Supreme Court Holds SEBI Cannot Reopen Final Order; Sets Aside Tribunal Direction for Investor Compensation

A bench of Justices Sanjay Kumar and K.V. Viswanathan heard appeals arising out of SEBI proceedings against M/s. Vital Communications Ltd. and others and interlocutory proceedings by two investors seeking restitution; the matters tested whether SEBI could pass fresh directions for disgorgement and restitution after an earlier SEBI order attained finality and whether the Securities Appellate Tribunal (SAT) could direct compensation to investors contrary to its own earlier findings.

The Court allowed Civil Appeal No. 7941 of 2019, set aside the SAT order dated 02.08.2019 directing SEBI to compensate two investors, and upheld the Tribunal’s finding that SEBI’s 28.09.2018 disgorgement order was barred by res judicata; however, the Court struck down the SAT’s award of costs in favour of the appellants and directed parties to bear their own costs. The Court emphasised the sanctity of finality and res judicata and noted that SEBI could not reopen a concluded exercise without just cause. The Court, in its reasoning, observed: "In the light of these edicts, it is not open to SEBI to claim that it could pass multiple final orders on the same cause of action. Having undertaken the exercise pursuant to its show-cause notices issued in 2012, SEBI passed the order dated 31.07.2014, in exercise of power under Section 11B of the Act of 1992, with certain directions which attained finality and were given full effect to. That being so, SEBI could not have reopened the entire exercise without just cause so as to pass a fresh order under Section 11B, once again, 4 years later." The Court also relied on established authorities that the doctrine of res judicata applied to administrative proceedings and cautioned against reopening final administrative adjudications.

Background The dispute arose from show-cause notices issued by SEBI in 2005 and renewed proceedings following a 2008 SAT remand in connection with alleged misleading advertisements, preferential allotments and a contrived buyback by VCL that artificially inflated its scrip in 2002. SEBI initially passed an order on 31.07.2014 restraining 24 noticees from accessing the securities market and freezing preferentially allotted shares, but it did not order disgorgement at that time. Two investors, Ram Kishori Gupta and Harishchandra Gupta, who purchased VCL shares believing the advertisements, sought compensation. SAT in April 2013 had held that SEBI had no mandate to award compensation as such relief was akin to damages and ordinarily lay before civil courts, but it left open SEBI’s power to consider refund if VCL was found guilty of fraud. After interlocutory directions and further SEBI action beginning with an internal order dated 16.12.2014 and subsequent enquiries, SEBI issued a disgorgement show-cause and, by order dated 28.09.2018, directed certain entities to disgorge ₹4,55,91,232 with interest, while declining individual restitution to the two investors. The SAT, however, by order dated 02.08.2019, directed SEBI to compensate the two investors their invested amount of ₹18,25,041, without interest. SEBI challenged that direction before this Court (Civil Appeal No. 7941/2019) and also assailed the SAT’s later orders quashing SEBI’s disgorgement direction as barred by res judicata by filing separate appeals (Civil Appeals Nos. 1649–1652 of 2022). The Supreme Court analysed the statutory scheme of the SEBI Act, 1992 (noting Section 11B and the post-2013 Explanation and Section 11(5) concerning disgorgement), traced the procedural history, found that the 31.07.2014 order had attained finality and that the later SEBI proceedings effectively attempted to reopen the same cause of action, and held those later directions unsustainable. The Court allowed SEBI’s appeal insofar as SAT had directed SEBI to pay compensation and dismissed the related diary appeal; it also upheld the Tribunal’s quashing of the 2018 disgorgement order as barred by res judicata but set aside the Tribunal’s costs award to the appellants.

Case No.: Civil Appeal No. 7941 of 2019; Civil Appeal Nos. 1649-1652 of 2022; Civil Appeal (Diary) No. 42829 of 2019 Case Title: Securities and Exchange Board of India v. Ram Kishori Gupta & Anr. Appearances: For the Petitioner(s): [Counsel not mentioned in the judgment] For the Respondent(s): [Counsel not mentioned in the judgment]