T. TAKANO versus SECURITIES AND EXCHANGE BOARD OF INDIA & ANR.

[2022] 16 S.C.R.

T. TAKANO

SECURITIES AND EXCHANGE BOARD OF INDIA & ANR.

(Civil Appeal Nos. 487-488 of 2022)

BFEBRUARY 18, 2022

[DR DHANANJAYA Y CHANDRACHUD ANDSANJIV KHANNA, JJ.]

Securities and Exchange Board of India Act 1992 (SEBI) –ss. 11(1), 11(4), 11B, 11B(1), 11B(2), 11C and 15HA – SEBIC(Prohibition of Fraudulent and Unfair Trade Practices) Regulations2003 (PFUTP Regulations) – Regn. 3(b), 3(c), 3(d), 4(1), 4(2)(e),4(2)(k), 5, 6, 9, 10, 11 and 12 – Regn. 6 – Disclosure of investigationreport – Appellant was employed as MD and CEO in public listedcompany – Show cause notice issued to the appellant for violationDof the provisions of the SEBI Act, SCRA and PFUTP Regulations –Show cause notice specifically relied upon the report of theinvestigation and invokes, inter alia, violation of the PFUTPRegulations by the appellant – Appellant responded to show causenotice stating that he had not received the report of the investigationconducted by SEBI – Respondent-SEBI stated that the investigationEreport is an ‘internal document’ which cannot be shared – Appellantreiterated the demand to receive report of the investigationconducted by SEBI – Whether an investigation report underRegulation 9 of the PFUTP Regulations must be disclosed to theperson to whom notice to show cause is issued – Held: The BoardFshould determine such parts of the investigation report u/Regn. 9which have bearing on the action which is proposed to be takenagainst the person to whom the notice to show cause is issued anddisclose the same – The Board shall be duty-bound to provide copiesof such parts of the report which concern the specific allegationswhich have been levelled against the appellant in the notice to showGcause – It can redact information that impinges on the privacy ofthird parties – It cannot exercise unfettered discretion in redactinginformation – The institution/authority/agency can withholddisclosure of those sections of the report which deal with third partypersonal information and strategic information bearing upon theH

stable and orderly functioning of the securities market – Respondentshould prima facie establish that the disclosure of the report wouldaffect third-party rights and the stability and orderly functioning ofthe securities market – The onus then shifts to the appellant to provethat the information is necessary to defend his case appropriately.

Allowing the appeals, the Court

HELD: 1.1 The appellant is unable to prove that thedisclosure of the entire report is necessary for him to defend thecase. The first respondent made the following arguments makinga prima facie case that the disclosure of the report would violatethird party rights: (i) Investigation reports contain informationon the volatile nature of the market; (ii) The report also containsthe personal information of various stakeholders. Disclosure willviolate the right to privacy of the third party individuals; and (iii)It includes strategic information. [Para 47][255-B-D]

1.2 The appellant did not sufficiently discharge his burdenby proving that the non-disclosure of the above information wouldaffect his ability to defend himself. However, merely because afew portions of the enquiry report involve information on third-parties or confidential information on the securities market, therespondent does not have right to withhold the disclosure ofthe relevant portions of the report. The first respondent can onlyclaim non-disclosure of those sections of the report which dealwith third party personal information and strategic informationon the functioning of the securities market. [Para 48][255-D-E]1.3 The Board should determine such parts of theinvestigation report under Regulation 9 which have bearing onthe action which is proposed to be taken against the person towhom the notice to show cause is issued and disclose the same.It can redact information that impinges on the privacy of thirdparties. It cannot exercise unfettered discretion in redactinginformation. On the other hand, such parts of the report whichare necessary for the appellant to defend his case against theaction proposed to be taken against him need to be disclosed. Itis needless to say that the investigating authority is duty-bound

Ato disclose such parts of the report to the noticee in good faith. Ifthe investigating authority attempts to circumvent its duty byrevealing minimal information, to the prejudice of the appellant,it will be in violation of the principles of natural justice. The court/appellate forum in an appropriate case will be empowered to callfor the investigation report and determine if the duty to discloseBhas been effectively complied with. [Para 49][255-F-H; 256-A]

1.4 The notice to show cause issued to the appellant is forviolation of the provisions of the SEBI Act, SCRA and PFUTPRegulations. The show cause notice has specifically referred towhat was revealed during the course of the investigation and hasCinvoked the provisions of the PFUTP Regulations in theallegations against the appellant. Since the show cause noticehas specifically relied upon the report of the investigation andinvokes, inter alia, violation of the PFUTP Regulations by theappellant, the mandate of Regulation 10 must be complied with.DHowever, while directing that there should be disclosure of theinvestigation report to the appellant, it needs to be clarified thatthis would not permit the appellant to demand roving inspectionof the investigation report which may contain sensitive informationas regards unrelated entities and transactions [Para 50][256-B,E-F]E

1.5 This Court concludes that: (i)The appellant has rightto disclosure of the material relevant to the proceedings initiatedagainst him. deviation from the general rule of disclosure ofrelevant information was made in Natwar Singh based on the stageof the proceedings. It is sufficient to disclose the materials reliedFon if it is for the purpose of issuing show cause notice for decidingwhether to initiate an inquiry. However, all information that isrelevant to the proceedings must be disclosed in adjudicationproceedings; (ii) The Board under Regulation 10 considers theinvestigation report submitted by the Investigating AuthorityGunder Regulation 9, and if it is satisfied with the allegations, itcould issue punitive measures under Regulations 11 and 12.Therefore, the investigation report is not merely an internaldocument. In any event, the language of Regulation 10 makes itclear that the Board forms an opinion regarding the

violation of Regulations after considering the investigation reportprepared under Regulation 9; (iii) The disclosure of materialserves three- fold purpose of decreasing the error in the verdict,protecting the fairness of the proceedings, and enhancing thetransparency of the investigatory bodies and judicial institutions;(iv) focus on the institutional impact of suppression of materialprioritises the process as opposed to the outcome. The directionof the Constitution Bench of this Court in Karunakar that thenon-disclosure of relevant information would render the order ofpunishment void only if the aggrieved person is able to provethat prejudice has been caused to him due to non-disclosure isfounded both on the outcome and the process;(v) The right to disclosure is not absolute. The disclosureof information may affect other third-party interests and thestability and orderly functioning of the securities market. Therespondent should prima facie establish that the disclosure ofthe report would affect third-party rights and the stability andorderly functioning of the securities market. The onus then shiftsto the appellant to prove that the information is necessary to defendhis case appropriately; and (vi) Where some portions of the enquiryreport involve information on third-parties or confidentialinformation on the securities market, the respondent cannot forthat reason assert privilege against disclosing any part of thereport. The respondents can withhold disclosure of those sectionsof the report which deal with third-party personal information andstrategic information bearing upon the stable and orderlyfunctioning of the securities market. [Para 51][256-G-H; 257-A-H; 258-A-B]

1.7 The Board shall be duty-bound to provide copies ofsuch parts of the report which concern the specific allegationswhich have been levelled against the appellant in the notice toshow cause. However, this does not entitle the appellant to receivesensitive information regarding third parties and unrelatedtransactions that may form part of the investigation report. [Para52][258-B-C]

Chandrama Tewari v. Union of India (1988) 1 SCR1102 : [1988] SCR 1102; Natwar Singh v. Director of

AEnforcement (2010) 13 SCC 255 : [2010] 13 SCR 99;Krishna Chandra Tandon v. Union of India AIR 1974SC 1589 – referred to.

Khudiram Das v. State of West Bengal (1975) 2 SCC81 : [1975] 2 SCR 832; Union of India and Ors. v.BMohd. Ramzan Khan (1991) 1 SCC 588 : [1990] 3Suppl. SCR 248; Managing Director, ECIL, Hyderabadv. B. Karunakar (1993) 4 SCC 727 : [1993] 2 Suppl.SCR 576; State Bank of Patiala v. S K Sharma (1996)3 SCC 364 : [1996] 3 SCR 972; State of Uttar Pradeshv. Ramesh Chandra Mangalik (2002) 3 SCC 443;CKothari Filaments v. Commr. of Customs (2009) 2 SCC192 : [2008] 17 SCR 647 – relied on.

From the Judgment and Order dated 29.09.2020 of the High Courtof Judicature at Bombay in Writ Petition (L) No.3298 of 2020 and Orderdated 22.10.2020 in Review Petition (L) No.4780 of 2020 in Writ PetitionG(L) No. 3298 of 2020.

Ashim Sood, Ms. Shreya Suri, Ms. Vaishnavi Rao, Ms. SwatiMittal, Rhytham Buaria, Senu Nizar, Armaan Pratap Singh, Ekansh Gupta,Kuberinder Bajaj, Ms. Aurica Bhattacharya, Samarth Mohanty, RajatSingh, Advs. for the Appellant.H

T. TAKANO v. SECURITIES AND EXCHANGE BOARD OFINDIA & ANR.

C. U. Singh, Sr. Adv., Ashish Prasad, Mahfooz Ahsan Nazki,Pruthvi Dhinoja, Advs. for the Respondents.

The Judgment of the Court was delivered by

DR DHANANJAYA Y CHANDRACHUD, J.

A. Factual Background

1. By judgment dated 29 September 2020, Division Bench ofthe Bombay High Court dismissed the petition instituted by the appellantunder Article 226 of the Constitution for challenging show cause noticewhich was issued by the first respondent[1] alleging violation of theprovisions of the SEBI (Prohibition of Fraudulent and Unfair TradePractices) Regulations 2003[2]. petition seeking review of the judgmentof the Division Bench was disposed of by an order dated 22 October2020. The appellant moved Special Leave Petition against the judgmentin the writ petition and the order in review. The principal issue is whetheran investigation report under Regulation 9 of the PFUTP Regulationsmust be disclosed to the person to whom notice to show cause isissued.

2. The appellant was employed as the Managing Director[3] andChief Executive Officer[4] in Ricoh India Limited[5], public listed company,for the financial years 2012-13, 2013-14 and 2014-15, till 31 March 2015.

