Case: T. Takano Vs. Securities and Exchange Board of India &amp; Anr

2. The appellant was employed as the Managing Director (MD) and Chief Executive Officer (CEO) in Ricoh India Limited (Company), a public listed company, for the financial years 2012-13, 2013-14 and 2014-15, till 31 March 2015. In 2016, BSR & Co. were appointed as statutory auditors of the Company. The auditors raised a suspicion regarding the veracity of the financial statements of the Company for the quarters that ended on June 30, 2015 and September 30, 2015. The Audit Committee of the Company appointed Price Water House Coopers Private Limited (PWC) to carry out a forensic audit. PWC submitted a preliminary audit report on 20 April 2016. The Company addressed a communication to the first respondent on the same day stating that the financial statements for those quarters did not reflect the true affairs of the Company and requested the first respondent to carry out an independent investigation on possible violations of the provisions of the PFUTP Regulations. The final report submitted by PWC was forwarded by the Company to the first respondent on 29 November 2016.3. The first respondent initiated an investigation. During the course of the investigation, summons was issued to Manoj Kumar (then MD & CEO for the financial year of 2015-16), Arvind Singhal (then Chief Financial Officer) and Anil Saini (then Senior Vice President and Chief Operating Officer). The Company in its letter dated 8 June 2016 submitted that it suspected Manoj Kumar, Arvind Singhal and Anil Saini for their involvement in misstating the financial affairs. The first respondent in its ex parte interim order–cum–show cause notice prima facie found two others, including the appellant, responsible for facilitating the misstatements of the financial position. With regard to the role of the appellant, it was noted:On examination of the Organization Structure of Ricoh for past years, it is noted that T. Takano was the MD & CEO of the Company till March 31, 2015. It is also noted that the mandate for PwC investigation was restricted to the half-year ended September 30, 2015 and not extended to all the years when the misstatements occurred. If Manoj Kumar, who was MD & CEO in FY 2015-16 was held responsible for the fraud, it is only logical that T. Takano as the previous MD & CEO (during whose tenure the fraud actually started) was also responsible for the misstatements. It appears that by restricting the investigation period mandated to PwC, the Company intended to restrain PwC from examining the transactions of the previous years and thereby ring-fence the earlier MD & CEO, T. Takano.4. Based on the investigation, it was noted that the financial misstatements commenced from 2012-13 and the Company suffered a loss due to, inter alia, transfers to third parties, write-offs and a sale made to Fourth Dimension Solutions Limited (FDSL) without inventory. It was further noted that the share price of the Company had gone up due to the misstatements. Hence, it was observed that the appellant, along with five others, has prima facie violated the provisions of Section 12A(a), 12(A)(b) and 12A(c) of the Securities and Exchange Board of India Act 1992 (SEBI Act) read with Regulations 3(b), 3(c), 3(d), 4(1), 4(2)(e), 4(2)(k) and 4(2)(r) of the PFUTP Regulations. Hence, the first respondent issued the following directions under Sections 11(1), 11(4) and 11B of the SEBI Act and Regulation 11 of the PFUTP Regulations:(i) The appellant and the other five key managerial persons were restrained from accessing the securities market or buying, selling or otherwise dealing in the securities market ;(ii) An independent audit firm was appointed for conducting a detailed forensic audit of the books of accounts of the company from the financial year 2012-13 ;(iii) The independent audit firm was called upon to submit a report to the first respondent within three months from the date of appointment; and(iv) A show cause notice for directions under Sections 11, 11(4) and 11 (B) of the SEBI Act, including directions for restraining/prohibiting him from accessing the securities market and buying, selling or otherwise dealing in securities in any manner.5. By his letters dated 6 June 2018 and 28 June 2018, and at a personal hearing on June 11, 2018 the appellant submitted that:(i) He had no knowledge of the purported transactions and/or the misstatements in the books of account;(ii) The inclusion of his name in the interim order-cum-show cause notice was speculative, based on the premise that since the MD and CEO of financial year 2015-16 has been held prima facie responsible, the appellant who was the MD and CEO during the previous year must also be held responsible; and(iii) The financial team was solely responsible for preparing financial statements. These statements were then examined by the statutory auditors of the company. The version subsequently prepared was the final version of the financial statement. Therefore, he had no knowledge of the intricacies of the financial statements.6. By an order dated 16 August 2018 (Confirmatory order), the first respondent confirmed