The Supreme Court has held that the release of an escrow amount under the SEBI Buyback Regulations does not prevent the market regulator from independently investigating allegations of fraud and market manipulation under the Prohibition of Fraudulent and Unfair Trade Practices Regulations.

The bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan allowed appeals filed by the Securities and Exchange Board of India and remanded the proceedings concerning Vedanta Limited’s ₹5,725 crore share buyback to the Securities Appellate Tribunal for fresh adjudication on the question of fraud.

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The bench directed the SAT to re-examine disputed historical trading data, contradictions between SEBI’s investigation reports and any corroborative material concerning the placement of buy orders.

The Tribunal has been directed to decide the matter within six months.

The principal question before the Supreme Court was whether the release of an escrow deposit under the exceptions contained in Regulation 15B(8) of the SEBI (Buyback of Securities) Regulations, 1998 barred a separate allegation, investigation or finding of fraud under the PFUTP Regulations.

Answering the question in the negative, the Court held that an inquiry concerning forfeiture or release of an escrow deposit was legally distinct from an investigation into fraudulent or manipulative conduct.

Regulation 14(3) of the Buyback Regulations required a company to utilise at least 50% of the amount earmarked for the buyback. Regulation 15B(8), in turn, permitted SEBI to direct forfeiture of the escrow where the company failed to meet that requirement, subject to certain exceptions.

Those exceptions covered situations where the volume-weighted average market price was higher than the buyback price, where inadequate sell orders were available despite the company placing buy orders, or where circumstances beyond the company’s control merited consideration.

The Supreme Court explained that the scope of an inquiry under Regulation 15B(8) was confined to determining whether the escrow was liable to be forfeited. Satisfaction of one of the prescribed exceptions merely meant that the escrow could not be forfeited.

It did not conclusively determine whether the company’s overall conduct amounted to fraud under the PFUTP Regulations.

“The mere release of the escrow does not create an automatic statutory bar to proceedings under the PFUTP Regulations because the release of the escrow is not necessarily equivalent to absence of fraud,” the Court observed.

The Court accordingly rejected Vedanta’s contention that SEBI’s decision to release the escrow necessarily defeated the subsequent allegations of fraud.

The dispute arose from a buyback announced by Vedanta Limited, formerly known as Cairn India Limited.

Through a special resolution dated November 26, 2013, the company decided to buy back 17.09 crore equity shares at a maximum price of ₹335 per share. The maximum amount earmarked for the exercise was ₹5,725 crore.

A public announcement was made on January 14, 2014. The buyback period opened on January 23, 2014 and was scheduled to close on July 22, 2014.

The company deposited approximately ₹143.12 crore, representing 2.5% of the maximum buyback size, in an escrow account maintained with Axis Bank.

By June 27, 2014, however, the company had bought back only approximately 3.6 crore shares, representing 21.48% of the targeted number of shares. It had deployed around ₹1,225 crore.

Vedanta subsequently sought an extension of the buyback period, but SEBI rejected the request because the Buyback Regulations did not contain a provision permitting such an extension.

After the buyback period ended, the company informed SEBI that it had been unable to utilise the mandatory minimum of 50% of the amount earmarked for the buyback. It nevertheless sought release of the escrow under Regulation 15B(8).

SEBI’s investigation department initially concluded that the conditions prescribed for releasing the escrow had been satisfied and recommended that the matter should not be pursued further on that aspect.

An internal legal opinion also indicated that the applicable exception to escrow forfeiture appeared to have been attracted. The legal department expressed doubt over whether a PFUTP case could be sustained on the same facts.

The Supreme Court, however, held that internal departmental notings could not be treated as binding determinations or final adjudicatory orders.

A file noting merely expressed an officer’s view for internal consideration and acquired legal effect only when it culminated in a final decision by the competent authority and was communicated to the affected person, the Court said.

The 2016 investigation report itself recorded that while the escrow was exempt from forfeiture, the suspected PFUTP violations were being investigated separately.

SEBI subsequently conducted a separate investigation into whether the company’s buyback announcement was made without a genuine intention to complete the transaction.

The investigation concluded that the company had failed to place sufficient buy orders and that its announcement was misleading. A show-cause notice was consequently issued under the PFUTP and Buyback Regulations.