* Ed.Note : Pagination as per the original Judgment

1 “SEBI” or the “Board”

2 “PFUTP Regulations”

4 “CEO”

5 “Company”

AIn 2016, BSR & Co. were appointed as statutory auditors of the Company.The auditors raised suspicion regarding the veracity of the financialstatements of the Company for the quarters that ended on June 30, 2015and September 30, 2015. The Audit Committee of the Company appointedPrice Water House Coopers Private Limited[6] to carry out forensicaudit. PWC submitted preliminary audit report on 20 April 2016. TheBCompany addressed communication to the first respondent on the sameday stating that the financial statements for those quarters did not reflectthe true affairs of the Company and requested the first respondent tocarry out an independent investigation on possible violations of theprovisions of the PFUTP Regulations. The final report submitted by PWCCwas forwarded by the Company to the first respondent on 29 November2016.

3. The first respondent initiated an investigation. During the courseof the investigation, summons was issued to Manoj Kumar (then MD &CEO for the financial year of 2015-16), Arvind Singhal (then ChiefDFinancial Officer) and Anil Saini (then Senior Vice President and ChiefOperating Officer). The Company in its letter dated 8 June 2016 submittedthat it suspected Manoj Kumar, Arvind Singhal and Anil Saini for theirinvolvement in misstating the financial affairs. The first respondent in itsex parte interim order–cum–show cause notice prima facie found twoothers, including the appellant, responsible for facilitating theEmisstatements of the financial position. With regard to the role of theappellant, it was noted:

“On examination of the Organization Structure of Ricoh for pastyears, it is noted that T. Takano was the MD & CEO of theCompany till March 31, 2015. It is also noted that the mandate forFPwC investigation was restricted to the half-year ended September30, 2015 and not extended to all the years when the misstatementsoccurred. If Manoj Kumar, who was MD & CEO in FY 2015-16was held responsible for the fraud, it is only logical that T. Takanoas the previous MD & CEO (during whose tenure the fraudGactually started) was also responsible for the misstatements. Itappears that by restricting the investigation period mandated toPwC, the Company intended to restrain PwC from examining thetransactions of the previous years and thereby ring-fence the earlierMD & CEO, T. Takano.”

4. Based on the investigation, it was noted that the financialmisstatements commenced from 2012-13 and the Company suffered aloss due to, inter alia, transfers to third parties, write-offs and salemade to Fourth Dimension Solutions Limited[7] without inventory. It wasfurther noted that the share price of the Company had gone up due tothe misstatements. Hence, it was observed that the appellant, along withfive others, has prima facie violated the provisions of Section 12A(a),12(A)(b) and 12A(c) of the Securities and Exchange Board of India Act1992[8] read with Regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(k) and4(2)(r) of the PFUTP Regulations. Hence, the first respondent issuedthe following directions under Sections 11(1), 11(4) and 11B of the SEBIAct and Regulation 11 of the PFUTP Regulations:

(i)The appellant and the other five key managerial personswere restrained from accessing the securities market orbuying, selling or otherwise dealing in the securities market;

(ii)An independent audit firm was appointed for conducting aDdetailed forensic audit of the books of accounts of thecompany from the financial year 2012-13 ;

(iii)The independent audit firm was called upon to submit areport to the first respondent within three months from thedate of appointment; and

(iv)A show cause notice for directions under Sections 11, 11(4)and 11 (B) of the SEBI Act, including directions forrestraining/prohibiting him from accessing the securitiesmarket and buying, selling or otherwise dealing in securitiesin any manner.

5. By his letters dated 6 June 2018 and 28 June 2018, and at apersonal hearing on June 11, 2018 the appellant submitted that:

(i)He had no knowledge of the purported transactions and/orthe misstatements in the books of account;

(ii)The inclusion of his name in the interim order-cum-showGcause notice was speculative, based on the premise thatsince the MD and CEO of financial year 2015-16 has beenheld prima facie responsible, the appellant who was the

7 “FDSL”

8 “SEBI Act”

220SUPREME COURT REPORTS

AMD and CEO during the previous year must also be heldresponsible; and

(iii)The financial team was solely responsible for preparingfinancial statements. These statements were then examinedby the statutory auditors of the company. The versionBsubsequently prepared was the final version of the financialstatement. Therefore, he had no knowledge of the intricaciesof the financial statements.

6. By an order dated 16 August 2018[9], the first respondentconfirmed the directions issued in the ex parte interim order dated 12CFebruary 2018. The order notes that though the facts indicate large-scale irregularities in business transactions, the time span of theirregularities and the exact role of the noticees are not fully ascertained,and therefore, “it would be premature to give credence to the submissionsof the individual noticees”. It was also observed that “a clear pictureregarding the financial affairs of the company and the role of variousDnoticees in the alleged fraud is yet to emerge pending such investigation.”The time for submission of the forensic report by the first respondentwas extended to 30 September 2018. SEBI appointed Pipara & Co.LLP on 20 February 2019 to conduct forensic audit of the books ofaccount of the Company. The report of the forensic auditors wasEsubmitted on 25 October 2019.

7. The appellant challenged the confirmatory order before theSecurities Appellate Tribunal[10], Mumbai. The appeals were allowed andthe order against the appellant was quashed on 29 January 2020 on thegrounds that:F(i) The confirmatory order is based on suspicion about therole of the appellant;

(ii) The submissions of the appellant were not dealt withappropriately;

(iii) Since the company is in liquidation, the appellant is not in aGposition to influence decisions; and

9 “Confirmatory order”

H10 “Tribunal”

(iv) The appellant cannot be prevented from dealing in the securitiesmarket when the appellant is held to be vicariously liable dueto the position he held as MD/CEO.

The tribunal, however, directed that the first respondent is at libertyto issue fresh show cause notice if the evidence against the appellantis made available through the forensic report or through the firstrespondent’s investigation.

8. fresh show cause notice was issued to the appellant on 19March 2020 under the provisions of Sections 11(1), 11(4), 11(4A), 11B(1)and 11B(2) and 15HA of the SEBI Act and Section 12A(2) read withSection 23H of the Securities Contracts (Regulation) Act 1956[11] basedon the forensic audit report and investigation conducted by the firstrespondent. With regard to the appellant, it was alleged that :

“… Mr. T. Takano, during whose tenure the business transactionswith FDSL started by virtue of his position as MD & CEO ofRicoh during FY 2012-13 to FY 2014-15, was actively involved incommitting the fraud and had knowingly restricted the mandategiven to PwC to six month so as to succeed in hiding his role inthe commission of fraud of publishing untrue financial statementsof Ricoh which resulted in misleading the investors about thefinancial performance of the company and thereby resulted ininducement to trades in the scrip. The said acts of the Noticee no.2 are alleged to be in violation of regulations 3 (b), (c), (d), 4(1)and 4(2)(e), (f), (k) and (r) of SEBI (PFUTP) Regulations, 2003and clause 49(V) read with 41(Il)(a) of the erstwhile ListingAgreement.”

9. The appellant claims that he received the show cause notice byemail on 4 August 2020. The appellant responded to the show causenotice on 6 August 2020 stating that though he had received the forensicaudit report submitted by Pipara & Co. LLP, he had not received thereport of the investigation conducted by SEBI. The appellant sought anopportunity to inspect the following records:

“[…] including but not limited to all material on which reliancewas placed Pipara & Co. LLP for the purpose of preparing theforensic audit report, all material on which reliance has been placedwhile issuing the Show Cause Notice, and on which reliance is

11 “SCRA”

Aintended to be placed while making any adjudication on the ShowCause Notice (“material”).”

10. By its communication dated 13 August 2020, the first respondentstated that the investigation report is an ‘internal document’ which cannotbe shared. The appellant was provided time until 9 August 2020 to inspectBthe other documents. The first respondent enclosed soft copies of theannexures to the forensic report and called upon the appellant to submita reply. The appellant reiterated the demand to inspect the investigationreport. By an email dated 4 September 2020, the appellant was informedthat the investigation report of SEBI was not relied on to issue the showcause notice and hence, would not be provided.C

11. The appellant filed writ petition before the Bombay HighCourt challenging the show cause notice which was issued on 19 March2020. In the alternative, inspection of all documents relied on to issue theshow cause notice was sought. The appellant submitted before the HighCourt that to non-disclosure of all relevant documents relied on to issueDthe show cause notice violated the principles of natural justice.

12. By its judgment dated 29 September 2020, the High Courtheld that the investigation report prepared under Regulation 9 of PFUTPRegulations is solely for internal purposes. In concluding that theinvestigation report need not be furnished while issuing show causeEnotice, the High Court has relied on the decision of this Court in NatwarSingh v. Director of Enforcement[12]. In sum and substance, the Highcourt has held that the report does not form the basis of the show causenotice and therefore need not be disclosed. The review petition challengingthe judgment of the Division Bench of the High Court was rejected.FB. Submissions of Counsel

13. Mr Ashim Sood, learned Counsel appearing for the appellantmade the following submissions:

(i)Regulation 10 has two synchronous requirements – (i)consideration of the investigation report and satisfaction onGsuch consideration that there is violation of the PFUTPRegulations; and (ii) hearing. The purpose of theinvestigation report is to adjudicate whether there has beena contravention of the Regulations. There is no intermediate

stage between the consideration of the report and theadjudication of liability. Both stages are synchronous, makingthe investigation report the primary material on which theadjudicator relies upon under the PFUTP Regulations;

(ii)The High Court erred in holding that the investigation reportis preliminary report and is to be used for “internaladministrative discipline”. The investigation report is not apreliminary document and is compiled at the end of athorough and exhaustive investigation. The proviso toRegulation 9, provides for an “interim report” making it clearthat the investigation report is not preliminary document;

(iii) The investigation report is not document to be used forinternal deliberations, which is stage that is crossed atRegulation 5. The investigation report is to be used foradjudication of liability in terms of Regulation 10;

(iv)The High Court erred in observing that the investigationreport was not used against the appellant and does not formthe basis of the show cause notice. The show cause noticedated 19 March 2020 contains several references to theinvestigation carried out by the first respondent. Theseallegations differ from the ones listed in an earlier showcause notice, which was issued to the appellant and wasset aside by SAT on 29 January 2020 in Appeal No 427 of2018. Further, the duty to disclose is not contingent onwhether the respondent relies on document; rather theduty is invoked when request made for document isfound to be reasonable and relevant for the defence to bemounted by the noticee;

(v)Regulation 10 mandates that the entire investigation reportbe disclosed to the noticee. This mandate can only be subjectto certain well-recognized exceptions. Such exceptions mustbe invoked with the utmost circumspection by SEBI andfor reasons that are recorded in writing;

(vi)The decision of this Court in Natwar Singh (supra) supportsthe principle that material relied upon in quasi-judicialproceeding must be disclosed to the person to whose

