reasonable
belief entertained by it because, if, the allegations leveled by
respondent no. 2, and the materials relied upon by him are
established, and, on the other hand, the defence of the petitioner is
not substantiated, it may tantamount to violation of the provisions of
the SEBI Act; of the Rules, and; of the Regulations made or the
direction issued by the Board under the Act, which have been taken
note of in the impugned order itself.”
Analysis and Findings
26. The previous discussion would show that DLF's IPO was opened
for public subscription on 11-14.06.2007. After the closure of the
subscription, on 15.06.2007, the second respondent sent a complaint
to SEBI, seeking cancellation of DLF'S listing on account of alleged
irregularities in the Draft Red Herring Prospectus. He addressed another
complaint dated 19.07.2007, levelling similar allegations and
requesting investigation under Section 11 of the SEBI Act. Alleging
inaction by SEBI, as regards investigation of the complaints made, the
complainant preferred WP (C) No. 7976 of 2007 (under Article 226)
seeking issuance of an appropriate writ directing SEBI to investigate
into DLF's affairs. The Learned Single Judge granted the relief. That
judgment, however, was set aside ‘in its entirety’- (by the Division
Bench, in LPA Nos. 436, 441, 488/2010). The reason for doing so was
that the learned Single Judge had issued a direction to the SEBI to
investigate not only into the two original complaints, but also into the,
materials further placed on record during the course of the writ
proceedings. Accordingly, the Division Bench noted that a mandamus
could only be granted as regards the two complaints which were not
acted upon, as the other material had never been placed before the
SEBI, negating any cause of action (failure to act) for the issuance of a
writ in respect of that information. The reasons which resulted in
setting aside the judgment of the Learned Single Judge are relevant to
determining the context of the earlier Division Bench order, on which
DLF, places heavy reliance in this appeal. After the order of the previous
Division Bench, SEBI appointed Mr. Saran, WTO, to investigate into the
complaints. Based on the investigation, Mr. Saran decided that (under
Section 11C of the SEBI Act) an investigation was required and called
for. Accordingly, he decided to issue a formal order to appoint an
investigation officer. DLF was aggrieved by this order and questioned it
in WP(C) No. 8128 of 2011. The Learned Single dismissed the petition,
by the impugned order. DLF has therefore preferred this appeal.
27. The appeal is primarily on the following three grounds:
28. Violation of principles of natural justice
29. Exceeding the jurisdictional limits set by the Division Bench in
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its previous order

30. Non-application of mind/non-fulfilment of Section 11C on facts
The Respondents objected to the maintainability of writ proceedings,
under Article 226 when an alternate remedy before the SAT is available.
The objection was not accepted by the Learned Single Judge.
Point No. 1
31. It is not disputed that DLF and the complainant were heard
separately, and that the written submissions of the latter were not
provided to the former. The question is whether this amounted to
violation of principles of natural justice (the right to hearing/audi
alteram partem). For this, the nature of the proceedings must be
examined in order to determine whether a right of hearing existed in
the first place. SEBI has provided the Court with the mode of inquiring
into complaints - first, investigations conducted prior to ordering
investigation under Section 11C. Second, is the investigation under
Section 11C by the Investigating Authority, exercising powers
enumerated under that Section. Finally, adjudication conducted under
Section 15I, if such course is thought prudent. SEBI's argues that the
present impugned order falls within the first step, and at this stage, no
right to hearing is required. Contrary to this, DLF urged that a hearing
is required at this stage as well, especially in light of the judgment of
the Division Bench which notes that “the decision shall be taken after
hearing the parties”.
32. There is nothing in the provisions of the Act suggesting that any
right to hearing inheres in any party at the first stage of investigation,
when SEBI considers whether to act on a complaint. Concededly, a
right to hearing exists in quasi-judicial and even administrative
proceedings (Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC
664 : AIR 1981 SC 818). However, this is so only when the decision is
based on the adjudication of the rights of parties. In fact, it is
instructive to notice that while Section 237 of the Companies Act, was
construed in Barium Chemicals Ltd., and Rohtas Industries Ltd., it was
neither argued before nor hinted by the Court that any question of an
opportunity being given to the company before taking action arises in
construing Section 237.
