SEBI v Ram Kishori Gupta and Fraud, an inherent risk of investing in securities market?

All/any views expressed herein belong solely to the author and do not reflect the view/opinions of any organisation.

In Deep Dive 1, we discussed the key provisions under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) that empower the Securities and Exchange Board of India (“SEBI”) to take enforcement actions.

Recently, the Hon'ble Supreme Court in SEBI v. Ram Kishori Gupta,[1] affirmed the applicability of the principle of res judicata to the proceedings initiated by SEBI and to those before the Securities Appellate Tribunal (“SAT”).

Summary of the Case

Original SCN

This case begun in 2005 when SEBI first issued a show cause notice (“SCN”). Pursuant to this, the Whole Time Member (“WTM”) of SEBI issued an order finding that a listed company VCL had contravened the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (“PFUTP”) by publishing misleading advertisements with an aim to create an artificial interest in its shares. In an appeal thereto, the SAT remanded the matter back to SEBI and directed SEBI to issue a fresh order based on a fresh SCN.

In the meanwhile, 2 investors Ram Kishori Gupta and another had raised grievances on account of losses incurred by them on buying shares of VCL on basis of the misleading advertisements. They prayed for directions from SAT to SEBI regarding compensation with interest. However, SAT, noting that Section 11(2) does not entail within its scope the power to direct compensation, rejected such plea vide order dated April 30, 2013. It also highlighted that this aspect needed to be looked into by a civil court of competent jurisdiction.

Though, SAT did direct SEBI to investigate into the complaints and to inform the two investors of the outcome of its investigation. Further, SAT directed that in case SEBI found VCL guilty of playing fraud on investors, it could consider directing the concerned entity or VCL to refund the actual amount spent by the 2 investors on purchasing the shares in question with appropriate interest and as per law.

Upon a review application being moved by SEBI, SAT clarified that “Similarly, we also clarify that while observing that consideration and imposition of penalties or the direction to a company to refund an amount collected by that company against the law is different matter and falls within the domain of SEBI, we have directed only consideration of such an issue, if any, as per the provisions of law, and only if the circumstances so require. To this extent, the abovesaid order of this Tribunal dated April 30, 2013 in appeal no. 207 of 2012 stands clarified.”

Fresh SCN

Thereafter, SEBI issued the fresh SCN and passed an order dated July 31, 2014 (“Final Order”) whereby it debarred and restrained VCL and the concerned promoters and directors. It was found that VCL had spread misleading information to public. It was also found that some promoters and directors were involved in allotting shares to 15 companies which were connected to VCL and these 15 companies were provided funds by VCL, which then sold the shares in the open market. The demat accounts of the allottees was directed to be frozen as was the transfer of shares.

The 2 investors filed a Miscellaneous Application before SAT with the grievance that SEBI had failed to comply with the directions issue vide Order dated April 30, 2013. Consequently, SEBI informed SAT that it would pass an additional order dealing with the same.

SEBI then issued the said additional order on December 16, 2014, directing the investigation department to assess the possibility of quantifying the ill-gotten gains for the purposes of disgorgement. The Investigation Department concluded that disgorgement would not be possible as the promoters and others who had been preferentially allotted the shares had not made profit. Consequently, restitution was found impossible in the absence of the possibility of disgorgement.

After giving due opportunity of hearing to all concerned, the WTM by an Order dated April 01, 2016, noted that SEBI failed to consider the observations in the order dated December 16, 2014 and failed to calculate the losses. SEBI was directed thereby to initiate disgorgement proceedings.

Disgorgement Proceedings

Thereafter, SEBI issued a fresh SCN to the same noticees asking them to show cause as to why directions on disgorgement must not be issued against them. The WTM Order dated September 28, 2018 in this regard, directed disgorgement of Rs. 4,55,91,232/- along with interest thereon @ 10% p.a. from August 2002 (“Disgorgement Order”).

However, the WTM held that restitution in this case was outside the scope of SEBI and that it was infeasible because (a) fraud committed had not only affected the two investors, but a large number of investors so it would be unfair to only compensate them; (b) shares held by them were not directly issued to them by VCL, but were purchased by them in the secondary market; (c) the apparent fact that investment in the securities market carried inherent risks, which an investor would be expected to factor in.

Appeals against the Disgorgement Order

Several appeals were filed against the Disgorgement Order. In one of the appeals, by an order dated August 2, 2019, SAT expressed disagreement with the WTM’s reasoning and opined that the spirit of the order dated April 30, 2013 was to the effect that the 2 investors deserved to be compensated in case VCL was found to have violated securities laws. As such the violation was conclusively proven by the order dated September 28, 2018. Thus, SAT directed SEBI to issue compensation to the extent of around 18 Lakhs, being the amount, they originally invested, either from the disgorged sum or from its IPEF.