224SUPREME COURT REPORTS

prejudice such material may be used for taking adverseaction;

(vii)In Khudiram Das v. State of West Bengal[13], this Courtheld that once statute prescribes reliance on certainmaterial, such material should be disclosed to the oppositeBparty. This principle has been followed in multiple contexts,including proceedings under the Companies Act 1956 andSpecial Courts Act 1979;

(viii) If the entire investigation report is not provided, it would bedifficult to come up with metric for determining whichCparts of the report are relevant to the noticee;

(ix)Permitting the respondent to selectively disclose portionsof the investigation report carries with it the risk ofconferring unfettered discretion upon the first respondent.The first respondent will attempt to disclose the least possibleDinformation in an adversarial proceeding, undermining themandate of Regulation 10;

(x)Without having access to the entirety of the investigationreport, the noticee will be incapable of effectivelychallenging the decision of the first respondent. It will resultEin the adoption of an opaque process where SAT or theHigh Courts would receive the report in sealed covers andmake ex parte determinations of whether the redactionsmade by the first respondent are justified, impacting thetransparency of the judicial process;

F(xi)Regulation 9 imposes qualitative requirement in relationto the investigation. If the investigation report is notdisclosed, there is no incentive for the investigator to meetthat qualitative requirement. There would be no way,therefore, to determine whether the investigation report wasproperly compiled and whether the investigation wasGconducted in regular manner, in accordance with thestandards of what proper investigation entails;

(xii)Redaction of the investigation report can be carried out asan exception for legitimate reasons. To reduce arbitrariness,

H13 (1975) 2 SCC 81

the redactions should be supported by written reasonsindicating the necessity of the measure. The reasons shouldhave certain degree of specificity;

(xiii) The exceptional situations in which redactions can be madeare known to law and include business secrets, personaldata and third-party confidential information; and

(xiv) Laws in the United States and European Union also adoptthe default position that the noticee shall have access to thefile subject to certain exceptions relating to business secretsand personal data, amongst others.

14. On behalf of the respondents, Mr CU Singh, learned seniorcounsel, made the following submissions:

(i)The appellant has raised the argument that the investigationhas been solely conducted under the PFUTP Regulationsand the failure to disclose the investigation report amountsto violation of Regulations 9 and 10. This is incorrect.The proceedings have been initiated under the provisionsof the SEBI Act and the SCRA as well for violation ofthe provisions of the PFUTP Regulations and the ListingAgreement. The SEBI Act and the SCRA are wider inscope than the PFUTP Regulations. Additionally, Regulation11 of PFUTP Regulations specifically provides that theactions or directions may be issued without prejudice to theprovisions contained in sub-sections (1), (2), (2A) and (3)of Sections 11 and 11B of the SEBI Act;

(ii)SEBI conducts an investigation under Section 11C of theSEBI Act, where, based on the findings arrived at duringthe investigation, allegations are levelled in the show causenotice. Together with the show cause notice all thedocuments that have been relied upon by the investigatorare provided to the noticee. In the present, case all therelevant documents have been provided to the noticee,including the report of Pipara and Co. which formed thebasis of the show cause notice. The appellant is not entitledto any other documents;

(iii)The quasi-judicial proceedings that are initiated by SEBIproceed on the basis of the allegations that are mentioned

226SUPREME COURT REPORTS

Ain the show cause notice and the documents that areannexed to it. No other material, document or investigationis considered for adjudication by the competent authority.Orders are passed only after an opportunity to file replyis given and personal hearing is provided to comply withthe principles of natural justice;B

(iv)Regulation 9 of PFUTP Regulations requires theInvestigating Authority to submit the report, after completionof the investigation, to the appointing authority. However,the provision does not require the furnishing of the report tothe noticee. The report is only in the nature of an inter-Cdepartmental communication between officers investigatingthe matter and the authority who decides if any enforcementaction is to be taken against an entity based on any primafacie grounds. It is not piece of evidence but is rather aculmination of documents that the investigating authorityDrelies upon or comes across during the investigation;(v)This Court in several similar cases have held that internalinvestigation reports are not required to be shared. (KrishnaChandra Tandon v. Union of India[14]and ChandramaTewari v. Union of India[15]);

E(vi)The investigations conducted by SEBI are highly sensitivegiven the volatile nature of the market. Disclosure of suchinformation may adversely affect the market. Further, theinvestigation reports also contain the personal informationof other stakeholders. They also include information relatingFto the commercial and business interests of third-parties.Sharing such information with the noticee will raise concernsregarding the privacy of third-parties and also affect theircompetitive position in the market;

(vii)Clauses (d), (e) and (h) of sub-Section (1) of Section 8 ofGthe Right to Information Act 2005[16] also exempt disclosureof – (i) “information including commercial confidence, tradesecrets or intellectual property, the disclosure of which wouldharm the competitive position of third party”; (ii)

14 AIR 1974 SC 158915 (1988) 1 SCR 1102H16 “RTI Act”

“information available in fiduciary relationship”; and (iii)“information which would impede the process ofinvestigation”; and

(viii) The US Securities and Exchange Commission conducts itsinvestigations on confidential basis to maximize theireffectiveness and protect the privacy of those involved. UKFinancial Conduct Authority also does not share confidentialinformation even when the same is requested under theFreedom of Information Act stating that clearconfidentiality restriction encourages free flow of informationand ifconfidential information were to be made public,sources would be less willing to give information. Article54 of Directive 2004/39 of the EU Parliament provides alegal framework for securities market and mandates thatinformation of such nature ought not to be shared. Thus,the refusal of SEBI to furnish the investigation report is inline with established global practices.

C. Analysis

C.1 Regulatory Framework of PFUTP Regulations

15. The PFUTP Regulations have been notified by SEBI inexercise of powers conferred by Section 30 of the SEBI Act. Regulation2(c) defines the expression ‘fraud’ in the following terms:

“2(c) “fraud” includes any act, expression, omission orconcealment committed whether in deceitful manner or not bya person or by any other person with his connivance or by hisagent while dealing in securities in order to induce another personor his agent to deal in securities, whether or not there is anywrongful gain or avoidance of any loss, and shall also include—

(1) knowing misrepresentation of the truth or concealment ofmaterial fact in order that another person may act to his detriment;

(2) suggestion as to fact which is not true by one who does notGbelieve it to be true;

(3) an active concealment of fact by person having knowledgeor belief of the fact;

(4) promise made without any intention of performing it;

A(5) representation made in reckless and careless mannerwhether it be true or false;

(6) any such act or omission as any other law specifically declaresto be fraudulent,

(7) deceptive behaviour by person depriving another of informedBconsent or full participation,

(8) false statement made without reasonable ground for believingit to be true.

(9) the act of an issuer of securities giving out misinformation thatCaffects the market price of the security, resulting in investors beingeffectively misled even though they did not rely on the statementitself or anything derived from it other than the market price.

And “fraudulent” shall be construed accordingly; Nothing containedin this clause shall apply to any general comments made in goodDfaith in regard to—

(a) the economic policy of the government

(b) the economic situation of the country

(c) trends in the securities market;

E(d) any other matter of like nature

whether such comments are made in public or in private;”

16. Chapter II of the Regulations relates to the prohibition offraudulent and unfair trade practices relating to the securities market.This includes Regulation 3 which deals with “Prohibition of certain dealingsFin securities” and Regulation 4 which deals with “Prohibition ofmanipulative, fraudulent and unfair trade practices”. Chapter II pertainsto the power of the Board to order an investigation. Regulation 5 isextracted below:

“5. Where the Board, the Chairman, the member or the ExecutiveGDirector (hereinafter referred to as “appointing authority”) hasreasonable ground to believe that—

(a) the transactions in securities are being dealt with in mannerdetrimental to the investors or the securities market in violation ofthese regulations;

(b) any intermediary or any person associated with the securitiesmarket has violated any of the provisions of the Act or the rulesor the regulations, it may, at any time by order in writing, directany officer not below the rank of Division Chief (hereinafterreferred to as the “Investigating Authority”) specified in the orderto investigate the affairs of such intermediary or persons associatedwith the securities market or any other person and to report thereonto the Board in the manner provided in section 11C of the Act.”

Regulation 6 enunciates the powers of the investigating authority.[17]The powers of the investigating authority include:

17 6. Without prejudice to the powers conferred under the Act, the Investigating Authorityshall have the following powers for the conduct of investigation, namely :

(1) to call for information or records from any person specified in section 11(2)(i) ofthe Act;

(2) to undertake inspection of any book, or register, or other document or record of anylisted public company or public company (not being intermediaries referred to insection 12 of the Act) which intends to get its securities listed on any recognized stockexchange where the Investigating Authority has reasonable grounds to believe that suchcompany has been conducting in violation of these regulations;

(3) to require any intermediary or any person associated with securities market in anymanner to furnish such information to, or produce such books, or registers, or otherdocuments, or record before him or any person authorized by him in this behalf as hemay consider necessary if the furnishing of such information or the production of suchbooks, or registers, or other documents, or record is relevant or necessary for thepurposes of the investigation;

(4) to keep in his custody any books, registers, other documents and record producedunder this regulation for maximum period of one month which may be extended uptoa period of six months by the Board :

Provided that the Investigating Authority may call for any book, register, other documentor record if the same is needed again :

Provided further that if the person on whose behalf the books, registers, other documentsand record are produced requires certified copies of the books, registers, other documentsand record produced before the Investigating Authority, he shall give certified copies ofsuch books, registers, other documents and record to such person or on whose behalfthe books, registers, other documents and record were produced;

(5) to examine orally and to record the statement of the person concerned or anydirector, partner, member or employee of such person and to take notes of such oralexamination to be used as an evidence against such person :Provided that the said notes shall be read over to, or by, and signed by, the person soexamined;

(6) to examine on oath any manager, managing director, officer or other employee ofany intermediary or any person associated with securities market in any manner inrelation to the affairs of his business and may administer an oath accordingly and forthat purpose may require any of those persons to appear before him personally.

A(i) Calling for information or records;

(ii) Undertaking inspection of books, registers and documents orrecords of any public company;

(iii) Requiring the disclosure of information, documents or recordsby any person associated with the securities market or by anBintermediary;

(iv) Reservation and custody of books, registers, documents andrecords for stipulated period;

(v) Examination of and recording the statement of directors,Cpartners, members or employees; and

(vi) Examination on oath.

