Source: Supreme Court  

Why in News? 

Recently, the bench of Justices Sanjay Kumar and K.V. Viswanathan stated that SEBI's subsequent disgorgement order was barred by the principle of res judicata, as it could have been raised in the earlier proceedings. 

• The Supreme Court held this in the matter of Securities and Exchange Board of India v.  Ram Kishori Gupta & Anr (2025). 

What was the Background of Securities and Exchange Board of India v.  Ram Kishori Gupta & Anr? 

• M/s. Vital Communications Limited (VCL), a public limited company listed on major stock exchanges, published misleading advertisements between May-June 2002 regarding buyback of shares, bonus shares, and preferential issues. 
• The Securities and Exchange Board of India (SEBI) issued a show-cause notice to VCL and its promoters on 24th May 2005, alleging that these advertisements were designed to artificially inflate share prices from ₹3-12 to ₹30. 
• SEBI's investigation revealed that VCL had allotted 72 lakh equity shares to 15 companies which all shared the same address and were listed as VCL's suppliers, suggesting circular funding where VCL's own funds were indirectly used to purchase its shares. 
• Between May-July 2002, promoter-related entities sold 71.14 lakh shares in the market, taking advantage of artificial demand created by the misleading advertisements. 
• Two investors, Ram Kishori Gupta and Harishchandra Gupta, had purchased 1,71,773 shares of VCL between May-June 2002 based on these misleading advertisements and suffered substantial financial losses. 
• SEBI passed an order on 20.02.2008 restraining VCL and most of its directors from accessing the securities market for two years, but this order was set aside by the Securities Appellate Tribunal (SAT) for procedural reasons. 
• After fresh show-cause notices in 2012, SEBI passed another order on 31th July 2014 restraining VCL and 23 other entities from accessing the securities market for specific periods but did not order disgorgement of profits. 
• Following complaints from the Gupta investors, SEBI reopened the matter and passed a new order on 28th September 2018 directing VCL and related entities to disgorge unlawful gains of ₹4,55,91,232/- with 10% interest. 
• VCL and other entities challenged this disgorgement order before SAT, arguing that it was barred by the principle of res judicata as the earlier 2014 order on the same offence had attained finality. 

What were the Court’s Observations? 

• The Supreme Court affirmed that the principle of res judicata applies to quasi-judicial proceedings, including those under the SEBI Act, 1992, and prevents parties from litigating the same question more than once. 
• The Court observed that SEBI was fully aware of the financial implications of VCL's illegal actions when passing its 2014 order, yet chose not to direct disgorgement at that time despite having the power to do so. 
• The Court noted that once SEBI's 2014 order attained finality (as it was neither challenged nor set aside) and the penalties were served, SEBI could not revisit the same cause of action to pass fresh directions in 2018. 
• The Court invoked the principle of constructive res judicata, holding that since SEBI could have ordered disgorgement in its 2014 proceedings but did not, it was barred from doing so in subsequent proceedings based on the same offence. 
• The Court criticized SEBI's "laidback and indolent approach" and "unconscionable delay" in handling the matter, noting that it took nearly two years after deciding to initiate disgorgement proceedings before actually issuing the show-cause notice. 

What are the Legal Provisions Referred? 

• The case primarily involves the Securities and Exchange Board of India Act, 1992, specifically Section 11 which states SEBI's duties to protect investors and regulate the securities market. 
• Section 11B of the SEBI Act empowers SEBI to issue directions and levy penalties, including directing disgorgement of wrongful gains made through contravention of the Act's provisions. 
  • The Explanation added to Section 11B (effective from 18.07.2013) clarifies that the power to issue directions includes and "always be deemed to have included" the power to direct disgorgement of wrongful gains. 
• Section 11(5) of the SEBI Act (inserted from 18.07.2013) provides that amounts disgorged pursuant to a direction under Section 11B shall be credited to the Investor Protection and Education Fund. 
• Section 15U(1) of the SEBI Act states that the Securities Appellate Tribunal shall not be bound by the procedure of the Code of Civil Procedure but shall be guided by principles of natural justice. 
• The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, particularly Regulations 3, 4, 5(1) & 6(a), which VCL and its promoters allegedly violated. 
• Section 77 of the Companies Act, 1956, concerning restrictions on a company's purchase of its own shares, which VCL allegedly contravened through indirect funding arrangements. 
• Section 11 of the Code of Civil Procedure, 1908, embodies the principle of res judicata, which prevents re-litigation of matters already finally decided by a competent court or tribunal.