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2023 SCC OnLine SAT 1019

In the Securities Appellate Tribunal†

(BEFORE TARUN AGARWALA, PRESIDING OFFICER AND MEERA SWARUP, MEMBER
(TECHNICAL))

Appeal No. 87 of 2021

Reliance Industries Limited … Appellant;
Versus
Securities and Exchange Board of India …
Respondent.
With
Appeal No. 88 of 2021
Mukesh D. Ambani … Appellant;
Versus
Securities and Exchange Board of India …
Respondent.
With
Appeal No. 89 of 2021
Navi Mumbai SEZ Pvt. Ltd. … Appellant;
Versus
Securities and Exchange Board of India …
Respondent.
And
Appeal No. 90 of 2021
Mumbai SEZ Ltd. … Appellant;
Versus
Securities and Exchange Board of India …
Respondent.
Appeal No. 87 of 2021; Appeal No. 88 of 2021; Appeal No. 89 of
2021; and Appeal No. 90 of 2021
Decided on December 4, 2023, [Order Reserved On : 11.10.2023]
Advocates who appeared in this case:
Appeal No. 87 of 2021
Mr. Somasekhar Sundaresan, Advocate with Mr. Ashwath Rau, Mr.
Vivek Shetty, Ms. Cheryl Fernandes, Mr. Harshit Jaiswal, Advocates i/b
AZB & Partners for the Appellant.
Mr. Arvind Datar, Senior Advocate with and Mr. Shiraz Rustomjee,
Senior Advocate with Mr. Suraj Choudhary, Ms. Shreya Parikh, Mr. Mihir
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Mody, Mr. Arnav Misra, Advocates i/b. K. Ashar & Co. for the
Respondent.
Appeal No. 88 of 2021
Mr. Somasekhar Sundaresan, Advocate with Mr. Ashwath Rau, Mr.
Vivek Shetty, Ms. Cheryl Fernandes, Mr. Harshit Jaiswal, Advocates i/b
AZB & Partners for the Appellant.
Mr. Arvind Datar, Senior Advocate with and Mr. Shiraz Rustomjee,
Senior Advocate with Mr. Suraj Choudhary, Ms. Shreya Parikh, Mr. Mihir
Mody, Mr. Arnav Misra, Advocates i/b. K. Ashar & Co. for the
Respondent.
Appeal No. 89 of 2021
Mr. Raghav Shankar, Advocate with Mr. Ayush Agarwala, Mr.
Suvaaankoor Das, Mr. Shantam Mandhyan, Ms. Megharanjani Chandu,
Advocates i/b Krishnamurthy and Co. for the Appellant.
Mr. Shiraz Rustomjee, Senior Advocate with Mr. Suraj Choudhary,
Mr. Mihir Mody, Mr. Arnav Misra, Ms. Shreya Parikh, Advocates i/b. K.
Ashar & Co. for the Respondent.
Mr. Raghav Shankar, Advocate with Mr. Ayush Agarwala, Mr.
Suvaaankoor Das, Mr. Shantam Mandhyan, Ms. Megharanjani Chandu,
Advocates i/b Krishnamurthy and Co. for the Appellant.
Mr. Shiraz Rustomjee, Senior Advocate with Mr. Suraj Choudhary,
Mr. Mihir Mody, Mr. Arnav Misra, Ms. Shreya Parikh, Advocates i/b. K.
Ashar & Co. for the Respondent.
The Judgment of the Court was delivered by
TARUN AGARWALA, PRESIDING OFFICER:— Four appeals have been
filed against a common order dated January 01, 2021 passed by the
Adjudicating Officer (“AO” for convenience) of the Securities and
Exchange Board of India (“SEBI” for convenience) imposing penalties
under Section 15HA of the SEBI Act, 1992. A sum of Rs. 25 crores has
been imposed upon Reliance Industries Limited noticee no. 1, Rs. 15
crores have been imposed upon noticee no. 2 Mukesh Ambani, Rs. 20
crores has been imposed upon noticee no. 3 Navi Mumbai SEZ Private
Limited and Rs. 10 crores have been imposed upon noticee no. 4
Mumbai SEZ Limited. All the four noticees have filed the appeals before
this Tribunal.
2. The facts leading to the filing of the present appeals is, that SEBI
conducted an investigation in the trading of the scrip of Reliance
Petroleum Limited (“RPL” for convenience) for the period November 01,
2007 to November 29, 2007 to ascertain as to whether there was any
violation of the Securities and Exchange Board of India Act and its
Rules and Regulations.
3. It was observed that a resolution was passed by the Board of
Directors on March 29, 2007 approving an operating plan for the year
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2007-2008 and resource requirements for the subsequent two years i.e.
approximately Rs. 87,000 crores. Thereafter, RIL decided to sell
approximately 5% of its shareholding in November 2007.
4. It was also observed that the Company RIL appointed 12 agents
to undertake transactions in the November 2007 RPL Futures. The
settlement period was November 01, 2007 to November 29, 2007.
These 12 agents took short positions in the Futures and Options
(“F&O”) segment on behalf of the Company while the Company
undertook transactions in RPL shares in the Cash Segment. It was
observed, that between November 01, 2007 to November 29, 2007
various transactions were undertaken by the Company in the cash
segment and by the agents in the F&O segment. It was found that the
trading in the cash segment in the last 10 minutes of trading on
November 29, 2007 resulted in the fall in the prices of RPL shares,
which also lowered the settlement price in the RPL November Futures in
the F&O segment.
5. Based on the above, a show cause notice dated December 16,
2010 was issued by the Whole Time Member (“WTM” for convenience)
and after due process an order dated March 24, 2017 was passed
holding that the Company had made unlawful gains by fraudulent and
manipulative strategy thereby violating Section 12A of the SEBI Act
read with Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent
and Unfair Trade Practices relating to Securities Market) Regulations,
2003 (“PFUTP Regulations” for convenience). The WTM also issued
directions to disgorge the unlawful gains of Rs. 447.27 crores along
with interest @12% per annum and further prohibited the Company
and the 12 entities from dealing in equity derivatives in the F&O
segment of the stock exchanges directly or indirectly for a period of 1
year.
6. The Company filed an Appeal No. 120 2017 against the order of
the WTM which was dismissed by this Tribunal by a majority decision of
2 : 1 by judgment dated November 05, 2020. Against the order of this
Tribunal, the Company has filed Civil Appeal No. 4015 of 2020 before
the Supreme Court of India where it is pending consideration. After the
passing of the order by the WTM on March 24, 2017, the AO initiated
proceedings on the same charges by issuing a show cause notice dated
November 21, 2017 against the appellants to show cause as to why an
inquiry should not be initiated and why penalty should not be imposed
under Section 15HA of the SEBI Act for the violations alleged against
the appellants.
7. The show cause notice issued by the AO against the Company was
based on the same allegations as per the show cause notice issued by
the WTM dated December 16, 2010 against the Company.
8. In so far as the appellant Mukesh Ambani is concerned the show
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cause notice alleged that he is the principal officer responsible for the
day to day and overall operations of the Company and is deemed to be
guilty of the offence committed by the Company and would be liable to
the proceeded against and punished accordingly under Section 27 of
the SEBI Act. The Show cause notice also alleged that Navi Mumbai
SEZ Private Limited and Mumbai SEZ Limited, noticees no. 3 and 4
financed the whole manipulation scheme by funding the 12 named
entities thereby were complicit in the scheme of manipulation to make
undue gains and have consequently violated Regulations 3 and 4 of the
PFUTP Regulations.
9. The AO after considering the material evidence on record and after
considering the replies of the appellants and the submissions made by
them upheld the allegations made in the show cause notice and
imposed penalties for violations committed by the appellants under the
SEBI Act.
10. We have heard Shri Somasekhar Sundaresan, the learned
counsel, Shri Raghav Shankar, the learned counsel for the appellants
and Shri Arvind Datar, the learned senior counsel and Shri Shiraz
Rustomjee, the learned senior counsel for the respondent.
11. Before we proceed, we may observe that noticees no. 2, 3 and 4
were not parties to the proceedings before the WTM.
12. The AO in the impugned order held that the Company had
violated the SEBI Act and the PFUTP Regulations by entering into a well
-planned operation with its appointed agents to earn undue profits from
the sale of RPL shares in both the cash and the F&O segment and by
manipulating the settlement price of November 2007 RPL Futures
contract by dumping large number of RPL shares in the cash segment
during the last 10 minutes of trading on November 29, 2007.
13. Having heard the learned counsel for the parties in Appeal No.
87 of 2021 filed by the Company, we are of the opinion, that the matter
is squarely covered by a decision of this Tribunal dated November 05,
2020 passed in Appeal No. 120 of 2017 Reliance Industries Limited v.
SEBI. This view of ours was fairly conceded by the learned counsel for
the appellant. In view of the aforesaid, we do not find any reason to
interfere with the impugned order in so far as it relates to the Company
RIL.
14. In Appeal No. 88 of 2021 filed by Mukesh Ambani, Managing
Director of RIL, we may observe, that the said appellant was not a party
in Section 11B proceedings before the WTM and the issue of vicarious
liability was not adjudicated by the WTM and, therefore, this issue is
not subjudice before the Supreme Court of India in the appeal filed by
the Company against the order of this Tribunal dated November 05,
2020. The respondent has no objection on this aspect and accordingly
the learned counsel for the respondent contended that the matter can
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be heard on merits.
15. The AO framed the following issue, namely, whether noticee-2,
being the CMD of Noticee-1 and responsible for its day-to-day affairs,
was liable for manipulative trading done by Noticee-1, resulting in
violation of Regulations 3(a), (b), (c), (d) and Regulation 4(1), 4(2)(d),
(e) of the PFUTP Regulations, 2003 and SEBI Circular No.
SMDRP/DC/CLR-10/01 dated November 02, 2001?
16. Shri Somasekhar Sundaresan, the learned counsel for the
appellants contended that the impugned order was based on surmises
and conjectures which is evident from various paragraphs in the
impugned order. Shri Somasekhar Sundaresan, contended that in
paragraph 67 of the impugned order it was observed that being a
Managing Director implies a high level of accountability and knowledge
of the overall functioning of the Company and that there was no
agreement between noticee no. 2 (Mukesh Ambani) and the Board of
RIL that limits the power of noticee no. 2's to implement the decision of
the Board of RIL. The AO further observed that even if such an
agreement existed it would go against the interest of RIL whereby the
Managing Director does not have any oversight over the decisions
relevant to the Company. In paragraph 71, the AO observed that he
finds it difficult to believe that the entire asset sale as decided in the
Board meeting dated March 29, 2007 was left at the discretion of the
two officers without the supervision of the Managing Director. The AO in
paragraph 72, 73 and 74 came to the conclusion that the two officers
were not competent to take the decisions independently. In paragraph
72, the AO held that authorising two officials to independently carry out
the trading activities was not desirable in any corporate structure and,
therefore, came to the conclusion that the intention of the Board of RIL
was never to put the entire responsibility of the activities on the said
officials without an oversight of the Managing Director who is also a
Member of the Board of RIL. In paragraph 72 the AO came to the
conclusion that it is highly unlikely that noticee no. 2 was not aware of
the transactions in the cash and F&O segment executed by the two
officials of the Company. In paragraph 77 the AO further came to the
conclusion that the two officials did not have any locus in the entire
scheme of transactions and therefore could not have independently
taken a decision for such multi-level implementation plan and,
therefore, concluded that noticee no. 2, being the Managing Director of
RIL must have given approval or had knowledge about the entire
manipulative scheme including manipulative trades undertaken by RIL.
17. On the aforesaid reasoning the AO held that noticee no. 2 was
guilty of the charges levelled against him and closed his eyes to the
stark evidence which was existing in the form of minutes of the two
Board meetings of RIL staring at him. It was contended that the AO has
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rewritten the Board Resolutions to a non-existent fact that the Board of