17. Under Regulation 7[18] the investigating authority may exercisecertain specified powers after obtaining the specific approval of theChairman or Members of the Board. Regulation 8[19] imposes duty to

D18 7. The Investigating Authority may, after obtaining specific approval from theChairman or Member also exercise all or any of the following powers, namely :(a) to call for information and record from any bank or any other authority or board orcorporation established or constituted by or under any Central, State or Provincial Actin respect of any transaction in securities which are under investigation;

(b) to make an application to the Judicial Magistrate of the first class having jurisdictionEfor an order for the seizure of any books, registers, other documents and record, if in thecourse of investigation, the Investigating Authority has reasonable ground to believethat such books, registers, other documents and record of, or relating to, any intermediaryor any person associated with securities market in any manner may be destroyed,mutilated, altered, falsified or secreted;

(c) to keep in his custody the books, registers, other documents and record seized underthese regulations for such period not later than the conclusion of the investigation as heFconsiders necessary and thereafter to return the same to the person, the company or theother body corporate, or, as the case may be, to the managing director or the manager orany other person from whose custody or power they were seized :

Provided that the Investigating Authority may, before returning such books, registers,other documents and record as aforesaid, place identification marks on them or any partthereof;

(d) save as otherwise provided in this regulation, every search or seizure made underGthis regulation shall be carried out in accordance with the provisions of the Code ofCriminal Procedure, 1973 (2 of 1974) relating to searches or seizures made under thatCode.

19 8. (1) It shall be the duty of every person in respect of whom an investigation hasbeen ordered under regulation 7—

(a) to produce to the Investigating Authority or any person authorized by him suchbooks, accounts and other documents and record in his custody or control and toH

cooperate upon every person in respect of whom an investigation hasbeen ordered under Regulation 7.

18. Regulation 9 upon which the controversy in the present caseturns is extracted below:

“9. The Investigating Authority shall, on completion of investigation,after taking into account all relevant facts, submit report to theappointing authority:

Provided that the Investigating Authority may submit an interimreport pending completion of investigations if he considersnecessary in the interest of investors and the securities market oras directed by the appointing authority.”

Regulation 9 envisages that the investigating authority must submita report to the appointing authority upon the completion of its investigationin the course of which all relevant facts have to be taken into account.The investigating authority may even submit an interim report, ifnecessary, in the interest of investors and the securities market or, ifdirected by the appointing authority.

furnish such statements and information as the Investigating Authority or the personso authorized by him may reasonably require for the purposes of the investigation;(b) to appear before the Investigating Authority personally when required to do so byhim under regulation 6 or regulation 7 to answer any question which is put to him bythe Investigating Authority in pursuance of the powers under the said regulations.(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act,1956 (1 of 1956), it shall be the duty of every manager, managing director, officer andother employee of the company and every intermediary referred to in section 12 of theAct or every person associated with the securities market to preserve and to produceto the Investigating Authority or any person authorized by him in this behalf, all thebooks, registers, other documents and record of, or relating to, the company or, as thecase may be, of or relating to, the intermediary or such person, which are in theircustody or power.

(3) Without prejudice to the generality of the provisions of sub-regulations (1) and (2),such person shall—

(a) allow the Investigating Authority to have access to the premises occupied by suchperson at all reasonable times for the purpose of investigation;

(b) extend to the Investigating Authority reasonable facilities for examining any books,accounts and other documents in his custody or control (whether kept manually or incomputer or in any other form) reasonably required for the purposes of the investigation;(c) provide to such Investigating Authority any such books, accounts and recordswhich, in the opinion of the Investigating Authority, are relevant to the investigation or,as the case may be, allow him to take out computer outprints thereof.

19. Regulation 10 deals with the Board’s power of enforcement.According to Regulation 10:

“10. The Board may, after consideration of the report referred toin regulation 9, if satisfied that there is violation of these regulationsand after giving reasonable opportunity of hearing to the personsBconcerned, issue such directions or take such action as mentionedin regulation 11 and regulation 12 :

Provided that the Board may, in the interest of investors and thesecurities market, pending the receipt of the report of theinvestigating authority referred to in regulation 9, issue directionsCunder regulation 11:

Provided further that the Board may, in the interest of investorsand securities market, dispense with the opportunity of pre-decisional hearing by recording reasons in writing and shall givean opportunity of post-decisional hearing to the persons concernedDas expeditiously as possible.”

20. The directions or measures which can be adopted by the Boardare specified in Regulations 11 and 12 which read as follows: -

“11. (1) The Board may, without prejudice to the provisionscontained in subsections (1), (2), (2A) and (3) of section 11 andEsection 11B of the Act, by an order, for reasons to be recorded inwriting, in the interests of investors and securities market, issueor take any of the following actions or directions, either pendinginvestigation or enquiry or on completion of such investigation orenquiry, namely :—

(a) suspend the trading of the security found to be or prima faciefound to be involved in fraudulent and unfair trade practice in arecognized stock exchange;

(b) restrain persons from accessing the securities market andprohibit any person associated with securities market to buy, sellor deal in securities;

(c) suspend any office-bearer of any stock exchange or self-regulatory organization from holding such position;

(d) impound and retain the proceeds or securities in respect ofany transaction which is in violation or prima facie in violation ofHthese regulations;

(e) direct and intermediary or any person associated with thesecurities market in any manner not to dispose of or alienate anasset forming part of fraudulent and unfair transaction;

(f) require the person concerned to call upon any of its officers,other employees or representatives to refrain from dealing insecurities in any particular manner;

(g) prohibit the person concerned from disposing of any of thesecurities acquired in contravention of these regulations;

(h) direct the person concerned to dispose of any such securitiesacquired in contravention of these regulations, in such manner asthe Board may deem fit, for restoring the status quo ante.

(2) The Board shall issue press release in respect of any finalorder passed under sub-regulation (1) in at least two newspapersof which one shall have nationwide circulation and shall also putthe order on the website of the Board.

12. (1) The Board may, without prejudice to the provisionscontained in subsections (1), (2), (2A) and (3) of section 11 andsection 11B of the Act, by an order, for reasons to be recorded inwriting, in the interests of investors and securities market take thefollowing action against an intermediary :

(a) issue warning or censure

(b) suspend the registration of the intermediary; or

(c) cancel of the registration of the intermediary

Provided that no final order of suspension or cancellation of anintermediary for violation of these regulations shall be passed unlessthe procedure specified in the regulations applicable to suchintermediary under the Securities and Exchange Board of India(Procedure for Holding Enquiry by Enquiry Officer and ImposingPenalty) Regulations, 2002 is complied with.”

21. Regulation 10 empowers the Board to either issue directionor take action as is specified in Regulations 11 and 12. Before issuingdirections or taking action under Regulations 11 and 12, three steps haveto be traversed by the Board. The first stage is the consideration of thereport of the investigating authority which has been referred to inRegulation 9. The second is the furnishing of reasonable opportunity

Aof being heard. The third is the satisfaction of the Board that there is aviolation of the regulations. Regulation 10 indicates in clear terms thatthe report which has been submitted by the investigating authority underRegulation 9 is an intrinsic component of the Board’s satisfaction fordetermining whether there has been any violation of the regulations.Regulation 10 contains mandate for the Board to consider the reportBwhich is referred to in Regulation 9. The submission which has beenurged on behalf of SEBI is to the effect that (i) the investigation report isa part of the internal administrative deliberations of the Board; (ii) itneed not be disclosed; and that (iii) only those materials which are reliedon have to be disclosed misses crucial part of Regulation 10. TheClanguage in which Regulation 10 is couched indicates that considerationof the report of the investigating authority which is submitted underRegulation 9 is one of the components guiding the Board’s satisfactionon the violation of the regulations. The words of Regulation 10 indicatethat the Board “after consideration of the report referred to in regulation9, if satisfied that there is violation of these regulations and after givingDa reasonable opportunity of hearing to the persons concerned”, takesaction under Regulations 11 and 12. As result of the mandate ofRegulation 10, the Board has to consider the investigation report as anintrinsic element in arriving at its satisfaction on whether there has beena violation of the regulations.EC.2 Duty to Disclose Investigative Material

22. While the respondents have submitted that only materials thathave been relied on by the Board need to be disclosed, the appellant hascontended that all relevant materials need to be disclosed. While tryingto answer this issue, we are faced with multitude of other equallyFimportant issues. These issues, all paramount in shaping the jurisprudencesurrounding the principles of access to justice and transparency, rangefrom identifying the purpose and extent of disclosure required, to balancingthe conflicting claims of access to justice and grounds of public interestsuch as privacy, confidentiality and market interest. An identification ofGthe purpose of disclosure would lead us closer identifying the extent ofrequired disclosure. There are three key purposes that disclosure ofinformation serves:

(i)Reliability:The possession of information by both the partiescan aid the courts in determining the truth of the contentions.HThe role of the court is not restricted to interpreting the

provisions of law but also determining the veracity and truthof the allegations made before it. The court would be ableto perform this function accurately only if both parties haveaccess to information and possess the opportunity to addressarguments and counter-arguments related to the information;

(ii)Fair Trial:Since verdict of the Court has far reachingrepercussions on the life and liberty of an individual, it isonly fair that there is legitimate expectation that the partiesare provided all the aid in order for them to effectivelyparticipate in the proceedings;

(iii)Transparency and accountability: The investigative agenciesand the judicial institution are held accountable throughtransparency and not opaqueness of proceedings.Opaqueness furthers culture of prejudice, bias, andimpunity – principles that are antithetical to transparency.It is of utmost importance that in country grounded in theRule of Law, the institutions adopt those procedures thatfurther the democratic principles of transparency andaccountability. The principles of fairness and transparencyof adjudicatory proceedings are the cornerstones of theprinciple of open justice. This is the reason why anadjudicatory authority is required to record its reasons forevery judgement or order it passes. However, the duty tobe transparent in the adjudicatory process does not beginand end at providing reasoned order. Keeping partybereft of the information that influenced the decision of anauthority undertaking an adjudicatory function alsoundermines the transparency of the judicial process. Itdenies the concerned party and the public at large the abilityto effectively scrutinise the decisions of the authority sinceit creates an information asymmetry.

23. The purpose of disclosure of information is not merelyindividualistic, that is to prevent errors in the verdict but is also towardsfulfilling the larger institutional purpose of fair trial and transparency.Since the purpose of disclosure of information targets both the outcome(reliability) and the process (fair trial and transparency), it would beinsufficient if only the material relied on is disclosed. Such rule of

Adisclosure, only holds nexus to the outcome and not the process.Therefore, as default rule, all relevant material must be disclosed.

