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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7941 OF 2019

SECURITIES AND EXCHANGE BOARD OF INDIA ....... Appellant

VERSUS

RAM KISHORI GUPTA & ANR. ........ Respondents

with

CIVIL APPEAL NOS. 1649-1652 OF 2022

and

CIVIL APPEAL NO. ................ OF 2025

(@ Diary No. 42829 OF 2019)

JUDGMENT

SANJAY KUMAR, J

1. Delay in the filing of Civil Appeal (Diary) No. 42829 of 2019 is condoned.

2. Considering the twists and turns that this litigation has taken since its

inception in 2005, these appeals put to test the saying that the scales of justice

may be slow to tip but when they do, let them tip in favour of what is right

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.

3. M/s. Vital Communications Limited, New Delhi (hereinafter, ‘VCL’), is a

public limited company whose shares were listed on the Bombay Stock

Exchange, the Delhi Stock Exchange and the National Stock Exchange. While

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Nancy Taylor Rosenberg, American author.

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so, the Securities and Exchange Board of India (hereinafter, ‘SEBI’) issued

show-cause notice dated 24.05.2005 to VCL and its promoters and directors

under Section 11(4) read with Sections 11 & 11B of the Securities and

Exchange Board of India Act, 1992 (for brevity, ‘the Act of 1992’), in relation to

alleged misleading advertisements issued by VCL with regard to buyback of its

shares, issue of bonus shares and preferential issue of shares within 30 days.

Details of the advertisements published in the newspapers between 27

th

May,

2002 and 24

th

June, 2002 were furnished therein and these advertisements

were stated to be a ploy to mislead investors by benchmarking the price of the

scrip at ₹30/-, when the share was trading at around ₹3/- to ₹12/-. SEBI further

stated that its investigation had revealed that VCL had allotted 72 lakh equity

shares of ₹10/- each at a premium of ₹2.50/-, amounting to ₹9,00,00,000/-, on

14.12.1999 to 15 companies which had all given the same address at the time

of opening their demat accounts. That apart, these 15 companies were shown

as suppliers of VCL. VCL’s funds were indirectly used for purchase of its own

shares, inasmuch as it gave advances to M/s. Anupama Communications Pvt.

Ltd. and M/s. CBS Systems Pvt. Ltd. which, in turn, gave trade advances to the

15 companies. Thereby, the same money came back to VCL as share

application money. It was also alleged that, between 2

nd

May, 2002 and 31

st

July, 2002, 71.14 lakh shares were sold by promoter-related entities in the

market, taking advantage of the artificial interest created by the misleading

advertisements. SEBI asserted that the chain of events in respect of the

buyback of shares, bonus issue and preferential allotment by VCL, along with

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the unwarranted advertisements, etc., suggested an orchestrated ploy on the

part of VCL and its promoters to create an artificial demand for the shares of

VCL and induce innocent investors into purchasing shares so as to absorb

sales by the promoter-related entities. VCL and its promoters and directors

were alleged to have violated Regulations 3, 4, 5(1) & 6(a) of the Securities

and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Markets) Regulations, 1995, along with Section

77 of the Companies Act, 1956. SEBI, therefore, called upon the addresses of

the notice to show cause as to why suitable directions, including a direction to

restrain all of them from accessing the securities market, and prohibiting them

from buying, selling or dealing in securities for a suitable period, should not be

passed under Section 11(4) read with Sections 11 and 11B of the Act of 1992.

4. Thereafter, SEBI, speaking through a Whole-Time Member (WTM),

passed order dated 20.02.2008 in exercise of power under Section 11B of the

Act of 1992 and Regulation 11 of the aforestated Regulations of 1995. SEBI

dropped the charges against Vinay Talwar, former Chairman-cum-Managing

Director of VCL, and imposed a lesser penalty on Shubha Jhindal, Director of

VCL, whereby she was restrained from accessing the securities market and

prohibited from buying, selling and dealing in securities in any manner for a

period of six months. As regards the remaining noticees, i.e., VCL and its other

directors and promoters, SEBI restrained them from accessing the securities

market and prohibited them from buying, selling and dealing in securities in any

manner for a period of two years.

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5. Aggrieved by this order, VCL and its promoters and directors filed

Appeal Nos. 61, 65 and 81 of 2008 before the Securities Appellate Tribunal,

Mumbai (for brevity, ‘the Tribunal’). By common order dated 28.08.2008, the

Tribunal allowed their appeals.

The Tribunal held that the impugned order

passed by SEBI failed to deal with the issues properly and set aside the order

dated 20.02.2008. The matter was remanded to enable SEBI to issue fresh

show-cause notices, afford an opportunity of hearing to the noticees and to

pass an order in accordance with law.