RIL only authorised the two executives to only identify and explore the
funding avenues but to implement to same they were expected to come
back to the Board which is in complete contradiction to the wordings of
the resolutions “explore, identify and implement”. It was urged that the
reasoning given by the AO is based on a figment or imagination and
misappreciation of the Boards' Resolution.
18. The learned counsel for the appellants contended that Section 27
of the SEBI Act as prevailing in 2007 applied only to “offences” i.e.
where SEBI has launched criminal proceedings under Section 24,
punishment for which could be imposed by Special Court established
under Section 26A read with Section 26B and 26E of the SEBI Act and
that Section 27 did not apply for adjudication proceedings involving
civil monetary penalties.
19. It was urged, that the Parliament while enacting the SEBI Act
had clearly distinguished between the word “contravention” and the
word “offence”. It was urged that the use of the word “offence”
existing at the time of the alleged violation was an offence which only
led to criminal action and could not lead to adjudication of a civil
liability.
20. The learned counsel further contended that the Parliament made
an amendment to Section 27 of the SEBI Act w.e.f. March 08, 2019.
The Notes on clauses to Finance Bill, 2018 indicates that the
amendment to Section 27 was brought in to “enlarge the scope of
section to cover enforcement proceedings” and accordingly, by the
amending act, the word “offence” in Section 27 was replaced by the
word “contravention”. It was urged that the Parliament was of the
view that Section 27 of the SEBI Act as it stood prior to the
amendment imposed vicarious liability only for “offences” giving rise
to criminal punishment and, consequently, amended Section 27 to
bring in vicarious liability for ‘contravention’ of the SEBI Act and the
Regulations giving rise to civil penalties. It was urged, that if “offence”
is the same as “contravention” then there was no need for the
Parliament to replace the term “offence” with “contravention” and
the Notes on Clauses to the Finance Bill reinforces this interpretation.
21. It was contended, that reliance by the respondents of the
judgment in Standard Chartered Bank v. Directorate of Enforcement,
(2006) 4 SCC 278 was misplaced and not applicable to the facts of the
present case. It was further urged, that SEBI had been consistently
accepting the legal position and the WTMs and the AO have consistently
passed various orders holding that Section 27 prior to amendment
w.e.f. March 08, 2019 did not provide for vicarious liability in respect of
civil liability of a Company. In this regard, the learned counsel drew the
attention to paragraph 43 of the WTM's order dated February 24, 2022
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in the matter of Pentamedia Graphics Limited where the WTM held:

‘43…regarding applicability of the Section 27 of the SEBI Act,
1992, for violation of Regulation 5(1) of PFUTP Regulations, 1995, I
note that during the relevant period (i.e. 2002-03), Section 27
provided for the vicarious liability of certain persons who were in
charge of and was responsible to the company where an offence is
committed by a company. Section 27 at that time did not provide for
the vicarious liability in respect of the civil liability of the company
arising out of the violations committed by such company. However,
after amendments made to Section 27 with effect from March 08,
2019, by the Finance Act, 2018, vicarious liability for civil liability of
the company has been introduced by replacing the word ‘offence’
with the word ‘contravention’ in Section 27 of the SEBI Act, 1992.
Therefore, Section 27 of the SEBI Act, 1992, at the relevant time,
did not create any vicarious liability of these Noticees for the
violations committed by PGL, with reference to Regulation 5(1) of
PFUTP Regulations, 1995 for which proceedings under Section 11, 11
(4) and 11B has been proposed, which are civil in nature. In view of
the above, violations as alleged in the SCN are not made out against
Noticee nos. 7 to 10.'
22. It was contended that the stand of the respondent that the
amendment was merely clarificatory is patently erroneous and is
against the consistent legal position taken by SEBI holding that prior to
amendment Section 27 did not provide vicarious liability in respect of
civil liability of a Company.
23. In the alternative, the learned counsel contended that even
assuming that Section 27 of the SEBI Act was applicable for civil
proceedings the requirements to impute a vicarious liability was not
satisfied. It was urged, that the law is well settled that the mere fact
that the person is holding the post as the Managing Director does not
suffice for imputing vicarious liability to such person. It was urged that
the proof of active role in the alleged contravention must be
demonstrated by clear and concrete evidence of his active role coupled
with criminal intent as a necessary precondition for affixing vicarious
liability. In support of his contention the learned counsel placed
reliance in the decision of the Supreme Court in Sunil Bharti Mittal v.
CBI, (2015) 4 SCC 609 and Shiv Kumar Jatia v. State of NCT, (2019)
17 SCC 193.
24. It was also urged, that in the instant case SEBI did not proceed
against the two individuals who had an active role in the alleged
contravention but SEBI chose only to proceed against the Managing
Director, noticee no. 2 only on the basis of his designation. It was
submitted that it is an established law that charges should be framed
against a person who had an active role and, therefore, the procedure
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adopted by SEBI in targeting noticee no. 2 for reasons best known to

them was wholly erroneous and malafide.
25. It was contended that the proviso to Section 27 requires “such
person” to prove that the offence was committed “without his
knowledge”. It was contended that if knowledge is relevant then state
of mind cannot be irrelevant and it cannot be argued by the respondent
that such person has to bring more proof then what had been shown.
The learned counsel contended that Section 27 does not introduce a
regime of strict liability of the Managing Director for any and all
violations of law by the Company. It was urged, that a conglomerate
such as RIL which operates in a wide spectrum of businesses and has
tens of thousands of employees spread across the length and breadth
of the country and abroad cannot suggest that the Managing Director is
ipso facto responsible for every alleged contravention of law by the
corporate entities.
26. It was also urged, that the show cause notice and the impugned
order was passed in the teeth of the internal noting of the respondent
in 2010 wherein the Chairman had posed a question as to what was the
nature of evidence against Mr. Mukesh Ambani. Inspite of this query
being raised by the Chairman of SEBI no proof of Mukesh Ambani's
involvement was brought to the notice of the Chairman inspite of which
proceedings were initiated which according to the learned counsel was
purely malafide. It was thus urged, that the initiation of proceedings
against noticee no. 2 was wholly erroneous and the proceedings should
be quashed and the penalty amount should be set aside.
27. Shri Arvind Datar, the learned senior counsel for the respondent
at the outset, conceded that a large Company like that of the appellant
is not expected that the Managing Director or the Senior Whole Time
Director are in the know of every little things that happens and that it
would be absurd to conclude that they should be made liable for these
small things. The learned senior counsel further said that at the same
time, considering the facts of the present case, it is clear that the
transaction could not have happened without the implicit knowledge of
the Managing Director, noticee no. 2.
28. The learned senior counsel contended that Section 27 of the
SEBI Act is a departure from the traditional criminal law and the
provision has its roots to the 1971 Wanchoo Committee Report. Section
27 of the SEBI Act and identical Sections in other legislation like the
Income Tax Act, Customs Act specifically introduced this provision
wherein the burden of proof was shifted upon the person in-charge
since it was difficult for the agencies to prove beyond a doubt in
criminal prosecution that the person in-charge was involved or
complicit. Thus, under Section 27 of the SEBI Act, the onus lay on the
person in-charge to prove his innocence.
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29. Shri Arvind Datar, the learned senior counsel contended that a
perusal of the minutes of Board of RIL dated March 29, 2007 and
November 19, 2007 indicates that only a general resolution was passed
to raise funds and that the said resolutions does not in any way indicate
that it allowed the two officers of the Company to trade and generate
funds for the Company. The learned senior counsel further contended
that it is unbelievable that the two officers could have carried out the
manipulative trades by themselves without the oversight and
involvement of the Managing Director or the Board. The learned counsel
contended that the well-planned transaction could not have happened
without the approval of the Managing Director and that Alok Agarwal,
LV Merchant and Sandeep Agarwal could not have done the
transactions all by themselves as it was not an ordinary sale of 5% of
the RPL shares.
30. The learned senior counsel contended that the language of
Section 27 makes it clear that it applies to civil adjudication. The
learned senior counsel contended that the word “offence” has not been
defined under the SEBI Act and therefore the meaning must be
understood as defined in the General Clauses Act which defines
“offence” as an act or omission made punishable by law for the time
being in force. It was urged, that Section 27 only enunciate the general
principle, namely, that the directors are responsible for acts of
employees and that the burden of proof is on them to show that the
contravention had taken place without their knowledge. It was urged,
that no evidence was filed by noticee no. 2 to show that he did not
have any knowledge.
31. The learned senior counsel stressed on the word “proceeded
against” and “punished” as depicted in Section 27 of the Act and
contended that these words are not “prosecuted” and “punished” as
depicted in Article 20 of the Constitution of India. Further the word
“punished” cannot be interpreted to mean that Section 27 was only
applicable to criminal proceedings. It was urged, that something which
is prohibited by law and a penalty is imposed is a punishment.
32. The learned senior counsel for the respondent further contended
that the amendment to Section 27 of the Act w.e.f March 08, 2019 read
with the Notes on clauses to the Finance Bill, 2018 only enlarges the
scope of the section and, therefore, the amendment was only
clarificatory in nature. In this regard, the learned senior counsel relied
upon a decision of the Supreme Court in Standard Chartered Bank v.
Directorate of Enforcement, (2006) 4 SCC 278 wherein the Supreme
Court after extensively dealing with the meaning of the word “offence”
concluded that “offence” and “contravention” are the same. The
learned senior counsel contended that the said decision is squarely
applicable in the instant case and accordingly Section 27 has to be held
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that it applies to civil adjudication. In this regard, the learned senior