33. The Supreme Court, in State of Gujarat v. Jamnadas, (1975) 2
SCR 330, noted that a right to hearing “is given before the penalty or
final action is taken.” Similarly, Lord Denning's words in Selvarajan v.
Race Relations Board, (1976) 1 All ER 12 are instructive:“It [the
investigating body] need not hold a hearing. It can do everything in
writing. It need not allow lawyers.” It is also settled that the right to a
hearing is contextual - (See The New Prakash Transport Co. Ltd. v. The
New Suwarna Transport Co. Ltd., AIR 1957 SC 232 and Haryana
Financial Corporation v. Kailash Chandra Ahuja, (2008) 9 SCC 31 (the
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right takes colour from the individual legislation). Therefore, while the
importance of the right to hearing or principles of natural justice cannot
be underestimated, one must determine if such a hearing is required as
regards all administrative decisions. In this case, however, the exercise
of power in question is only the exercise of inquisitorial power to
determine whether an investigation is to be conducted in fact, the
Supreme Court in Competition Commission of India (supra) noted a
difference between adjudicatory and quasi-adjudicatory functions and
inquisitorial functions. Consequently, at that point, when the order of
the investigating authority may lead to a prejudicial outcome, a right to
hearing is mandated. Alternatively, a direction issued under Section
11B, which may lead to prejudice to those it affects, a right to hearing
is required as in that case a “direction means guidance of
command’ (V.P.S. Gill v. Air India, AIR 1988 Bom 416, 421) or “is in
the nature of an order requiring positive compliance” (Rajendranath v.
CIT, (1979) 4 SCC 282). In the present case, an order to constitute an
investigating authority does not, by itself, lead to any finding adverse
to the Appellant. In fact, in Bhoruka Financial Services Ltd. (SAT's order
considered and approved by the learned Single Judge) while examining
Section 11C, reaffirmed this conclusion:
“It is not the requirement of Section 11C that opportunity of
hearing is to be afforded to any intermediary of the marked before
ordering such investigation. The reason is obvious. Investigation by
itself does not adversely affect any person or intermediary and no
civil consequences flow from such an order”.
34. Arguably, if the SEBI were making an order under Section 11B,
a right to hearing may perhaps be mandated-if the functions are of a
quasi-judicial character. (Refer to Nandakishore Prasad v. State of
Bihar, (1978) 3 SCC 366). This Court is mindful of the ruling of the
Supreme Court in Khemchand v. Union of India, AIR 1958 SC 300 that
“the notice must not only be given an opportunity but such
opportunity must be a reasonable one … If the opportunity to show
cause is to be a reasonable one it is clear that he should be informed
about the charge or charges levelled against him and the evidence
by which it is sought to be established, for it is only then that he will
be able to put forward his defence.”
35. In this case, no charges were made against DLF by SEBI. Quite
to the contrary; the impugned order of the Whole Time Member notes
that:
“A formal order would be issued appointing the Investigating
Authority. The said Officer shall investigate the matter without being
prejudiced by any observations made hereinabove … If [at the time
when the investigation under Section 11C is carried out] violations
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are brought out in the investigation, the Securities and Exchange

board shall proceed in accordance with law”.
36. The Supreme Court, in the Competition Commission of India
Case when considering Section 19 of the Competition Act, 2002, noted
that
“The provisions of Section 19 do not suggest that any notice is
required to be given to the informant, affected party or any other
person at that stage. Such parties cannot claim the right to notice or
hearing but it is always open to the Commission to call any ‘such
person’, for rendering assistance or produce such records, as the
Commission may consider appropriate.”
37. The wide amplitude of SEBI's power, to invoke its authority, and
enforce regulatory standards, was emphasized recently, by the
Supreme Court in its judgment, reported as Sahara India Real Estate
Corporation Ltd v. Securities Exchange Board of India (Civil Appeal Nos.
9813 & 9833/2011, decided on 31-8-2012) as follows:
“From a collective perusal of sections 11, 11A, 11B and 11C of the
SEBI Act, the conclusions drawn by the SAT, that on the subject of
regulating the securities market and protecting interest of investors
in securities, the SEBI Act is a stand-alone enactment, and the
SEBI's powers thereunder are not fettered by any other law including
the Companies Act, is fully justified.”