6. Parallelly, one Ram Kishori Gupta and her husband, Harishchandra

Gupta, who allegedly purchased shares of VCL on the basis of the misleading

advertisements, separately filed Appeal No. 207 of 2012 before the Tribunal.

They had purchased 1,71,773 shares of VCL from the Bombay Stock

Exchange between 23.05.2002 and 25.06.2002. They claimed to have suffered

huge losses and approached the forum constituted under the Consumer

Protection Act, 1986, for redressal of their grievance. However, by order dated

17.01.2010, the National Consumer Disputes Redressal Commission, New

Delhi, held that their complaint would not fall within the purview of the

Consumer Protection Act, 1986, and left it open to them to approach SEBI.

They, thereupon, preferred a petition on 21.08.2010 to SEBI, which was

forwarded to the Bombay Stock Exchange, under letter dated 13.09.2010.

However, SEBI finally declined their request for grant of compensation. In the

meanwhile, as the order dated 20.02.2008 passed by SEBI had been set aside

by the Tribunal on 28.08.2008, SEBI was again seized of the matter upon

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remand. They, therefore, sought a direction to SEBI to pay them compensation

of ₹51,53,190/-, at the rate of ₹30/- per share. Alternatively, they sought such

compensation after deducting ₹4,41,767/-, being the proceeds of the shares

sold by them in May/June, 2005, at the average price of ₹2.37 per share.

7. This appeal was disposed of by the Tribunal, vide order dated

30.04.2013. The Tribunal found that there was no directive or mandate in any

of the measures under Section 11(2) of the Act of 1992, empowering SEBI to

undertake the task of considering and granting compensation to investors for

the losses that they may have suffered due to misleading or fraudulent

advertisements by a company. The Tribunal, therefore, concluded that the

prayer of the appellants for a direction to SEBI to grant them compensation of

₹51,53,190/- was totally misconceived and rejected the same. The Tribunal

further observed that this aspect needed to be looked into by a Civil Court of

competent jurisdiction and not by SEBI under the Act of 1992. The Tribunal

directed SEBI to look into the appellants’ complaint as to the alleged misleading

and fraudulent advertisements issued by VCL. The outcome of such

investigation was directed to be conveyed to the appellants on completion

thereof. The Tribunal further 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 appellants on purchasing the

shares in question with appropriate interest and as per law.

8. Review Application No. 8 of 2013 was moved by SEBI in Appeal No.

207 of 2012 filed by the aforestated two investors. This review petition was

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disposed of by the Tribunal on 19.12.2013. Therein, the Tribunal clarified as

follows:

‘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.’

9. While so, pursuant to the remand by the Tribunal, fresh show-cause

notices dated 06.07.2012 and 12.07.2012 were issued by SEBI. The noticees

therein, including VCL, were 24 entities in all. Thereafter, through a WTM, SEBI

passed order dated 31.07.2014 in exercise of power under Sections 11 and

11B of the Act of 1992, read with Regulation 11 of the Securities and Exchange

Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003, and Regulation 44 of the Securities and

Exchange Board of India (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997. In effect, SEBI found therein that VCL had spread

misleading information to the public. It was opined that some of the 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 WTM, in exercise of power

conferred by Section 19 read with Sections 11 and 11B of the Act of 1992 and

the Regulations, cited supra, restrained the 24 noticees from accessing the

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securities market and prohibited them from buying, selling or otherwise dealing

in securities, directly or indirectly or being associated with the securities market

in any manner whatsoever, for the periods specified against each of them. The

WTM further directed that the preferentially allotted shares of VCL, lying in the

demat accounts of the allottees, shall remain frozen and VCL was not to give

effect to the transfer of any shares acquired and held by the allottees in the

preferential allotment dated 14.12.1999. The WTM also restrained the

preferential allottees from exercising voting rights or other rights attached to

the shares acquired and held by them in such preferential allotment.

10. After the passing of this order, Ram Kishori Gupta and Harishchandra

Gupta filed Miscellaneous Application No. 145 of 2014 in Appeal No. 207 of

2012. Their grievance therein was that, while passing order dated 31.07.2014,

SEBI had failed to comply with the directions given in the Tribunal’s order dated

30.04.2013 in their Appeal No. 207 of 2012. Thereupon, the learned counsel

appearing for SEBI informed the Tribunal that SEBI would pass an additional

order dealing with the directions set out in the order dated 30.04.2013 passed

by the Tribunal. The Tribunal, vide order dated 17.11.2014, permitted SEBI to

do so within a time frame, after giving a personal hearing to Ram Kishori Gupta

and Harishchandra Gupta.

