SUPREME COURT ON FRAUD IN SHARE BUYBACKS: ESCROW RELEASE DOES NOT END SEBI PROCEEDINGS

INTRODUCTION

In Securities and Exchange Board of India v. Vedanta Limited & Ors., Civil Appeal Nos. 25-26 of 2024, 2026 INSC 978, the Supreme Court of India, by its Judgment dated 9 September 2026, comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan, examined an important question concerning fraudulent conduct in share buybacks. The Court considered whether the release of an escrow amount under the SEBI Buyback Regulations prevents SEBI from subsequently examining the same transaction for possible fraud under the PFUTP Regulations. While answering this question in the negative, the Court also emphasised that an allegation of fraud cannot be based merely on suspicion or incomplete data. The matter was ultimately remanded to the Securities Appellate Tribunal (SAT) for a fresh decision on the question of fraud.

 

BACKGROUND OF THE DISPUTE

The dispute arose from a buyback announced by Vedanta Limited, formerly known as Cairn India Limited. By a Special Resolution dated 26 November 2013, the Company decided to buy back approximately 17.09 crore equity shares at a maximum price of Rs. 335 per share, with a total proposed investment of Rs. 5,725 Crore.

The buyback was announced on 14 January 2014 and was scheduled to remain open for six months, from 23 January 2014 to 22 July 2014. In compliance with the applicable regulations, the Company deposited approximately Rs. 143.125 Crore in an escrow account.

However, by June 2014, the Company had bought back only about 3.6 crore shares, representing 21.48% of the targeted number. It had spent approximately Rs. 1,225 Crore. The Company sought an extension of the buyback period, but SEBI rejected the request as the Regulations did not provide for such an extension. The Company thereafter sought release of the escrow amount, which was eventually allowed.

 

THE ALLEGATION OF FRAUD

The release of the escrow amount did not bring the matter to an end.

SEBI subsequently conducted a separate investigation into whether the Company had made a false buyback announcement without having a genuine intention to complete it. The investigation alleged that the company had failed to place sufficient buy orders despite favourable market conditions.

SEBI’s Adjudicating Officer eventually held that the Company had acted fraudulently and imposed a penalty of Rs. 5.25 crore on the Company and Rs. 15 lakh each on certain directors. According to the Adjudicating Officer, the manner in which the buy orders were placed created a misleading impression that the Company genuinely intended to complete the buyback.

The SAT, however, set aside the penalties. It found, among other things, that the Company could not have predicted how the market would behave, that the share price remained above the buyback price for a substantial period and that there was no prescribed method requiring the Company to place buy orders in a particular manner.

 

THE QUESTION BEFORE THE SUPREME COURT

The main question before the Supreme Court was whether the release of the escrow amount under Regulation 15B(8) of the Buyback Regulations prevented an independent inquiry into fraud under the PFUTP Regulations.

The Respondents argued that once SEBI had accepted that the conditions for release of the escrow were satisfied, it could not subsequently allege that the same conduct was fraudulent.

The Supreme Court rejected this argument.

 

RELEASE OF ESCROW IS NOT A FINDING ON FRAUD

The Court drew a clear distinction between the two proceedings.

According to the Court, Regulation 15B(8) is concerned with a limited question: whether the escrow amount should be forfeited or released. Satisfaction of the conditions for release of the escrow does not amount to a finding that the Company has not committed fraud.

Therefore, the release of the escrow does not create a statutory bar against a later investigation or proceeding under the PFUTP Regulations. The two regulatory questions operate independently.

This is perhaps the most important legal principle emerging from the Judgment.

 

FRAUD CANNOT BE BASED ON MERE SUSPICION

While the Court accepted SEBI’s right to examine the transaction for fraud, it also made it clear that such an allegation must be supported by reliable evidence.

The Court reiterated that fraud cannot be established merely through conjectures or surmises. The applicable standard is the balance of probabilities, but the evidence must still be strong enough to reasonably support the finding of fraud.

The Court also referred to its recent decision in Reliance Industries Ltd. v. SEBI, observing that where there is no clear evidence of inducement of third parties, the alleged manipulative conduct must be such that there is effectively no other reasonable explanation except fraud.

 

SERIOUS PROBLEMS IN THE TRADING DATA

The Supreme Court found that the case against Vedanta raised an important factual problem.

The Respondents pointed out significant discrepancies between the trading data relied upon by SEBI and the data subsequently supplied by the NSE. For example, on 17 February 2014, the Investigation Report showed more than 1.31 crore shares available for sale at or below Rs. 335, whereas the NSE’s own data showed only slightly more than 30 lakh shares.

Similar discrepancies were found for other dates as well.

The Court held that these discrepancies went to the very root of the allegation of fraud. Since SAT had not properly examined them, the Supreme Court considered it inappropriate to itself decide the factual issue in its appellate jurisdiction.

 

MATTER REMANDED TO SAT

The Supreme Court therefore partly allowed the Appeals and remanded the matter to SAT.

SAT has been directed to examine the conflicting trading data, consider the relevant material and, if necessary, summon persons and call for documents. It must then decide afresh whether the evidence establishes fraud under the PFUTP Regulations. The Court directed that this exercise be completed within six months.

 

CONCLUSION

The Judgment strikes an important balance between SEBI’s regulatory powers and the need for fairness in proceedings alleging fraud. The Supreme Court has made it clear that release of an escrow amount does not immunise a company from a subsequent fraud investigation. At the same time, SEBI cannot establish fraud merely by pointing to an unusual trading pattern or incomplete data.

The decision is therefore significant not only for buyback transactions but also for securities law generally. It reinforces the principle that serious findings of fraud must rest on reliable evidence and a proper examination of the surrounding circumstances.

 

SARTHAK KALRA

Senior Legal Associate

The Indian Lawyer & Allied Services

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