the directions issued in the ex parte interim order dated 12 February 2018. The order notes that though the facts indicate large-scale irregularities in business transactions, the time span of the irregularities and the exact role of the noticees are not fully ascertained, and therefore, it would be premature to give credence to the submissions of the individual noticees. It was also observed that a clear picture regarding the financial affairs of the company and the role of various noticees in the alleged fraud is yet to emerge pending such investigation. The time for submission of the forensic report by the first respondent was extended to 30 September 2018. SEBI appointed Pipara & Co. LLP on 20 February 2019 to conduct a forensic audit of the books of account of the Company. The report of the forensic auditors was submitted on 25 October 2019.7. The appellant challenged the confirmatory order before the Securities Appellate Tribunal (Tribunal), Mumbai. The appeals were allowed and the order against the appellant was quashed on 29 January 2020 on the grounds that:(i) The confirmatory order is based on a suspicion about the role of the appellant;(ii) The submissions of the appellant were not dealt with appropriately;(iii) Since the company is in liquidation, the appellant is not in a position to influence decisions; and(iv) The appellant cannot be prevented from dealing in the securities market when the appellant is held to be vicariously liable due to the position he held as MD/CEO.The tribunal, however, directed that the first respondent is at liberty to issue a fresh show cause notice if the evidence against the appellant is made available through the forensic report or through the first respondents investigation.8. A fresh show cause notice was issued to the appellant on 19 March 2020 under the provisions of Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) and 15HA of the SEBI Act and Section 12A(2) read with Section 23H of the Securities Contracts (Regulation) Act 1956 (SCRA) based on the forensic audit report and investigation conducted by the first respondent. With regard to the appellant, it was alleged that :… Mr. T. Takano, during whose tenure the business transactions with FDSL started by virtue of his position as MD & CEO of Ricoh during FY 2012-13 to FY 2014-15, was actively involved in committing the fraud and had knowingly restricted the mandate given to PwC to six month so as to succeed in hiding his role in the commission of fraud of publishing untrue financial statements of Ricoh which resulted in misleading the investors about the financial performance of the company and thereby resulted in inducement to trades in the scrip. The said acts of the Noticee no. 2 are alleged to be in violation of regulations 3 (b), (c), (d), 4(1) and 4(2)(e), (f), (k) and (r) of SEBI (PFUTP) Regulations, 2003 and clause 49(V) read with 41(Il)(a) of the erstwhile Listing Agreement.9. The appellant claims that he received the show cause notice by email on 4 August 2020. The appellant responded to the show cause notice on 6 August 2020 stating that though he had received the forensic audit report submitted by Pipara & Co. LLP, he had not received the report of the investigation conducted by SEBI. The appellant sought an opportunity to inspect the following records:[…] including but not limited to all material on which reliance was placed Pipara & Co. LLP for the purpose of preparing the forensic audit report, all material on which reliance has been placed while issuing the Show Cause Notice, and on which reliance is intended to be placed while making any adjudication on the Show Cause Notice (material).10. By its communication dated 13 August 2020, the first respondent stated that the investigation report is an internal document which cannot be shared. The appellant was provided time until 9 August 2020 to inspect the other documents. The first respondent enclosed soft copies of the annexures to the forensic report and called upon the appellant to submit a reply. The appellant reiterated the demand to inspect the investigation report. By an email dated 4 September 2020, the appellant was informed that the investigation report of SEBI was not relied on to issue the show cause notice and hence, would not be provided.11. The appellant filed a writ petition before the Bombay High Court challenging the show cause notice which was issued on 19 March 2020. In the alternative, inspection of all documents relied on to issue the show cause notice was sought. The appellant submitted before the High Court that to non-disclosure of all relevant documents relied on to issue the show cause notice violated the principles of natural justice.12. By its judgment dated 29 September 2020, the High Court held that the investigation report prepared under Regulation 9 of PFUTP Regulations is solely for internal purposes. In concluding that the investigation report need not be furnished while issuing a show cause notice, the High Court has relied on the decision of this Court in Natwar Singh v. Director of Enforcement (2010) 13 SCC 255 . In sum and substance, the High court has held that the report does not form the basis of the show cause notice and therefore need not be disclosed. The review petition challenging the judgment of the Division Bench of the High Court was rejected.