24. It would be fundamentally contrary to the principles of naturaljustice if the relevant part of the investigation report which pertains tothe appellant is not disclosed. The appellant has to be given reasonableBopportunity of hearing. The requirement of reasonable opportunitywould postulate that such material which has been and has to be takeninto account under Regulation 10 must be disclosed to the noticee. If thereport of the investigation authority under Regulation 9 has to beconsidered by the Board before satisfaction is arrived at on possibleviolation of the regulations, the principles of natural justice require dueCdisclosure of the report.

25. The consequence of the Board arriving at satisfaction thatthere has been violation of the regulations is that the Board can takerecourse to the actions specified under Regulations 11 and 12. Regulation11 empowers the Board to:D

(i)Suspend the trading of the security found to be involved in afraudulent and unfair trade practice in recognized stockexchange;

(ii)Restraining persons from accessing the securities market andEprohibiting any person associated with it from dealing insecurities;

(iii) Suspending an office bearer of recognized stock exchange;

(iv) Impounding and retaining the proceeds or securities;

(v) Issuing direction not to dispose of or alienate an assetFforming part of fraudulent and unfair transaction;

(vi) Prohibit the disposal of any of the securities acquired incontravention of these regulations; and

(vii) Directing the disposal of any securities in accordance withGthe mandate of the Board.

Under Regulation 11(2), press release has to be issued by theBoard in respect of final order which is passed under Regulation 11(1).

26. Regulation 12 empowers the Board to suspend or cancel theregistration of an intermediary among other things. The provisions of

Regulations 11 and 12 indicate that the consequences of the satisfactionwhich is arrived at by the Board under Regulation 10, if there is violationof the Regulations, are grave.

27. The submission of Mr U Singh, learned senior counsel isthat only those materials which are relied upon should be disclosed tothe first respondent. Regulation 10, as we have noted earlier, stipulatesthat the satisfaction of the Board whether there has been violation ofthe regulations has to be arrived at:

(i) after considering the report of the investigating authorityreferred to in Regulation 9; and

(ii) after giving reasonable opportunity of hearing to the personconcerned.

Once the subordinate legislation mandates that the investigatingauthority’s report is an essential ingredient for the Board to arrive at thesatisfaction, it requires due disclosure.

28. Now in the above context, it would be material to advert tothe decision of this court in Natwar Singh (supra). The issue before thetwo-judge Bench of this Court was whether noticee who is servedwith show cause notice under Rule 4(1) of the Foreign ExchangeManagement (Adjudication Proceedings and Appeal) Rules 2000[20], isentitled to demand all the documents in the possession of the adjudicatingauthority including those documents upon which no reliance has beenplaced while issuing notice to show cause as to why an enquiry shouldnot be initiated against him. Rule 4 is in the following terms:

“4. Holding of inquiry.—

(1) For the purpose of Adjudicating under section 13 of the Actwhether any person has committed any contravention as specifiedin that section of the Act, the Adjudicating Authority shall, issue anotice to such person requiring him to show cause within suchperiod as may be specified in the notice (being not less than tendays from the date of service thereof) why an inquiry should notbe held against him.

(2) Every notice under sub-rule (1) to any such person shall indicatethe nature of contravention alleged to have been committed by

Ahim. (3) After considering the cause, if any, shown by such person,the Adjudicating Authority is of the opinion that an inquiry shouldbe held, he shall issue notice fixing date for the appearance ofthat person either personally or through his legal practitioner or achartered accountant duly authorised by him.”

BRule 4(1) of the FEMA Rules 2000 indicates that in the firstinstance, the adjudicating authority has to issue notice requiring theperson to show cause why an enquiry should not be held against him.The stage of the notice under Rule 4(1) is not for adjudication but is forthe purpose of deciding whether an enquiry should be held. If afterconsidering the cause which is shown, the adjudicating authority is ofCthe opinion that an enquiry should be held, thereupon under Rule 4(3), anotice is issued for the appearance of the person. Sub-Rule (4) providesthat on the date fixed, the adjudicating authority shall explain thecontravention alleged to have been committed and under sub-Rule (5)an opportunity of producing documents or evidence has to be given.DUnder sub-Rule (8), the adjudicating authority is empowered to imposea penalty if it is satisfied, upon considering the evidence produced thatthere has been contravention.

29. Now in this backdrop, Justice B. Sudarshan Reddy speakingfor the two-judge Bench of this Court interpreted Rule 4 as follows:

E“23. The Rules do not provide and empower the AdjudicatingAuthority to straightaway make any inquiry into allegations ofcontravention against any person against whom complaint hasbeen received by it. Rule 4 of the Rules mandates that for thepurpose of adjudication whether any person has committed anycontravention, the Adjudicating Authority shall issue notice toFsuch person requiring him to show cause as to why an inquiryshould not be held against him. It is clear from bare reading ofthe rule that show cause notice to be so issued is not for thepurposes of making any adjudication into alleged contraventionbut only for the purpose of deciding whether an inquiry should beGheld against him or not. Every such notice is required to indicatethe nature of contravention alleged to have been committed bythe person concerned. That after taking the cause, if any, shownby such person, the Adjudicating Authority is required to form anopinion as to whether an inquiry is required to be held into theallegations of contravention. It is only then the real and substantialHinquiry into allegations of contravention begins.”

The above extract clearly indicates that the show cause noticeunder Rule 4(1) is not for the purpose of making an adjudication into thealleged contravention but only for deciding whether an enquiry must beconducted. The stage when an enquiry is held is subsequent to the initialstage contemplated by Rule 4(1). During the course of the adjudication,the fundamental principle is that material which is used against personmust be brought to notice. As this Court observed:

“30. The right to fair hearing is guaranteed right. Everyperson before an authority exercising the adjudicatorypowers has right to know the evidence to be used againsthim. This principle is firmly established and recognised by thisCourt in Dhakeswari Cotton Mills Ltd. v. CIT [AIR 1955 SC65 : (1955) 1 SCR 941]. However, disclosure not necessarilyinvolves supply of the material. person may be allowed to inspectthe file and take notes. Whatever mode is used, the fundamentalprinciple remains that nothing should be used against the personwhich has not been brought to his notice. If relevant material isnot disclosed to party, there is prima facie unfairnessirrespective of whether the material in question arosebefore, during or after the hearing. The law is fairly well settledif prejudicial allegations are to be made against person, he mustbe given particulars of that before hearing so that he can preparehis defence. However, there are various exceptions to thisgeneral rule where disclosure of evidential material mightinflict serious harm on the person directly concerned orother persons or where disclosure would be breach ofconfidence or might be injurious to the public interestbecause it would involve the revelation of official secrets,inhibit frankness of comment and the detection of crime,might make it impossible to obtain certain clauses ofessential information at all in the future (see R. v. Secy. ofState for Home Deptt., ex p [1995 QB 43 : (1994) 3 WLR1110 : (1995) 1 All ER 479 (CA)] ).

31. The concept of fairness may require the adjudicating authorityto furnish copies of those documents upon which reliance hasbeen placed by him to issue show-cause notice requiring the noticeeto explain as to why an inquiry under Section 16 of the Act shouldnot be initiated. To this extent, the principles of natural justice and

Aconcept of fairness are required to be read into Rule 4(1) of theRules. Fair procedure and the principles of natural justice are in-built into the Rules. noticee is always entitled to satisfy theadjudicating authority that those very documents upon whichreliance has been placed do not make out even primafacie case requiring any further inquiry. In such view of theBmatter, we hold that all such documents relied on by theauthority are required to be furnished to the noticee enablinghim to show proper cause as to why an inquiry should notbe held against him though the Rules do not provide forthe same. Such fair reading of the provision would not amountCto supplanting the procedure laid down and would in no mannerfrustrate the apparent purpose of the statute.”

(emphasis supplied)

30. The decision of this Court distinguishes between the initialstage under Rule 4(1) which is only for the purpose of deciding whetherDan enquiry has to be held and the subsequent stage of adjudication intothe allegations of contravention. This Court further held:

“34. As noticed, reasonable opportunity of being heard is to beprovided by the adjudicating authority in the manner prescribedfor the purpose of imposing any penalty as provided for in the ActEand not at the stage where the adjudicating authority is requiredmerely to decide as to whether an inquiry at all be held into thematter. Imposing of penalty after the adjudication is fraught withgrave and serious consequences and therefore, the requirementof providing reasonable opportunity of being heard beforeFimposition of any such penalty is to be met. In contradistinction,the opinion formed by the adjudicating authority whether an inquiryshould be held into the allegations made in the complaint are notfraught with such grave consequences and therefore the minimumrequirement of show-cause notice and consideration of causeshown would meet the ends of justice. proper hearing alwaysGinclude, no doubt, fair opportunity to those who are parties in thecontroversy for correcting or contradicting anything prejudicial totheir view.”

31. On the facts of that case, the Court held that the enquiryagainst the noticee was yet to commence:

“36. In the present case, the inquiry against the noticee is yet tocommence. The evidence as may be available upon whichthe adjudicating authority may place reliance, undoubtedly,is required to be furnished to the person proceeded againstat the second stage of inquiry into allegations ofcontravention. It is at that stage, the adjudicating authority is notonly required to give an opportunity to such person to producesuch documents as evidence as he may consider relevant to theinquiry, but also enforce attendance of any person acquainted withthe facts of the case to give evidence or to produce any documentwhich in its opinion may be useful for or relevant to the subject-matter of the inquiry. It is no doubt true that natural justiceoften requires the disclosure of the reports and evidencein the possession of the deciding authority and such reportsand evidence relevant to the subject-matter of the inquirymay have to be furnished unless the scheme of the Actspecifically prohibits such disclosure.”

(emphasis supplied)

This Court further noted that the documents which the appellantwanted were documents upon which no reliance was placed by theauthority for setting the law into motion. Consequently, this Courtconcluded that:

“48. On fair reading of the statute and the Rules suggests thatthere is no duty of disclosure of all the documents in possession ofthe adjudicating authority before forming an opinion that an inquiryis required to be held into the alleged contraventions by noticee.Even the principles of natural justice and concept of fairness donot require the statute and the Rules to be so read. Any otherinterpretation may result in defeat of the very object of the Act.Concept of fairness is not one-way street. The principles ofnatural justice are not intended to operate as roadblocks to obstructstatutory inquiries. Duty of adequate disclosure is only an additionalprocedural safeguard in order to ensure the attainment of thefairness and it has its own limitations. The extent of its applicabilitydepends upon the statutory framework.”