counsel also relied upon a decision of the Constitution Bench of the
Supreme Court in Thomas Dana v. State of Punjab, 1959 Supp (1) SCR
274 wherein it was observed that all criminal offences are offences, but
all offences in the sense of infringement of law are not criminal offences
meaning thereby that the word “offence” need not always be read as
criminal offence. Reliance was also made on the decision in Apex
Laboratories Pvt. Ltd. v. Deputy Commissioner of Income Tax, Large Tax
Payer Unit-II, (2022) 7 SCC 98.
33. It was urged, that the Managing Director stands on a different
position and since the Managing Director has wide powers and overall
responsibilities, it cannot be said that noticee no. 2 had no knowledge.
In support of his proposition the learned senior counsel placed reliance
upon a decision of RNRL v. RIL, (2010) 7 SCC 1, SMS Pharmaceuticals
Ltd. v. Neeta Bhalla, (2005) 8 SCC 89, K.K. Ahuja v. V.K Vora, (2009)
10 SCC 48.
34. The learned senior counsel further stated that there are various
decisions of this Tribunal where it has held that Section 27 applies to a
Managing Director. In support of his submission the learned counsel
placed reliance in the decision in Rahul H Shah v. SEBI, 2004 SCC
OnLine SAT 77, Almondz Global Securities v. SEBI in Appeal No. 275 of
2014 decided on 13.05.2016, Mohan Lall Chauhan v. SEBI in Appeal
No. 516 of 2021 decided on August 24, 2022, N. Narayanan v. SEBI in
Appeal No. 29 of 2012 decided on 05.10.2012, NSE v. SEBI (dark-fibre)
in Appeal No. 334 of 2019 decided on August 09, 2023, NSE v. SEBI
(Colocation) in Appeal No. 333 of 2019 decided 23.01.2023 and in the
case of Secretary of State for Trade and Industry v. Baker, (2000) 1
BCLC 523 (UK-Court of Appeal). It was thus urged, that the contention
of noticee no. 2 that he was unaware in the matter of sales of RPL
shares cannot be believed.
35. The learned senior counsel also placed reliance upon Section 106
and 114(f) and (g) of the Evidence Act to stress that if the Managing
Director wants to espouse the proposition that all events happened
without his knowledge, then he has to produce the best evidence in his
possession and if he does not produce in terms of examples (f) and (g)
in Section 114 of the Evidence Act then the Court is entitled to draw an
adverse inference. In support to his submission the learned counsel
placed reliance upon a decision of the Supreme Court in Gopal Krishnaji
Ketkar v. Mohamed Haji Latif, (1968) 3 SCR 862.
36. Shri Rustomjee, the learned senior counsel for the respondent
also submitted that the resolutions passed by the Company were
couched in widest possible and general terms and can only be
characterised as a broad statement of intent. The learned senior
counsel contended that the two resolutions are vague and not specific
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and it could never be contemplated that the two persons could execute
the transactions unsupervised, unchecked, unmonitored to raise an
amount of Rs. 87,000 crores without any further recourse to the Board.
The learned senior counsel contended that the Managing Director is
responsible for the management of the affairs of the Company and that
mens rea is not required nor the conscious state of mind is required
under Section 27 of the SEBI Act. The learned senior counsel contended
that intention is irrelevant in a civil fraud and relied upon a decision of
the Supreme Court in SEBI v. Shri Kanaiyalal Baldevbhai Patel, (2017)
14 SCR 268.
37. Having considered the submissions made at the bar by the
learned counsel for the parties, in our opinion, the following issues
arises for consideration:—
(i) Whether Section 27 of the SEBI Act prior to its amendment w.e.f.
March 08, 2019 provided for vicarious liability only in respect of
criminal proceedings initiated against a Company for
contravention of the SEBI Act?
(ii) Whether Section 27 of the SEBI Act after its amendment w.e.f.
March 08, 2019 provided for vicarious liability for civil liability of a
Company for contravention of the SEBI Act, Rules, Regulations,
directions or orders made thereunder?
(iii) Whether in the facts and circumstances of the present case the
Managing Director of the Company can be held vicariously liable
for penalties under Section 27 of the SEBI Act for contravention of
Section 12A of the SEBI Act read with Regulations 3 and 4 of the
PFUTP Regulations?
(iv) Whether there has been undue delay in the initiation of the
proceedings by the AO.
38. Before dealing with the submissions, it would be appropriate to
consider the relevant provisions of the SEBI Act, namely, Section 15HA,
24, 26 and 27 of the SEBI Act. For facility, the same are extracted
below:—
Penalty for fraudulent and unfair trade practices. 15HA.
If any person indulges in fraudulent and unfair trade practices
relating to securities, he shall be liable to a penalty [which shall not
be less than five lakh rupees but which may extend to twenty-five
crore rupees or three times the amount of profits made out of such
practices, whichever is higher.
Offences.
24. (1) Without prejudice to any award of penalty by the
adjudicating officer [or the Board] under this Act, if any person
contravenes or attempts to contravene or abets the contravention of
the provisions of this Act or of any rules or regulations made
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thereunder, he shall be punishable with imprisonment for a term

which may extend to [ten years, or with fine, which may extend to
twenty-five crore rupees or with both].
(2) If any person fails to pay the penalty imposed by the
adjudicating officer [or the Board] or fails to comply with any [***]
directions or orders, he shall be punishable with imprisonment for a
term which shall not be less than one month but which may extend
to [ten years, or with fine, which may extend to twenty-five crore
rupees or with both].
Cognizance of offences by courts.
26. (1) No court shall take cognizance of any offence punishable
under this Act or any rules or regulations made thereunder, save on
a complaint made by the Board [* * *]. [(2) *****]”
Pre and post amendment of Section 27 of the SEBI Act are as under:
Offences by companies. Contravention by companies.
27.(1) Where an offence under 27. (1) Where [a contravention
this Act has been committed by of any of the provisions of this
a company, every person who at Act or any rule, regulation,
the time the offence was direction or order made
committed was in charge of, and thereunder] has been committed
was responsible to, the company by a company, every person who
for the conduct of the business of at the time the [contravention]
the company, as well as the was committed was in charge of,
company, shall be deemed to be and was responsible to, the
guilty of the offence and shall be company for the conduct of the
liable to be proceeded against business of the company, as well
and punished accordingly: as the company, shall be deemed
Provided that nothing contained to be guilty of the
in this sub-section shall render [contravention] and shall be
any such person liable to any liable to be proceeded against
punishment provided in this Act, and punished accordingly:
if he proves that the offence was Provided that nothing contained
committed without his knowledge in this sub-section shall render
or that he had exercised all due any such person liable to any
diligence to prevent the punishment provided in this Act,
commission of such offence. if he proves that the
(2) Notwithstanding anything [contravention] was committed
contained in sub-section (1), without his knowledge or that he
where an offence under this Act had exercised all due diligence to
has been committed by a prevent the commission of such
company and it is proved that the [contravention].
offence has been committed with (2) Notwithstanding anything
the consent or connivance of, or is contained in sub-section (1),
attributable to any neglect on the where an [contravention] under
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part of, any director, manager, this Act has been committed by a
secretary or other officer of the company and it is proved that the
company, such director, manager, [contravention] has been
secretary or other officer shall committed with the consent or
also be deemed to be guilty of the connivance of, or is attributable to
offence and shall be liable to be any neglect on the part of, any
proceeded against and punished director, manager, secretary or
accordingly. other officer of the company, such
Explanation.-For the purposes of director, manager, secretary or
this section,— other officer shall also be deemed
(a) “company” means any body to be guilty of the
corporate and includes a firm or [contravention] and shall be
other association of individuals; liable to be proceeded against
and and punished accordingly.
(b) “director” in relation to a firm, Explanation:
means a partner in the firm. For the purposes of this section,-
(a) “company” means any body
corporate and includes a firm or
other association of individuals;
and
(b) “director”, in relation to a
firm, means a partner in the firm.
39. Section 15HA provides that if any persons indulges in a
fraudulent and unfair trade practice relating to securities then he shall
be liable to a penalty which shall not be less than five lakh rupees and
which may extend to twenty-five crore rupees or three times of profit
made out of such practices. The aforesaid penalty is provided under
Chapter VI-A of the SEBI Act where various kind of penalties have been
provided for violations of the various provisions of the Act. The Act also
provides for issuance of various directions under Section 11 and 11B
under Chapter IV to regulate the securities market by such measures
as it deems fit. Section 24, 26 and 27 comes under the miscellaneous
category under Chapter VII of the SEBI Act. Section 24 provides that
without prejudice to an award or penalty awarded by the AO or by the
Board, if any, person contravenes the provisions of the Act or the Rules
or Regulations made thereunder, he shall be punishable with
imprisonment or with fine. Section 26 of the Act provides that no Court
shall take cognizance of any offence punishable under this Act or any
Rules or Regulations made thereunder, save on a complaint made by
the Board. Section 27 provides that prior to the amendment dated
March 08, 2019 any offence made by the company under the Act or
under the Rules or Regulations, then the person who was in charge of
or was responsible shall be liable to be proceeded with and punished
accordingly.
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40. From a perusal of various provisions of the Act, the intention of

the Parliament was very clear, namely, that certain directions could be
issued under Section 11 and 11B of the Act in order to protect the
interest of the investors in securities and to regulate the securities
market by such measures as it deemed fit. In addition to the directions
issued under Section 11 and 11B of the SEBI Act, penalties could be
imposed by the authorities of SEBI under Chapter VIA from Section
15A to 15B wherein monetary penalties can be imposed for violation of
various provisions of the Act, Rules and Regulations. Under Chapter
VII, if a person contravenes any provisions of the Act then he shall be
punishable with imprisonment. Under Section 26 upon a complaint
made by the Board, an offence against the company can be tried by a
Court of law and, under Section 27, where an offence is committed by
the company then any person responsible to the company or was in
charge of the company shall be liable to be proceeded with and
punished accordingly.
41. Thus, a harmonious reading of Section 24, 26 and 27 of the
SEBI Act makes it clear that the intention of the legislature was that
upon a failure to do something prescribed by the statute would be an
offence tried in a Court of law and the person in charge of or who was
responsible for the conduct of the business of the company would be
proceeded with and punished accordingly.
42. The term “offence” and “contravention” has not been defined
under the Act. Under Section 3(38) of the General Clauses Act
“offence” means any act or omission made punishable by any law for
the time being in force. Black's Law Dictionary, 7th Edition defines
“offence” as a violation of the law. Stroud's Judicial Dictionary, 7th
Edition defines “offence” as equivalent to a crime and the intention of
the legislature is that failure to do something prescribed by statute may
be described as an offence.
43. On the other hand, Black's Law Dictionary 7th Edition defines
“contravention” as an act violating a legal condition or obligation; a
minor violation of the law. Stroud's Judicial Dictionary, 7th Edition
defines “contravention” to mean to include a failure to comply with
the provision in question.
44. Thus, “offence” is a wider term than “contravention”. The
terms “offence” and “contravention” are similar but not synonymous.
One may contravene a norm which may not be punishable by law but a
contravention which if it contravenes an Act becomes an offence
punishable by law. An offence and contravention are both terms related
to violation of laws, but there are some subtle differences. An offence is
generally referred to a more serious violation of law. Offences can result
in imposition of heavy fines or imprisonment. On the other hand,
contravention refers to a less serious violation of law. Contraventions
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are often associated with minor infractions leading to imposition of

minor penalties. In effect, the main difference between an offence and
contravention is in the severity of the violation. Offences are typically
more serious and involves prosecution by a court of law whereas,
contraventions are minor infractions attracting simpler penalties. Thus,
there is a distinction between “offence” and “contravention”.
Consequently, one has to see the intention of the Parliament when it
uses the word “offence” or where it uses the word “contravention”.
45. From the aforesaid, the intention of the Parliament from a
reading of Chapter IV, VIA and VIII of the SEBI Act makes it clear that
in addition to the powers given to SEBI under Chapter IV and VA of the
SEBI Act, SEBI was also provided the power to punish a person or the
company by imprisonment or fine by initiating a proceedings in an
appropriate Court of law. This was in addition to issuance of a direction
under Chapter IV or imposing of penalty under Chapter IVA.
46. Thus, the term “offence” prior to the amendment in Section 27
related to criminal proceedings. Until March 07, 2019 Section 27
operated in cases of commission of an “offence” within the meaning of
the SEBI Act which is dealt with under Section 24 of the SEBI Act and
is tried before a Special Court established for this purpose. On a plain
reading of Section 27, as it stood on the date of the transaction in
question, makes it clear that Section 27 of the SEBI Act did not include
within its scope the levy of civil penalties for the alleged violation of the
provisions of the SEBI Act and the PFUTP Regulations. The pre-
amendment Section 27 specifically restricted the imposition of vicarious
liability for commission of offences by companies to cases involving
offences by companies. Section 24 of the SEBI Act clearly sets out the
scope of the term “offences” to be exclusively tried by the Special
Courts established under Section 26 of the SEBI Act.
47. The Notes on Clauses appended to the Finance Bill, 2018 by
which Section 27 was amended indicates that the legislature felt that
there was a need to “enlarge the scope of the Section to cover
enforcement proceedings” by expanding the legislative provision for
vicarious liability to cover not only offences within the meaning of the
SEBI Act but also any contravention.
48. We are thus of the view, that Section 27 prior to the amendment
i.e. prior to March 08, 2019 had no application to civil liability and only
after the amendment w.e.f. March 08, 2019 that Section 27 provided
for vicarious liability on both criminal and civil liability for contravention
of the SEBI Act, Rules and Regulations.
49. The contention that the 2018 amendment was clarificatory in
nature is patently misconceived and is irreconcilable with the Notes to
clauses appended to Finance Bill, 2018 which expressly notes that the
amendment was with the view to expand the scope of the provision
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rather than noting that the amendment was only for the purpose of
removable of doubt or to clarify the scope of the provision. The Notes
on Clauses makes it abundantly clear that the amendment to Section
27 was a substantive modification to the scope of the provision wherein
for the first time the officers of the company were made vicariously
liable for contravention of the SEBI Act.
50. We are also of the view that the Finance Act, 2018 did not give
retrospective effect to this amendment nor can such effect be inferred
by necessary implication from the language of the amendment. The
amendment, being substantive in nature can only be prospective and
cannot have any retrospective application. The impugned order holding
the amendment to be clarificatory in nature is thus patently erroneous.
51. In 2007, Section 27 applied only to “offences” by companies
under the Securities and Exchange Board of India Act (which includes
Rules and Regulations). After the amendment, it applies to
“contraventions” not only under the SEBI Act, but also directions and
orders made thereunder. The Notes on Clauses tabled in Parliament for
the amendment makes it clear that the intent was to “enlarge the
scope” of Section 27 to cover “enforcement proceedings”. The term
“enforce” has been held to mean “compel obedience.” Therefore in the
context of the SEBI Act, it can only mean the civil proceedings that
may be taken for issuance of directions and to penalise as a weapon of
compelling compliance with the law.
52. Had Parliament been of the view that the word “offences” takes
within its fold both civil and criminal proceedings as canvassed by the
respondent relying on Standard Chartered (supra), then Parliament
would not have replaced the word “offence” with “contravention” in
the SEBI Act. The law is very clear, namely, that the intent and scope
must be discerned from the legislation in question, and Parliament
consciously replaced the word “offence” (which takes its colour from
the provisions of Chapter VII of the Act) with the wider term
“contravention” making it clear that the Parliamentary intention was
to “enlarge the scope” to include civil proceedings as well.
53. The findings in paragraphs 62-63 of the impugned order that
Section 27 always covered civil proceedings in its purview and that the
amendment was “clarificatory in nature” is irreconcilable with the
scheme and legislative history of the SEBI Act.
54. This view of ours is fortified by the fact that SEBI since inception
has accepted the fact that Section 27 does not provide for vicarious
liability in respect of civil liability of a company arising out the
violations committed by the company. As recent as on 24.02.2022 in
re : Pentamedia Graphics Ltd., a WTM of SEBI held:—
“…regarding applicability of the Section 27 of the SEBI Act, 1992
for violation of Regulation 5(1) of PFUTP Regulations, 1995, I note
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that during the relevant period (i.e. 2002-03), Section 27 provided

