[SEBI Regulations] Noticee has right to disclosure of material relevant to proceedings against him: Supreme Court

The Supreme Court on Friday held that a noticee under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations (PFUTP Regulations) had the right to disclosure of material that was relevant to the proceedings against him [T. Takano v. Securities and Exchange Board of India]..A Bench of Justices DY Chandrachud and Sanjiv Khanna however also noted that this right is not absolute, and if the SEBI is able to show that the disclosure would have an adverse effect, the burden of proving necessity would move to the noticee.“The respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately,” it was held..- The appellant, among others, was suspected of being involved in misstating a company’s financial affairs and thus, received a show cause notice from SEBI;- The appellant sought SEBI’s investigation report, which was refused for several reasons including that it contained third party and sensitive market information;- This notice was challenged by the appellant who stated that such non-disclosure was violative of principles of natural justice;- The Supreme Court held that the noticee had a right to disclosure, subject only to protection of third-party rights;- Therefore, a balanced view was arrived at with the respondents being directed to make the report available with redactions on the premise of third party and market information..The Apex Court was hearing an appeal against an order of the Bombay High Court which upheld a show cause notice issued without an investigation report under the Securities and Exchange Board of India Act for misstating a company’s financial affairs..The SEBI stated that the investigation report could not be shared as it was an internal document. Further, the appellant was informed that SEBI’s investigation report was not relied on to issue the show cause notice and thus, would not be provided..However, the appellant moved the High Court against the notice stating that the non-disclosure of all relevant documents relied on to issue a show cause notice violated principles of natural justice..The High Court dismissed the petition concluding that the investigation report need not be furnished while issuing a show cause notice. A review petition was also rejected by the High Court leading to the present appeal..The respondents submitted before the top court that only materials relied on by the Board needed to be disclosed, whereas the appellant contended that all relevant materials were required.It was the appellants contention that the duty to disclose was not contingent on whether the respondent relied on the document, but was invoked when a request made for a document was found to be reasonable.In fact, it was submitted that Regulation 10 required the entire investigation report be disclosed to the notice, apart from certain well-recognised exceptions..The respondents, however, opposed this on the ground that all relevant documents were provided to the noticee, including the report which formed the basis of the show cause notice.It was also the respondents concern that since investigations conducted by SEBI were highly sensitive given the volatile nature of the market, their disclosure may adversely affect the market. This concern also extended to the personal information of other stakeholders contained within the investigation reports.“Sharing such information with the noticee will raise concerns regarding the privacy of third-parties and also affect their competitive position in the market,” SEBI said..The principal issue that fell for the Court’s consideration, thus, was whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued..The Bench began by establishing that as a default rule, all relevant material must be disclosed, and it would fundamentally be contrary to the principles of natural justice if relevant parts of the investigation report pertaining to the appellant was not disclosed..However, the caveat emphasised by the Court was that the actual test was whether the material required to be disclosed was relevant for purpose of adjudication.“If it is, then the principles of natural justice require its due disclosure,” the Court said..With this, exceptions to this general rule were discussed. It was noted that the right of the noticee to disclosure must be balanced with a need to preserve any other third-party rights that may be affected.“The requirement of compliance with the principles of natural justice cannot therefore be read to encompass the right to a roving disclosure on matters unconnected or as regards the dealings of third parties,” the judgment stated..Coming to the facts, it was the Court’s view that the appellant did not sufficiently discharge his burden by proving that the non-disclosure of the above information would affect his ability to defend himself..However, the respondent could only claim non-disclosure of parts that dealt with third party personal information and strategic information on the functioning of the securities market..Reaching a balanced conclusion, the Court directed the Board to redact information which impinged on others’ privacy, but retain parts that were necessary for the appellant to defend his case.“If the investigating authority attempts to circumvent its duty by revealing minimal information, to the prejudice of the appellant, it will be in violation of the principles of natural justice,” the judgment cautioned..This, however, would not permit a roving inspection on the appellant’s part, the top court made it clear while setting aside the High Court order..[Read Judgment]