11. In consequence, a WTM of SEBI passed order dated 16.12.2014.

Therein, he noted the grievance of Ram Kishori Gupta and Harishchandra

Gupta to the effect that they had invested ₹18,25,041/- in the purchase of VCL’s

shares, believing its false advertisements, and suffered a loss of ₹13,83,274/-.

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He also took note of their prayer to direct VCL to refund the actual amount

spent by them on purchasing the shares in question along with appropriate

interest and penalties. He found merit in their argument that SEBI was under a

mandate to protect the interest of investors and should, therefore, take

appropriate measures to exercise such mandate. He also opined that no

person could be allowed unjust enrichment by way of wrongful gain made on

account of fraudulent, manipulative and unfair trade practices, but noted that,

in the instant case, the ill-gotten gains, if any, made by the entities mentioned

in the order dated 31.07.2014 had not been quantified during the investigation

and, therefore, the same was not considered in the said order. He concluded

that this was a fit case to examine the feasibility of quantifying the ill-gotten

gains, if any, and disgorgement of the same and, thereafter, consider restitution

to the complainants in accordance with the provisions of the Act of 1992 and

the Regulations framed thereunder. He noted that, insofar as the relief of

compensation was concerned, it could only be given through the process of

disgorgement, if justified by the facts and circumstances of the case. He,

accordingly, directed the Investigation Department of SEBI to examine the

feasibility of quantifying the ill-gotten gains, if any, and issue requisite notice(s)

for disgorgement of the same within a time frame. Lastly, in such an event, he

directed SEBI to consider restitution in the case of the complainants in

accordance with the provisions of the Act of 1992 and the Regulations framed

thereunder. This order was purportedly passed in exercise of power under

Sections 11, 11B and 19 of the Act of the 1992.

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12. Significantly, the aforestated order dated 16.12.2014 failed to take into

account the earlier order dated 30.04.2013 passed by the Tribunal in Appeal

No. 207 of 2012, which categorically negated the prayer of Ram Kishori Gupta

and Harishchandra Gupta to direct SEBI to grant them compensation. Therein,

the Tribunal had clearly recorded that there is no mandate in law requiring SEBI

to compensate an investor who suffered loss on account of trading in shares,

as it would be in the nature of a claim for damages and would require to be

looked into by a Civil Court of competent jurisdiction. It was only if VCL was

found guilty of playing fraud on investors, that SEBI was required to consider

directing the concerned entity or VCL to refund the amount spent by Ram

Kishori Gupta and Harishchandra Gupta on the purchase of their shares along

with appropriate interest. The clarificatory order dated 19.12.2013 passed by

the Tribunal thereafter in the review application filed by SEBI puts it beyond the

realm of doubt that SEBI was to ‘consider’ directing VCL to refund the amount

collected by it in violation of law, only if the circumstances so required. In effect,

SEBI’s WTM, while passing the order dated 16.12.2014, virtually reviewed the

earlier orders dated 30.04.2013 and 19.12.2013 passed by the Tribunal in

Appeal No. 207 of 2012.

13. However, acting upon the directions in the order dated 16.12.2014, the

Investigation Department of SEBI conducted an enquiry and addressed Report

dated 15.06.2015 to Ram Kishori Gupta and Harishchandra Gupta. Therein, it

stated that, though VCL had published misleading advertisements, neither the

promoter group nor the preferential allottees had made any gain out of it and,

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in the absence thereof, disgorgement was not possible. In consequence, it

concluded that, in the absence of any disgorgement, SEBI could not order

refund of their monies. Stating so, the Investigation Team ended by requesting

Ram Kishori Gupta and Harishchandra Gupta to inform SEBI if they wished to

avail a personal hearing in the matter before the WTM.

14. Aggrieved by the Report dated 15.06.2015, Ram Kishori Gupta and

Harishchandra Gupta again approached the Tribunal by way of Appeal No. 189

of 2015. However, on 27.08.2015, this appeal was disposed of by the Tribunal

as withdrawn, noting that the appellants were afforded an opportunity of

hearing before a WTM of SEBI in connection with the Report dated 15.06.2015.

The WTM of SEBI was, accordingly, directed to pass appropriate orders on

merits, after hearing the appellants, as expeditiously as possible.