for the vicarious liability of certain persons who were in charge of
and was responsible to the company where an offence is committed
by a company. Section 27 at that time did not provide for the
vicarious liability in respect of the civil liability of the company
arising out of the violations committed by such company. However,
after amendments made to Section 27 with effect from March 08,
2019, by the Finance Act, 2018, vicarious liability for civil liability of
the company has been introduced by replacing the word “offence”
with the word “contravention” in Section 27 of the SEBI Act, 1992.
Therefore, Section 27 of the SEBI Act, 1992, at the relevant time,
did not create any vicarious liability of these noticees for the
violations committed by PGL with reference to Regulation 5(1) of
PFUTP Regulations, 1995 for which proceedings under Section 11, 11
(4) and 11B has been proposed, which are civil in nature. In view of
the above, violations as alleged in the show cause notice are not
made out against noticees nos. 7 to 10.”
55. We also find that SEBI has consistently held that Section 27
prior to its amendment w.e.f. March 08, 2019 did not provide for
vicarious liability in respect of civil liability of the company arising out
of such violations committed by such company. A compilation of the 23
orders passed by the WTM as well as by the AO as recently as on March
24, 2023 was produced before the Tribunal which fact has not been
disputed by the respondents. The list of these 23 orders are reproduced
below:—
“(1) SEBI Final order dated 28.05.2021 in the matter of Tatia Global
Vennture Limited WTM/AB/IVD-ID 19/10/2021-22
(2) SEBI Final Order dated 15.06.2021 in the matter of Inter Globe
Finance Limited WTM/AB/IVD/ID19/12261/2021-22
(3) SEBI Final Order dated 08.07.2021 in the matter of V.B.
Industries Limited WTM/AB/IVD/ID19/12493/2021-22
(4) SEBI Final Order dated 14.07.2021 in the matter of Venmax
Drugs and Pharmaceuticals Limited
WTM/AB/IVD/ID19/12587/2021-22
(5) SEBI Final Order dated 06.08.2021 in the matter of Jaisukh
Dealers Limited WTM/AB/IVD-ID19/12937/2021-22
(6) SEBI Final Order dated 11.08.2021 in the matter of Eskay K ‘n’ it
India Limited WTM/AB/IVD/ID19/12999/2021-22
(7) SEBI Final Order dated 14.09.2021 in the matter of JMD
Ventures Limited WTM/AB/IVD/ID19/13326/2021-22
(8) SEBI Final Order dated 07.10.2021 in the matter of Svam
Software Limited WTM/AB/IVD/ID19/13689/2021-22
(9) SEBI Final Order dated 23.11.2021 in the matter of Jai Mata
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Glass Limited WTM/AB/IVD/ID19/14250/2021-22

(10) SEBI Final Order dated 25.11.2021 in the matter of ARSS
Infrastructure Projects Limited WTM/AB/IVD/ID19/14342/2021-
22
(11) SEBI Final Order dated 21.12.2021 in the matter of K Lifestyle
& Industries Limited WTM/AB/IVD/ID19/14495/2021-22
(12) SEBI Adjudication Order dated 21.12.2021 in the matter of
Edynamics Solutions Limited SM/AD/2022-23/22324-22327
(13) SEBI Final Order dated 21.12.2021 in the matter of Nu Tek
India Limited WTM/AB/IVD/ID19/14527/2021-22
(14) SEBI Adjudication Order dated 12.01.2022 in the matter of Blue
Circle Services Limited MC/RM/2021-22/14712-14715
(15) SEBI Final Order dated 20.01.2022 in the matter of Landmarc
Leisure Corporation Limited WTM/AB//IVD/ID19/14750/2021-22
(16) SEBI Final Order dated 28.02.2022 in the matter of Hit Kit
Global Solutions Ltd. WTM/AB/IVD/ID19/15232/2021-22
(17) SEBI Final Order dated 21.03.2022 in the matter of Quest
Financial Services Limited WTM/AB/IVD/ID19/15432/2021-22
(18) SEBI Final Order dated 24.03.2022 in the matter of GDR Issue
by Pentamedia Graphics Limited WTM/AB/IVD/ID4/15397/2021-
22
(19) SEBI Final Order dated 21.04.2022 in the matter of Dalmia
Industrial Development Limited WTM/AB/IVD/ID19/16060/2022-
23
(20) SEBI Final Order dated 29.06.2022 in the matter of Parsvnath
Developers Limited WTM/AB/IVD/ID19/17508/2022-23
(21) SEBI Adjudication Order dated 29.08.2022 in the matter of
Triveni Enterprises Limited JS/N/2022-23/18728-18730
(22) SEBI Final Order dated 14.10.2022 in the matter of Pentasoft
Technologies Limited WTM/AB/IVD/ID4/20306/2022-23
(23) SEBI Final Order dated 24.04.2023 in the matter of Vistaar
Capital Advisors Limited WTM/AB/AFD-1/AFD-1-SEC/25881/2023
-24”
56. In SEBI v. Sunil Krishna Khaitan, (2023) 2 SCC 643, the
Supreme Court emphasised that it is important for SEBI to be
consistent and predictable while interpreting the provisions of its parent
legislation. The relevant extract is reproduced hereunder:— “59. It is
important for the regulator to be consistent and predictable. Further
regulations must be clear as ambiguous regulations cause confusion
and uncertainty. Regularity and predictability, along with certainty, are
hallmarks of good regulation and governance. These principles underpin
the “rule of law:, check arbitrariness and are read as the intent of the
legislation, which the Courts, if need be, will enforce as a principle of
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interpretation. The Board is entrusted to preform legislative, executive,

investigative and adjudicatory functions. A regulator when it executes
statutory functions interprets the enactment and gives meaning and, in
that sense, lays down what it believes is the rule. As a legislator who
constructs and states at the first instance what is the rule, the Board
tacitly promises and prophesies the interpretation that appeals to them.
Any good regulatory system must promote and adhere to principle of
certainty and consistency, providing assurance to the individual as to
the consequence of transactions forming part of his daily affairs.”
57. Thus reliance by the AO on the decision in Standard Chartered
is erroneous. The judgment was not rendered in the context of a pari
materia provision. Section 68 of the FERA used the word
“contravention” in the body of the section and the term “offences”
was only used in the side heading. In that light, the Supreme Court
after considering other provisions of the FERA Act, held that the
intention of the legislature was that “offence” and “contravention”
meant the same in so far as Section 68 of the FERA Act was concerned.
We may note at this stage that Section 68 of the FERA Act is more or
less pari materia with the amended provisions of Section 27 of the SEBI
Act w.e.f. March 08, 2019. However, Section 27 of the SEBI Act prior to
amendment was totally different and distinct from the provision of
Section 68 of the FERA Act. Thus, reliance on the decision of the
Standard Chartered was misplaced. In Standard Chartered (supra) the
Supreme Court held that the phrase “contravention” takes within its
fold both civil as well as criminal violations in the context of Section 68
of FERA. In sharp contrast, at all times relevant to this appeal, Section
27 of the SEBI Act, did not use the word “contravention” at all, and
when Parliament amended it in 2018, explicitly, Parliament stated that
the intention was to enlarge the scope to include enforcement
proceedings.
58. The meaning of the term “offence” is required to be understood
in the context in which it is used in the legislation. A suggestion that
the term “offence” as occurring in the SEBI Act also covers civil
proceedings is at odds with the range of provisions in Chapter VII of
the SEBI Act which is a facet that was not even examined by the AO,
much less ruled upon. We find that parliament was conscious of the
usage of the two words “contravention” and “offence” in the SEBI Act
and consciously chose to replace “offence” with “contravention”
explicitly, in order to enlarge the scope of Section 27.
59. Thus, we hold that Section 27 of the SEBI Act as it stood prior to
the amendment did not apply to civil liability and, therefore, the
Managing Director could not be penalised by SEBI under Section 27 of
the Act.
60. In view of the aforesaid, it is not necessary for us to deal with
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the issue as to whether the Managing Director could be made

vicariously liable under Section 27 of the SEBI Act for contravention of
the Section 12A and Regulations 3 and 4 of the PFUTP Regulations.
61. However, on this issue, we find that from the minutes of the
Board meeting of RIL held on 29.03.2007, that Alok Agarwal, Chief
Financial Officer (CFO) made a presentation detailing the Company's
Operating Plan and Capital Budget for the year 2007-2008 and the
prospective plan for succeeding 3 to 5 years. The presentation set out
the resource requirements for the next two years and the funding
avenues for the same, namely:
Sr. Resource Rs. Sr. Funding Avenues Rs.
No. requirement Crore No. Crore
over next 2
years
1 Upstream 39,400 9 Internal Accruals 30,500
2 Retail 25,000 10 Equity 17,000
3 Jamnagar 5,000 11 Debt including 39,500
SEZ through
Infrastructure ECB/Monetization
including through
Sales /divestments
of assets &
investments
4 Convention 6,000
Centre
5 Off gas 6,600
cracker
6 Haryana SEZ 2,000
7 Normal 3,000
8 Total Capex 87,000 12 Total Funding 87,000
62. The minutes of the Board also authorized Alok Agarwal, the CFO
and LV Merchant (Controller Accounts), senior executives of the
Company to ‘explore, identify and implement optimal avenues of
funding’.
63. On 19.11.2007, RIL's Board noted an update from Alok Agarwal
and the minutes recorded as follows:
“The Board was informed of the progress made towards raising of
resources for the Company's ongoing projects in line with the fund
raising program as earlier authorised by the Board of Directors at the
budget meeting held in March 2007. The Board was also informed
that after exploring various means of finance, the company is
disposing RPL shares of up to 5% through trades in RPL securities.
Board noted the same.”
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64. It is a matter of record that:

(a) One of the funding avenues identified by Alok Agarwal and LV
Merchant for meeting the fund requirements was to sell RPL
shares held by RIL representing 5% of the outstanding equity
shares of RPL; and
(b) Only these two senior executives assisted by one Sandeep
Agarwal (employee of an RIL subsidiary), carried out the trades in
RPL shares in both, Cash & F&O segments and raised Rs. 5,013
crore i.e. Rs. 4,500 crore in the Cash segment and Rs. 513 crore
in F&O segment.
(c) The impugned order records that Rs. 447.27 crore was the
alleged unlawful profit.
65. The evidence contained in the minutes of these two Board
meetings held on 29.03.2007 and 19.11.2007 makes it clear that:
(a) The RIL Board approved the funding avenues and specifically and
directly authorised Alok Agarwal and LV Merchant to the exclusion
of the Managing Director to “explore, identify and implement” the
means of raising of the funds.
(b) The authorisation given to the two authorised persons, namely,
Alok Agarwal and LV Merchant was not with any caveat for coming
back to the Board for further instructions or directions. They were
the persons made responsible to the Company for the divestment
of the 5% RPL shares, without having to check back with the
Board. It is not the case of SEBI that this authorisation was
illegal.
(c) The quantum and the manner of executing the sale and the
means to realise the best price were left to the discretion of these
two authorised persons. The two authorised persons simply
updated the Board on 19.11.2007 that the process of sale of 5%
RPL shares was ongoing.
(d) There is no documentary evidence or investigative finding
whether from statements recorded in the investigation or
otherwise, that notice No. 2 had knowledge of the trades or that
the appellant was involved in the execution of the trades carried
out by the two authorised persons. The appellant's knowledge was
restricted only to the limited update given by the two authorised
persons at the Board meeting held on 19.11.2007 like other Board
members. (e) Noticee No. 2 did not authorise Alok Agarwal, LV
Merchant and Sandeep Agarwal to execute the trades.
66. The aforesaid, two minutes of the Board meetings dated
29.03.2007 and 19.11.2007 are not disputed by the respondent. From
the aforesaid, it is clear that the Board of Directors had specifically
directed the two officers to explore, identify and implement optional
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avenues of funding and thereafter on 19.11.2007 the Board of Directors

were informed by these two persons that the funds are being raised by
disposing 5% of RPL shares through trades in RPL securities. In view of
this impeccable evidence, notice No. 2 had discharged the burden
under Section 27 of the Act and the onus shifted upon SEBI to prove
that notice No. 2 was complicit. The finding that the appellant was
complicit to the violations committed by the company and, therefore,
liable under Section 27 of the Act is patently erroneous and is based on
surmises and conjectures.
67. We find that a specific denial was made by noticee no. 2 of his
involvement in the trades executed by the two officers of the company.
We also find that the AO in paragraph 64 holds that it is relevant to
examine the role of the Managing Director in terms of direct
involvement or knowledge with regard to the manipulative scheme or
trades undertaken by the company. We find that the AO failed to
establish either direct involvement or knowledge of the Managing
Director with regard to the trades undertaken by the company and,
therefore, the finding that the Managing Director was ‘complicit’ to the
violations committed by the company through its two officers is based
on surmises and conjectures and on the basis of the figment of his
imagination.
68. The burden under the proviso to Section 27(1) of the SEBI Act
was completely discharged by the appellant when evidence was placed
that two officers of high rank of the company were authorised to sell
the shares of the Company. These two officers reported to the Board of
Directors which approved the action of the two officers to sell the
shares of the Company. The burden that the Managing Director of the
Board of Directors exercised all due diligence was discharged and,
therefore, the onus shifted back to SEBI to show that the Managing
Director was responsible for the execution of the trades in question. In
the absence of any finding being given by the AO establishing direct
involvement or knowledge of the Managing Director in the execution of
the trades the finding that the Managing Director was complicit in the
execution of the trades with the two officers is purely based on
surmises and conjectures. Thus, on this score noticee no. 2 i.e. the
Managing Director cannot be held responsible for the execution of the
shares in the facts and circumstances of the present case.
69. We may also note that on the same transactions, the WTM had
also passed an order and arrived at a conclusion holding that the
transactions were decided by the authorised senior executives. The
WTM further accepted that the Board of Directors of the company had
delegated the requisite powers to the authorised senior executives to
conceive and implement the subject transactions and left the details to
be decided by the two individuals. The said delegation of authority by
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the Board to the two senior executive, one being the CFO and the other
being the Controller Accounts of the Company was an exercise of due
diligence on the part of the Board regard being had to the seniority,
expertise, experience and functional role of the two individuals who
were named to act on behalf to the Board. The limited role played by
the Board was only to take note of the transactions after they had been
executed by the two senior executives. Without considering the findings
of the WTM the AO in the impugned order has misdirected itself in
holding that the Managing Director was responsible under Section 27 of
the SEBI Act merely on the ground that he was the Managing Director.
70. We may also point out that in terms of Section 194 of the
Companies Act, 1956, the minutes of the meeting of the Board are
conclusive evidence of the proceedings recorded therein. When the
Board by a resolution explicitly authorised two senior officers of the
company to implement funding avenues, the effect of such resolution is
to empower these two executives for execution of the transactions in
question. On this basis, the AO cannot brush aside this evidence while
holding that the Managing Director was responsible for the execution of
the trades.
71. Assuming that Section 27 of the SEBI Act is applicable for civil
proceedings, we find that the requirement to impute a vicarious liability
is not satisfied. The law is well settled that the mere fact that a person
holds a designation of Managing Director does not suffice for imputing a
vicarious liability to such person. It has been repeatedly held that the
proof of “active role” in the alleged contravention in issue must be
demonstrated by clear and concrete evidence of his active role coupled
with criminal intent as a necessary pre-condition for affixing vicarious
liability. This view of ours is fortified by a decision of the Supreme Court
in Sunil Bharati Mittal v. CBI, (2015) 4 SCC 609 wherein the Supreme
Court held:—
“42. No doubt, a corporate entity is an artificial person which acts
through its officers, Directors, Managing Director, Chairman etc. If
such a company commits an offence involving mens rea, it would
normally be the intent and action of that individual who would act on
behalf of the company. It would be more so, when the criminal act is
that of conspiracy. However, at the same time, it is the cardinal
principle of criminal jurisprudence that there is no vicarious liability
unless the statute specifically provides so.
43. Thus, an individual who has perpetrated the commission of an
offence on behalf of a company can be made accused, along with the
company, if there is sufficient evidence of his active role coupled
with criminal intent. Second situation in which he can be implicated
is in those cases where the statutory regime itself attracts the
doctrine of vicarious liability, by specifically incorporating such a
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provision.
44. When the company is the offendor, vicarious liability of the
Directors cannot be imputed automatically, in the absence of any
statutory provision to this effect. One such example is Section 141 of
the Negotiable Instruments Act, 1881. In Aneeta Hada (supra), the
Court noted that if a group of persons that guide the business of the
company have the criminal intent, that would be imputed to the
body corporate and it is in this backdrop, Section 141 of the
Negotiable Instruments Act has to be understood. Such a position is,
therefore, because of statutory intendment making it a deeming
fiction. Here also, the principle of “alter ego”, was applied only in one
direction, namely, where a group of persons that guide the business
had criminal intent, that is to be imputed to the body corporate and
not the vice versa. Otherwise, there has to be a specific act
attributed to the Director or any other person allegedly in control and
management of the company, to the effect that such a person was
responsible for the acts committed by or on behalf of the company.
45.1. Jethsur Surangbhai v. State of Gujarat
“9. …With due respect what the High Court seems to have
missed is that in a case like this where there was serious
defalcation of the properties of the Sangh, unless the prosecution
proved that there was a close cohesion and collusion between all
the accused which formed the subject matter of a conspiracy, it
would be difficult to prove the dual charges particularly against
the appellant (A-1). The charge of conspiracy having failed, the
most material and integral part of the prosecution story against
the appellant disappears. The only ground on the basis of which
the High Court has convicted him is that as he was the Chairman
of the Managing Committee, he must be held to be vicariously
liable for any order given or misappropriation committed by the
other accused. The High Court, however, has not referred to the
concept of vicarious liability but the findings of the High Court
seem to indicate that this was the central idea in the mind of the
High Court for convicting the appellant. In a criminal case of such
a serious nature mens rea cannot be excluded and once the
charge of conspiracy failed the onus lay on the prosecution to
prove affirmatively that the appellant was directly and personally
connected with acts or omissions pertaining to Items 2, 3 and 4.
It is conceded by Mr Phadke that no such direct evidence is
forthcoming and he tried to argue that as the appellant was
Chairman of the Sangh and used to sign papers and approve
various tenders, even as a matter of routine he should have acted
with care and caution and his negligence would be a positive proof
of his intention to commit the offence. We are however unable to
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agree with this somewhat broad statement of the law. In the

absence of a charge of conspiracy the mere fact that [pic]the
appellant happened to be the Chairman of the Committee would
not make him criminally liable in a vicarious sense for items 2 to
4. There is no evidence either direct or circumstantial to show that
apart from approving the purchase of fertilisers he knew that the
firms from which the fertilisers were purchased did not exist.
Similar is the case with the other two items. Indeed, if the
Chairman was to be made liable then all members of the
Committee viz. Tehsildar and other nominated members, would
be equally liable because all of them participated in the
deliberations of the meetings of the Committee, a conclusion
which has not even been suggested by the prosecution. As
Chairman of the Sangh the appellant had to deal with a large
variety of matters and it would not be humanly possible for him to
analyse and go into the details of every small matter in order to
find out whether there has been any criminal breach of trust. In
fact, the hero of the entire show seems to be A-3 who had so
stage-managed the drama as to shield his guilt and bring the
appellant in the forefront. But that by itself would not be
conclusive evidence against the appellant. There is nothing to
show that A-3 had either directly or indirectly informed the
appellant regarding the illegal purchase of fertilisers or the
missing of the five oil engines which came to light much later
during the course of the audit. Far from proving the intention the
prosecution has failed to prove that the appellant had any
knowledge of defalcation of Items 2 to 4. In fact, so far as item 3
is concerned, even Mr Phadke conceded that there is no direct
evidence to connect the appellant.”
72. Again in Shiv Kumar Jatia v. State of NCT, (2019) 17 SCC 193,
the Supreme Court held:—
“19. The liability of the Directors/the controlling authorities of
company, in a corporate criminal liability is elaborately considered by
this Court in the case of Sunil Bharti Mittal. In the aforesaid case,
while considering the circumstances when Director/person in charge
of the affairs of the company can also be prosecuted, when the
company is an accused person, this Court has held, a corporate
entity is an artificial person which acts through its officers, Directors,
Managing Director, Chairman, etc. If such a company commits an
offence involving mens rea, it would normally be the intent and
action of that individual who would act on behalf of the company. At
the same time it is observed that it is the cardinal principle of
criminal jurisprudence that there is no vicarious liability unless the
statute specifically provides for. It is further held by this Court, an
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individual who has perpetrated the commission of an offence on

behalf of the company can be made an accused, along with the
company, if there is sufficient evidence of his active role coupled
with criminal intent. Further it is also held that an individual can be
implicated in those cases where statutory regime itself attracts the
doctrine of vicarious liability, by specifically incorporating such a
provision.
21. By applying the ratio laid down by this Court in the case of
Sunil Bharti Mittal it is clear that an individual either as a Director or
a Managing Director or Chairman of the company can be made an
accused, along with the company, only if there is sufficient material
to prove his active role coupled with the criminal intent. Further the
criminal intent alleged must have direct nexus with the accused.
Further in the case of Maksud Saiyed v. State of Gujarat this Court
has examined the vicarious liability of Directors for the charges
levelled against the Company. In the aforesaid judgment this Court
has held that, the Penal Code does not contain any provision for
attaching vicarious liability on the part of the Managing Director or
the Directors of the Company, when the accused is a Company. It is
held that vicarious liability of the Managing Director and Director
would arise provided any provision exists in that behalf in the
Statute. It is further held that Statutes indisputably must provide
fixing such vicarious liability. It is also held that, even for the said
purpose, it is obligatory on the part of the complainant to make
requisite allegations which would attract the provisions constituting
vicarious liability.
22. In the judgment of this Court in the case of Sharad Kumar
Sanghi v. Sangita Rane while examining the allegations made
against the Managing Director of a Company, in which, company was
not made a party, this Court has held that when the allegations
made against the Managing Director are vague in nature, same can
be the ground for quashing the proceedings under Section 482 of Cr.
P.C. In the case on hand principally the allegations are made against
the first accused company which runs Hotel Hyatt Regency. At the
same time, the Managing Director of such company who is accused
no. 2 is a party by making vague allegations that he was attending
all the meetings of the company and various decisions were being
taken under his signatures. Applying the ratio laid down in the
aforesaid cases, it is clear that principally the allegations are made
only against the company and other staff members who are incharge
of day to day affairs of the company. In absence of specific
allegations against the Managing Director of the company and having
regard to nature of allegations made which are vague in nature, we
are of the view that it is a fit case for quashing the proceedings, so
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far as the Managing Director is concerned.”

