It is a set principle that Securities Exchange Board of India is an adjudicatory body having the powers of the Civil Courts. The Hon’ble Supreme Court while analyzing the powers of the SEBI and the Securities Appellate Tribunal in Subrata Roy Sahara v Union of India, clarified that although certain powers analogous to those of a civil court under the Code of Civil Procedure, 1908 (CPC) have been expressly conferred, such powers are limited in scope and subject-specific. The Court held that the mere conferment of select procedural powers does not lead to the wholesale application of the CPC to SEBI proceedings.
Instead, the statutory framework envisages that SEBI and SAT function independently of the CPC, guided primarily by the principles of natural justice. Notably, the Court emphasised Section 15-Y of the SEBI Act, which bars the jurisdiction of civil courts in matters covered by the Act, reinforcing the limited role of general civil procedure in this specialised regulatory regime.
However, in the case of Securities Exchange Board of India v. Ram Kishori Gupta, a critical question was raised before the Supreme Court i.e., whether Section 11 of the CPC, which governs res judicata, is applicable to SEBI and SAT proceedings, despite the procedural limitations under Section 15U (1) of the SEBI Act, 1992. Additionally, the it provided clarity on the scope of SEBI’s and SAT’s powers in awarding compensation to victims who suffered losses due to Unfair Trade Practices.
This case provides critical jurisprudence on the limits of regulatory authority, finality of quasi-judicial orders, and investor remedies in cases of securities fraud. The case centred around the SEBI’s attempt to issue a disgorgement order in 2018, four years after a final penalty order had already been passed.
Background of Ram Kishori Gupta v. SEBI
Facts:
Fraudulent practices were committed by Vital Communications Limited (VCL), which included misleading advertisements about share buybacks, bonus issues, and preferential allotments that artificially inflated the company’s stock prices.
In response, SEBI initiated proceedings in 2005 under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 and under Section 77 of the Companies Act, 1956. SEBI’s first order in 2008 was set aside by the SAT and remanded.
SEBI then issued a fresh order on July 31, 2014, imposing market bans and freezing preferential shares, but notably did not order disgorgement of unlawful gains. That 2014 order was not challenged and hence attained finality.
However, an investor, Ram Kishori Gupta, who suffered losses due to VCL’s fraudulent conduct, filed an application before SAT in 2014, arguing that SEBI had failed to consider investor restitution as previously directed by SAT in 2013.
SAT instructed SEBI to consider this issue, following which SEBI’s Whole-Time Member (WTM) issued a fresh direction in December 2014 to investigate whether disgorgement was feasible. Initially, SEBI’s investigation department concluded in June 2015 that quantifying unlawful gains was not possible.
Despite this, SEBI’s WTM issued a new order in April 2016 overriding the investigation report and directing that disgorgement proceedings be initiated. After an unjustified 22-month delay, SEBI finally issued a show-cause notice in January 2018 and passed the disgorgement order in September 2018, directing recovery of ₹4.55 crore along with interest and imposing a fresh five-year market ban.
The SAT in 2021 struck down the 2018 order, holding that it was barred by the doctrine of res judicata, as the same cause of action had already culminated in the final 2014 order. SEBI appealed this decision to the Supreme Court, arguing that its powers under Section 11B of the SEBI Act (as amended in 2013) allowed it to pass disgorgement orders independently and that SAT’s procedure being exempt from the Civil Procedure Code meant res judicata does not apply.
The Court addressed whether SEBI could reopen proceedings and order disgorgement after having passed a final order in 2014, effectively questioning the finality of regulatory decisions. It further analysed the applicability of the doctrine of res judicata in SEBI proceedings, particularly where a cause of action had already been conclusively adjudicated, thereby raising concerns of fairness and procedural certainty.
Additionally, the Court considered whether SEBI has the statutory authority to grant compensation to investors who suffered losses due to fraudulent and unfair trade practices, clarifying the boundaries of SEBI’s power to go beyond punitive measures and award restitution in investor-centric actions.
Decision:
Application of Res Judicata to Quasi-Judicial Authorities:
The Supreme Court held that the doctrine of res judicata is applicable to SEBI’s quasi-judicial proceedings, despite arguments suggesting that Section 15U of the SEBI Act exempts the regulator from strict adherence to the CPC.
