T. TAKANO v. SECURITIES AND EXCHANGE BOARD OF INDIA & Anr.

212 SUPREME COURT REPORTS [2022] 16 S.C.R. 212 [2022] 16 S.C.R. A B C D E F G H T. TAKANO v. SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. (Civil Appeal Nos. 487-488 of 2022) FEBRUARY 18, 2022 [DR DHANANJAYA Y CHANDRACHUD AND SANJIV KHANNA, JJ.] Securities and Exchange Board of India Act 1992 (SEBI) – ss. 11(1), 11(4), 11B, 11B(1), 11B(2), 11C and 15HA – SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003 (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 investigation report – Appellant was employed as MD and CEO in a public listed company – Show cause notice issued to the appellant for violation of the provisions of the SEBI Act, SCRA and PFUTP Regulations – Show cause notice specifically relied upon the report of the investigation and invokes, inter alia, a violation of the PFUTP Regulations by the appellant – Appellant responded to show cause notice stating that he had not received the report of the investigation conducted by SEBI – Respondent-SEBI stated that the investigation report is an ‘internal document’ which cannot be shared – Appellant reiterated the demand to receive report of the investigation conducted by SEBI – Whether an investigation report under Regulation 9 of the PFUTP Regulations must be disclosed to the person to whom a notice to show cause is issued – Held: The Board should determine such parts of the investigation report u/Regn.

9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same – The Board shall be duty-bound to provide copies of such parts of the report which concern the specific allegations which have been levelled against the appellant in the notice to show cause – It can redact information that impinges on the privacy of third parties – It cannot exercise unfettered discretion in redacting information – The institution/authority/agency can withhold disclosure of those sections of the report which deal with third party personal information and strategic information bearing upon the 212 T. TAKANO v. SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. 213 stable and orderly functioning of the securities market – Respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market – The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately.

Allowing the appeals, the Court HELD: 1.1 The appellant is unable to prove that the disclosure of the entire report is necessary for him to defend the case. The first respondent made the following arguments making a prima facie case that the disclosure of the report would violate third party rights: (i) Investigation reports contain information on the volatile nature of the market; (ii) The report also contains the personal information of various stakeholders. Disclosure will violate 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 burden by proving that the non-disclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on third- parties or confidential information on the securities market, the respondent does not have a right to withhold the disclosure of the relevant portions of the report. The first respondent can only claim non-disclosure of those sections of the report which deal with third party personal information and strategic information on the functioning of the securities market. [Para 48][255-D-E]

1.3 The Board should determine such parts of the investigation report under Regulation 9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same. It can redact information that impinges on the privacy of third parties. It cannot exercise unfettered discretion in redacting information. On the other hand, such parts of the report which are necessary for the appellant to defend his case against the action proposed to be taken against him need to be disclosed. It is needless to say that the investigating authority is duty-bound A B C D E F G H 214 SUPREME COURT REPORTS [2022] 16 S.C.R. to disclose such parts of the report to the noticee in good faith. If the investigating authority attempts to circumvent its duty by revealing 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 call for the investigation report and determine if the duty to disclose has been effectively complied with. [Para 49][255-F-H; 256-A]

1.4 The notice to show cause issued to the appellant is for violation of the provisions of the SEBI Act, SCRA and PFUTP Regulations. The show cause notice has specifically referred to what was revealed during the course of the investigation and has invoked the provisions of the PFUTP Regulations in the allegations against the appellant. Since the show cause notice has specifically relied upon the report of the investigation and invokes, inter alia, a violation of the PFUTP Regulations by the appellant, the mandate of Regulation 10 must be complied with. However, while directing that there should be a disclosure of the investigation report to the appellant, it needs to be clarified that this would not permit the appellant to demand roving inspection of the investigation report which may contain sensitive information as regards unrelated entities and transactions [Para 50][256-B, E-F]

1.5 This Court concludes that: (i)The appellant has a right to disclosure of the material relevant to the proceedings initiated against him. A deviation from the general rule of disclosure of relevant information was made in Natwar Singh based on the stage of the proceedings. It is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for deciding whether to initiate an inquiry. However, all information that is relevant to the proceedings must be disclosed in adjudication proceedings; (ii) The Board under Regulation 10 considers the investigation report submitted by the Investigating Authority under Regulation 9, and if it is satisfied with the allegations, it could issue punitive measures under Regulations 11 and 12. Therefore, the investigation report is not merely an internal document. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the A B C D E F G H T. TAKANO v.

SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. 215 violation of Regulations after considering the investigation report prepared under Regulation 9; (iii) The disclosure of material serves a three- fold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions; (iv) A focus on the institutional impact of suppression of material prioritises the process as opposed to the outcome. The direction of the Constitution Bench of this Court in Karunakar that the non-disclosure of relevant information would render the order of punishment void only if the aggrieved person is able to prove that prejudice has been caused to him due to non-disclosure is founded both on the outcome and the process; (v) The right to disclosure is not absolute. The disclosure of information may affect other third-party interests and the stability and orderly functioning of the securities market.

The respondent should prima facie establish that the disclosure of the report would affect third-party rights and the stability and orderly functioning of the securities market. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately; and (vi) Where some portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent cannot for that reason assert a privilege against disclosing any part of the report. The respondents can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning 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 of such parts of the report which concern the specific allegations which have been levelled against the appellant in the notice to show cause. However, this does not entitle the appellant to receive sensitive information regarding third parties and unrelated transactions that may form part of the investigation report. [Para 52][258-B-C] Chandrama Tewari v. Union of India (1988) 1 SCR 1102 : [1988] SCR 1102; Natwar Singh v. Director of A B C D E F G H 216 SUPREME COURT REPORTS [2022] 16 S.C.R. A B C