15. Pursuant thereto, a WTM of SEBI, after giving due opportunity of

hearing to all concerned, passed order dated 01.04.2016. Therein, noting the

claim of Ram Kishori Gupta and Harishchandra Gupta that they had suffered a

loss of ₹51,53,190/-, the WTM opined that SEBI had failed to consider the

observations in the order dated 16.12.2014 and failed to calculate the losses

caused by the promoters/directors/concerned entities, as mentioned in the

earlier order dated 31.07.2014. He, accordingly, reviewed the entire matter in

the light of the order dated 31.07.2014 and the investigation into the subject

issue and opined that the acts of fraud, highlighted in the order dated

31.07.2014, threatened market integrity and the orderly development of the

market, calling for regulatory intervention to protect the interest of investors. He

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further opined that these entities could not be allowed to unjustly enrich

themselves at the cost of investors. He noted that SEBI, while determining the

ill-gotten gains in the scrip of VCL, proceeded on a hypothesis different from

the findings in the order dated 31.07.2014 passed earlier and, in view of the

above, as the ill-gotten gains were still to be arrived at, he opined that it would

be appropriate to direct SEBI to look into the exact figure of ill-gotten gains by

VCL, its promoters/directors/preferential allottees, Master Finlease Pvt. Ltd.

(MFL), an entity owned by Vijay Jhindal, a director of VCL, and others.

Thereafter, SEBI was directed to initiate disgorgement proceedings against

those who perpetrated fraud on the investors. He further directed that it would

be appropriate that the claims of Ram Kishori Gupta and Harishchandra Gupta

be taken on record and be considered in accordance with the provisions of the

Act of 1992 and the Regulations framed thereunder on disgorgement of the ill-

gotten gains.

16. Consequential to the above order dated 01.04.2016, SEBI issued

show-cause notice dated 19.01.2018 to the 24 entities/noticees named in the

earlier order dated 31.07.2014. They were called upon to show cause as to

why appropriate directions for disgorgement of their ill-gotten gains should not

be issued against them under Section 11B of the Act of 1992. SEBI then passed

order dated 28.09.2018. This order was passed in exercise of power under

Sections 11 and 11B of the Act of 1992. Thereby, Noticee Nos. 1,2,3,5 and 7 to

24, being VCL, its directors and other entities, were held jointly and severally

liable to disgorge their unlawful gains of ₹4,55,91,232/-. They were also

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directed to pay interest thereon @ 10% per annum from 01.08.2002 till the date

of payment. The disgorgement was to be made, with applicable interest, within

45 days from the date of receipt of the order and if they failed to do so, they

were restrained from buying, selling or dealing in the securities market in any

manner whatsoever or accessing the securities market directly or indirectly for

a period of 5 years. Insofar as the issue of restitution is concerned, SEBI’s

WTM noted the decision in the earlier order dated 30.04.2013 passed by the

Tribunal and held that restitution of the losses suffered by Ram Kishori Gupta

and Harishchandra Gupta was outside the scope of SEBI. Referring to the

observation of the Tribunal therein that SEBI may pass a direction to

compensate their losses either against VCL or the entity concerned, the WTM

opined that such a direction was not feasible for a variety of reasons. The fraud

committed had not only affected Ram Kishori Gupta and Harishchandra Gupta

but also a large number of investors who had traded during the relevant time;

and the shares held by the complainants were not directly issued to them by

VCL but were purchased by them in the secondary market and it would be

unfair to only compensate them selectively, as there would be many others who

suffered similar losses by trading in the scrip. Lastly, the complainants could

not deny the fact that investment in the securities market carried inherent risks,

which an investor would be expected to factor in. Considering these

circumstances in totality, the WTM deemed it appropriate not to issue any

direction regarding restitution in favour of Ram Kishori Gupta and

Harishchandra Gupta.

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17. Several appeals came to be filed before the Tribunal against the

aforestated order dated 28.09.2018 passed by the WTM of SEBI. Ram Kishori

Gupta and Harishchandra Gupta filed Appeal No. 44 of 2019, aggrieved by the

denial of restitution, while Appeal Nos. 318 of 2019, 321 of 2019, 444 of 2019

and 442 of 2021 were filed by VCL and others against the direction for

disgorgement. Surprisingly, the Tribunal chose to separate the appeals and did

not adjudicate them jointly. Appeal No. 44 of 2019, filed by Ram Kishori Gupta

and Harishchandra Gupta, was independently disposed of by the Tribunal, vide

order dated 02.08.2019, and Appeal Nos. 318 of 2019, 321 of 2019, 444 of

2019 and 442 of 2021, filed in relation to disgorgement, were disposed of

separately over two years thereafter, by common order dated 20.12.2021.

18. By the order dated 02.08.2019, the Tribunal disagreed with the

reasoning of the WTM of SEBI in his order dated 28.09.2018 and opined that,

the spirit of the order dated 30.04.2013 was to the effect that Ram Kishori

Gupta and Harishchandra Gupta deserved to be compensated in case VCL

was found to have violated securities laws. As such violation by VCL had been

conclusively proved by the order dated 28.09.2018, the Tribunal directed SEBI

to compensate them to the extent of ₹18,25,041/-, being the amount that they

had invested in the shares of VCL in the year 2002. 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. SEBI was directed to pay this compensation,

either from the amount disgorged from VCL and the connected entities or from

its Investor Protection and Education Fund, within a time frame.

