Lack of clarity on evidence sharing continues to lead securities market disputes

At the post-board meeting press conference, Pandey was asked if exchanges faced a conflict between maximising trading volumes and disciplining errant participants.

Last week wall Street firm Jane Street moved the Securities Appellate Tribunal (SAT), seeking the tribunal to order Sebi to release all documents used to justify the interim, ex-parte order issued against the trading firm, a move that was opposed by Sebi, stating that the documents being sought were not relevant to the case. Read More

In a September 2022 case, the Supreme Court had forced Sebi to share certain evidence it withheld from an accused, including a legal opinion the market regulator had sought in the matter. Sebi claimed legal privilege and had declined to share the legal opinion.

In the verdict, the Supreme Court had in 2022 heavily criticized Sebi’s ‘opaqueness’ in sharing relevant documents with parties, and observed such reluctance raises ‘concerns of transparency and fair trial’. The apex court had made similar observations in several other cases.

In  T.Takano case, the court held Sebi must disclose all relevant materials to the person against whom it has initiated proceedings. The court emphasized  Sebi’s duty to disclose evidence goes beyond just the documents it explicitly relies upon, it must also disclose any material that is relevant to the adjudication and has a nexus to the action taken.

In the PWC case, involving fraud at erstwhile Satyam Computers, the Supreme Court overruled Sebi’s objections and granted document inspection rights to PWC allowing them to cross-examine evidence presented by Sebi.

In the appeal filed by Jane Street, the firm alleged that initial probes by the National Stock Exchange (NSE) and Sebi found no fault with the trading patterns of Jane Street. The firm specifically pointed to a probe by Sebi’s Integrated Surveillance Department (ISD) which, in a December 2024 report, said it found no evidence that Jane Street was manipulating Bank Nifty.

However, Sebi subsequently initiated another probe which resulted in the regulator passing an interim order seeking to impound Rs 4,843 crore as alleged illegal gains made by Jane Street.

While Sebi does allow inspection of documents to all parties against whom it passes orders, what constitutes relevant documents is often open to interpretation, with Sebi often taking a conservative view.

Legal experts have said that sharing evidence with Jane Street is crucial, since the regulator had issued an interim ex-parte order, which means the trader did not get an opportunity to reply or defend its position.

“An interim order is nothing but a show-cause notice seeking a reply, and for a party to reply meaningfully, it needs much more than what is written in the order, including why certain aspects were omitted or not considered.” said Sumit Agrawal, senior partner, Regstreet Law Advisors & former Sebi Officer.

“Courts have repeatedly stressed that fairness requires full access to ‘relevant’ documents, not just what SEBI chooses to ‘refer’ or ‘rely’ on. Yet, in practice, the regulator resists disclosure tooth and nail on technicalities, often relying on selective portions of the Supreme Court’s Kavi Arora judgment to justify non-disclosure,“ Sumit Agrawal added.

An email sent to Sebi seeking comments remained unanswered.

In another a case involving Religare Finvest, the company's former chief executive officer (CEO) Kavi Arora moved the apex court seeking access to inspection of certain annexures related to a forensic audit commissioned by Sebi. In this case, the Supreme Court took a more conservative view on evidence sharing and held that documents relied upon before issuing a show cause notice need not be disclosed if they were not relied upon in the inquiry.

“Withholding documents that may favour an accused simply on the ground that the same were 'not relevant' could create a perception of bias or of an outcome-driven approach rather than a neutral one. That the documents were not relevant require sufficient justification to repel any objections of bias or non-conformity to natural justice. “In its absence, there is a risk of an inference for foreign institutional investors that regulatory predictability is weak,” said Shiv Sapra, Partner, Kochhar & Co.

“Sebi’s continued reluctance to disclose relied-upon documents strikes at the heart of natural justice. Courts have repeatedly held that transparency and fair trial require regulators to share all material forming the basis of their orders,” said Amit Tungare, managing partner, Asahi Legal.