In May 2021, SEBI’s Adjudicating Officer imposed a penalty of ₹5.25 crore on the company and separate penalties of ₹15 lakh each on three directors or signatories to the public announcement.

The Adjudicating Officer found that the company did not place buy orders on the National Stock Exchange on 24 allegedly favourable trading days. On several other favourable days, only negligible orders were placed.

According to SEBI, the company had purchased approximately 3.67 crore shares despite a considerably larger quantity of shares allegedly being available at or below the maximum buyback price of ₹335.

SEBI maintained that the manner in which the buy orders were placed demonstrated a lack of genuine intention to complete the buyback. It alleged that the public announcement created a misleading impression among investors and influenced investment decisions.

The SAT set aside the penalties in October 2023 after holding that violations of the PFUTP and Buyback Regulations had not been proved.

The Tribunal noted that the market price remained above the ₹335 price cap for a substantial part of the buyback period. It also observed that the regulations did not prescribe any mandatory frequency, methodology or degree of aggressiveness for placing buy orders.

The SAT found that the company had appointed professional intermediaries, deposited ₹143.12 crore in escrow and spent ₹1,225.45 crore purchasing approximately 3.67 crore shares. These circumstances, according to the Tribunal, did not indicate that the transaction was a sham.

It further held that aggressive buying during the initial period could itself have driven up the share price and made the remaining buyback more difficult.

SEBI challenged the SAT’s decision before the Supreme Court under Section 15Z of the SEBI Act.

While considering the governing principles, the Supreme Court held that an unusual trading pattern or suspicious conduct alone was insufficient to establish fraud under the PFUTP Regulations.

Fraud could not be established merely through allegations, conjectures or surmises. It had to be proved on the balance of probabilities through an objective assessment of the evidence.

Where SEBI was unable to prove that third parties had been induced to deal in securities because of the alleged misconduct, the supposed manipulative device must be of such a nature that there was no other reasonable explanation except fraud, the Court said.

In a case alleging that a company deliberately structured its trading activity to avoid completing a buyback, historical trading data had to be considered alongside contemporaneous instructions, internal communications and other conduct attributable to the company or persons controlling it.

The Supreme Court found material discrepancies between the trading figures used in SEBI’s investigation report and the corresponding data supplied by the NSE.

For February 17, 2014, SEBI’s investigation report recorded that more than 1.31 crore shares were available for sale at or below ₹335. The corresponding NSE data, however, reportedly showed that only slightly more than 30 lakh shares were available at that price—a difference of more than four times.

Similarly, for February 14, 2014, the investigation report recorded an available quantity of 1,24,82,361 shares, while the NSE’s data allegedly reflected only 36,83,335 shares.

The Court also noticed discrepancies in the BSE data for the period between May 20 and July 22, 2014. One part of the investigation report indicated that the lowest market price remained above ₹335, whereas another part stated that sell orders were available at or below ₹335 during the same period.

The Court held that the conflict went to the very root of the finding of fraud.

Since the Supreme Court’s appellate jurisdiction under Section 15Z is ordinarily confined to questions of law, the Court said the factual discrepancies should be examined by the SAT.

The Supreme Court also flagged an internal contradiction between SEBI’s investigation reports.

An investigation report dated February 3, 2016 found that the company’s corporate announcements had no material impact on the price or trading volume. A subsequent report dated March 17, 2017, however, recorded a finding of fraud on materially the same set of facts.

Neither the Adjudicating Officer nor the SAT had considered this contradiction.

The Court said the SAT was better placed to require SEBI to explain the inconsistent findings and decide whether the contradiction affected the reliability of the fraud allegations.

The Supreme Court directed the SAT to first determine which version of the historical trading data accurately reflected the availability of sell orders and the prevailing prices during the buyback period.

The Tribunal must record specific findings on the discrepancies identified by the Supreme Court and any further inconsistencies brought to its notice.

The Court clarified that the SAT could exercise its powers under Section 15U(2) of the SEBI Act to summon and examine officers of Vedanta, its merchant bankers and other persons acquainted with the transaction.

It could also direct the discovery and production of documents to ascertain the complete facts concerning the placement of buy orders.

The SAT was further directed to examine whether circumstances beyond the historical trading data corroborated the allegations of fraud. It must then render fresh findings under the PFUTP Regulations without being influenced by the Supreme Court’s observations on the factual merits of the controversy.

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