73. We may point out that the Board of Directors in a company is
supreme. The Managing Director reports to the Board. The Board has
the full authority to delegate any function to any officers of the
Company to the exclusion of the Managing Director. The contention of
the respondent that the Managing Director is responsible for the day to
day affairs of the Company and the officials report to him and,
therefore, the Managing Director is responsible is deemed to be in the
knowledge of the transactions is not applicable in the case in hand,
especially when the Board had specifically authorised the two senior
most officials to execute the trades in question. We also find that in the
instant case the two officials have reported to the Board and not to the
Managing Director.
74. In view of the aforesaid, the decisions cited by the learned
counsel for the respondents are not applicable to the facts of the
present case and are distinguishable. Reliance on the decision of the
Supreme Court in Apex Laboratories Private Limited v. Deputy
Commissioner of Income Tax, Large Tax Payer Unit-II, (2022) 7 SCC 98
is misplaced and is of no assistance to the respondent. The said
decision dealt with Section 37 of the Income Tax Act, 1961 wherein the
Explanation 1 to Section 37 used the word “offence” and, on that basis,
the Supreme Court disallowed the expenditure incurred by
pharmaceutical companies to provide freebies to doctors which the
medical council said was prohibited and liable for action on the basis
that providing freebies was illegal/prohibited by law and/or punishable.
The question before the Supreme Court was whether giving of freebies
to doctors was prohibited by law which was answered in the affirmative
by the Supreme Court and in that contest it was held that the word
“punishable” includes in its fold “civil wrongs” for which punishment
can be given. Thus, the said decision does not advance SEBI's case of
stating that for the purpose of SEBI Act the amendment was not a
substantive amendment to enlarge the scope to cover civil wrongs.
Similarly, the decision of this Tribunal in Janak Chimanlal Dave v. SEBI
in Appeal No. 446 of 2020 decided on 20.09.2021 which follows Apex
Laboratories Private Limited (supra) is also not relevant to the facts of
this case. Reliance on the decision of the Supreme Court in S.M.S.
Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89 and the decision
in K.K. Ahuja v. V.K Vora, (2009) 10 SCC 48 is misplaced. In SMS
Pharmaceuticals Ltd. (Supra) the Supreme Court held:—
“9. The position of a managing director or a joint managing
director in a company may be different. These persons, as the
designation of their office suggests, are in charge of a company and
are responsible for the conduct of the business of the company. In
order to escape liability such persons may have to bring their case
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within the proviso to Section 141(1), that is, they will have to prove
that when the offence was committed they had no knowledge of the
offence or that they exercised all due diligence to prevent the
commission of the offence.”
75. The said decision has no application to the facts of the present
case.
76. Similarly, the decision of this Tribunal in Rahul H. Shah v. SEBI,
2004 SCC OnLine SAT 77, Almondz Global Securities v. SEBI decided
by this Tribunal on 13.05.2016 in Appeal No. 275 of 2014 are not
applicable to the facts and circumstances of the case. It was not a case
of vicarious liability but involvement of an independent allegation that
the Managing Director had failed to act in accordance with the
stipulated obligations under the ICDR. Similarly, the decision of this
Tribunal in NSE v. SEBI decided on 09.08.2023 in Appeal No. 334 of
2019 is also distinguishable. This Tribunal held that the Managing
Director of NSE was liable under Section 27(1) for not verifying the
license of Sampark at the time of due diligence. The Managing Director
was held liable and accountable for failure to verify the license as there
was no positive evidence of any officer being made responsible for
execution of the activity, namely, checking of the licence. In contrast
with the present case, we find that in the instant appeal there is clear
evidence that the Board specifically and directly authorised two senior
executives to explore, identify and implement the divestment of
investment. Similarly, the decision of this Tribunal in Sayanti Sen v.
SEBI, 2019 SCC OnLine SAT 132 is also not applicable as we find that
the issue whether Section 27 applies to civil proceedings under SEBI
Act was never raised by the parties nor considered by the Tribunal. It
was a case as to whether an individual fell within the definition of the
term “officer in default” under Section 5(g) of the Companies Act,
1956. Similarly, in NSE v. SEBI (Colocation matter) in Appeal No. 333
of 2019 decided on 23.01.2023 this Tribunal observed that the
Managing Director and CEO cannot abdicate their responsibility for the
lapse by the professionals to whom the functions were delegated. In
that case, the Managing Director and the CEO acknowledged that
specific functions were delegated and this Tribunal observed that the
CEO and the Managing Director cannot pass on the responsibility to the
delegates. The said decision is distinguishable as in the instant case we
find that the Board of RIL had specifically authorised two persons to
decide the disinvestment. The Managing Director, noticee no. 2 had not
delegated its powers to the two authorised persons. It was the Board
who had delegated the matter to the two officers. We may also point
out that the show cause notice against noticee no. 2 specifically alleged
that he was complicit to and responsible for the acts of noticee no. 1.
For facility, paragraph 44 of the show cause notice is extracted below.
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“44. The Noticee No. 2 being the Managing Director of the

Company in the principal officer responsible for the day-to-day and
overall operations of the company. Further, Section 27 of the SEBI
Act, 1992 mentions that where an offence under this Act has been
committed by a company, every person who at the time the offence
was committed was in charge of and was responsible to the company
for the conduct of business of the company, as well as the company,
shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly. The acts of Noticee No.
1 and Noticee No. 2 (being the CMD and Principal officer of Noticee
No. 1 and therefore complicit to and responsible for the acts of
Noticee 1) are in violation.”
77. Based on the aforesaid, issue 3 was framed in the impugned
order. We find that the AO in paragraph 61 of the impugned order
raised the issue as to whether noticee no. 2 was complicit to the
violation of the Company. In paragraph 64 the AO states that it is
necessary to examine the role of noticee no. 2 in terms of either direct
involvement or knowledge/awareness of the trades undertaken by RIL.
Inspite of contending that the AO is required to examine the complicit
involvement of noticee no. 2 with regard to execution of the trades, we
find that the AO in the impugned order does not arrive at any
conclusion that the appellant was involved in the actual
conceptualisation and execution of the alleged trades by RIL. We are of
the opinion, that whereas the AO recognises that knowledge by the
appellant was a pre-requisite for a finding that noticee no. 2 was liable
for RIL's alleged violation yet without giving a conclusive finding has
travelled beyond the show cause notice to conclude in paragraph 72 of
the impugned order that noticee no. 2 had implicit knowledge of the
alleged trades and authorised the implementation plan. The AO further
went on to hold that it is highly unlikely that noitcee no. 2 was not
aware of the execution of the trades. The findings given by the AO in
our opinion is purely based on surmises and conjectures.
78. In this regard, the word “complicit” means involvement with
others in an activity which is unlawful. On the other hand, the word
“implicit” is suggestive though not directly expressed.
79. Thus, in the absence of any specific finding by the AO on noticee
no. 2 complicit involvement in the execution of the implementation
plan or in the execution of the trades, the AO cannot dwell into
surmises and conjectures and base its findings on presumption to hold
that the noticee no. 2 was implicitly involved in the transactions on the
ground of being a Managing Director and which implies a high level of
accountability of knowledge of overall functioning of the Company.
80. Reliance by the respondent on a reference to a Board Resolution
dated 27.07.2004 which is extracted from a judgment of the Hon'ble
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Supreme Court in Reliance Natural Resources Limited v. Reliance

Industries Limited, (2010) 7 SCC 1 to contend that the appellant had
substantial powers of management is a desperate attempt on their part
to sustain the impugned order. We find that the said decision was not
made the basis of passing the impugned order. Further, it is not even
SEBI's case that the resolution of 2004 which gave express powers to
the Managing Director continued to subsist in 2007 when the subject
transactions took place. In our opinion, the said decision has no bearing
with the present case in as much as in the instant case the Board by a
specific resolution dated March 29, 2007 exclusively vested relevant
powers and functions in relation to the subject transaction to the two
senior executives of the Company. The fact that noticee no. 2 may have
otherwise enjoyed substantial powers of management is of no avail,
when specific power were exclusively vested in the two senior
executives through a resolution passed by the Board of Directors of the
Company.
81. Considering the aforesaid, we are of the opinion that Section 27
does not introduce a regime of strict liability of the Managing Director
for any violation of law by the Company. This proposition was also
accepted by the learned senior counsel for the respondent and accepted
that such an approach would have absurd consequences. We find that
in a conglomerate such as the Company in question is concerned which
operates a wide spectrum of businesses and has tens of thousands of
employees spread across the length and breadth of the country and
abroad, it cannot be suggested that the Managing Director is ipso facto
responsible for every alleged contravention of law by the corporate
entities. Thus, we are of the opinion, that in view of the stark evidence
in the form of minutes of the two Board meetings of RIL which
conclusively proves that the impugned trades were carried out by two
senior officials without the knowledge of the appellant no liability can
be fastened upon noticee no. 2 in the facts of the given case. The
burden under Section 27 was discharged by noticee no. 2 and the AO
has miserably failed to prove that noticee no. 2 was involved in the
execution of the trades carried out by two senior executives.
82. Noticee no. 3 was incorporated on 15.06.2004 and noticee no. 4
was incorporated on 05.04.2000. Both noticee nos. 3 and 4 are involved
inter alia in the business of construction of building, infrastructure,
setting up of a Special Economic Zone (SEZ) and acquisition of
properties.
83. Noticee nos. 3 and 4 invested their idle funds by lending the
same by way of short term inter corporate deposits to other companies
in order to earn interest and, if necessary, also avail inter corporate
deposits from other companies by paying interest.
84. On 04.08.2007, noticee no. 4 entered into a ‘Facility Agreement
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with Vinamra Universal Traders Pvt. Ltd. (“Vinamra”) in terms of which

the parties agreed to place short-term Inter-Corporate Deposits
(“ICDs”) with each other from time to time on agreed terms and
conditions. Vinamra was also a company involved in the business of
investments. The key terms of the Facility Agreement were as follows:
(i) Article 1.1. provided that the aggregate overall limit of the facility
under the agreement was Rs. 600 crore.
(ii) Article 3.1 of the agreement specified a fixed rate of interest of
6.5% p.a.
(iii) Article 4.1 stipulated that the borrower shall repay the amount
of the loan within 1 day of being served a notice in writing calling
for repayment.
85. On 22.09.2007 noticee no. 3 entered into a ‘Facility Agreement’
with Vinamra. The terms of the Facility Agreement between noticee no.
3 and Vinamra were similar to those of the agreement between noticee
no. 4 and Vinamra, namely,
(i) Article 1.1 provided that the aggregate overall limit of the facility
under the agreement was Rs. 3500 crore.
(ii) Article 3.1 specified a fixed rate of interest of 8% per annum.
(iii) Article 4.1 stipulated that the borrower shall repay the amount
of the loan within 15 days of being served a notice in writing
calling for repayment.
86. Noticee nos. 3 and 4 placed ICDs with Vinamra in several
tranches from time to time and earned interest thereon. In the case of
noticee no. 4, funds in the cumulative amount of Rs. 500 crore were
lent by it to Vinamra on various dates between 27.09.2007 and
31.03.2008, while noticee no. 3 lent funds in the cumulative amount of
Rs. 2,775 crores to Vinamra on various dates between 03.10.2007 till
26.03.2008. It is not in dispute that the funds lent were repaid in full
along with interest at the rates stipulated in the respective Facility
Agreements.
87. Noticee nos. 3 and 4 received letters dated 27.02.2009 from the
respondent SEBI, referring to an ongoing investigation in the matter of
Reliance Petroleum Limited (“RPL”) asking for details in respect of the
inter-corporate deposits placed by Noticee nos. 3 and 4 with Vinamra.
88. By letter dated 23.03.2009, Noticee nos. 3 and 4 provided the
required information and a copy of Facility Agreement to the
respondent. By letter dated 13.04.2010, the noticee nos. 3 and 4 sent
further details to the respondent in respect of ICDs placed with
Vinamra. Noticee nos. 3 and 4 also sent a statement of outstanding
ICDs with Vinamra as on 31.03.2008 and repayment thereof during the
Financial Year 2008-2009.
89. In February and March 2010, SEBI addressed letters to noticee
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no. 3 seeking further information in connection with the transactions

