The Securities Appellate Tribunal has reaffirmed that strict compliance with procedural norms under the SEBI Adjudication Rules is non-negotiable. In a significant ruling, the Tribunal set aside a ₹50 lakh penalty imposed on three individuals for non-compliance with SEBI’s directions, holding that failure to serve the show cause notice personally violated the foundational principle of natural justice.
Background & Facts
The Dispute
The dispute arose from SEBI’s investigation into Citrus Check Inns Limited, which was alleged to be operating an unregistered Collective Investment Scheme (CIS) in violation of the SEBI (Collective Investment Scheme) Regulations, 1999. SEBI issued an ex parte ad interim order on June 3, 2015, restraining the Company and its directors from collecting funds from investors. This order was confirmed on August 24, 2015. The appellants - Omprakash Basantlal Goenka, Prakash Ganpat Utekar, and Venkatraman Natarajan - were named as directors and noticees in the proceedings. Despite challenges to these orders before the Tribunal and ultimately the Supreme Court, SEBI proceeded to initiate penalty proceedings under Section 15HB of the SEBI Act, 1992.
Key Facts
- Citrus Check Inns Limited was under Corporate Insolvency Resolution Process (CIRP) from May 2, 2017, following an NCLT order appointing an Insolvency Resolution Professional (IRP)
- The Company’s registered office address was 16-19, Shilpin Center, 1st Floor, 40, GD Ambedkar Marg, Wadala-400031
- The appellants were not involved in day-to-day operations and held non-executive director positions
- The alleged violation involved collection of ₹25,000 from only two investors, with no material linking appellants directly to fund collection
- Omprakash was in judicial custody from May 20, 2018, to September 30, 2019
- Prakash was in custody from October 2018 to March 2020
- Venkatraman was in custody from October 2018 to March 2020
- All appellants were unaware of the Show Cause Notice (SCN) or hearing notices due to incarceration and loss of access to Company premises and email accounts
Procedural History
- January 17, 2014: SEBI received complaint against Citrus Check Inns Limited
- June 3, 2015: SEBI issued ex parte ad interim order restraining fund collection
- August 24, 2015: SEBI confirmed the interim order
- February 3, 2016: SAT set aside SEBI’s orders and directed registration under CIS Regulations
- November 9, 2016: Supreme Court set aside SAT’s order and restored SEBI’s directions
- May 2, 2017: NCLT appointed IRP for Citrus Check Inns Limited
- July 14, 2017: SEBI issued SCN to Company and directors at registered office address
- June 19, 2018: First hearing notice sent to Company address; returned ‘left’
- July 23, 2018: Second hearing notice sent via email to Company addresses
- September 6, 2018: Third hearing notice emailed to Omprakash at [email protected] (while he was in jail)
- September 11, 2018: Third hearing notice allegedly accepted by Mr. Sonal Bhalchandra Utekar on behalf of Prakash
- October 18, 2018: Fourth hearing notice published in three Mumbai newspapers
- December 28, 2018: AO passed impugned penalty order of ₹50 lakh jointly/severally against appellants
- January 2, 2019: Impugned order emailed to Omprakash at [email protected]
- December 11, 2024: Appellants received demand notice
- December 2024: Appellants received attachment notices and became aware of penalty order
- April 9, 2026: Appeals heard and reserved
- June 15, 2026: SAT delivered judgment
The Parties' Positions
For the Appellants
- SCN and hearing notices were never served personally as required under Rule 7(a) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995
- After appointment of IRP on May 2, 2017, appellants lost access to Company premises and email accounts
- All hearing notices were sent to Company address or emails under IRP’s control
- Appellants were in judicial custody during all critical periods and could not receive notices
- Service via email during incarceration does not constitute valid service
- Affixation and newspaper publication are not substitutes for personal service under Rule 7(a)
- Proceedings are void ab initio due to moratorium under IBC, Sections 14 and 31
For the Respondent (SEBI)
- Service was effected through multiple modes: speed post, email, affixation, and newspaper publication
- Third hearing notice was accepted by Mr. Sonal Bhalchandra Utekar on behalf of Prakash
- Impugned order was emailed to Omprakash and affixed at Prakash’s residence
- Appellants failed to challenge the order post-release from custody
- Amendment to Rule 7 in 2021 is clarificatory and applies retrospectively
- Delay in filing appeal (2278 days) is inordinate and unexplained
Relief Sought
The appellants sought setting aside of the penalty order dated December 28, 2018, on grounds of violation of natural justice and non-service of SCN. They also sought quashing of all proceedings initiated after the CIRP commencement date.