Observations of SAT & Supreme Court

SAT disposed off the remaining appeals filed in this matter, on the ground that the Disgorgement Order was barred by the principle of res judicata, as the fresh SCNs had already culminated in the Final Order. SEBI had attempted to argue that the principle does not apply to its proceedings as it is exempted from the procedure laid down in the Civil Procedure Code, 1908 (“CPC”), on account of Section 15U(1) of the SEBI Act.

SAT and eventually the Supreme Court also rejected SEBI’s contentions and noted that though SAT is not bound by the procedure laid down in the CPC, per Section 15U(1) itself, it is guided by the principles of natural justice. It also noted that S. 15U(1) does not cover proceedings before SEBI and WTM under SEBI and thus, SEBI cannot claim exemption from the applicability of the principle of res judicata.

Supreme Court emphasized that at the time of passing the Final Order, the WTM had the discretion to issue directions for disgorgement, but felt it sufficient to provide lesser penalties and it was not open for SEBI to re-open the issue. Accordingly, the Supreme Court observed that it was not open to SEBI to claim that it could pass multiple final orders on the same cause of action. It also observed that it was not for SAT to interpret its earlier order dated April 30, 2013 and to give it a different colour, contrary to its plain meaning.

This case naturally brings to the fore the real issues of multiplicity of proceedings and their implications. It is a significant reminder of the sanctity needed to be attached to the finality of a judgment or final order, for SEBI. An off-headline remark that caught my eye, and made me think, below.

From an investor protection lens, a question arises: Is fraud an inherent market risk?

Two references that on the first reading suggested that fraudulent and misleading advertisements are inherent risks of investing in the securities market. Though, the Supreme Court did not comment on such references, they seem bizarre.

• Para 16 of the order highlighted that the WTM opined that a direction to compensate 2 complaining investors for their losses against VCL was infeasible. The said WTM Order noted that “Further, while the complainants may have suffered losses in this matter, they cannot deny the fact that any investment in the securities market carries inherent risks, which an investor is expected to factor in”

• At para 18, the SAT’s order dated August 2, 2019 was being summarized wherein it was stated that “The Tribunal directed that no interest had to be paid thereon as they had to bear part of the risk of investing in the securities market.”

These were mere passing references, and they were not the sole reasons for the rejection of pleas for compensation or restitution to the 2 investors. However, it is strange to see language suggesting that investors must factor in fraud as an inherent risk of investing in a (supposedly) well-regulated securities market. More so, when it has been established by the WTM Order itself that the advertisements were indeed fraudulent and misleading.[2]

Taking for instance the example of mutual fund advertisements’ disclaimer, viz. Mutual funds are subject to market risks. Investors must read all scheme related documents carefully before investing. Say, investor read the scheme related documents carefully and chose to invest. It would be strange to suggest that if the scheme related documents misrepresent information or are intentionally misleading, the investor must bear the losses incurred on its account.

If such a supposition were to be considered, the whole point of law and regulation would lose its meaning. In a well-regulated securities market, it cannot be said that fraud and unfair trade practices are inherent risks of investing in securities market. That would deflate the purpose of PFUTP Regulations.

Another example would be the BASEL Framework. The Basel Committee on Banking Supervision defines ‘market risk’ in context of banking as “the risk of losses arising from movement in market prices”.[3] In fact, even the NISM explains that primary risks of investing in the securities market include the risk of price fluctuations, credit risks, illiquidity and inflation.

The need for this discourse is also more pronounced in the present context, as it deals with PFUTP which in turn deals with market abuse, which erodes investor confidence and impairs economic growth.[4] The Supreme Court in N. Narayanan v. Adjudicating Officer,[5] had gone on to state that “Prevention of market abuse and preservation of market integrity is the hallmark of securities law. Section 12A r/w Regulation 3 and 4 of the 2003 Regulations essentially intended to preserve ‘market integrity’ and to prevent ‘market abuse’.”

Thus, SEBI is dutybound to prevent instances of market abuse which includes fraud which includes misleading advertisements meant to induce public to act, in the securities market. To suggest that fraud is inherent risk of investing in the securities market thus simply sounds odd.

Lastly, it is no doubt clear that in Indian context, as in the case of most jurisdictions that have embraced the concept of disgorgement, it is viewed not as equitable remedy but as a punitive measure. The case at hand also highlights that perhaps this may be a good time as any, to provide better transparent and clear indication to the investors on how restitution works.[6]

[1] C.A. 7941 of 2019, dated April 7, 2025.

[2] This is in no way an attempt at suggesting that direction of restitution ought to have been granted.

[3] https://www.bis.org/basel_framework/chapter/MAR/11.htm

[4] Report of the Fair Market Conduct Committee under the Chairmanship of TK Viswanathan (August 9, 2018).

[5] 2013 12 SCC 152.

[6] At the moment, Regulation 5(3) of the SEBI (Investor Protection and Education Fund) Regulations, 2009 reads:

“the amounts disgorged and credited to the Fund…and the interest accrued thereon shall, in cases where the Board deems fit to make restitution to eligible and identifiable investors who have suffered losses resulted from violation of securities laws….be utilised only for the purposes of such restitution or reward….”