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Challenging the above order dated 02.08.2019 passed by the Tribunal

in Appeal No. 44 of 2019, SEBI filed Civil Appeal No. 7941 of 2019 before this

Court. While issuing notice therein on 18.10.2019, this Court stayed the

operation and implementation of the impugned judgment dated 02.08.2019.

Aggrieved by the denial of interest therein on the amount directed to be

refunded to them, Ram Kishori Gupta and Harishchandra Gupta filed Civil

Appeal (Diary) No. 42829 of 2019.

19. Two years later, by the order dated 20.12.2021, the Tribunal disposed

of the other appeals. Therein, the Tribunal noted the contention of VCL and the

other appellants that the disgorgement order dated 28.09.2018 was barred by

the principle of res judicata. This argument was founded on the premise that

the show-cause notices dated 06.07.2012 and 12.07.2012 had already

culminated in the final order dated 31.07.2014, whereby they had been barred

from accessing the securities market for specified periods and, as this order

had attained finality, there was no cause for the SEBI to pass a fresh order for

disgorgement pursuant to the very same notices under the very same

provisions, i.e., Sections 11 and 11B of the Act of 1992. The Tribunal then noted

its earlier order dated 30.04.2013, passed in the context of the prayer of Ram

Kishori Gupta and Harishchandra Gupta, and observed that no direction had

been issued to SEBI therein to consider the feasibility of quantifying ill-gotten

gains or to initiate proceedings for disgorgement against the appellants and the

other entities. Ergo, the Tribunal concluded that the direction, in SEBI’s order

dated 16.12.2014, to the Investigation Department, to examine the feasibility

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of quantifying ill-gotten gains and to issue requisite notices for disgorgement,

was wholly without jurisdiction. The Tribunal, accordingly, agreed with the

appellants that no fresh proceedings on the same cause of action could have

been initiated under Sections 11 and 11B of the Act of 1992 after the order

dated 31.07.2014 attained finality. The order dated 28.09.2018 was, therefore,

held to be barred by the principle of res judicata.

20. The Tribunal also rejected the contention of SEBI that the principle of

res judicata in Section 11 of the Code of Civil Procedure, 1908, would not apply

to proceedings initiated under the Act of 1992 and held that the finality attaching

to a judgment would be imperative and great sanctity needed to be attached

thereto. In consequence, the Tribunal held that it would not be permissible for

SEBI to disturb such finality by passing a fresh order on the very same cause

of action. The principle of res judicata was, therefore, held to be fully applicable

in the instant case, notwithstanding Section 15U(1) of the Act of 1992, which

left it open to the Tribunal to be guided by the principles of natural justice and

to regulate its own procedure, as it was not bound by the procedure laid down

by the Code of Civil Procedure, 1908. The appeals were, accordingly, allowed

with costs of ₹2,00,000/- to be paid to each of the appellants.

The common judgment dated 20.12.2021 passed by the Tribunal was

assailed by SEBI, by way of Civil Appeal Nos. 1649-1652 of 2022.

21. At this stage, we may note that the Act of 1992 was promulgated for

establishment of a Board to protect the interests of investors in securities and

to promote the development of, and to regulate, the securities market and for

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matters connected therewith or incidental thereto. Section 3 thereof deals with

the establishment of SEBI, a body corporate having perpetual succession and

a common seal. Section 4 details the composition of SEBI and provides that it

shall consist of a Chairman, two members from the concerned Ministry, one

member from the Reserve Bank, and five other members, of whom at least

three shall be whole-time members, all to be appointed by the Central

Government. The powers and functions of SEBI are set out in Chapter IV of

the Act of 1992, comprising Sections 11, 11A, 11AA, 11B, 11C and 11D.

Section 11(1) provides that it shall be the duty of SEBI to protect the interests

of investors in securities and to promote the development of, and to regulate,

the securities market, by such measures as it thinks fit. Section 11(2) details

such measures under clauses (a) to (m). Section 11(4) details some more

measures that can be taken by SEBI, either pending investigation or enquiry

or on completion of such investigation or enquiry. Section 11A of the Act of 1992

empowers SEBI to specify, by way of Regulations, the matters relating to issue

of capital, transfer of securities and others matters incidental thereto; and the

manner in which such matters shall be disclosed by companies. SEBI is also

empowered under Section 11A(b), by general or special orders, to prohibit any

company from issuing a prospectus, offer document or advertisements

soliciting money from public for the issue of securities; and specify the

conditions subject to which the prospectus, offer document or advertisement,

if not prohibited, may be issued. Section 11B of the Act of 1992 empowers SEBI

to issue directions and levy penalty. It presently reads as under:

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‘11B. Power to issue directions and levy penalty – (1) Save as

otherwise provided in section 11, if after making or causing to be made an

enquiry the Board is satisfied that it is necessary-

(i) in the interest of investors, or orderly development of securities

market; or

(ii) to prevent the affairs of any intermediary or other persons referred to

in section 12 being conducted in a manner detrimental to the interests

of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person,

it may issue such directions -

(a) to any person or class of persons referred to in section 12, or associated

with the securities market; or

(b) to any company in respect of matters specified in section 11A,

as may be appropriate in the interests of investors in securities and the

securities market.

(2) Without prejudice to the provisions contained in sub -section (1),

sub-section (4A) of section 11 and section 15- I, the Board may, by an order,

for reasons to be recorded in writing, levy penalty under sections 15A, 15B,

15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding

an inquiry in the prescribed manner.

Explanation.- For the removal of doubts, it is hereby declared that the power

to issue directions under this section shall include and always be deemed

to have been included the power to direct any person, who made profit or

averted loss by indulging in any transaction or activity in contravention of

the provisions of this Act or regulations made thereunder, to disgorge an

amount equivalent to the wrongful gain made or loss averted by such

contravention.’

However, at the relevant point of time when the show-cause notices were

issued by SEBI in the year 2012, Section 11B of the Act of 1992 read thus:

‘11B. Power to issue directions – Save as otherwise provided in

section 11, if after making or causing to be made an enquiry the Board is

satisfied that it is necessary-

(iv) in the interest of investors, or orderly development of securities

market; or

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(v) to prevent the affairs of any intermediary or other persons referred to

in section 12 being conducted in a manner detrimental to the interests

of investors of securities market; or

(vi) to secure the proper management of any such intermediary or person,

it may issue such directions -

(a) to any person or class of persons referred to in section 12, or associated

with the securities market; or

(b) to any company in respect of matters specified in section 11A,

as may be appropriate in the interests of investors in securities and the

securities market.

22. The scheme of Section 11B of the Act of 1992 is that SEBI, in the

interest of investors in securities and the securities market, may make or cause

to be made an enquiry in that regard and, if it is satisfied that it is necessary to

do so, SEBI may issue such directions, be it to a person or a class of persons,

referred to in Section 12, or associated with the securities markets or to any

company in respect of matters specified in Section 11A, as may be appropriate

in the interest of investors in securities and the securities market. The

Explanation, which was inserted therein with effect from 18.07.2013, makes it

clear for the removal of doubts that the power to issue directions under Section

11B shall include and always be deemed to have included the power to direct

disgorgement of an amount equivalent to the wrongful gain made or loss

averted by indulging in any transaction or activity in contravention of the

provisions of the Act of 1992 or the Regulations made thereunder. Section 11(5)

of the Act of 1992, which was also inserted in the statute book with effect from

18.07.2013, provides that disgorgement may be affected pursuant to a

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direction issued under Section 11B of the Act of 1992 or the provisions of allied

enactments, such as the Securities Contracts (Regulation) Act, 1956, or the

Depositories Act, 1996, etc, and the amount disgorged pursuant to such

direction shall be credited to the Investor Protection and Education Fund

established by SEBI and shall be utilised by it in accordance with the

Regulations made under the Act of 1992. Section 19 is titled ‘Delegation’ and

states that SEBI may, by general or special order in writing, delegate to any of

its members, officers or any other persons, subject to such conditions as may

be specified in the order, such of its powers and functions as it may deem

necessary.

23. It is in this statutory context, that the exercise of power by SEBI in the

case on hand, at different points of time, requires to be examined. The

chronology of events, set out hereinbefore, demonstrates that the first

show-cause notice issued on 24.05.2005 by SEBI to VCL and others resulted

in the order dated 20.02.2008. However, this order was invalidated by the Tribunal on 28.08.2008, requiring SEBI to issue notices afresh and decide the matter again. This remand resulted in the order dated 31.07.2014 passed by

SEBI. Notably, this order was passed in exercise of power under Sections 11 and 11B of the Act of 1992 read with relevant Regulations. Conscious of the scope of such power, the WTM of SEBI deemed it sufficient to punish the

entities concerned, including VCL, by only directing that they should not access

the securities market and stood prohibited from buying, selling or otherwise

dealing in securities, directly or indirectly, or being associated with the

20

securities market, for the periods specified as against each of them. Out of the

24 entities so penalized, Shubha Jhindal was visited with such restraint/

prohibition for one year while the remaining 23 entities had to suffer such

punishment for 3 years each. In addition, the preferentially allotted shares of

VCL were directed to remain frozen with consequential restraints as regards

transfer and exercise of voting rights. Perusal of the said order reflects that the

WTM was well aware of the illegal and fraudulent actions of VCL, its promoters,

directors and other entities, and the financial implications thereof. Despite the

same, no order was passed by him in relation to disgorgement of any ill-gotten

gains made by them as a consequence of such transgressio ns. The

Explanation, inserted in Section 11B thereafter, puts it beyond the pale of doubt

that the power to direct disgorgement was deemed have always been included

in the general power of issuing directions thereunder.