The Legal Issue
The central question was whether Rule 7(a) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, mandates personal service or tendering of a show cause notice to the person or their authorized agent before resorting to alternative modes such as email, affixation, or publication.
Arguments Presented
For the Appellant
The appellants relied on Uma Karthikeyan v. SEBI, Dhiren Dharamdas Agrawal v. SEBI, and Paresh Nathalal Chauhan v. SEBI to argue that Rule 7(a) is mandatory and sequential. They contended that skipping personal service and proceeding directly to email or publication violates natural justice. They emphasized that incarceration and loss of access to Company premises rendered alternative service ineffective. The IRP’s control over email and premises meant no agent was available to receive notices on their behalf. They further argued that the moratorium under IBC, Section 14, rendered SEBI’s proceedings void.
For the Respondent
SEBI argued that service was effected through multiple channels, including email and acceptance by a third party. It relied on the 2021 amendment to Rule 7 as clarificatory, suggesting that alternative modes were always permissible. SEBI contended that publication in newspapers and affixation constituted sufficient service, especially given the appellants’ failure to act after release from custody. It also challenged the delay in filing the appeal, asserting that the appellants had ample opportunity to challenge the order.
The Court's Analysis
The Tribunal examined the language of Rule 7(a) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, which mandates that a notice shall be served by delivering or tendering it to the person or their duly authorized agent. The Tribunal noted that this is the first and mandatory step under the rule. The Tribunal then referred to its own binding precedent in Uma Karthikeyan v. SEBI, where it held that skipping Rule 7(a) and proceeding directly to Rule 7(b) or 7(c) renders service invalid.
"In our view it was not open to the respondent to jump or skip Rule 7(a) and serve notice under Rule 7(b) and 7(c). If service had been attempted under Rule 7(a) by delivering or tendering it to that person i.e. by personal service the person tendering the service would have found out that the appellant had left the premises. Affixation at the address which has been vacated by the appellant is no service in the eyes of law."
The Tribunal emphasized that the appellants were in judicial custody during the entire period of service attempts and had no access to the Company’s premises or email accounts after the IRP’s appointment. The fact that notices were sent to addresses or emails controlled by the IRP did not constitute service upon the appellants. The Tribunal rejected SEBI’s argument that acceptance by a third party (Mr. Sonal Bhalchandra Utekar) constituted valid service, noting no evidence established him as an authorized agent.
The Tribunal also dismissed SEBI’s reliance on the 2021 amendment, holding that the rules in force at the time of the proceedings govern the validity of service. The Tribunal further held that the moratorium under IBC did not automatically invalidate SEBI’s proceedings, but the failure to serve the SCN rendered the entire proceeding void on grounds of natural justice.
The Verdict
The appellants succeeded. The Tribunal set aside the penalty order dated December 28, 2018, qua the appellants. The matter was remanded to SEBI for fresh consideration. The appellants are directed to appear before SEBI on July 15, 2026, without further notice, and to fully cooperate without seeking adjournments. SEBI must provide the appellants an opportunity to file replies to the SCN and complete all proceedings by December 31, 2026. No costs were awarded.
What This Means For Similar Cases
Personal Service Is Mandatory Under Rule 7(a)
- Practitioners must ensure that SEBI strictly follows Rule 7(a) before resorting to email, affixation, or publication
- Service via email to a corporate address controlled by an IRP does not constitute service on individual directors
- Absence of proof of authorized agency renders third-party acceptance invalid
Incarceration Does Not Waive Right to Notice
- Judicial custody does not imply waiver of procedural rights
- SEBI cannot presume knowledge of notices based on publication or affixation when the accused is incarcerated
- The burden remains on SEBI to prove actual or constructive service under Rule 7(a)
Post-Release Delay Is Not a Substitute for Procedural Fairness
- Failure to challenge an order after release from custody cannot cure prior violation of natural justice
- The Tribunal prioritized procedural fairness over delay, even where delay exceeded 2000 days
- This reinforces that natural justice is a substantive right, not a procedural formality
