SEBI | Release Of Escrow Under Buyback Regulations Does Not Preclude Independent Inquiry Into Fraud Under PFUTP Regulations: Supreme Court

"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." Supreme Court, in a significant ruling dated 9th September 2026, held that the release of an escrow account under Regulation 15B(8) of the SEBI (Buyback of Securities) Regulations, 1998, does not preclude or bar an independent investigation or finding of fraud under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

A bench of Justices J.B. Pardiwala and K.V. Viswanathan observed that the two inquiries operate in entirely different fields, with the escrow mechanism being limited to determining forfeiture, whereas the PFUTP inquiry focuses on the commission of fraud.

Distinction in Statutory Scope

The court clarified that Regulation 15B(8) is confined to determining whether the escrow is liable for forfeiture due to non-compliance with the buyback size requirements. The satisfaction of these conditions merely triggers the release of the escrow and cannot be treated as a clean chit regarding fraudulent intent. The bench emphasized that the scope of the escrow inquiry is restricted to the financial obligation, while the PFUTP inquiry encompasses the entirety of the company's conduct to detect manipulative or deceptive practices.

Notings in Departmental Files Not Binding

Addressing the respondents' reliance on internal SEBI notings suggesting that fraud would be difficult to sustain once the escrow conditions were met, the court underscored that such internal opinions are not binding. The bench reiterated that notings in a departmental file do not have the sanction of law to be an effective order. Such documents essentially represent viewpoints for internal consideration and do not culminate in an executable order affecting the rights of parties until they reach the final decision-making authority.

Requirement for Evidentiary Rigour

The court cautioned that fraud cannot be established on the basis of mere conjecture or surmise, but must be proven on the touchstone of the balance of probabilities. It highlighted that where an authority is unable to demonstrate direct inducement of third parties, the device or tactic deemed manipulative must be such that there could be no other explanation but that of fraud. This elevates the standard of proof to a higher degree of the preponderance of probabilities when direct evidence of fraudulent meetings of minds is absent.

"The trading data must, therefore, be considered alongside any contemporaneous instructions, communications, internal records, or other conduct attributable to the company or persons in control which may corroborate the inference sought to be drawn from the pattern of trades."

Directing Fresh Adjudication

The bench identified a material infirmity in the proceedings because both the Adjudicating Officer and the Securities Appellate Tribunal (SAT) failed to address significant discrepancies in the historical trading data relied upon by SEBI. Pointing out that these conflicting data sets go to the root of the fraud finding, the court remanded the matter to the SAT. The tribunal has been directed to scrutinize the trading data properly and, if necessary, exercise its powers under Section 15U(2) of the SEBI Act to summon officials and documents.

Directions to the Tribunal

The SAT must now conduct a fresh adjudication on the question of fraud, specifically recording findings on the instances of data discrepancy while remaining uninfluenced by the observations made by the Supreme Court on the merits of the controversy. The court underscored that the SAT is better equipped to handle such factual disputes and to call upon the appellant to explain internal contradictions between its various investigation reports. The tribunal is expected to dispose of the matter expeditiously within a period of six months.

Date of Decision: 09 September 2026