Reasoning:
The language in which Regulation 10 is couched indicates that consideration of the report of the investigating authority which is submitted under Regulation 9 is one of the components guiding the Boards satisfaction on the violation of the regulations. The words of Regulation 10 indicate that the Board after consideration of the report referred to in regulation 9, if satisfied that there is a violation of these regulations and after giving a reasonable opportunity of hearing to the persons concerned, takes action under Regulations 11 and 12. As a result of the mandate of Regulation 10, the Board has to consider the investigation report as an intrinsic element in arriving at its satisfaction on whether there has been a violation of the regulations.28. Now in the above context, it would be material to advert to the decision of this court in Natwar Singh (supra). The issue before the two-judge Bench of this Court was whether a noticee who is served with a show cause notice under Rule 4(1) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules 2000 (FEMA Rules 2000), is entitled to demand all the documents in the possession of the adjudicating authority including those documents upon which no reliance has been placed while issuing a notice to show cause as to why an enquiry should not be initiated against him. Rule 4 is in the following terms:4. Holding of inquiry(1) For the purpose of Adjudicating under section 13 of the Act whether any person has committed any contravention as specified in that section of the Act, the Adjudicating Authority shall, issue a notice to such person requiring him to show cause within such period as may be specified in the notice (being not less than ten days from the date of service thereof) why an inquiry should not be held against him.(2) Every notice under sub-rule (1) to any such person shall indicate the nature of contravention alleged to have been committed by him. (3) After considering the cause, if any, shown by such person, the Adjudicating Authority is of the opinion that an inquiry should be held, he shall issue a notice fixing a date for the appearance of that person either personally or through his legal practitioner or a chartered accountant duly authorised by him.Rule 4(1) of the FEMA Rules 2000 indicates that in the first instance, the adjudicating authority has to issue a notice requiring the person to show cause why an enquiry should not be held against him. The stage of the notice under Rule 4(1) is not for adjudication but is for the purpose of deciding whether an enquiry should be held. If after considering the cause which is shown, the adjudicating authority is of the opinion that an enquiry should be held, thereupon under Rule 4(3), a notice is issued for the appearance of the person. Sub-Rule (4) provides that on the date fixed, the adjudicating authority shall explain the contravention alleged to have been committed and under sub-Rule (5) an opportunity of producing documents or evidence has to be given. Under sub-Rule (8), the adjudicating authority is empowered to impose a penalty if it is satisfied, upon considering the evidence produced that there has been a contravention.29. Now in this backdrop, Justice B. Sudarshan Reddy speaking for the two- judge Bench of this Court interpreted Rule 4 as follows:23. The Rules do not provide and empower the Adjudicating Authority to straightaway make any inquiry into allegations of contravention against any person against whom a complaint has been received by it. Rule 4 of the Rules mandates that for the purpose of adjudication whether any person has committed any contravention, the Adjudicating Authority shall issue a notice to such person requiring him to show cause as to why an inquiry should not be held against him. It is clear from a bare reading of the rule that show cause notice to be so issued is not for the purposes of making any adjudication into alleged contravention but only for the purpose of deciding whether an inquiry should be held against him or not. Every such notice is required to indicate the nature of contravention alleged to have been committed by the person concerned. That after taking the cause, if any, shown by such person, the Adjudicating Authority is required to form an opinion as to whether an inquiry is required to be held into the allegations of contravention. It is only then the real and substantial inquiry into allegations of contravention begins.The above extract clearly indicates that the show cause notice under Rule 4(1) is not for the purpose of making an adjudication into the alleged contravention but only for deciding whether an enquiry must be conducted. The stage when an enquiry is held is subsequent to the initial stage contemplated by Rule 4(1). During the course of the adjudication, the fundamental principle is that material which is used against a person must be brought to notice. As this Court observed:30. The right to fair hearing is a guaranteed