38. The first stage of investigation - i.e. initiation (of investigation)
after formation of opinion, under Section 11C, as is the case here, may
be exercised on mere receipt of a phone call, or anonymous complaint.
The preconditions for exercise of investigative power are that SEBI
should have “reasonable ground to believe that” (a) the transactions in
securities are being dealt with in a manner detrimental to the investors
or the securities market; or (b) any intermediary or any person
associated with the securities market has violated any of the provisions
of the SEBI Act or the rules or the regulations made or directions issued
by the SEBI thereunder. It can then, “at any time by order in writing”,
direct any person (i.e. the “Investigating Authority”) specified in the
order to investigate the affairs of such intermediary or persons
associated with the securities market and to report to it (i.e. SEBI).The
report can then lead to further action, if warranted. If, in such cases,
speed in taking a decision is warranted, to track an errant stock
exchange manipulator, or discipline behaviour which is outlawed by
regulations, such as insider trading, there would be complete paralysis,
and Parliamentary intention of exercising effective regulative
supervision would be defeated, if a pre-opinion formation hearing is to
be read into, by the Courts. Accordingly, it is held that as a matter of
law, no right to hearing was required in the present case.
Point No. 2
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39. It is no doubt true that if a right to hearing is required, then

both parties must be heard in each other's presence (Payyavula
Vengamma). However, as the learned Single Judge held, the ratio of
that case does not apply here as in that case the proceedings were
quasi-judicial in character, and thus, determining rights and obligations
of parties. However, as discussed above, in this case, no decision is
taken so as to prejudice either party, or any direction given. The
mandate of the law, at the stage of SEBI's deciding whether to direct
investigation or not, was to decide in writing, that reasonable grounds
existed, calling for investigation.
40. DLF's argument was that the Division Bench's direction that
“SEBI shall examine the complaints and take a decision and
communicate it to the parties. Needless to emphasize, SEBI, if so
advised in law, can always call for documents … The decision shall be
taken after hearing the parties within a period of three months from
the date of receipt of the order passed today.”
41. and its further direction setting aside the judgment of the
Learned Single Judge in its entirety, conferred a right to hearing,
whereby fair procedure had to be necessarily followed.
42. As noted previously, the reason for setting aside the judgment of
the learned Single Judge was very specific, and did not mean to grant
an independent right of hearing to either party for all stages of the
investigation. The reason was that the Learned Single Judge had issued
a direction, mandating the SEBI to investigate not only into the two
original complaints, but also, materials further placed on record during
the course of those judicial proceedings. Accordingly, the Division
Bench noted that a writ of mandamus could only be granted as regards
the two complaints which were not acted upon, as the other material
had never been placed before the SEBI, negating any cause of action
(failure to act) for the issuance of a writ in respect of that information.
The Division Bench nevertheless carefully directed the SEBI only to take
action “with utmost objectivity regard being had to the law in the field”,
as the SEBI has earlier not investigated these complaints at all but
forwarded them to DLF. Indeed, the Division Bench only required SEBI
to exercise its discretionary powers under Section 11C and “take a
decision” as the law required. Thus, Section 11C, which has a step-by-
step decision making process, was required to be considered by the
SEBI, without vesting any right to hearing for the first stage in the
parties when such hearing is not required by the Act. In fact, the
Division Bench noted that SEBI “shall act with utmost objectivity
regard being had to the law in the field and without being influenced by
the counter affidavit [where it had denied any reason to investigate]”.
These facts clarify as apparent that the judgment of the Division Bench
only required SEBI to act as mandated by its governing statute, which
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in turn required no hearing at this stage. Therefore, the contention that

the judgment of the Division Bench vested any additional right of
hearing, on the party cannot be accepted.
43. DLF had argued that the Division Bench previously ordered the
SEBI to investigate only the two original complaints, and thus, the
additional material considered by the WTO, SEBI exceeded the
“jurisdictional limits set by the Learned Division Bench” (Writ Petition).