with Vinamra. By its letter dated 13.04.2010. Noticee no. 3 : (i)
provided details of the Directors of the Company since 01.01.2007; (ii)
stated that it had no relationship with Reliance Industries Ltd. (‘RIL’)
and (iii) confirmed that there were no fund transfers executed by it
with RIL during the period 01.04.2007 to 31.03.2008. Since then, there
was no further communication between Noticee nos. 3 and 4 and SEBI
in this connection after the aforementioned letter of April 2010.
90. On 21.11.2017, i.e. after ten years the noticee nos. 3 and 4
received a show cause notice from the respondent. The show cause
notice was issued to RIL (being notice no. 1), Chairman and Managing
Director of RIL (being noticee no. 2), Navi Mumbai SEZ (being noticee
no. 3) and Mumbai SEZ (being noticee no. 4).
91. The show cause notice substantially referred to the transactions
stated to have been carried out by RIL and its agents during the month
of November 2007, wherein, it was inter alia alleged that:
(i) RIL took short positions through 12 entities acting as its agents in
November 2007 RPL Futures by breaching the client-wise position
limit prescribed under certain circulars issued by SEBI.
(ii) RIL depressed the settlement price of November 2007 RPL
Futures by dumping large number of shares in the cash market
during the last ten minutes of hearing on 29.11.2007 and,
thereby gained on its short positions in the derivatives market;
(iii) This fraudulent and manipulative strategy was a well thought
out and deliberate attempt to make extraordinary gains.
(iv) The above acts of RIL are in violation of Regulation 3(a), (b),
(c), (d) and Regulation 4(1),4(2) (d) &(e) of the PFUTP
Regulations and SEBI Circular No. SMDRP/DC/CIR-10/01 dated
02.11.2001.
92. As regards noticee nos. 3 and 4, the show cause notice alleged
that:
(i) Noticee nos. 3 and 4 were promoted by the “Reliance Group”
(ii) Anand Jain, Chairman of Noticee nos. 3 and 4 are closely
associated with the Reliance Group as a strategic advisor to the
Company. (iii) Noticee nos. 3 and 4 are located at the same
address as Vinamra and Dharti (both of which acted as agents of
RIL in taking positions in the futures market)
(iv) Noticee nos. 3 and 4 and Vinamra have a common Director-
Sanjay Punkhia.
(v) Noticee nos. 3 and 4 financed the whole manipulation scheme by
funding the front entries of RIL at the behest of RIL and its MD
and was thereby complicit in the scheme of manipulation to make
undue gains, and have also violated Regulations 3(b),(c),(d) and
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Regulations 4(2),(d) and (e) of PFUTP Regulations.

93. Noticee no. 3 and 4 contended that there was an undue delay in
the initiation of proceedings and that they were not parties to the
proceedings raised by the WTM nor have dealt in any securities and,
therefore, have not violated Regulations 3 and 4 of the PFUTP
Regulations or Section 12A of the SEBI Act. The noticees further
submitted that necessary copies of the documents were not provided
which was in violation of the principles of natural justice.
94. The AO after considering the material evidence on record held
that noticee nos. 3 and 4 have actively aided and abetted RIL by
providing funds to Vinamra which was ultimately used in providing
margin money to the stock brokers for taking short positions by the
agents of RIL in RPL futures for earning illegitimate profits from the
said positions and therefore noticee nos. 3 and 4 have violated the
provisions of the Regulations 3 and 4 of the PFUTP Regulations. The AO
found it fit to impose a penalty under Section 15HA imposing Rs.
20,00,00,000 (Rupees Twenty Crore Only) upon noticee no. 3and Rs.
10,00,00,000 (Rupees Ten Crore Only) on noticee no. 4 on the basis of
the quantum of loans advanced by them to Vinamra.
95. We have heard Shri Raghav Shankar, the learned counsel for the
appellants and Shri Shiraz Rustomjee, the learned senior counsel for
the respondent.
96. The issue framed by the AO against noticee nos. 3 and 4 was
whether noticee no. 3 and 4 have aided and abetted noticee no. 1 by
providing funds to one of the agents appointed by noticee no. 1 who in
turn provided funds to the other agents appointed by noticee no. 1
resulting in violation of Regulations 3 and 4 of the PFUTP Regulations.
97. From a perusal of the show cause notice it indicates that it is not
SEBI's case that noticee nos. 3 and 4 were involved in undertaking the
transactions in connection with RPL shares and futures in the month of
November 2007, rather it is SEBI's case that these transactions were
allegedly financed by monies traceable to the noticee nos. 3 and 4 and
therefore noticee nos. 3 and 4 were complicit in the contravention
allegedly committed by RIL.
98. The learned counsel for noticee nos. 3 and 4 contended that
there is an unexplained delay in the initiation of the proceedings and
denial of natural justice. It was urged, that the transaction in question
was of November 2007 whereas the show cause notice was issued after
10 years on November 21, 2017. It was contended that the AO has
committed a manifest error in holding that there is no delay in the
initiation of the proceedings in as much as SEBI had taken an internal
decision to await the decision in Section 11B proceedings against RIL
and its agents before taking further action in the matter and that such
proceedings eventually culminated in an order dated March 24, 2017
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passed by the WTM and, thereafter, the show cause notice was issued
in November 2017. Thus, there is no delay in the initiation of the
proceedings.
99. The learned counsel urged, that the aforesaid reasoning is
patently erroneous and against the provisions of the Limitation Act. It
was contended that limitation runs from the date of the passing of the
order and that the decision of SEBI to await the decision of the WTM's
proceedings was patently erroneous. In support of his contention, the
learned counsel placed reliance upon a decision of this Tribunal in
Rakesh Kathotia v. SEBI, 2019 SCC OnLine SAT 74 and in Reliance
Industries Holding Private Limited v. SEBI in Appeal No. 748 of 2021
decided on July 20, 2023. It was also urged, that on account of the
delay in the initiation of proceedings the noticees were seriously
prejudiced by the delay in the issuance of the show cause notice since
no record of the commercial transaction which concluded 10 years ago
could be made available. The learned counsel relied upon a decision in
HB Stockholdings Ltd. v. SEBI, 2013 SCC OnLine SAT 56 and Libord
Finance Ltd. v. WTM, SEBI 2008 SCC OnLine SAT 46 wherein this
Tribunal held that long delay itself causes grave injustice to the
delinquent and results into violation of the principles of natural justice.
100. It was also contended that necessary documents which were
specifically mentioned in the show cause notice were not supplied and
the appellants provided a list of documents before the AO and one such
document was the investigation report. It was urged that the
documents so mentioned in the show cause notice were withheld and
SEBI refused to provide a copy of the investigation report which was
contrary to the law laid down in T. Takano v. SEBI, 2022 SCC OnLine
SC 210.
101. It was also urged, that the finding of the AO that the appellant
had violated the PFUTP Regulations is purely based on surmises and
conjectures. The finding that there was a nexus between the Facility
Agreements executed by the noticees with Vinamra and the impugned
trades carried out by RIL and its agents is patently erroneous. It was
urged, that the Facility Agreement was executed prior in point of time
before the alleged trades were executed by RIL and, therefore, it cannot
lead to any presumption that the loan given by noticee nos. 3 and 4 to
Vinamra was for the purposes for the 12 agents to trade by taking open
positions. It was urged that the impugned order is based on pure
conjectures and on the assumption that the Facility Agreements were
entered into solely for the purpose of funding RIL transactions in the
November 2007 futures market. Further, the impugned order proceeds
on an erroneous basis that the inter corporate deposit (ICDs) of Rs.
2775 crores in case of noticee no. 3 and Rs. 550 crores in the case of
noticee no. 4 were in fact meant for the purpose of funding
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manipulative trade of RIL.