right. Every person before an authority exercising the adjudicatory powers has a right to know the evidence to be used against him. This principle is firmly established and recognised by this Court in Dhakeswari Cotton Mills Ltd. v. CIT [AIR 1955 SC 65  : (1955) 1 SCR 941 ] . However, disclosure not necessarily involves supply of the material. A person may be allowed to inspect the file and take notes. Whatever mode is used, the fundamental principle remains that nothing should be used against the person which has not been brought to his notice. If relevant material is not disclosed to a party, there is prima facie unfairness irrespective of whether the material in question arose before, during or after the hearing. The law is fairly well settled if prejudicial allegations are to be made against a person, he must be given particulars of that before hearing so that he can prepare his defence. However, there are various exceptions to this general rule where disclosure of evidential material might inflict serious harm on the person directly concerned or other persons or where disclosure would be breach of confidence or might be injurious to the public interest because it would involve the revelation of official secrets, inhibit frankness of comment and the detection of crime, might make it impossible to obtain certain clauses of essential information at all in the future (see R. v. Secy. of State for Home Deptt., ex p H [1995 QB 43 : (1994) 3 WLR 1110 : (1995) 1 All ER 479 (CA)] ).31. The concept of fairness may require the adjudicating authority to furnish copies of those documents upon which reliance has been placed by him to issue show-cause notice requiring the noticee to explain as to why an inquiry under Section 16 of the Act should not be initiated. To this extent, the principles of natural justice and concept of fairness are required to be read into Rule 4(1) of the Rules. Fair procedure and the principles of natural justice are in-built into the Rules. A noticee is always entitled to satisfy the adjudicating authority that those very documents upon which reliance has been placed do not make out even a prima facie case requiring any further inquiry. In such view of the matter, we hold that all such documents relied on by the authority are required to be furnished to the noticee enabling him to show a proper cause as to why an inquiry should not be held against him though the Rules do not provide for the same. Such a fair reading of the provision would not amount to supplanting the procedure laid down and would in no manner frustrate the apparent purpose of the statute.30. The decision of this Court distinguishes between the initial stage under Rule 4(1) which is only for the purpose of deciding whether an enquiry has to be held and the subsequent stage of adjudication into the allegations of contravention. This Court further held:34. As noticed, a reasonable opportunity of being heard is to be provided by the adjudicating authority in the manner prescribed for the purpose of imposing any penalty as provided for in the Act and not at the stage where the adjudicating authority is required merely to decide as to whether an inquiry at all be held into the matter. Imposing of penalty after the adjudication is fraught with grave and serious consequences and therefore, the requirement of providing a reasonable opportunity of being heard before imposition of any such penalty is to be met. In contradistinction, the opinion formed by the adjudicating authority whether an inquiry should be held into the allegations made in the complaint are not fraught with such grave consequences and therefore the minimum requirement of a show-cause notice and consideration of cause shown would meet the ends of justice. A proper hearing always include, no doubt, a fair opportunity to those who are parties in the controversy for correcting or contradicting anything prejudicial to their view.31. On the facts of that case, the Court held that the enquiry against the noticee was yet to commence:36. In the present case, the inquiry against the noticee is yet to commence. The evidence as may be available upon which the adjudicating authority may place reliance, undoubtedly, is required to be furnished to the person proceeded against at the second stage of inquiry into allegations of contravention. It is at that stage, the adjudicating authority is not only required to give an opportunity to such person to produce such documents as evidence as he may consider relevant to the inquiry, but also enforce attendance of any person acquainted with the facts of the case to give evidence or to produce any document which in its opinion may be useful for or relevant to the subject-matter of the inquiry. It is no doubt true that natural justice often requires the disclosure of the reports and evidence in the possession of the deciding authority and such reports and evidence relevant to the subject-matter of the inquiry may have to be furnished unless the scheme of the Act specifically prohibits such disclosure.This Court further noted that the documents which the appellant wanted were documents upon which no reliance