SEBI Cannot Revisit Concluded Issues Under Same Cause of Action; Principle of Res Judicata Applies : Supreme Court
Kiran Raj
The Supreme Court of India Division Bench of Justice P.V. Sanjay Kumar and Justice K.V. Viswanathan set aside the judgment of the Securities Appellate Tribunal (SAT) dated August 2, 2019, which had directed SEBI to compensate two investors who purchased shares of Vital Communications Ltd. (VCL) in 2002 based on misleading advertisements. The Court held that the Tribunal's order lacked legal basis, as the issue of compensation had attained finality in earlier proceedings. The Court also upheld the SAT's later judgment dated December 20, 2021, which invalidated SEBI’s subsequent disgorgement order against VCL and others. However, the Bench disapproved of the costs imposed on SEBI and set them aside.
The litigation originated from SEBI’s show-cause notice issued on May 24, 2005, to Vital Communications Ltd. (VCL) and its promoters and directors, alleging publication of misleading advertisements regarding share buybacks, bonus issues, and preferential allotments. SEBI claimed that these actions were designed to artificially inflate the share price and mislead investors. SEBI alleged that 72 lakh shares had been preferentially allotted to 15 entities with the same address, and funds had circulated through intermediaries to create the appearance of genuine share purchases.
Following an investigation, SEBI passed an order on February 20, 2008, through a Whole-Time Member (WTM), restraining VCL and others from accessing the securities market for two years. This order was appealed before the Securities Appellate Tribunal, which set it aside on August 28, 2008, directing SEBI to issue fresh show-cause notices and pass a fresh order after hearing all parties.
In parallel, investors Ram Kishori Gupta and Harishchandra Gupta, who had purchased 1,71,773 shares of VCL between May and June 2002, filed Appeal No. 207 of 2012 before SAT, seeking compensation of ₹51,53,190 or alternatively, after adjusting ₹4,41,767 from share sales, for the remaining amount. They had earlier approached the consumer forum, which declined to entertain the matter and advised them to approach SEBI.
On April 30, 2013, SAT rejected their claim for compensation, holding that SEBI had no statutory mandate to award damages for investment losses. The Tribunal left open the option for SEBI to direct VCL to refund the purchase amount with interest if it was found guilty of fraud. SEBI’s review petition resulted in a clarificatory order dated December 19, 2013, affirming that compensation could only be considered if warranted by circumstances.
Following a remand, SEBI issued fresh notices on July 6 and 12, 2012. On July 31, 2014, SEBI passed another order under Sections 11 and 11B of the SEBI Act, prohibiting 24 entities from accessing the market and freezing shares allotted through preferential allotment.
Subsequently, the Guptas filed another application before SAT, claiming SEBI had failed to comply with earlier directions. SEBI undertook to issue a separate order addressing these concerns. Accordingly, on December 16, 2014, SEBI passed a second order stating that though no ill-gotten gains were previously quantified, the matter would be re-examined, and disgorgement considered, leading to potential restitution.
SEBI’s Investigation Department, through a report dated June 15, 2015, concluded that no quantifiable gains were made and therefore, restitution was not feasible. Despite this, SEBI’s WTM passed an order on April 1, 2016, directing further inquiry into possible profits and ordering disgorgement if gains were identified.
On January 19, 2018, SEBI issued a show-cause notice to the original 24 entities and subsequently passed an order on September 28, 2018, directing them to jointly disgorge ₹4,55,91,232 with 10% annual interest. The order also stated that in case of non-compliance, the entities would be barred from the securities market for five years. However, SEBI declined restitution, stating that many investors, not just the Guptas, had suffered losses.
The Guptas appealed this refusal before SAT, which on August 2, 2019, directed SEBI to pay ₹18,25,041 to them without interest. This order was challenged before the Supreme Court in Civil Appeal No. 7941 of 2019. SEBI’s disgorgement order was separately challenged by VCL and others, culminating in SAT’s December 20, 2021, order quashing the disgorgement on the ground of res judicata, which SEBI challenged in Civil Appeal Nos. 1649–1652 of 2022.
