Bombay High Court Backs SEBI’s Decision to Reject Settlement, Affirms Regulatory Compliance.


04 December 2024 Secretarial Compliance >> COMPLIANCES  

In a significant ruling, the Bombay High Court dismissed a petition of First Overseas Capital Limited, Mumbai Vs Securities & Exchange Board of India challenging the rejection of settlement applications filed by a petitioner before the Securities and Exchange Board of India (SEBI). The Court’s decision sheds light on the due process involved in SEBI’s settlement proceedings and underscores the limited scope of judicial intervention in such matters.

The petitioner had filed settlement applications with SEBI, which were rejected by the regulator in a communication dated October 30, 2024. The petitioner contested the rejection, arguing that the decision was based on the alleged deficiencies in the documents provided, particularly concerning the maintenance of net worth for the financial years ending March 31, 2019, March 31, 2020, and March 31, 2021. 

The petitioner’s counsel, Mr. Shah, asserted that the documents had been provided multiple times and that the specific nature of the deficiencies had not been communicated clearly by SEBI. He argued that the rejection of the settlement proposal was arbitrary and failed to give fair consideration to the petitioner’s submissions. Moreover, he submitted that, even if deficiencies were pointed out, the petitioner was ready to rectify them within a reasonable timeframe.

 
 

However, SEBI’s counsel, Mr. Doctor, countered that the petitioner had failed to adhere to the timeline for submitting the necessary documents, despite being granted multiple extensions and opportunities. He pointed out that the documents submitted by the petitioner were consistently found to be deficient, and the net worth requirement, a critical condition for settlement, had not been met. According to SEBI, this failure to comply with basic requirements led to the rejection of the settlement application. Mr. Doctor also emphasized that the settlement process had been thoroughly examined by SEBI’s internal committees and the Whole-Time Members, and no unfairness had occurred in this regard.


The Court, in its judgment, noted that while the petitioner did not have a vested right to compel SEBI to accept the settlement proposal, the regulator was still bound to consider the application fairly. The Court observed that the petitioner had been granted additional opportunities, including a specific order from the Court in March 2024, to ensure the proper submission of documents. Despite these indulgences, the petitioner had failed to comply with the regulatory requirements, particularly the net worth condition, which was essential for the settlement process.

The Court referred to previous decisions, including the Shilpa Stock Broker case, which emphasized that SEBI, as an expert regulatory body, had the discretion to determine whether a dispute should be resolved through settlement or proceed to enforcement. The Court also acknowledged the importance of ensuring compliance with regulations for the wider public interest and financial stability of the securities market.

The judgment reinforced the principle that SEBI’s decisions, made after due consideration of documents and regulatory requirements, should not be subjected to judicial scrutiny unless there is clear evidence of arbitrariness or unfairness. In this case, the Court found no such evidence and dismissed the petition, ruling that SEBI had acted within its powers and had provided the petitioner ample opportunity to rectify the deficiencies in its application.

This case highlights the limited role of the judiciary in second-guessing SEBI’s regulatory decisions, particularly in settlement matters where commercial discretion and public interest play key roles. The judgment underscores the importance of adherence to regulatory timelines and requirements and the need for parties involved in settlement applications to ensure full compliance with the conditions set out by the regulator.

Ultimately, the Court dismissed the petition, upholding SEBI’s rejection of the petitioner’s settlement applications, and emphasized that no further indulgence was warranted in this matter. The decision serves as a reminder that regulatory compliance and the integrity of the settlement process are paramount in maintaining the orderly functioning of the securities market.


Securities and Exchange Board of India Act, 1992