was placed by the authority for setting the law into motion. Consequently, this Court concluded that:48. On a fair reading of the statute and the Rules suggests that there is no duty of disclosure of all the documents in possession of the adjudicating authority before forming an opinion that an inquiry is required to be held into the alleged contraventions by a noticee. Even the principles of natural justice and concept of fairness do not require the statute and the Rules to be so read. Any other interpretation may result in defeat of the very object of the Act. Concept of fairness is not a one-way street. The principles of natural justice are not intended to operate as roadblocks to obstruct statutory inquiries. Duty of adequate disclosure is only an additional procedural safeguard in order to ensure the attainment of the fairness and it has its own limitations. The extent of its applicability depends upon the statutory framework.32. The issue in Natwar Singh (supra) was whether the authority was bound to disclose to the noticee all the documents in its possession before forming an opinion on whether an enquiry is required to be held into the alleged contravention by the noticee. The Court held that at that stage there was no requirement of furnishing all such documents to the noticee since the only purpose of the notice under Rule 4(1) was for deciding whether an enquiry should be held. Rule 4(1), in other words, was not a final adjudication and consequently the requirement of a disclosure of all materials in the possession of the authority was not attracted. At that stage, it was sufficient that only documents that have been relied on are disclosed.33. The High Court in the present case has palpably misconstrued the judgment in Natwar Singh (supra). The High Court has failed to notice that the issue in that case was whether at the stage when the authority decides under Rule 4(1) of the FEMA Rules 2000 whether an enquiry should be held, a disclosure of all documents in the possession of the authority to the noticee is warranted. This was answered in the negative. This Court distinguished the stage of adjudication as distinct from the initial stage under Rule 4(1). At the stage of adjudication, all documents useful or relevant to the subject-matter have to be disclosed to the notice, subject to exceptions noticed by the court.Krishna Chandra Tandon (supra) to buttress the submission.However, it is clear from the judgment that even if the documents are merely inter-departmental communications, there is a duty to disclose such documents if they have been relied upon by the enquiry officer. A two-Judge Bench of this observed:16. Mr Hardy next contended that the appellant had really no reasonable opportunity to defend himself and in this connection he invited our attention to some of the points connected with the enquiry with which we have now to deal. It was first contended that inspection of relevant records and copies of documents were not granted to him. The High Court has dealt with the matter and found that there was no substance in the complaint. All that Mr Hardy was able to point out to us was that the reports received by the CIT from his departmental subordinates before the charge-sheet was served on the appellant had not been made available to the appellant. It appears that on complaints being received about his work the CIT had asked the Inspecting Assistant Commissioner Shri R.N. Srivastava to make a report. He made a report. It is obvious that the appellant was not entitled to a copy of the report made by Mr Srivastava or any other officer unless the enquiry officer relied on these reports. It is very necessary for an authority which orders an enquiry to be satisfied that there are prima facie grounds for holding a disciplinary enquiry and, therefore, before he makes up his mind he will either himself investigate or direct his subordinates to investigate in the matter and it is only after he receives the result of these investigations that he can decide as to whether disciplinary action is called for or not. Therefore, these documents of the nature of inter- departmental communications between officers preliminary to the holding of enquiry have really no importance unless the Enquiry Officer wants to rely on them for his conclusions. In that case it would only be right that copies of the same should be given to the delinquent. It is not the case here that either the Enquiry Officer or the CIT relied on the report of Shri R.N. Srivastava or any other officer for his finding against the appellant. Therefore, there is no substance in this submission.35. However, merely because the investigating authority has denied placing reliance on the report would not mean that such material cannot be disclosed to the noticee. The court may look into the relevance of the material to the proposed action and its nexus to the stage of adjudication. Simply put, this entails evaluating whether the material in all reasonable probability would influence the decision of the authority. The above position was laid down by this Court in Khudiram Das v. State of West Bengal (1975) 2 SCC 81 . Ruling in the context of preventive detention, a four-judge Bench of this Court observed:15. Now, the proposition can hardly be disputed that if there is before the District Magistrate material against the detenu which is of a highly damaging character and having nexus and relevancy with the object of detention, and proximity with the time when the subjective satisfaction forming the basis of the detention order was arrived at, it would be legitimate for the Court to infer that such material must have influenced the District Magistrate in arriving at his subjective satisfaction and in such a case the Court would refuse to accept the bald statement of the District Magistrate that he did not take such material into account and excluded it from consideration. It is elementary that the human mind does not function in compartments. When it receives impressions from different sources, it is the totality of the impressions which goes into the making of the decision and it is not possible to analyse and dissect the impressions and predicate which impressions went into the making of the decision and which did not. Nor is it an easy exercise to erase the impression created by particular circumstances so as to exclude the influence of such impression in the decision making process. Therefore, in a case where the material before the District Magistrate is of a character which would in all reasonable probability be likely to influence the decision of any reasonable human being, the Court would be most reluctant to accept the ipse dixit of the District Magistrate that he was not so influenced and a fortiori, if such material is not disclosed to the detenu, the order of detention would be vitiated, both on the ground that all the basic facts and materials which influenced the subjective satisfaction of the District Magistrate were not communicated to the detenu as also on the ground that the detenu was denied an opportunity of making an effective representation against the order of detention.37. In State of Uttar Pradesh v. Ramesh Chandra Mangalik (2002) 3 SCC 443,  it was held that the duty to disclose is confined only to material and relevant documents which may have been relied upon in support of the charges. In that case, the personal file of other officers was not supplied to the delinquent officer. It was noted that such documents have not been relied upon by the enquiry officer. The delinquent officer was not able to prove the relevance of the documents that were suppressed. This Court observed:11. Learned counsel for the appellant has further submitted that particular documents, copies of which are said to have not been supplied are not indicated by the respondent, much less in the order of the High Court nor has their relevance been pointed out. The submission is that the delinquent will also have to show as to in what manner any particular document was relevant in connection with the inquiry and what prejudice was caused to him by non-furnishing of a copy of the document. In support of this contention, reliance has been placed upon a case reported in Chandrama Tewari v. Union of India [1987 Supp SCC 518  : 1988 SCC (L&S) 226 : (1987) 5 ATC 369] . It has been observed in this case that the obligation to supply copies of documents is confined only to material and relevant documents which may have been relied upon in support of the charges. It is further observed that if a document even though mentioned in the memo of charges, has no bearing on the charges or if it is not relied upon or it may not be necessary for cross- examination of any witness, non-supply of such a document will not cause any prejudice to the delinquent. The inquiry would not be vitiated in such circumstances. In State of T.N. v. Thiru K.V. Perumal [(1996) 5 SCC 474  : 1996 SCC (L&S) 1280] relied upon by the appellant, it is held that it is for the delinquent to show the relevance of a document a copy of which he insists to be supplied to him. Prejudice caused by non-supply of document has also to be seen. In yet another case relied upon by the learned counsel for the appellant, reported in State of U.P. v. Harendra Arora [(2001) 6 SCC 392  : 2001 SCC (L&S) 959] it has been held that a delinquent must show the prejudice caused to him by non-supply of a copy of the document where order of punishment is challenged on that ground.38. In Kothari Filaments v. Commr. Of Customs (2009) 2 SCC 192,  this Court held that the Commissioner of Customs in the exercise of its quasi-judicial powers cannot pass an order on the basis of material which is only known to the authorities. This Court held:14. The statutory authorities under the Act exercise quasi-judicial function. By reason of the impugned order, the properties could be confiscated, redemption fine and personal fine could be imposed in the event an importer was found guilty of violation of the provisions of the Act. In the event a finding as regards violation of the provisions of the Act is arrived at, several steps resulting in civil or evil consequences may be taken. The principles of natural justice, therefore, were required to be complied with.15. The Act does not