SEBI’s release of buyback escrow does not bar separate fraud proceedings, Supreme Court rules in Vedanta case; matter remanded to SAT

Vedanta Limited, formerly Cairn India Limited, approved a buyback of 17.09 crore equity shares at a maximum price of ₹335 per share, involving a maximum investment of ₹5,725 crore, through the open-market route.

The buyback period ran from 23 January 2014 to 22 July 2014. The company deposited ₹143.124 crore in escrow, but ultimately bought back only 3.67 crore shares for ₹1,225.45 crore, representing 21.48% of the proposed quantity.

SEBI rejected the company’s request for extension of the buyback period, and the company later sought release of the escrow amount on the ground that the conditions under Regulation 15B(8) of the SEBI (Buyback of Securities) Regulations, 1998 were satisfied.

SEBI’s preliminary investigation recommended release of the escrow, but a subsequent investigation alleged that the company had made a misleading buyback announcement without intending to complete it, thereby violating the PFUTP Regulations and Regulation 19(1)(a) of the Buyback Regulations.

The Adjudicating Officer imposed a penalty of ₹5.25 crore on Vedanta and ₹15 lakh each on three individual respondents under Sections 15HA and 15HB of the SEBI Act, 1992.

The Securities Appellate Tribunal set aside the penalties, holding that fraud and violations of the Buyback Regulations had not been established.

SEBI appealed to the Supreme Court under Section 15Z of the SEBI Act.

Whether the release of the escrow amount under Regulation 15B(8) of the Buyback Regulations precludes or bars an independent inquiry or finding of fraud under the PFUTP Regulations.

Whether the material on record, including the historical NSE/BSE trading data and surrounding circumstances, established that the respondents had made a fraudulent or misleading buyback announcement without intending to fulfil it.

Regulation 14(3) of the Buyback Regulations requires a company to utilise at least 50% of the amount earmarked for an open-market buyback, while Regulation 15B(8) merely governs the possible forfeiture or release of the escrow amount when that requirement is not met; satisfaction of its exceptions does not determine whether fraud has occurred under the PFUTP Regulations.

Fraud under Regulations 2(1)(c), 3 and 4 of the PFUTP Regulations must be established on the balance of probabilities through an objective assessment of the evidence, and not through conjecture or surmise.

Relying on KSL Industries v. Chairman, SEBI, the Court stated that fraud requires convincing evidence and, where relevant, a real nexus between the conduct and the alleged manipulation.

Under SEBI v. Kishore R. Ajmera, fraudulent conduct may be inferred from the cumulative effect of surrounding circumstances, although direct evidence is unnecessary.

SEBI v. Kanaiyalal Baldevbhai Patel establishes that the PFUTP Regulations are broadly worded but require proof of the relevant fraudulent practice, inducement or inequitable result.

The Court also relied on SEBI v. Terrascope Ventures Ltd. and Reliance Industries Ltd. v. SEBI for the propositions that the inference of fraud must be supported by corroborative circumstances and, where inducement is not established, the impugned device must admit of no reasonable explanation other than fraud.

The Supreme Court’s jurisdiction under Section 15Z is ordinarily confined to questions of law, whereas SAT possesses broad fact-finding powers under Section 15U.

The Court rejected the respondents’ contention that release of the escrow amount conclusively negatived fraud. Regulation 15B(8) addresses only whether the escrow may be forfeited; it does not adjudicate compliance with the independent prohibitions under the PFUTP Regulations.

However, the Court also held that the AO’s finding of fraud could not presently be sustained because it rested substantially on historical NSE/BSE trading data whose accuracy was disputed.

The record disclosed material inconsistencies between the investigation report and the exchange data regarding available sell orders and prices on particular dates.

These discrepancies had not been examined by either the AO or SAT and went to the evidentiary foundation of the fraud finding.

Further, SEBI’s earlier investigation had reportedly found no material impact of the buyback announcement on price or volume, whereas its later investigation alleged fraud on substantially the same facts; this internal contradiction also remained unexplained.

Since resolving these factual issues required examination of trading records and potentially witness evidence, SAT was the appropriate forum under Section 15U, rather than the Supreme Court exercising limited appellate jurisdiction under Section 15Z.

The appeals were partly allowed, and the matter was remanded to SAT for fresh adjudication on the question of fraud alone.

SAT was directed to scrutinise and reconcile the competing trading data, record specific findings on the identified discrepancies, exercise its powers under Section 15U to summon witnesses and obtain documents if necessary, examine corroborative circumstances beyond the trading data, and thereafter decide the PFUTP allegations independently and uninfluenced by the Supreme Court’s observations on the merits.

SAT was directed to dispose of the matter within six months.