32. The issue in Natwar Singh (supra) was whether the authoritywas bound to disclose to the noticee all the documents in its possession

ABC

Abefore forming an opinion on whether an enquiry is required to be heldinto the alleged contravention by the noticee. The Court held that at thatstage there was no requirement of furnishing all such documents to thenoticee since the only purpose of the notice under Rule 4(1) was fordeciding whether an enquiry should be held. Rule 4(1), in other words,was not final adjudication and consequently the requirement of aBdisclosure of all materials in the possession of the authority was notattracted. At that stage, it was sufficient that only documents that havebeen relied on are disclosed.

33. The High Court in the present case has palpably misconstruedthe judgment in Natwar Singh (supra). The High Court has failed toCnotice that the issue in that case was whether at the stage when theauthority decides under Rule 4(1) of the FEMA Rules 2000 whether anenquiry should be held, disclosure of all documents in the possession ofthe authority to the noticee is warranted. This was answered in thenegative. This Court distinguished the stage of adjudication as distinctDfrom the initial stage under Rule 4(1). At the stage of adjudication, alldocuments useful or relevant to the subject-matter have to be disclosedto the notice, subject to exceptions noticed by the court.

34. On behalf of the Board, it has been urged that the investigationreport is in the nature of an inter-departmental communication and needEnot be disclosed. Reliance was placed on the judgment of this Court inKrishna Chandra Tandon (supra) to buttress the submission. However,it is clear from the judgment that even if the documents are merely inter-departmental communications, there is duty to disclose such documentsif they have been relied upon by the enquiry officer. two-Judge Benchof this observed:F

“16. Mr Hardy next contended that the appellant had really noreasonable opportunity to defend himself and in this connectionhe invited our attention to some of the points connected with theenquiry with which we have now to deal. It was first contendedthat inspection of relevant records and copies of documents wereGnot granted to him. The High Court has dealt with the matter andfound that there was no substance in the complaint. All thatMr Hardy was able to point out to us was that the reports receivedby the CIT from his departmental subordinates before the charge-sheet was served on the appellant had not been made available toHthe appellant. It appears that on complaints being received about

his work the CIT had asked the Inspecting Assistant CommissionerShri R.N. Srivastava to make report. He made report. It isobvious that the appellant was not entitled to copy of the reportmade by Mr Srivastava or any other officer unless the enquiryofficer relied on these reports. It is very necessary for an authoritywhich orders an enquiry to be satisfied that there are prima faciegrounds for holding disciplinary enquiry and, therefore, beforehe makes up his mind he will either himself investigate or directhis subordinates to investigate in the matter and it is only after hereceives the result of these investigations that he can decide as towhether disciplinary action is called for or not. Therefore, thesedocuments of the nature of inter-departmentalcommunications between officers preliminary to the holdingof enquiry have really no importance unless the EnquiryOfficer wants to rely on them for his conclusions. In thatcase it would only be right that copies of the same shouldbe given to the delinquent. It is not the case here that eitherthe Enquiry Officer or the CIT relied on the report of Shri R.N.Srivastava or any other officer for his finding against the appellant.Therefore, there is no substance in this submission.”

(emphasis supplied)

35. However, merely because the investigating authority has deniedplacing reliance on the report would not mean that such material cannotbe disclosed to the noticee. The court may look into the relevance of thematerial to the proposed action and its nexus to the stage of adjudication.Simply put, this entails evaluating whether the material in all reasonableprobability would influence the decision of the authority. The aboveposition was laid down by this Court in Khudiram Das v. State ofWest Bengal[21]. Ruling in the context of preventive detention, four-judge Bench of this Court observed:

“15. Now, the proposition can hardly be disputed that if thereis before the District Magistrate material against the detenuwhich is of highly damaging character and having nexusand relevancy with the object of detention, and proximitywith the time when the subjective satisfaction forming thebasis of the detention order was arrived at, it would belegitimate for the Court to infer that such material must

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Ahave influenced the District Magistrate in arriving at hissubjective satisfaction and in such case the Court wouldrefuse to accept the bald statement of the DistrictMagistrate that he did not take such material into accountand excluded it from consideration. It is elementary that thehuman mind does not function in compartments. When it receivesBimpressions from different sources, it is the totality of theimpressions which goes into the making of the decision and it isnot possible to analyse and dissect the impressions and predicatewhich impressions went into the making of the decision and whichdid not. Nor is it an easy exercise to erase the impression createdCby particular circumstances so as to exclude the influence of suchimpression in the decision making process. Therefore, in casewhere the material before the District Magistrate is of characterwhich would in all reasonable probability be likely to influence thedecision of any reasonable human being, the Court would be mostreluctant to accept the ipse dixit of the District Magistrate that heDwas not so influenced and fortiori, if such material is not disclosedto the detenu, the order of detention would be vitiated, both on theground that all the basic facts and materials which influenced thesubjective satisfaction of the District Magistrate were notcommunicated to the detenu as also on the ground that the detenuEwas denied an opportunity of making an effective representationagainst the order of detention.”

(emphasis supplied)

The principle that the material that may influence the decision ofa quasi-judicial authority to award penalty must be disclosed to aFdelinquent was affirmed by this Court in Union of India and Ors. v.Mohd. Ramzan Khan[22]. In that case, this Court laid down that adelinquent officer is entitled to receive the report of the enquiry officerwhich has been furnished to the disciplinary authority. This principlewas affirmed by Constitution Bench of this Court in ManagingGDirector, ECIL, Hyderabad v. B. Karunakar[23]. The rationale behindthe right to receive the report of the enquiry officer was explained bythis Court in the following terms:

22 (1991) 1 SCC 588H23 (1993) 4 SCC 727

“26. The reason why the right to receive the report of theenquiry officer is considered an essential part of thereasonable opportunity at the first stage and also principleof natural justice is that the findings recorded by the enquiryofficer form an important material before the disciplinaryauthority which along with the evidence is taken intoconsideration by it to come to its conclusions. It is difficultto say in advance, to what extent the said findings includingthe punishment, if any, recommended in the report wouldinfluence the disciplinary authority while drawing itsconclusions. The findings further might have been recordedwithout considering the relevant evidence on record, or bymisconstruing it or unsupported by it. If such finding is tobe one of the documents to be considered by the disciplinaryauthority, the principles of natural justice require that theemployee should have fair opportunity to meet, explainand controvert it before he is condemned. It is negation ofthe tenets of justice and denial of fair opportunity to theemployee to consider the findings recorded by third partylike the enquiry officer without giving the employee anopportunity to reply to it. Although it is true that thedisciplinary authority is supposed to arrive at its ownfindings on the basis of the evidence recorded in the inquiry,it is also equally true that the disciplinary authority takesinto consideration the findings recorded by the enquiryofficer along with the evidence on record. In thecircumstances, the findings of the enquiry officer doconstitute an important material before the disciplinaryauthority which is likely to influence its conclusions. If theenquiry officer were only to record the evidence and forward thesame to the disciplinary authority, that would not constitute anyadditional material before the disciplinary authority of which thedelinquent employee has no knowledge. However, when theenquiry officer goes further and records his findings, as statedabove, which may or may not be based on the evidence on recordor are contrary to the same or in ignorance of it, such findings arean additional material unknown to the employee but are taken intoconsideration by the disciplinary authority while arriving at itsconclusions. Both the dictates of the reasonable opportunity as

ABC

DEF

well as the principles of natural justice, therefore, require thatbefore the disciplinary authority comes to its own conclusions, thedelinquent employee should have an opportunity to reply to theenquiry officer’s findings. The disciplinary authority is thenrequired to consider the evidence, the report of the enquiry officerand the representation of the employee against it.”

(emphasis supplied)

For the purpose of determining if prejudice has been caused by anon-disclosure, this Court held that the report must be furnished to theaggrieved person and the employee must shoulder the burden of provingCon facts that his case was prejudiced – either the outcome or thepunishment – by the non-disclosure:

“30. [v] ] The next question to be answered is what is the effecton the order of punishment when the report of the enquiry officeris not furnished to the employee and what relief should be grantedto him in such cases. The answer to this question has to be relativeto the punishment awarded. When the employee is dismissed orremoved from service and the inquiry is set aside because thereport is not furnished to him, in some cases the non-furnishing ofthe report may have prejudiced him gravely while in other cases itmay have made no difference to the ultimate punishment awardedto him. Hence to direct reinstatement of the employee with back-wages in all cases is to reduce the rules of justice to mechanicalritual. The theory of reasonable opportunity and the principles ofnatural justice have been evolved to uphold the rule of law and toassist the individual to vindicate his just rights. They are notincantations to be invoked nor rites to be performed on all andsundry occasions. Whether in fact, prejudice has been causedto the employee or not on account of the denial to him ofthe report, has to be considered on the facts andcircumstances of each case. Where, therefore, even afterthe furnishing of the report, no different consequence wouldhave followed, it would be perversion of justice to permitthe employee to resume duty and to get all theconsequential benefits. It amounts to rewarding the dishonestand the guilty and thus to stretching the concept of justice to illogicaland exasperating limits. It amounts to an “unnatural expansion ofnatural justice” which in itself is antithetical to justice.

31. Hence, in all cases where the enquiry officer’s report is notfurnished to the delinquent employee in the disciplinaryproceedings, the Courts and Tribunals should cause the copy ofthe report to be furnished to the aggrieved employee if he has notalready secured it before coming to the Court/Tribunal and givethe employee an opportunity to show how his or her casewas prejudiced because of the non-supply of the report. Ifafter hearing the parties, the Court/Tribunal comes to theconclusion that the non-supply of the report would havemade no difference to the ultimate findings and thepunishment given, the Court/Tribunal should not interferewith the order of punishment. The Court/Tribunal should notmechanically set aside the order of punishment on the ground thatthe report was not furnished as is regrettably being done at present.

