Supreme Court Remands Fraud Allegations In Vedanta's Cairn India ₹5,725 Crore Buyback To SAT

The Supreme Court on Wednesday remanded allegations of fraud relating to Vedanta's Cairn India's proposed ₹5,725 crore share buyback to the Securities Appellate Tribunal (SAT) for fresh adjudication.

It held that unresolved discrepancies in the trading data relied upon by SEBI went to the root of the fraud finding.

A Bench of Justices J.B. Pardiwala and K.V. Viswanathan clarified that the release of an escrow amount maintained for the buyback does not bar a separate inquiry into alleged fraud under the Prevention of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

However, the Court did not decide whether Vedanta or its directors had committed fraud. Instead,

It remanded the “question of fraud alone” to SAT, directing it to examine the disputed trading data and any other circumstances relevant to the allegation.

The case concerns a buyback announced by Cairn India, which is now part of Vedanta Limited. In November 2013, Cairn India decided to buy back 17.09 crore equity shares from the open market at a maximum price of ₹335 per share, with ₹5,725 crore earmarked for the buyback.

The company made the public announcement in January 2014, with the buyback period running from January 23 to July 22, 2014. It ultimately bought 3,67,03,839 shares for ₹1,225.45 crore, against the targeted 17.09 crore shares.

SEBI alleged that the company had failed to place sufficient buy orders despite opportunities to purchase shares at or below the ₹335 price cap. According to SEBI, the conduct showed that the company did not genuinely intend to complete the buyback and that the public announcement consequently amounted to a misleading representation.

The Adjudicating Officer accepted SEBI's allegations and imposed a ₹5.25 crore penalty on the company and ₹15 lakh each on three directors for alleged violations of the PFUTP and Buyback Regulations.

SAT later set aside the penalties, finding that the alleged violations had not been established. SEBI challenged that decision before the Supreme Court.

One of the principal arguments before the Supreme Court was that SEBI had earlier released the cash escrow maintained for the buyback after finding that the conditions for its release had been satisfied. The company argued that the release of the escrow was inconsistent with the subsequent allegation that the buyback announcement was fraudulent.

The Supreme Court rejected this argument.

It held that the escrow mechanism under Regulation 15B(8) and an investigation into fraud under the PFUTP Regulations operate in different fields. Regulation 15B(8) is concerned with whether the escrow is liable to forfeiture; it does not determine whether fraudulent conduct has occurred.

“In view of the foregoing and considering the totality of the circumstances,” the Court held, “we are of the view that the scope of the enquiry contemplated by Regulation 15B(8) of Buyback Regulation is confined to determining whether the escrow is liable to be forfeited in the circumstances contemplated by the provision.”, it ruled.

The top court said that satisfaction of the conditions governing release of the escrow “by itself, cannot be treated as a finding on whether the PFUTP Regulations have been violated or not.”

It further held that the release of the escrow does not create an automatic statutory bar against proceedings under the PFUTP Regulations because the two inquiries have different purposes.

“Thus, 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 ruled.

In this background, the court found that the factual foundation of the case required further examination.

The court noted that the Adjudicating Officer's finding of fraud rested on historical NSE and BSE trading data concerning the availability of sell orders at or below the ₹335 price cap.

Cairn India had challenged the accuracy of that data before the Adjudicating Officer and SAT, but neither authority had adjudicated the issue.

The Supreme Court identified multiple discrepancies.

For February 17, 2014, SEBI's investigation report recorded more than 1.31 crore shares as available for sale at or below ₹335. However, the corresponding NSE data showed slightly more than 30 lakh shares, a difference of more than four times.

For February 14, the investigation report recorded 1,24,82,361 shares available for sale at or below ₹335, while NSE's own data showed only 36,83,335 shares in the corresponding sell-side order book.

The Court also identified a contradiction concerning BSE data between May 20 and July 22, 2014. One part of SEBI's investigation report indicated that the lowest price of the company's shares during this period was substantially above ₹335. Yet another part of the same report and the show-cause notice referred to sell orders being available at or below ₹335.

The Supreme Court said these discrepancies were not peripheral matters.

“This, in our view, is a disputed question of fact that goes to the very root of the finding of fraud,” the Court said.

It held that the Supreme Court, exercising appellate jurisdiction under Section 15Z of the SEBI Act, was not the appropriate forum to resolve these factual disputes. Determining which version of the trading data was correct, or whether the discrepancies could be explained, was an exercise that properly belonged to SAT.

The Court also found another unresolved contradiction in SEBI's own investigative record.

An investigation report dated February 3, 2016 had recorded that there was no material impact on the price or volume of the company's shares attributable to its corporate announcements. A subsequent investigation report dated March 17, 2017, however, proceeded to find fraud on materially the same set of facts.

Neither the Adjudicating Officer nor SAT had addressed this contradiction.

The Supreme Court held that SAT was better placed to call upon SEBI to explain the conflicting investigative findings and assess whether the contradiction affected the reliability of the case against the company and its directors.

The Court also stressed that a trading pattern that merely raises suspicion cannot, by itself, establish fraud. Where the allegation is that the company deliberately structured its trading activity so that it would not complete the buyback, the trading data must be considered alongside surrounding circumstances that may corroborate the inference of fraudulent intent.

These could include contemporaneous instructions, communications, internal records, or other conduct attributable to the company or those in control, the Court said.

Accordingly, the apex court directed SAT to first scrutinise the trading data placed before it by both sides, including data furnished by NSE, and determine which version accurately reflects the availability of sell orders and prevailing prices during the buyback period.

SAT has also been permitted to summon and examine company officers, the merchant bankers engaged for the buyback and other persons acquainted with the facts and to require production of relevant documents concerning the placement of buy orders.

It may further examine whether there are corroborating circumstances beyond the historical trading data that have a bearing on the question of fraud.

SAT must thereafter make fresh findings on whether fraud under the PFUTP Regulations has been established. The Supreme Court directed SAT not to be influenced by its observations on the merits of the controversy, except for the legal principles laid down in the judgment.

The matter is to be disposed of within six months.

The Supreme Court accordingly partly allowed SEBI's appeals and remanded the matter to SAT “for fresh adjudication on the question of fraud alone.”

For Appellant: Navin Pahwa, Sr. Advocate, Advocate Abhishek Singh, .K Ashar & Co., AOR

For Respondent: Rajiv Shakdher, Sr. Advocate, Advocates Anuradha Dutt, Pawan Sharma, Rishabh Sharma, Vaishali Joshi, Karan Khetani, Jonathan Ivan Rajan, B.Vijayalakshmi Menon, AOR, Amit Agrawal, AOR Sumit Agrawal, Sana Jain, Akanksha Chauhan