This is incorrect. Firstly, the Division Bench did not set any
jurisdictional limits. Again, as stated above, the Division Bench
mandated the SEBI to investigate into the two complaints, and not as
regards other material, because it noted that a mandamus was granted
only as regards material that was earlier placed before the SEBI but
was not acted upon. Therefore, while the writ of mandamus was limited
to the two original complaints, the SEBI was free to investigate and
take into account any additional material in keeping with its plenary
powers under the SEBI Act (Securities Exchange Board of India v. Ajay
Agarwal, decided by Supreme Court on 25-2-2010). In fact, the
Division Bench noted that “Needless to emphasize, SEBI, if so advised
by law, can always call for documents”. Thus, the Division Bench did
not seek to restrict the statutory powers under the SEBI Act, but
rather, required it to exercise its discretionary powers wholly and with
utmost objectivity. It would be unjustified therefore to claim that the
SEBI was restricted while conducting appropriate investigation, by
disallowing a consideration of material relevant to the original
complaints. Such a restrictive interpretation would mock the statute,
and restrict the powers of SEBI, which are otherwise plainly wide.
Moreover, as long as the material is relevant, and germane to the
question, i.e. whether to hold an inquiry or not, it would have to be
taken into account. The findings of the learned Single judge on this
aspect are sound, and call for no interference.
Point No. 3
44. DLF had argued that the jurisdictional pre-requisite under
Section 11C, that the Board should have “reasonable ground to
believe”, has not been met in this case. Reliance on the decisions of the
Supreme Court in Ganga Saran and Sons (Pvt.) Ltd., and S.
Narayanappa, which are decisions in the context of the Income Tax Act
have been placed. The Supreme Court, in those cases, noted that these
indeed are jurisdictional pre-requisites and the belief “must be held in
good faith : it cannot be merely a pretence”. “To put it differently it is
open to the Court to examine the question whether the reasons for the
belief have a rational connection or a relevant bearing to the formation
of the belief and are not extraneous or irrelevant to the purpose of the
Section”. (S. Narayanappa, supra).
45. There is no question that SEBI must also base its decisions on
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relevant considerations and proceed in good faith. However, the

standard of judicial review in such cases is deferential, i.e. the Court
will not review on merits, but rather, see if the decision was based on
relevant considerations. As noted in I.T.O. v. Lakhmani Mewal Das,
(1976) 103 ITR 437 (SC),
“Rational connection postulates that there must be a direct nexus
or live link between the material coming to the notice of the
Assessing Officer and the formation of his belief that there has been
escapement of income of the assesses from assessment in the
particular year. It is not any and every material, how so ever vague
and indefinite or distant, remote and farfetched, which would
warrant the formation of the belief …”
46. The question in this case is whether impugned order of SEBI
considered relevant material and whether there was a direct nexus
between the material considered and the conclusion reached. As noted
in Sunil Kumar Jain v. Income Tax Officer, (2005) 198 CTR (All) 472,
“The sufficiency of the material cannot be gone into but relevancy
certainly be gone into.”
47. Here, the material considered by the SEBI (even material
outside the original complaints) was relevant and germane to the issue
in hand, i.e. possible violations of the disclosure norms and the
Companies Act. Indeed, the record clearly shows that the decision was
based on certain relevant factors, inter alia : 1) Relations between
Appellant and Sudipti, as regards the two DHRP that were filed (para 7
of the Order);
2) Failure to make disclosures of the FIR registered against Sudipti
(para 11 0f the Order);
3) Reasoned inferences regarding DLF's knowledge of the FIR (para
11 of the Order);
4) Duty on the DLF to disclose facts in the DHRP, under specific
guidelines (Guideline 6.11.1.1.(a)) (para 12 of the Order);
5) Indirect purchase of lands through intermediaries (para 13 of the
Order).
48. A reading of the Order clearly displays that submissions of both
parties were considered, relevant material was placed on record, and a
decision reached consequent thereto. The fact that no specific violations
of a particular Section of the Companies Act or the DIP Guidelines are
mentioned does not vitiate the order; as the first stage of investigation
is only preliminary and based on reasoning provided by the SEBI, it
was advised to appoint an Investigating Authority to further determine
the veracity of these claims. Indeed, it is not for the High Court to
second-guess the reasoning of the SEBI, as long as a deferential review
does not reveal any extraneous circumstances. On this aspect too, this
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Court is of opinion that the findings of the learned single judge do not
call for interference.
49. The result of the above discussion is that all the three points are
held against the Appellant, DLF. The appeal has to therefore fail; it is
dismissed without any order on costs.
———
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