(emphasis supplied)

36. In State Bank of Patiala v. SK Sharma[24], this Court notedthat if facet of rule of natural justice is violated on grounds ofpreserving public interest, the entire proceeding is not vitiated unlessprejudice has been caused to the delinquent. distinction was madebetween the complete non-abidance of the principles of natural justice,that is where no information was disclosed and arguments of insufficientdisclosure. It was held that when the latter argument is made, the Courtmust determine if the insufficient disclosure caused prejudice. This Courtobserved:“28. The decisions cited above make one thing clear, viz., principlesof natural justice cannot be reduced to any hard and fast formulae.As said in Russell v. Duke of Norfolk [(1949) 1 All ER 109 : 65TLR 225] way back in 1949, these principles cannot be put in astrait-jacket. Their applicability depends upon the context and thefacts and circumstances of each case. (See Mohinder SinghGill v. Chief Election Commr. [(1978) 1 SCC 405 : (1978) 2 SCR272] ) The objective is to ensure fair hearing, fair deal, to theperson whose rights are going to be affected. (See A.K.Roy v. Union of India [(1982) 1 SCC 271 : 1982 SCC (Cri) 152]and Swadeshi Cotton Mills v. Union of India [(1981) 1 SCC 664].)As pointed out by this Court in A.K. Kraipak v. Union ofIndia [(1969) 2 SCC 262] , the dividing line between quasi-judicial

function and administrative function (affecting the rights of party)has become quite thin and almost indistinguishable — fact alsoemphasised by House of Lords in Council of Civil ServiceUnions v. Minister for the Civil Service [(1984) 3 All ER 935 :(1984) 3 WLR 1174 : 1985 AC 374, HL] where the principles ofnatural justice and fair hearing were treated as synonymous.Whichever the case, it is from the standpoint of fair hearing —applying the test of prejudice, as it may be called — that any andevery complaint of violation of the rule of audi alteram partemshould be examined. Indeed, there may be situations whereobservance of the requirement of prior notice/hearing may defeatthe very proceeding — which may result in grave prejudice topublic interest. It is for this reason that the rule of post-decisionalhearing as sufficient compliance with natural justice was evolvedin some of the cases, e.g., Liberty Oil Mills v. Union ofIndia [(1984) 3 SCC 465] . There may also be cases wherethe public interest or the interests of the security of Stateor other similar considerations may make it inadvisable toobserve the rule of audi alteram partem altogether [as inthe case of situations contemplated by clauses (b) and (c)of the proviso to Article 311(2)] or to disclose the materialon which particular action is being taken. There may indeedbe any number of varying situations which it is not possible foranyone to foresee. In our respectful opinion, the principles emergingfrom the decided cases can be stated in the following terms inrelation to the disciplinary orders and enquiries: distinction oughtto be made between violation of the principle of natural justice,audi alteram partem, as such and violation of facet of the saidprinciple. In other words, distinction is between “no notice”/”nohearing” and “no adequate hearing” or to put it in different words,“no opportunity” and “no adequate opportunity”. To illustrate —take case where the person is dismissed from service withouthearing him altogether (as in Ridge v. Baldwin [1964 AC 40 :(1963) 2 All ER 66 : (1963) 2 WLR 935] ). It would be casefalling under the first category and the order of dismissal wouldbe invalid — or void, if one chooses to use that expression(Calvin v. Carr [1980 AC 574 : (1979) 2 All ER 440 : (1979) 2WLR 755, PC] ). But where the person is dismissed from service,say, without supplying him copy of the enquiry officer’s report

(Managing Director, ECIL v. B. Karunakar [(1993) 4 SCC 727 :1993 SCC (L&S) 1184 : (1993) 25 ATC 704] ) or without affordinghim due opportunity of cross-examining witness (K.L.Tripathi [(1984) 1 SCC 43 : 1984 SCC (L&S) 62] ) it would be acase falling in the latter category — violation of facet of thesaid rule of natural justice — in which case, the validity of theorder has to be tested on the touchstone of prejudice, i.e., whether,all in all, the person concerned did or did not have fair hearing.It would not be correct — in the light of the above decisionsto say that for any and every violation of facet of naturaljustice or of rule incorporating such facet, the order passedis altogether void and ought to be set aside without furtherenquiry. In our opinion, the approach and test adopted in B.Karunakar [(1993) 4 SCC 727 : 1993 SCC (L&S) 1184 :(1993) 25 ATC 704] should govern all cases where thecomplaint is not that there was no hearing (no notice, noopportunity and no hearing) but one of not affording properhearing (i.e., adequate or full hearing) or of violation of aprocedural rule or requirement governing the enquiry; thecomplaint should be examined on the touchstone ofprejudice as aforesaid.”

(emphasis supplied)

37. In State of Uttar Pradesh v. Ramesh Chandra Mangalik[25],it was held that the duty to disclose is confined only to material andrelevant documents which may have been relied upon in support of thecharges. In that case, the personal file of other officers was not suppliedto the delinquent officer. It was noted that such documents have notbeen relied upon by the enquiry officer. The delinquent officer was notable to prove the relevance of the documents that were suppressed.This Court observed:

“11. Learned counsel for the appellant has further submitted thatparticular documents, copies of which are said to have not beensupplied are not indicated by the respondent, much less in theorder of the High Court nor has their relevance been pointed out.The submission is that the delinquent will also have to show as toin what manner any particular document was relevant inconnection with the inquiry and what prejudice was caused to

Ahim by non-furnishing of copy of the document. In support ofthis contention, reliance has been placed upon case reportedin Chandrama Tewari v. Union of India [1987 Supp SCC 518 :1988 SCC (L&S) 226 : (1987) 5 ATC 369] . It has been observedin this case that the obligation to supply copies ofdocuments is confined only to material and relevantBdocuments which may have been relied upon in support ofthe charges. It is further observed that if document eventhough mentioned in the memo of charges, has no bearingon the charges or if it is not relied upon or it may not benecessary for cross-examination of any witness, non-supplyCof such document will not cause any prejudice to thedelinquent. The inquiry would not be vitiated in suchcircumstances. In State of T.N. v. Thiru K.V. Perumal [(1996)5 SCC 474 : 1996 SCC (L&S) 1280] relied upon by the appellant,it is held that it is for the delinquent to show the relevance ofa document copy of which he insists to be supplied toDhim. Prejudice caused by non-supply of document has alsoto be seen. In yet another case relied upon by the learned counselfor the appellant, reported in State of U.P. v. HarendraArora [(2001) 6 SCC 392 : 2001 SCC (L&S) 959] it has beenheld that delinquent must show the prejudice caused to him byEnon-supply of copy of the document where order of punishmentis challenged on that ground.”

(emphasis supplied)

38. In Kothari Filaments v. Commr. Of Customs[26], this Courtheld that the Commissioner of Customs in the exercise of its quasi-Fjudicial powers cannot pass an order on the basis of material which isonly known to the authorities. This Court held:

“14. The statutory authorities under the Act exercise quasi-judicialfunction. By reason of the impugned order, the properties couldbe confiscated, redemption fine and personal fine could be imposedGin the event an importer was found guilty of violation of theprovisions of the Act. In the event finding as regards violation ofthe provisions of the Act is arrived at, several steps resulting incivil or evil consequences may be taken. The principles of naturaljustice, therefore, were required to be complied with.

H26 (2009) 2 SCC 192

15. The Act does not prohibit application of the principles of naturaljustice. The Commissioner of Customs either could not have passedthe order on the basis of the materials which were known only tothem, copies whereof were not supplied or inspection thereto hadnot been given. He, thus, could not have adverted to the report ofthe overseas enquiries. person charged with misdeclaration isentitled to know the ground on the basis whereof he would bepenalised. He may have an answer to the charges or may nothave. But there cannot be any doubt whatsoever that in law he isentitled to proper hearing which would include supply of thedocuments. Only on knowing the contents of the documents, hecould furnish an effective reply….”

39. The following principles emerge from the above discussion:

(i)A quasi-judicial authority has duty to disclose the materialthat has been relied upon at the stage of adjudication; and

(ii)An ipse dixit of the authority that it has not relied on certainmaterial would not exempt it of its liability to disclose suchmaterial if it is relevant to and has nexus to the actionthat is taken by the authority. In all reasonable probability,such material would have influenced the decision reachedby the authority.

Thus, the actual test is whether the material that is required to bedisclosed is relevant for purpose of adjudication. If it is, then the principlesof natural justice require its due disclosure.

40. The investigation report forms the material considering which,the Board arrives at satisfaction regarding whether there has been aviolation of the regulations. If it is satisfied that there has been violationof the regulations, after giving reasonable opportunity to be heard, theBoard is empowered to take action according to Regulations 11 and 12.It would not suffice for the first respondent to claim as it did before theHigh Court that it did not rely on the investigation report. The ipse dixitof the authority that it was not influenced by certain material would notsuffice. If the material is relevant to and has nexus to the stage atwhich satisfaction is reached by an authority, such material would bedeemed to be important for the purpose of adjudication. The writtensubmissions of the Board clearly state that the findings of the investigationreport are important for the authority to decide whether there are any

Aprima facie grounds to initiate enforcement proceedings under Regulation10. The relevant extract of the submissions is reproduced below:

“It is submitted that Regulation 9 of PFUTP Regulations requirethe Investigating Authority to submit the report after completionof the investigation to the appointing authority. However, theBprovision does not require furnishing of the report to the Noticee.Further, the investigation report is merely culmination ofdocuments which the investigating authority relies on/come acrosswhile conducting the investigation and is not piece of evidencein itself. It is report which is necessary for an authority,who orders an investigation, to decide as to whether thereCare prima-facie grounds to initiate enforcement proceedingsor not. Therefore, before the authority makes up his mind,he will either himself investigate or direct his subordinatesto investigate in the matter. It is only after the authorityreceives the report of the investigation that he can decideDas to whether action is called for or not. Therefore, theinvestigation report is in the nature of inter-departmentalcommunications between officers investigating the matter andauthority who can decide any enforcement action against the entity.

The findings recorded in the investigation report againstthe Noticee are brought out in the SCN and the copies of all thedocuments that are relied upon by SEBI, while issuing the SCNare always shared with the concerned. The present case is noexception.”

(emphasis supplied)

41. The above extracts indicate that the findings of the investigationreport are relevant for the Board to arrive at the satisfaction on whetherthe Regulations have been violated. Even if it is assumed that the reportis an inter-departmental communication, as held in Krishna ChandraGTandon (supra), there is duty to disclose such report if it is relevantfor the satisfaction of the enforcement authority for the determination ofthe alleged violation.