prohibit application of the principles of natural justice. The Commissioner of Customs either could not have passed the order on the basis of the materials which were known only to them, copies whereof were not supplied or inspection thereto had not been given. He, thus, could not have adverted to the report of the overseas enquiries. A person charged with misdeclaration is entitled to know the ground on the basis whereof he would be penalised. He may have an answer to the charges or may not have. But there cannot be any doubt whatsoever that in law he is entitled to a proper hearing which would include supply of the documents. Only on knowing the contents of the documents, he could furnish an effective reply….39. The following principles emerge from the above discussion:(i) A quasi-judicial authority has a duty to disclose the material that has been relied upon at the stage of adjudication; and(ii) An ipse dixit of the authority that it has not relied on certain material would not exempt it of its liability to disclose such material if it is relevant to and has a nexus to the action that is taken by the authority. In all reasonable probability, such material would have influenced the decision reached by the authority.Thus, the actual test is whether the material that is required to be disclosed is relevant for purpose of adjudication. If it is, then the principles of natural justice require its due disclosure.40. The investigation report forms the material considering which, the Board arrives at a satisfaction regarding whether there has been a violation of the regulations. If it is satisfied that there has been a violation of the regulations, after giving a reasonable opportunity to be heard, the Board is empowered to take action according to Regulations 11 and 12. It would not suffice for the first respondent to claim as it did before the High Court that it did not rely on the investigation report. The ipse dixit of the authority that it was not influenced by certain material would not suffice. If the material is relevant to and has a nexus to the stage at which satisfaction is reached by an authority, such material would be deemed to be important for the purpose of adjudication. The written submissions of the Board clearly state that the findings of the investigation report are important for the authority to decide whether there are any prima facie grounds to initiate enforcement proceedings under Regulation 10.41. The above extracts indicate that the findings of the investigation report are relevant for the Board to arrive at the satisfaction on whether the Regulations have been violated. Even if it is assumed that the report is an inter-departmental communication, as held in Krishna Chandra Tandon (supra), there is a duty to disclose such report if it is relevant for the satisfaction of the enforcement authority for the determination of the alleged violation.42. In Khudiram Das (supra), a four-Judge Bench of this Court laid down a two-prong test for the standard of relevancy; firstly, the material must have nexus with the order and secondly, the material might have influenced the decision of the authority. A Constitution Bench of this Court in Karunakar (supra) held that the non-disclosure of the relevant information is not in itself sufficient to warrant the setting aside of the order of punishment. It was held that in order to set aside the order of punishment, the aggrieved person must be able prove that prejudice has been caused to him due to non-disclosure. To prove prejudice, he must prove that had the material been disclosed to him the outcome or the punishment would have been different. The test for the extent of disclosure and the corresponding remedy for non-disclosure is dependent on the objective that the disclosure seeks to achieve. Therefore, the impact of non-disclosure on the reliability of the verdict must also be determined vis-à-vis, the overall fairness of the proceeding. While determining the reliability of the verdict and punishment, the court must also look into the possible uses of the undisclosed information for purposes ancillary to the outcome, but that which might have impacted the verdict.43. In Natwar Singh (supra), it was held that material which is relevant to the subject-matter of the proceedings must be disclosed, unless the scheme of the statute indicates to the contrary. The non-disclosure of such material is prima facie arbitrary. A deviation from this general rule was made based on the stage of the proceedings. It was held that it is sufficient to disclose the materials relied on if it is for the purpose of issuing a show cause notice for initiating inquiry. However, in the present case, since the report of the investigating authority under Regulation 9 enters into the calculus of circumstances borne in mind by the Board in arriving at its satisfaction under Regulation 10 for taking actions as specified in Regulations 11 and 12, it would be contrary to the Regulations to assert that the investigation report is merely an internal document of which a disclosure is not warranted. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9. Thus, the investigation report has to be duly disclosed to the noticee. However, the right to disclosure is not absolute. It needs to be determined if the non-disclosure of the investigative report is protected by any of the exceptions to the rule.45. We cannot be oblivious to the wide range of sensitive information that the investigation report submitted under Regulation 9 may cover, ranging from information on financial transactions and on other entities in the securities market, which might affect third-party rights. The report may contain market sensitive information which may impinge upon the interest of investors and the stability of the securities market. The requirement of compliance with the principles of natural justice cannot therefore be read to encompass the right to a roving disclosure on matters unconnected or as regards the dealings of third parties. The investigating authority may acquire information of sensitive nature bearing upon the orderly functioning of the securities market. The right of the noticee to disclosure must be balanced with a need to preserve any other third- party rights that may be affected.46. In Natwar Singh (supra), this Court has observed that there are exceptions to the general rule of disclosing evidentiary material. This Court held that such exceptions can be invoked if the disclosure of material causes harm to others, is injurious to public health or breaches confidentiality. While identifying the purpose of disclosure, we have held that one of the crucial objectives of the right to disclosure is securing the transparency of institutions. The claims of third party rights vis-à-vis the right to disclosure cannot be pitted as an issue of public interest and fair adjudication. The creation of such a binary reduces and limits the purpose that disclosure of information serves. The respondent should prima facie establish that the disclosure of the report would affect third party rights. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately.47. Applying this test to the facts, we find that the appellant is unable to prove that the disclosure of the entire report is necessary for him to defend the case. The first respondent made the following arguments making a prima facie case that the disclosure of the report would violate third party rights:(i) Investigation reports contain information on the volatile nature of the market;(ii) The report also contains the personal information of various stakeholders. Disclosure will violate the right to privacy of the third party individuals; and(iii) It includes strategic information.48. The appellant did not sufficiently discharge his burden by proving that the non-disclosure of the above information would affect his ability to defend himself. However, merely because a few portions of the enquiry report involve information on third-parties or confidential information on the securities market, the respondent does not have a right to withhold the disclosure of the relevant portions of the report. The first respondent can only claim non-disclosure of those sections of the report which deal with third party personal information and strategic information on the functioning of the securities market.49. Therefore, the Board should determine such parts of the investigation report under Regulation 9 which have a bearing on the action which is proposed to be taken against the person to whom the notice to show cause is issued and disclose the same. It can redact information that impinges on the privacy of third parties. It cannot exercise unfettered discretion in redacting information. On the other hand, such parts of the report which are necessary for the appellant to defend his case against the action proposed to be taken against him need to be disclosed. It is needless to say that the investigating authority is duty-bound to disclose such parts of the report to the noticee in good faith. If the investigating authority attempts to circumvent its duty by revealing minimal information, to the prejudice of the appellant, it will be in violation of the principles of natural justice. The court/appellate forum in an appropriate case will be empowered to call for the investigation report and determine if the duty to disclose has been effectively complied with.50. The notice to show cause issued to the appellant is for violation of the provisions of the SEBI Act, SCRA and PFUTP Regulations. The show cause notice has specifically referred to what was revealed during the course of the investigation and has invoked the provisions of the PFUTP Regulations in the allegations against the appellant.Since the show cause notice has specifically relied upon the report of the investigation and invokes, inter alia, a violation of the PFUTP Regulations by the appellant, the mandate of Regulation 10 must be complied with. However, while directing that there should be a disclosure of the investigation report to the appellant, it needs to be clarified that this would not permit the appellant to demand roving inspection of the investigation report which may contain sensitive information as regards unrelated entities and transactions.