SUPREME COURT CLARIFIES APPLICABILITY OF RES JUDICATA TO SEBI PROCEEDINGS AND INVESTOR COMPENSATION CLAIMS

The Judgment in the Case of Securities and Exchange Board of India v. Ram Kishori Gupta & Anr., Civil Appeal No. 7941 of 2019 with Civil Appeal Nos. 1649-1652 of 2022 and Civil Appeal No. ____ of 2025 (@ Diary No. 42829 of 2019) was delivered by Division Bench of the Supreme Court of India, comprising Hon’ble Justice Sanjay Kumar and Justice K.V. Viswanathan on 7th April 2025. This case deals with allegations of fraudulent trade practices and misleading advertisements by M/s. Vital Communications Ltd. (VCL), leading to loss for investors. It particularly examines SEBI’s power to impose penalties and disgorgement Orders under the SEBI Act, and whether such actions were barred by the principle of Res Judicata.

Facts of the Case

M/s. Vital Communications Ltd. (VCL), a public listed company, was accused by SEBI in 2005 of issuing misleading advertisements regarding share buybacks, bonus shares, and preferential allotment. These ads aimed to artificially inflate the share price, attracting investors while promoter-related entities sold 71.14 lakh shares during the inflated period. It was revealed that 72 lakh shares were allotted to 15 companies connected to VCL using routed company funds, violating SEBI regulations and the Companies Act.

SEBI passed an initial Order in 2008 banning VCL and its promoters from the securities market, but the Securities Appellate Tribunal (SAT) set it aside and remanded the matter for reconsideration. In 2014, a fresh SEBI Order again restrained the involved parties. Separately, investors Ram Kishori Gupta and Harishchandra Gupta, who lost money due to the misleading ads, pursued compensation through SEBI and the SAT.

Later, in 2018, SEBI issued a new Order directing disgorgement of ₹4.55 crore with interest. This second Order was challenged by the implicated entities on the ground that the earlier SEBI Order from 2014 had attained finality, making the second Order void under the principle of res judicata.

Main Issues

1. Whether SEBI’s second Order dated 28.09.2018 for disgorgement was barred by res judicata.
2. Whether SEBI could re-initiate proceedings on the same cause of action already concluded in 2014.
3. Whether Ram Kishori Gupta and her husband were entitled to compensation from SEBI.
4. Whether the Tribunal’s direction awarding compensation and costs to the investors was legally sustainable.

Contentions of the Parties

Contentions of the Appellant (SEBI)

The Appellant argued that the principle of res judicata under Section 11 of the Code of Civil Procedure 1908, ought not to be applied to proceedings initiated by SEBI under the SEBI Act 1992, as such proceedings serve a distinct regulatory function. It was contended that the disgorgement Order issued in 2018 was a measure taken in the public interest, aimed at correcting prior inaction in the quantification of ill-gotten gains arising from fraudulent activities. SEBI further alleged that the act of restitution, particularly in the context of secondary market transactions, falls outside its statutory mandate and operational purview. The Appellant also maintained that the direction of compensation by the Tribunal was unwarranted, asserting that investors had undertaken the inherent risk associated with investing and, thus, could not claim restitution from SEBI.

Contentions of the Respondents (Ram Kishori Gupta & Others)

The Respondents contended that SEBI had failed in its statutory duty to safeguard the interests of investors and, having permitted fraudulent activity by VCL, ought to be held accountable for compensating the resulting losses. It was argued that the Tribunal had correctly interpreted its earlier Order and had validly exercised its authority in directing SEBI to compensate the aggrieved investors. The Respondents alleged that they had invested a sum of ₹18, 25,041/- based on misleading and fraudulent advertisements and had consequently suffered unjust and irrecoverable losses. They further asserted that SEBI’s delay and inaction in effecting disgorgement enabled wrongdoers to unjustly benefit, while innocent investors were left to bear the brunt of financial harm.

Supreme Court

The Supreme Court held that SEBI’s second Order dated 28.09.2018 was unsustainable in law as it was passed on the same cause of action already concluded by the Order dated 31.07.2014, which had attained finality. The principle of res judicata, though generally applicable to courts, was held to be equally binding on quasi-judicial bodies like SEBI, to preserve the sanctity of final decisions.

The Court further ruled that the direction of the SAT to award ₹18, 25,041/- as compensation to the investors was erroneous. It noted that the SAT had already rejected this prayer in 2013 and revisiting it was not permissible. SEBI was never mandated by law to compensate investors for trading losses such claims were to be addressed by civil courts.

The Court also disapproved the SAT’s grant of ₹2, 00,000/- costs to entities that were found guilty of fraud, terming it unjustified.

Accordingly, Civil Appeal No. 7941 of 2019 was allowed setting aside the SAT’s Order directing SEBI to pay compensation. Civil Appeal (Diary No. 42829 of 2019) was dismissed, denying additional relief to the investors and Civil Appeals Nos. 1649-1652 of 2022 were partly allowed, upholding the SAT’s quashing of SEBI’s second Order dated 28.09.2018, but setting aside the cost award.

SEBI could not issue multiple final Orders on the same cause of action. Compensation and disgorgement directions passed later were invalid and the principle of res judicata applies to regulatory bodies like SEBI.

Parichaya Reddy

Associate

The Indian Lawyer & Allied Services

 

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