42. In Khudiram Das (supra), four-Judge Bench of this Courtlaid down two-prong test for the standard of ‘relevancy’; firstly, theHmaterial must have nexus with the order and secondly, the material

might have influenced the decision of the authority. Constitution Benchof this Court in Karunakar (supra) held that the non-disclosure of therelevant information is not in itself sufficient to warrant the setting asideof the order of punishment. It was held that in order to set aside theorder of punishment, the aggrieved person must be able prove thatprejudice has been caused to him due to non-disclosure. To proveprejudice, he must prove that had the material been disclosed to him theoutcome or the punishment would have been different. The test for theextent of disclosure and the corresponding remedy for non-disclosure isdependent on the objective that the disclosure seeks to achieve.Therefore, the impact of non-disclosure on the reliability of the verdictmust also be determined vis-à-vis, the overall fairness of the proceeding.While determining the reliability of the verdict and punishment, the courtmust also look into the possible uses of the undisclosed information forpurposes ancillary to the outcome, but that which might have impactedthe verdict.43. In Natwar Singh (supra), it was held that material which isrelevant to the subject-matter of the proceedings must be disclosed,unless the scheme of the statute indicates to the contrary. The non-disclosure of such material is prima facie arbitrary. deviation fromthis general rule was made based on the stage of the proceedings. Itwas held that it is sufficient to disclose the materials relied on if it is forthe purpose of issuing show cause notice for initiating inquiry. However,in the present case, since the report of the investigating authority underRegulation 9 enters into the calculus of circumstances borne in mind bythe Board in arriving at its satisfaction under Regulation 10 for takingactions as specified in Regulations 11 and 12, it would be contrary to theRegulations to assert that the investigation report is merely an internaldocument of which disclosure is not warranted. In any event, thelanguage of Regulation 10 makes it clear that the Board forms an opinionregarding the violation of Regulations after considering the investigationreport prepared under Regulation 9. Thus, the investigation report has tobe duly disclosed to the noticee. However, the right to disclosure is notabsolute. It needs to be determined if the non-disclosure of theinvestigative report is protected by any of the exceptions to the rule.

C.3. Exceptions to the Duty to Disclose

44. The contention of the respondents is that since the investigationreport under Regulation 9 would also include information on “commercial

Aand business interests, documents involving strategic information,investment strategies, rationale for investments, commercial informationand information regarding the business affairs of the entities/personsconcerned” affecting the privacy and the competitive position of otherentities, it should not be disclosed. Buttressing this argument, therespondent referred to clauses (d), (e) and (h) of the sub-Section (1) ofBthe RTI Act which states there shall be no duty to disclose informationaffecting the commercial confidence or that which could harm thecompetitive position of third party or impede the process of investigation,unless there is larger public interest in the disclosure of information.The RTI Act attempts to balance the interests of third party individualsCwhose information may be disclosed and public interest in ensuringtransparency and accountability. The RTI Act is reflective of theparliamentary intent to facilitate transparency in the administration, whichis the rationale for the disclosure of information. This is subject to certaindefined exceptions.

D45. We cannot be oblivious to the wide range of sensitiveinformation that the investigation report submitted under Regulation 9may cover, ranging from information on financial transactions and onother entities in the securities market, which might affect third-partyrights. The report may contain market sensitive information which mayimpinge upon the interest of investors and the stability of the securitiesEmarket. The requirement of compliance with the principles of naturaljustice cannot therefore be read to encompass the right to rovingdisclosure on matters unconnected or as regards the dealings of thirdparties. The investigating authority may acquire information of sensitivenature bearing upon the orderly functioning of the securities market.FThe right of the noticee to disclosure must be balanced with need topreserve any other third-party rights that may be affected.46. In Natwar Singh (supra), this Court has observed that thereare exceptions to the general rule of disclosing evidentiary material. ThisCourt held that such exceptions can be invoked if the disclosure of materialGcauses harm to others, is injurious to public health or breachesconfidentiality. While identifying the purpose of disclosure, we have heldthat one of the crucial objectives of the right to disclosure is securing thetransparency of institutions. The claims of third party rights vis-à-vis theright to disclosure cannot be pitted as an issue of public interest and fairadjudication. The creation of such binary reduces and limits the purposeH

that disclosure of information serves. The respondent should prima facieestablish that the disclosure of the report would affect third party rights.The onus then shifts to the appellant to prove that the information isnecessary to defend his case appropriately.

47. Applying this test to the facts, we find that the appellant isunable to prove that the disclosure of the entire report is necessary forhim to defend the case. The first respondent made the following argumentsmaking prima facie case that the disclosure of the report would violatethird party rights:

(i)Investigation reports contain information on the volatilenature of the market;

(ii) The report also contains the personal information of variousstakeholders. Disclosure will violate the right to privacy ofthe third party individuals; and

(iii)It includes strategic information.

48. The appellant did not sufficiently discharge his burden byproving that the non-disclosure of the above information would affecthis ability to defend himself. However, merely because few portionsof the enquiry report involve information on third-parties or confidentialinformation on the securities market, the respondent does not have aright to withhold the disclosure of the relevant portions of the report.The first respondent can only claim non-disclosure of those sections ofthe report which deal with third party personal information and strategicinformation on the functioning of the securities market.

49. Therefore, the Board should determine such parts of theinvestigation report under Regulation 9 which have bearing on theaction which is proposed to be taken against the person to whom thenotice to show cause is issued and disclose the same. It can redactinformation that impinges on the privacy of third parties. It cannot exerciseunfettered discretion in redacting information. On the other hand, suchparts of the report which are necessary for the appellant to defend hiscase against the action proposed to be taken against him need to bedisclosed. It is needless to say that the investigating authority is duty-bound to disclose such parts of the report to the noticee in good faith. Ifthe investigating authority attempts to circumvent its duty by revealingminimal information, to the prejudice of the appellant, it will be in violation

Aof the principles of natural justice. The court/appellate forum in anappropriate case will be empowered to call for the investigation reportand determine if the duty to disclose has been effectively complied with.

50. The notice to show cause issued to the appellant is for violationof the provisions of the SEBI Act, SCRA and PFUTP Regulations. TheBshow cause notice has specifically referred to what was revealed duringthe course of the investigation and has invoked the provisions of thePFUTP Regulations in the allegations against the appellant. Para 8 (2)of the show cause notice is extracted below:

“(II) It is alleged that Mr. T. Takano, during whose tenure theCbusiness transactions with FDSL started by virtue of his positionas MD & CEO of Ricoh during FY 2012-13 to FY 2014-15, wasactively involved in committing the fraud and had knowinglyrestricted the mandate given to PwC to six month so as to succeedin hiding his role in the commission of fraud of publishing untruefinancial statement of Ricoh which resulted in misleading theDinvestors about the financial performance of the company andthereby resulted in inducement of traders in the scrip. The saidacts of the Noticee no. 2 are alleged to be violation of regulations3 (b), (c), (d), 4(1) and 4(2)(e), (f), (k) and (r) of SEBI (PFUTP)Regulations, 2003 and clause 49 (V) read with 41 (II)(a) of theEerstwhile Listing Agreement.”

Since the show cause notice has specifically relied upon the reportof the investigation and invokes, inter alia, violation of the PFUTPRegulations by the appellant, the mandate of Regulation 10 must becomplied with. However, while directing that there should be disclosureFof the investigation report to the appellant, it needs to be clarified thatthis would not permit the appellant to demand roving inspection of theinvestigation report which may contain sensitive information as regardsunrelated entities and transactions.

D. Conclusion

G51. The conclusions are summarised below:

(i)The appellant has right to disclosure of the materialrelevant to the proceedings initiated against him. deviationfrom the general rule of disclosure of relevant informationwas made in Natwar Singh (supra) based on the stage of

the proceedings. It is sufficient to disclose the materialsrelied on if it is for the purpose of issuing show causenotice for deciding whether to initiate an inquiry. However,all information that is relevant to the proceedings must bedisclosed in adjudication proceedings;

(ii)The Board under Regulation 10 considers the investigationreport submitted by the Investigating Authority underRegulation 9, and if it is satisfied with the allegations, itcould issue punitive measures under Regulations 11 and 12.Therefore, the investigation report is not merely an internaldocument. In any event, the language of Regulation 10makes it clear that the Board forms an opinion regardingthe violation of Regulations after considering the investigationreport prepared under Regulation 9;

(iii)The disclosure of material serves three- fold purpose ofdecreasing the error in the verdict, protecting the fairnessof the proceedings, and enhancing the transparency of theinvestigatory bodies and judicial institutions;

(iv)A focus on the institutional impact of suppression of materialprioritises the process as opposed to the outcome. Thedirection of the Constitution Bench of this Court inKarunakar (supra) that the non-disclosure of relevantinformation would render the order of punishment void onlyif the aggrieved person is able to prove that prejudice hasbeen caused to him due to non-disclosure is founded bothon the outcome and the process;

(v)The right to disclosure is not absolute. The disclosure ofinformation may affect other third-party interests and thestability and orderly functioning of the securities market.The respondent should prima facie establish that thedisclosure of the report would affect third-party rights andthe stability and orderly functioning of the securities market.The onus then shifts to the appellant to prove that theinformation is necessary to defend his case appropriately;and

(vi)Where some portions of the enquiry report involveinformation on third-parties or confidential information on

the securities market, the respondent cannot for that reasonassert privilege against disclosing any part of the report.The respondents can withhold disclosure of those sectionsof the report which deal with third-party personal informationand strategic information bearing upon the stable and orderlyfunctioning of the securities market.

52. The Board shall be duty-bound to provide copies of such partsof the report which concern the specific allegations which have beenlevelled against the appellant in the notice to show cause. However, thisdoes not entitle the appellant to receive sensitive information regardingthird parties and unrelated transactions that may form part of theCinvestigation report.

53. During the course of the hearing, the Court has been apprisedof the fact that though the hearing before the designated officer hasbeen held, no orders have been passed in deference to the pendency ofthe present proceedings. Having regard to the conclusion which hasbeen arrived at above, we direct that after due disclosure is made tothe appellant in terms as noted above, reasonable opportunity shall begranted to the appellant of being heard with reference to the matters ofdisclosure in compliance with the principles of natural justice before afinal decision is arrived at.

54. The disclosure in terms of the present judgment shall becommunicated to the appellant within one month from the date of thisjudgment and the appellant shall be given period of one month to respond.The officer concerned in charge of the enquiry shall fix date for personalhearing before taking final decision. The appeals are allowed in theabove terms.F

55. The judgment of the Division Bench of the High Court ofJudicature at Bombay dated 29 September 2020 is accordingly set aside.In the circumstances of the case, there shall be no order as to costs.

56. Pending application(s), if any, shall stand disposed of.

Ankit Gyan and Amarendra Kumar(Assisted by : Adnan Khan, LCRA)

Appeals allowed.