24. In any event, it was only owing to Ram Kishori Gupta’s and

Harishchandra Gupta’s complaint that the order dated 31.07.2014 did not take

into account the directions in the earlier order dated 30.04.2013 in their Appeal

No. 207 of 2012, that the Tribunal passed the order dated 17.11.2014 recording

the concession of the learned counsel for SEBI that the WTM would pass an

additional order dealing with such directions. This, in turn, led to the passing of

a fresh order by SEBI on 16.12.2014, which reopened the exercise undertaken

earlier that had culminated in the order dated 31.07.2014. This order

completely ignored the negation by the Tribunal, in the earlier order dated

30.04.2013, of the prayer of Ram Kishori Gupta and Harishchandra Gupta

21

against SEBI. The case then proceeded on a tangent and in a different direction

altogether, resulting in the order dated 29.08.2018 passed under Sections 11

and 11B of the Act of 1992, visiting disgorgement and, in the event of their

default, fresh and longer restraints/prohibitions upon VCL and the others.

25. When the earlier order dated 31.07.2014, on the same cause of action

and based on the very same show-cause notices, remained intact and attained

finality, as it was neither challenged nor set aside, the later order dated

29.08.2018 could not have been passed, supplementing it with additional

directions. Be it noted that by the time this order came to be passed, the

penalties of restraint and prohibition visited upon the 24 entities, under the

earlier order dated 31.07.2014, had already been suffered by them. The order

had, therefore, worked itself out. While so, 22 out of the 24 entities were again

visited with fresh penalties in the form of disgorgement coupled with much

longer restraints/prohibitions, in the event of default in payment. Imposition of

the penalty of disgorgement was very much within the ambit and scope of SEBI

even at the time the initial order dated 31.07.2014 was passed but, in his

wisdom, the WTM of SEBI did not choose to resort to it. Once the said order

attained finality and was fully given effect to, passing of a fresh order once

again, on the very same cause of action, trampled upon and reversed the

finality that had already attached to the said order.

26. No doubt, the illegalities committed by VCL and the other entities had

financial implications which may have warranted a direction for disgorgement,

but once the SEBI did not choose to issue such a direction in the first instance

22

and was satisfied with lesser penalties in its order dated 31.07.2014, the

question of permitting SEBI, without just cause, to revisit the said final order

and pass fresh directions does not arise. Doing so would be violative of public

policy, which attaches great value and sanctity to the finality of judicial

determinations and the principle of res judicata .

27. Though it was contended by SEBI that the principle of res judicata in

Section 11 of the Code of Civil Procedure, 1908, cannot be imported into these

proceedings, due to Section 15U(1) of the Act of 1992, we are not persuaded

to agree. This provision merely deals with the procedure and powers of the

Tribunal and states that the Tribunal shall not be bound by the procedure laid

down by the Code of Civil Procedure, 1908, but shall be guided by the

principles of natural justice and shall have the power to regulate its own

procedure. Significantly, this provision does not cover proceedings before the

SEBI and its WTMs under the Act of 1992. Therefore, SEBI cannot claim

exemption from the applicability of the principle of res judicata thereunder.

28. In Hope Plantations Ltd. vs. Taluk Land Board, Peermade and

another

2

, a 3- Judge Bench of this Court affirmed that the principle of res

judicata is based on public policy and justice. It was pointed out that the rule of

res judicata prevents the parties to a judicial determination from litigating the

same question over again, even though the determination may be

demonstrably wrong. It was held that when proceedings attain finality, parties

2

(1999) 5 SCC 590

23

are bound by the judgment and are estopped from questioning it. They cannot

litigate again on the same cause of action, nor can they litigate any issue which

was necessary for decision in the earlier litigation. It was pointed out that

Section 11 of the Code of Civil Procedure, 1908, contains provisions of res

judicata but these are not exhaustive of the general doctrine of res judicata . It

was observed that the principles of res judicata would be equally applicable in

proceedings before administrative authorities. Further, in Amalgamated

Coalfields Ltd. and another vs. Janapada Sabha Chhindwara and others

3

,

a Constitution Bench observed that constructive res judicata is an artificial form

of res judicata and it postulates that if a plea could have been taken by a party

in a proceeding between him and his opponent, he would not be permitted to

take that plea against the same party in a subsequent proceeding which is

based on the same cause of action. Affirming this view in Devilal Modi vs.

