SECURITIES AND EXCHANGE BOARD OF INDIA versus RAM KISHORI GUPTA & ANR. (07/04/2025) — Supreme Court headnote

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Summary

Once SEBI's order of 31.07.2014 under Sections 11 and 11B of the SEBI Act, 1992, passed on show-cause notices of 2012 against Vital Communications Ltd and connected entities, attained finality and was fully worked out, SEBI could not reopen the same cause of action four years later and pass a fresh disgorgement order on the same notices; the later order was barred by res judicata and constructive res judicata, principles that bind quasi-judicial and administrative authorities and from which Section 15U(1) gives SEBI no exemption. Equally, the Securities Appellate Tribunal's order of 30.04.2013 rejecting the two investors' claim for compensation from SEBI had attained finality, so the Tribunal could not later direct SEBI to compensate them. The Tribunal's award of Rs. 2,00,000 costs to each of the entities found guilty of fraud was set aside.

Issues

Whether SEBI, having passed a final order on 31.07.2014 under Sections 11 and 11B of the SEBI Act, 1992 on the show-cause notices of 2012, could later pass a fresh order of disgorgement against the same entities on the same cause of action.
Whether the principle of res judicata applies to proceedings before SEBI and its Whole-Time Members, and whether Section 15U(1) of the SEBI Act, 1992 excludes it.
Whether the Securities Appellate Tribunal could direct SEBI to compensate two investors for their losses when the Tribunal's own earlier order of 30.04.2013 had negatived their prayer for compensation and attained finality.
Whether the disgorgement order could be sustained against entities that had not appealed against it.
Whether the Tribunal was justified in awarding costs of Rs. 2,00,000 each to the appellant entities found to have committed fraud on investors.

Provisions considered

Section 11B (with Explanation inserted w.e.f. 18.07.2013) and Section 11(5), Securities and Exchange Board of India Act, 1992Section 11B empowers SEBI, after enquiry and if satisfied it is necessary in the interest of investors or the securities market, to issue directions to persons referred to in Section 12 or associated with the market, or to companies in matters under Section 11A. The Explanation declares that this power includes, and is deemed always to have included, the power to direct disgorgement of wrongful gain or loss averted; Section 11(5) routes disgorged amounts to the Investor Protection and Education Fund. The Court held that disgorgement was within SEBI's power when the 31.07.2014 order was passed, but SEBI chose not to resort to it and could not do so afresh on the same cause of action. (¶¶ 21, 22, 23, 25, 29)
Section 15U(1), Securities and Exchange Board of India Act, 1992Section 15U(1) provides that the Securities Appellate Tribunal is not bound by the procedure in the Code of Civil Procedure, 1908, but is guided by natural justice and regulates its own procedure. The Court held it deals only with the Tribunal's procedure and does not cover proceedings before SEBI and its Whole-Time Members, so SEBI cannot invoke it to claim exemption from res judicata. (¶¶ 20, 27)
Section 11, Code of Civil Procedure, 1908Relying on Hope Plantations, the Court observed that Section 11 contains provisions of res judicata but is not exhaustive of the general doctrine, which rests on public policy and applies equally to proceedings before administrative authorities; constructive res judicata (Amalgamated Coalfields, Devilal Modi) bars pleas that could have been taken in the earlier proceeding on the same cause of action. (¶¶ 27, 28)

Held

When SEBI's order dated 31.07.2014, passed under Sections 11 and 11B on the same cause of action and the same show-cause notices, was neither challenged nor set aside and the penalties of restraint imposed under it had already been suffered, the order had worked itself out and attained finality. A later order on the same notices, imposing disgorgement and longer restraints on 22 of the 24 entities, could not have been passed; it trampled upon and reversed that finality. Disgorgement was within SEBI's power even in 2014, but having been satisfied with lesser penalties SEBI could not, without just cause, revisit its final order. (¶¶ 23, 25, 26, 29, 31)
The principles of res judicata and constructive res judicata, founded on public policy, apply to proceedings before administrative and quasi-judicial authorities and bind the adjudicating authorities as well as the parties. SEBI cannot claim that it may pass multiple final orders on the same cause of action, and Section 15U(1), which concerns only the Tribunal's procedure, affords SEBI no exemption. (¶¶ 27, 28, 29)
The Tribunal's order dated 30.04.2013, which held that SEBI had no mandate to compensate investors for trading losses (a matter for a civil court) and only required SEBI to consider directing a refund if fraud was found, as clarified on 19.12.2013, had attained finality. The investors could not reopen it to fasten liability on SEBI; the Whole-Time Members' orders of 16.12.2014 and 01.04.2016 virtually reviewed those Tribunal orders, and the Tribunal in 2019 could not reinterpret its earlier order to give it a different colour and direct SEBI to pay compensation of Rs. 18,25,041. (¶¶ 12, 18, 24, 31)
Because the fresh disgorgement order suffered from an inherent lack of jurisdiction, being barred by res judicata and constructive res judicata, it could not be sustained even against the entities that did not appeal against it. (¶ 31)
SEBI's delay of nearly two years between the order of 01.04.2016 directing fresh examination and the show-cause notice of 19.01.2018 was unconscionable and does not befit a statutory regulator of a volatile market. (¶ 30)
Although the Tribunal rightly set aside the disgorgement order, its direction awarding costs of Rs. 2,00,000 to each appellant entity, which had been found to have indulged in fraudulent transactions, was entirely unjustified and was set aside. (¶¶ 32, 33)

Result

Civil Appeal No. 7941 of 2019 (SEBI) allowed; the Tribunal's judgment dated 02.08.2019 in Appeal No. 44 of 2019 directing compensation set aside. Civil Appeal (Diary) No. 42829 of 2019 by the investors seeking interest dismissed (delay condoned). Civil Appeal Nos. 1649-1652 of 2022 allowed only to the extent of setting aside the costs of Rs. 2,00,000 awarded against SEBI; the Tribunal's setting aside of the disgorgement order of 2018 upheld. Parties to bear their own costs.