The Supreme Court stated that “finality of judicial determinations and the principle of res judicata” must be upheld. The Court noted that SEBI’s initial order of July 31, 2014, had been passed under the same show-cause notices and attained finality. It had imposed market access restrictions without ordering disgorgement. The Court stated that “once the said order attained finality and was fully given effect to, passing of a fresh order once again, on the very same cause of action, trampled upon and reversed the finality that had already attached to the said order.”
The Court recorded that SEBI could not invoke Section 15U of the SEBI Act to escape the application of res judicata, as this provision only applied to SAT’s procedures and not to SEBI itself. The Court stated: “SEBI cannot claim exemption from the applicability of the principle of res judicata thereunder.”
The Bench held that the subsequent order of SEBI dated September 28, 2018, was passed without jurisdiction and was “unsustainable in law.”
Addressing the restitution awarded to the Guptas, the Court stated: “the compensation claim of Ram Kishori Gupta and Harishchandra Gupta against SEBI stood decided by the Tribunal’s order dated 30.04.2013, which also attained finality.” It further held that “it was not for the Tribunal to interpret its earlier order… and give it a different colour, contrary to its plain meaning.”
The Bench also criticised the cost award of ₹2,00,000 to each of the 22 entities involved, stating that “the direction of the Tribunal practically rewarding them with costs… was entirely unjustified on facts.”
The Court allowed Civil Appeal No. 7941 of 2019 and set aside the SAT judgment dated August 2, 2019, which had directed SEBI to pay ₹18,25,041 to the Guptas. Civil Appeal (Diary) No. 42829 of 2019, filed by the Guptas seeking interest on the compensation, was dismissed.
The Court upheld the SAT judgment dated December 20, 2021, which had quashed the SEBI disgorgement order dated September 28, 2018, as being barred by res judicata. However, the direction to SEBI to pay costs of ₹2,00,000 to each of the appellants was set aside.
The Bench concluded that the second round of action taken by SEBI under Sections 11 and 11B of the SEBI Act was barred by law and noted the delays in SEBI’s actions, stating that they were incompatible with the nature of securities regulation.
Advocates Representing the Parties:
For the Appellants: Mrs. K. Sarada Devi, AOR; Ms. Kaveri Kalyana Ram, Advocate; Mr. Challa Sateesh Chandra, Advocate; Mr. Amarjit Singh Bedi, Advocate; Ms. Surekha Raman, Advocate; Mr. Shreyash Kumar, Advocate; Mr. Yashwant Sanjenbam, Advocate; Mr. Harshit Singh, Advocate; Mr. Sidharth Nair, Advocate; M/s. K J John And Co., AOR
For the Respondents: Dr. Purvish Malkan, Senior Advocate; Mr. Prakash Shah, Advocate; Mr. Raghav Pandey, Advocate; Mr. Ritesh Kumar, Advocate; Ms. Sharmishtha Choudhary, Advocate; Ms. Gauri Pandey, Advocate; Mrs. Rekha Pandey, AOR; Mr. Amarjit Singh Bedi, Advocate; Ms. Surekha Raman, Advocate; Mr. Shreyash Kumar, Advocate; Mr. Harshit Singh, Advocate; Mr. Yashwant Sanjenbam, Advocate; Mr. Sidharth Nair, Advocate; M/s. K J John And Co., AOR; Mrs. K. Sarada Devi, AOR; Ms. Kaveri Kalyana Ram, Advocate; Mr. H.C. Gupta, Advocate; Mr. Challa Sateesh Chandra, Advocate
Case Title: Securities and Exchange Board of India v. Ram Kishori Gupta & Another
Case Number: Civil Appeal No. 7941 of 2019; Civil Appeal Nos. 1649–1652 of 2022; Civil Appeal (Diary) No. 42829 of 2019
Bench: Justice P V Sanjay Kumar, Justice K.V. Viswanathan
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