State Tax Officer, Ratlam, and others

4

, a Constitution Bench observed that

this view is founded on the same considerations applicable to res judicata,

because if the doctrine of constructive res judicata is not applied, it would be

open to a party to take one proceeding after another and urge new grounds

every time and that, plainly, would be inconsistent with considerations of public

policy. Needless to state, these stellar principles would not only apply to the

parties to a dispute but would also bind the adjudicating authorities seized of

such dispute, be they judicial, quasi-judicial or administrative.

3

AIR 1964 SC 1013

4

AIR 1965 SC 1150

24

29. In the light of these edicts, it is not open to SEBI to claim that it could

pass multiple final orders on the same cause of action. Having undertaken the

exercise pursuant to its show-cause notices issued in 2012, SEBI passed the

order dated 31.07.2014, in exercise of power under Section 11B of the Act of

1992, with certain directions which attained finality and were given full effect to.

That being so, SEBI could not have reopened the entire exercise without just

cause so as to pass a fresh order under Section 11B, once again, 4 years later.

30. In this regard, we may also note the unconscionable delay on the part

of SEBI. Though the WTM of SEBI passed the order on 01.04.2016, requiring

an examination afresh and initiation of disgorgement proceedings, it was only

on 19.01.2018 that SEBI got around to issuing a show-cause notice proposing

disgorgement and then passed an order seven months later. This laidback and

indolent approach on the part of SEBI in dealing with the matter needs mention

as it does not augur well for a statutory body enjoined with the duty of protecting

investors and regulating the securities market which, by its very nature, is

volatile, to drag its feet and indulge in unwarranted and unjustified delays.

31. Viewed thus, we are of the opinion that the entire exercise undertaken

by SEBI after the passing of the final order dated 31.07.2014, resulting in the

disgorgement order dated 28.09.2018, was unsustainable in law. Further, as

the compensation claim of Ram Kishori Gupta and Harishchandra Gupta

against SEBI stood decided by the Tribunal’s order dated 30.04.2013, which

also attained finality, it was not open to them to reopen the same and seek to

pin such liability upon SEBI once again. The directions in that regard by the

25

WTMs of SEBI in the orders dated 16.12.2014 and 01.04.2016, culminating in

the direction for restitution by the Tribunal in its judgment dated 02.08.2019 in

Appeal No. 44 of 2019, cannot be sustained. It was not for the Tribunal to

interpret its earlier order dated 30.04.2013 and give it a different colour,

contrary to its plain meaning. Finally, it has been contented before us by SEBI

that as only 4 entities, including VCL, out of 22 entities, filed appeals against

the disgorgement order dated 28.09.2018, the said order cannot be invalidated

against those who had not chosen to file any appeal. We are informed that

some of the individuals concerned have expired while most of the corporate

entities have become defunct. In any event, as the order suffers from an

inherent lack of jurisdiction, being barred by the principle of res judicata/

constructive res judicata, this argument cannot stand.

32. However, given the fact that VCL and the other entities, who were the

appellants before the Tribunal, were held to have indulged in fraudulent acts

and transactions and were not innocent or guileless, by any stretch of

imagination, the direction of the Tribunal practically rewarding them with costs

of ₹2,00,000/- each was entirely unjustified on facts.

33. On the above analysis, Civil Appeal 7941 of 2019 is allowed and the

judgment dated 02.08.2019 passed by the Securities Appellate Tribunal,

Mumbai, in Appeal No. 44 of 2019 is set aside. In consequence, Civil Appeal

(Diary) No. 42829 of 2019 which seeks additional benefits, pursuant to the

aforestated judgment dated 02.08.2019 passed in Appeal No. 44 of 2019, must

necessarily fail and the said appeal is dismissed. Lastly, as we find that the

26

Tribunal was fully justified in setting aside the disgorgement order dated

29.08.2018, SEBI’s attack against the Tribunal’s judgment dated 20.12.2021,

on that score, is held to be devoid of merit. However, as noted hereinabove,

the direction of the Tribunal therein, mulcting SEBI with exorbitant costs

payable to the appellants, is completely unsustainable and the same is,

accordingly, set aside. Civil Appeal Nos.1649-1652 of 2022 are allow ed to that

extent.

Parties shall bear their own costs.

..............................., J.

Sanjay Kumar

..............................., J.

K.V. Viswanathan

April 7, 2025

New Delhi.