2025 (7) TMI 647 - HC - SEBI

Fraud in the trading in the RTS scrip - orders restraining the Petitioner from dealing in securities - Petitioner sent the Respondent a Demand Draft for Rs. 25, 00, 000/- stating that this was towards payment of the settlement charges in the matter - HELD THAT - This Petition could be disposed of by making the following order (A) The Petitioner agrees and undertakes to furnish a fresh Pay Order of Rs. 25, 00, 000/- to the Respondent on or before 25th July 2025 towards the settlement charges mentioned in the Respondent s letter dated 24th February 2012 (Exhibit F to the Petition). (B) The Petitioner undertakes to this Court that she has not bought sold or dealt in securities since the dates of issuance of the Show Cause Notices to her and has therefore satisfied the requirement of being debarred from doing so for a period of three years as set out in the terms of consent. The Petitioner shall hereafter be at liberty to access the capital markets and/ or deal in securities forthwith. (C) The Respondent undertakes to this Hon ble Court that it shall pass a Consent Order allowing the Consent Application subject to the modifications set out herein within a period of 2 weeks from the date of receipt of the Pay Order. (D) Upon the passing of the Consent Order the proceedings initiated under the said Show Cause Notices shall stand settled and the Orders dated 18th June 2021 and 27th October 2021 passed by SEBI as mentioned in paragraph 12 above shall not be enforced against the Petitioner. (E) The Consent Order neither absolves nor incriminates the Petitioner of any offence or violation of the SEBI Act and/ or SEBI Regulations. (F) All issues and matters arising in the pending Suit filed by Network Stock Broking Pvt. Ltd. Ors.shall be decided by the Court on their own merits.

Summary

The core legal questions considered by the Court include: (1) Whether the Respondent was justified in rejecting the Petitioner's Consent Application under the SEBI Act and related regulations; (2) The validity and enforceability of the orders restraining the Petitioner from dealing in securities and withholding pay-outs; (3) The interplay between the pending civil suit concerning the RTS Power Corporation Ltd trades and the regulatory proceedings initiated by the Respondent; (4) The implications of the Petitioner's settlement offer and payment towards the consent charges; (5) The effect and scope of the Consent Order to be passed, particularly in relation to pending adjudication and civil proceedings; and (6) The rights of the Petitioner to access capital markets and to claim release of pay-out amounts deposited under court orders.

Regarding the rejection of the Consent Application, the Court examined the legal framework under the SEBI Act, particularly sections 11, 11B, and 15I, which empower the Respondent to investigate and impose penalties for fraudulent trading practices. The Respondent's issuance of Show Cause Notices and subsequent orders restraining the Petitioner from dealing in securities were grounded in these provisions. The Court noted that the Respondent initially agreed in principle to the Petitioner's settlement offer, which included payment of Rs. 25,00,000/- and a three-year abstention from securities trading, contingent upon release of pay-out amounts. However, the Respondent later rejected the Consent Application citing ongoing civil litigation and representations from stockbrokers, returning the Petitioner's settlement payment. The Court scrutinized this procedural shift and the Respondent's insistence on further internal committee review despite prior acceptance in principle. The Petitioner challenged the validity of this approach, arguing that the settlement had been accepted and payment made.

The Court also analyzed the relationship between the civil suit filed by buy-side stockbrokers seeking to annul certain RTS trades and the regulatory proceedings. The civil suit involved claims for restraint on pay-outs and refund of amounts, with the Petitioner and Respondent as defendants. Orders were passed directing the deposit of pay-out amounts in fixed deposits under court supervision. The Court observed that the regulatory orders, including the interim restraint on trading and withholding of pay-outs, overlapped with the civil litigation. This overlap raised questions about the appropriate forum and procedure for adjudicating rights to pay-out amounts and claims of fraudulent trading. The Court emphasized that the civil suit should proceed independently on its merits, uninfluenced by the regulatory consent order or SEBI's penalty and debarment orders.

In interpreting the procedural history, the Court highlighted key evidence such as the Petitioner's initial Consent Application dated 4th March 2011, the subsequent revised settlement offer, and the Respondent's communication dated 24th February 2012 indicating acceptance in principle. The Petitioner's payment by Demand Draft and request for issuance of the Consent Order were critical factual elements. The Respondent's rejection letter dated 27th June 2014 and return of the Demand Draft formed the basis of the dispute. The Court also considered the adjudicating officer's penalty order dated 18th June 2021 and the Whole Time Member's debarment order dated 27th October 2021, which were stayed pending the present petition's disposal.

The Court applied the law to the facts by balancing the Petitioner's right to settle regulatory proceedings through consent under the SEBI Act with the Respondent's mandate to ensure compliance and protect market integrity. It recognized the Respondent's discretion in accepting or rejecting consent applications but underscored the need for procedural fairness and consistency, especially after an in-principle acceptance and payment. The Court addressed competing arguments regarding the timing and effect of the Consent Order, the impact of ongoing civil litigation, and the Respondent's authority to withhold pay-outs. It resolved these by facilitating a settlement framework that preserved the rights of all parties and allowed the civil suit to proceed independently.

The Court concluded that the Petitioner would furnish a fresh Pay Order of Rs. 25,00,000/- towards settlement charges, and undertook that the Petitioner had abstained from securities trading since issuance of the Show Cause Notices, satisfying the debarment condition. The Respondent was directed to pass the Consent Order within two weeks of receiving the Pay Order. Upon issuance of the Consent Order, the regulatory proceedings under the Show Cause Notices would stand settled, and penalty and debarment orders would not be enforced against the Petitioner. Importantly, the Consent Order would neither absolve nor incriminate the Petitioner regarding any offence under the SEBI Act or Regulations. Finally, the Court mandated that the civil suit be adjudicated on its own merits without influence from the Consent Order or regulatory penalty orders, preserving the parties' rights to claim pay-out amounts or other reliefs in accordance with law.

Significant holdings include the Court's articulation that the Consent Order "neither absolves nor incriminates the Petitioner of any offence or violation of the SEBI Act and/ or SEBI Regulations," thereby clarifying the limited scope and effect of such settlements. The Court established the principle that regulatory consent orders and civil litigation must be treated as parallel but independent processes, ensuring that neither prejudices the other. The Court's direction that the civil suit shall be "decided by the Court on their own merits, uninfluenced by the passing of the Consent Order by SEBI and/or the Orders dated 18th June, 2021 and 27th October, 2021" underscores the separation of regulatory enforcement from private civil claims.

In conclusion, the Court preserved the Petitioner's right to settle regulatory proceedings by payment and abstention, while safeguarding ongoing civil litigation rights and ensuring procedural fairness in the Respondent's handling of consent applications. The final determination allowed the Consent Order to be passed subject to agreed terms, stayed enforcement of penalty and debarment orders pending settlement, and maintained the independence of the civil suit adjudication. This balanced approach protected market integrity, regulatory authority, and litigant rights in a complex multi-forum dispute involving securities trading fraud allegations.