The Court clarified that while procedural requirements of the CPC do not apply, substantive principles like res judicata do. Relying on the Constitutional Bench decision in Devilal Modi v. STO (1965), the Court reinforced that res judicata applies to all judicial and quasi-judicial bodies to uphold the finality of decisions and prevent repeated litigation. It also cited Hope Plantations Ltd. v. Taluk Land Board, to stress that finality is crucial for maintaining regulatory certainty.
The Court warned that allowing SEBI to reopen concluded matters would not only lead to uncertainty but could also result in harassment of regulated entities.
Finality of Regulatory Orders:
In assessing the status of SEBI’s 2014 order, the Court laid down a clear rule: once a final order is passed disposing of all issues raised in a show-cause notice, SEBI cannot revisit the same cause of action to impose additional penalties later.
It firmly rejected SEBI’s argument that disgorgement could be treated separately from other penalties. The Court observed that the 2014 order had explicitly considered and declined to impose disgorgement, and thus the 2018 order breached the principle of res judicata.
The ruling emphasized the legitimate expectation of finality for regulated entities, which is necessary to ensure fairness and consistency in regulatory processes.
Limitations on SEBI’s Regulatory Powers:
The judgment delineated important limitations on the scope of SEBI’s powers. Although Section 11B grants SEBI broad authority to issue directions in the interest of investors, the Court clarified that these powers must be exercised within the scope of the original proceeding.
It disapproved of SEBI’s attempt to impose “serial penalties” by reopening concluded cases after several years. The Court made it clear that the exercise of regulatory power does not extend to reinitiating proceedings without new violations or fresh evidence, and such practice would undermine the integrity and credibility of the regulatory framework.
Investor Compensation and SEBI’s Role:
On the issue of investor compensation, the Court agreed with the Securities Appellate Tribunal’s 2013 view that SEBI does not have statutory authority to award compensation to investors. It observed that compensation involves adjudication of civil rights, which must be decided by competent civil courts and not through regulatory proceedings.
The Court emphasized that SEBI’s role is essentially preventive, i.e., to detect and deter market malpractice rather than remedial, which would involve compensating investors. However, it left open the possibility for the legislature to create a statutory investor compensation framework, should such a remedy be deemed necessary.
Critique of SEBI’s Procedural Lapses:
The Court took a critical view of SEBI’s handling of the proceedings, particularly highlighting the unreasonable 22-month delay between the 2016 direction and the 2018 disgorgement order. It pointed out that SEBI’s inconsistent approach—initially finding no unlawful gain and later imposing disgorgement—revealed a lack of diligence and procedural clarity.
The Court stressed that market regulators must act promptly and decisively to preserve their credibility and effectiveness. Delays and procedural lapses not only erode confidence in regulatory processes but also impair the efficacy of the regulator’s mandate.
Impact of the Decision:
The Supreme Court ensured that SEBI consolidated all potential sanctions like prohibitions and disgorgement into one single final order. It further stated that SEBI cannot issue another final order to cure omissions or oversights after the previous order has attained finality for the same cause of action.
It was reiterated that res judicata applies to SEBI orders. The Court stated that litigants—whether regulators, companies, or individual investors—cannot continue proceedings on the same cause of action. Finality encourages stability and reduces the burden of multi-tier litigation.
The judgment clarifies that SEBI’s mandate to protect investors does not equate to unrestricted authority to award compensation for market losses. Disgorgement is permitted solely in cases where concrete, unlawful gains can be identified. Investors seeking additional monetary relief must resort to appropriate civil court proceedings.
Conclusion:
Through this decision, the Supreme Court reiterated that the principle of res judicata is applicable to the adjudicatory bodies in general and hence, SEBI and SAT also come under that ambit it is applicable. Further, it has clearly held that once SEBI exercises its statutory powers and such action reaches finality, the regulator cannot reopen or initiate fresh proceedings on the same cause of action to impose additional or alternative sanctions. This finality upholds the sanctity of judicial and quasi-judicial decisions, fostering legal certainty and reinforcing stability in the securities market.
The Court has also provided important clarity regarding the scope of SEBI’s authority. While acknowledging SEBI’s broad powers to investigate and penalise market misconduct, the judgment makes it clear that awarding compensation or damages to affected investors falls outside its statutory mandate. Such remedies, the Court observed, must be pursued before civil courts.
By striking a careful balance between investor protection and the need for finality in regulatory actions, the decision offers meaningful guidance to regulators, corporates, and investors alike. It ensures that disputes are resolved with efficiency and finality, discouraging repetitive and prolonged litigation that could otherwise erode trust in the regulatory framework.