102. Having heard the learned counsel for the parties, we are of the
opinion that there is an inordinate delay in the issuance of the show
cause notice. Admittedly, the trades were executed by RIL in November
2007. The noticee nos. 3 and 4 received letters dated 27.02.2009 from
SEBI referring to the ongoing investigation in the matter of Reliance
Petroleum Limited and asked for details in respect of ICDs placed by
noticee nos. 3 and 4 with Vinamra. The said information was provided
by the noticee on March 29, 2009. In February and March 2010 SEBI
again addressed letters to noticee nos. 3 and 4 seeking further
information which were duly supplied vide letter dated April 13, 2010.
103. After 10 years the show cause notice dated 21.11.2017 was
issued alleging that noticee nos. 3 and 4 were promoted by the
Reliance Group and that noticee nos. 3 and 4 by financing the monies
to Vinamra were complicit and aided and abetted the manipulation of
the trade executed by RIL through its 11 agents.
104. The AO has rejected the contention of the appellants holding
that there is no delay on the ground that SEBI had taken an internal
decision to await the Section 11B proceedings against RIL and its
agents before taking further action in the matter. In our opinion, such
finding is patently perverse and against the basic principles of the
Limitation Act. The Limitation starts running from the day the
impugned order is passed. Limitation order does not stop on the whims
and fancies of a regulator. The regulator cannot stop the clock on the
ground that they would await the decision in proceedings initiated
under Section 11B before taking further action in the matter. In our
opinion, there is no legal bar of initiation of adjudication proceedings
during pendency of Section 11B proceedings. In our opinion,
adjudication proceedings and Section 11B proceedings can be held in
parallel.
105. In our opinion, the appropriate procedure would have been for
SEBI to initiate adjudication proceedings simultaneously with the 11B
proceedings and, thereafter, could have kept the adjudication
proceedings in abeyance. By not doing so the limitation starts running
against the regulator.
106. Consequently, in our view there is an inordinate delay in the
initiation of the proceedings against the noticees. It is a settled
principle of law that when no limitation period is prescribed, in that
event, proceedings should be initiated within a reasonable time. What
would be the reasonable time could depend on the facts and
circumstance of each case, nature of default, prejudice caused etc. The
Supreme Court in Sunil Krishna Khatian (supra) have held and
reconfirmed the settled law that in the absence of limitation prescribed
by an enactment the authority has to exercise the power within a
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reasonable time and that this would depend upon the facts of each case
and whether the violation was hidden and camouflaged or whether the
authority had or had not the knowledge of the alleged violation.
107. This Tribunal in a plethora of cased have quashed the
proceedings and the impugned order on the ground of inordinate delay.
108. In Mr. Rakesh Kathotia v. SEBI in Appeal No. 7 of 2016 decided
by this Tribunal on May 27, 2019 this Tribunal held:—
“23. It is no doubt true that no period of limitation is prescribed in
the Act or the Regulations for issuance of a show cause notice or for
completion of the adjudication proceedings. The Supreme Court in
Government of India v. Citedal Fine Pharmaceuticals, Madras
[(1989) 3 SCC 483 : AIR 1989 SC 1771] held that in the absence of
any period of limitation, the authority is required to exercise its
powers within a reasonable period. What would be the reasonable
period would depend on the facts of each case and that no hard and
fast rule can be laid down in this regard as the determination of this
question would depend on the facts of each case. This proposition of
law has been consistently reiterated by the Supreme Court in
Bhavnagar University v. Palitana Sugar Mill (2004) 12 SCC 670,
State of Punjab v. Bhatinda District Coop. Milk P. Union Ltd. (2007)
11 SCC 363 and Joint Collector Ranga Reddy Dist. v. D. Narsing Rao
(2015) 3 SCC 695. The Supreme Court recently in the case of
Adjudicating Officer, SEBI v. Bhavesh Pabari 2019 SCC OnLine SC
294 held:
“There are judgments which hold that when the period of
limitation is not prescribed, such power must be exercised within a
reasonable time. What would be reasonable time, would depend
upon the facts and circumstances of the case, nature of the
default/statute, prejudice caused, whether the third-party rights had
been created etc.”
109. Similar view was held in Ashok Shivlal Rupani v. SEBI (Appeal
No. 417 of 2018 along with other connected appeals decided on August
22, 2019). Against the order of this Tribunal in the matter of Ashok
Shivlal Rupani, SEBI filed Civil Appeal No. 8444-8445 of 2019 before
the Supreme Court of India which was dismissed and the order of this
Tribunal affirmed by the Supreme Court.
110. Similar view was again reiterated in the matter of Ashlesh
Gunvantbhai Shah v. SEBI (Appeal No. 169 of 2019) and other
connected appeals decided on January 31, 2020 (2020 SCC OnLine SAT
30) where on account of inordinate delay in the initiation of the
proceedings by issuance of the show cause notice, the penalty order
was quashed.
111. In the light of the aforesaid, we are of the opinion that there
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has been an inordinate delay in the issuance of the show cause notice.
Even though there is no period of limitation prescribed in the Act and
the Regulations for issuance of a show cause notice and for completion
of the adjudication proceedings, nonetheless, the authorities are
required to exercise its powers within a reasonable period. In AO, SEBI
v. Bhavesh Pabari, 2019 SCC OnLine SC 294 the Supreme Court held
that an authority is required to exercise its powers within a reasonable
period.
112. Similar view was again reiterated by this Tribunal in Reliance
Industries Holding Pvt. Ltd. v. SEBI, 2023 SCC OnLine SAT 402.
113. In view of the aforesaid, we are of the view that time starts to
run from the date of commission of the alleged violation. The
respondents being aware of this fact and having knowledge of the
alleged transactions chose deliberately not to initiate proceedings and,
consequently, the action of the respondents cannot be justified by
initiating a belated show cause notice.
114. On account of the delay serious prejudice has been caused to
the noticees. In HB Stockholdings Ltd. v. SEBI, 2013 SCC OnLine SAT
56 this Tribunal while dealing with the delay of 11 years in the issuance
of a show cause notice held:
“…human memory has a short shelf life. Allowing matters to go on
and on for years together serves no purpose, rather it risks loss of
evidence such as important documents which may get destroyed
while the issue gathers dust…in this backgrounds, the Appellants
were compelled to make a feeble attempt to defend their case on the
basis of scanty and incomplete materials supplied by the
Respondent.”
115. Similarly, in Libord Finance Ltd. v. WTM, SEBI, 2008 SCC
OnLine SAT 46 this Tribunal observed:
“…how could anyone file a proper reply after a lapse of more than
eight years. This long delay itself causes grave injustice to the
delinquent and results into violation of the principles of natural
justice. Such delays defeat the very purpose of the proceedings.”
116. The decisions cited by the respondent in the matter of Kunal
Pradeep Savla v. SEBI, Appeal No. 231 of 2007 decided on 13.04.2018,
Dr. V.K. Sukumaran v. SEBI, Appeal No. 473 of 2020 decided on
24.08.2021 and Hindustan Times Ltd. v. Union of India, (1998) 2 SCC
242 has no application to the facts of the case and are irrelevant.
117. We also find that there is a violation of principles of natural
justice in not supplying the documents to noticee nos. 3 and 4 which
documents were relied upon in the show cause notice. We find that
noticee nos. 3 and 4 had repeatedly addressed letters to SEBI on
11.06.2018 and 25.06.2018 requesting certain documents which were
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specifically mentioned in the show cause notice. Some of these

documents were provided by SEBI vide letter dated 17.06.2019 and
08.03.2019. The documents which were not provided were specifically
again asked for which also included a copy of the investigation report.
Inspite of the specific request for supply of the documents which has
not been disputed by the respondents, we find that the said documents
were not supplied, especially the copy of the investigation report. The
Supreme Court in T. Takano v. SEBI (Supra) has clearly held that
investigation report is an intrinsic component of the Board's satisfaction
for determining whether there has been any violation of the regulations
and that the investigation report forms the material on the basis of
which a show cause notice is issued. Since the show cause notice is on
the basis of the investigation report there was an obligation imposed
upon the respondent to provide the documents asked for by the
appellants which they failed to supply. Non supply of the documents
was violative of the principles of natural justice. We are also of the
opinion that prejudice caused because of non-disclosure of the relevant
material was writ large.
118. Even otherwise on merits, we are of the opinion that the
finding that the appellants by providing funds to Vinamra were
complicit in the manipulative scheme adopted by RIL and its agents
and had aided and abetted in the manipulative scheme is purely based
on surmises and conjectures and cannot be sustained. The finding that
the appellants consequently contravened PFUTP Regulations cannot be
sustained.
119. In this regard, we may note that noticee nos. 3 and 4 had
executed Facility Agreement with Vinamra on August 04, 2007 and
September 22, 2007 much before RIL took a decision in an around
October 30, 2007 to sell 5% stake in RPL. Between October 30, 2007
and November 03, 2007 RIL appointed 12 agents to undertake
transactions in November 2007 future segment for RPL shares. Agency
Agreement was executed during this period between RIL and the 12
agents. Short positions were taken by the 12 agents between
November 01, 2007 and November 06, 2007.
120. Based on the aforesaid facts, a finding has been given by the
AO that on a combined reading of the Facility Agreement and Agency
Agreement it can be inferred that noticee nos. 3 and 4 had prior
knowledge of the scheme of alleged manipulative trades by RIL and
that noticee nos. 3 and 4 were fully aware that the funds given by them
to Vinamra was meant for financing the alleged trades in question and,
therefore, noticee nos. 3 and 4 aided and abetted in the manipulative
scheme. This finding in our opinion cannot be sustained for the
following reasons:—
121. The Facility Agreement was signed on August 04, 2007 and
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September 22, 2007. The execution of these documents is not disputed

nor there is any allegation that these agreements were manufactured
for the purpose of this case. The starting point for the alleged
manipulative scheme by RIL was the decision taken in an around
October 30, 2007 to sell RPL shares. These facts are noted in paragraph
26 of the impugned order. On or before October 30, 2007 noticee no. 3
had already advanced funds to the tune of Rs. 625 crores and noticee
no. 4 had loaned an amount of Rs. 45 crores on or before October 30,
2007. We are of the opinion, that as on the date of the execution of the
Facility Agreement it was not possible for noticee nos. 3 and 4 to have
knowledge that RIL would sell shares in the cash segment in November
2007 and that RIL would take positions in the futures segment through
its agents. There is no evidence to show that prior to October 30, 2007
the decision of RIL to sell shares of RPL and appoint 12 agents was
known to noticee nos. 3 and 4.
122. We are thus of the opinion, that the execution of the Facility
Agreement had nothing to do with the Agency Agreement which came
two months later and, therefore, the Facility Agreement and the Agency
Agreement cannot be read together. The two agreements are wholly
unconnected and cannot raise any kind of an inference as held by the
AO in the impugned order.
123. The evidence that has been brought on record does not indicate
that noticee nos. 3 and 4 could have known in August/September
2007, namely, at the time of execution of the Facility Agreement that
RIL would decide in end of October to sell the RPL shares or that RIL
would take position in the November futures through its agents or that
RIL would enter into agency agreements with the 12 agents or that RIL
would trade in the last 10 minutes on November 29, 2007 in such a
manner so as to suppress the price of the RPL shares. Thus, in our
opinion, when the Facility Agreement was executed, noticee nos. 3 and
4 could not have known that RIL would enter into the cash segment or
would take positions in the November 2007 futures.
124. We are also of the opinion, that the assumption/presumption
drawn by the AO that the Facility Agreement was entered into solely for
the purpose of funding RIL transactions in the November 2007 futures
market is wholly erroneous. Pursuant to the Facility Agreements ICDs
were placed as early as on September 2007 much before the subject
transactions took place and continued to be placed from time to time
till March 2008. The finding given by the AO that Rs. 2,775 crores
advanced by noticee nos. 3 and Rs. 550 crores advanced by noticee no.
4, to Vinamra were utilised by the 12 agents for the purpose of funding
the manipulative trades of RIL is patently erroneous and cannot be
sustained. The ICDs given by noticee nos. 3 and 4 were from
September to March whereas the funds required by the 12 agents were
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from November 01, 2007 to November 06, 2007 when they took short
positions in the futures segment.
125. Assuming without admitting that the noticee nos. 3 and 4 had
knowledge and provided funds for the alleged manipulative trades only
those funds that flowed between November 01, 2007 and November
06, 2007 could at best have a nexus with the taking of the short
positions in the November 2007 futures. The AO however has
considered the entire loans of Rs. 2775 crores given by noticee no. 3
and Rs. 550 crores given by noticee no. 4 from the period September
2007 to March 2008. We may note that noticee no. 4 did not lend any
money to Vinamra between November 01, 2007 to November 06, 2007
and that noticee no. 3 had given a loan of Rs. 350 crores in two
transactions of November 05, 2007 and November 06, 2007 to
Vinamra. Thus, the finding of the AO that Rs. 2775 crores and Rs. 550
crores totalling Rs. 3325 crores were given by noticee nos. 3 and 4 that
funded the 12 agents for the alleged trades is patently erroneous.
126. We also find that one of the basic charge against noticee nos. 3
and 4 was that noticee nos. 3 and 4 were promoted by Reliance Group.
This allegation was found to be false. The AO found that Anand Jain was
the Chairman of noticee nos. 3 and 4 and that noticee nos. 3 and 4
were not promoted by the Reliance Group. Once this fact became clear
that noticee nos. 3 and 4 were not promoted by the Reliance Group, the
AO should have dropped the matter instead of going into a tirade that
Anand Jain was closely associated with Reliance Group as a strategic
advisor or that Sanjay Punkhia was a common director of noticee nos. 3
and 4 and Vinamra and, therefore, there is a connection between
noticee nos. 3 and 4 with Reliance Group. In our view, the reasoning
adopted by the AO in coming to a conclusion that noticee nos. 3 and 4
are connected to RIL is baseless and cannot be accepted. Such indirect
connection without any further evidence of their involvement cannot be
a ground to hold that noticee nos. 3 and 4 were aware of the
manipulative trades allegedly conducted by RIL and its agents. It is
thus not necessary for us to go into the question of their connection in
detail.
127. In view of the aforesaid, it is not necessary for us to go into the
question as to whether noticee no. 3 and 4 by giving loans to Vinamra
could be held to be dealing in securities violating the PFUTP Regulations
as in our view no case is made out of any violation by noticee nos. 3
and 4.
128. In view of the aforesaid, Appeal No. 87 of 2021 is dismissed.
The impugned order in so far as it relates to Appeal Nos. 88 of 2021, 89
of 2021 and 90 of 2021 are quashed. The said appeals are allowed. In
the event noticee nos. 2, 3, and 4 have deposited the penalty amount
under protest, if any, then the respondent is directed to refund the
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amount forthwith. In the circumstances of the case, parties shall bear

their own costs.
———
†
Mumbai Bench

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