Escrow Release in Failed Buyback Does Not Bar SEBI Fraud Proceedings, Supreme Court Holds

A Division Bench rules that Vedanta's escrow release under Buyback Regulations creates no statutory immunity from fraud charges under PFUTP Regulations, remanding the case to SAT.

The Supreme Court has held that the release of an escrow deposit under the SEBI (Buyback of Securities) Regulations, 1998 does not, by itself, bar SEBI from proceeding against a company for fraud under the PFUTP Regulations, 2003. The ruling arose from a failed share buyback by Vedanta Limited (formerly Cairn India Limited), in which SEBI's Adjudicating Officer had imposed penalties totalling over Rs. 5.25 Crore for making a misleading buyback announcement without intent to fulfil it. The Securities Appellate Tribunal, Mumbai set aside those penalties in October 2023, finding no fraud proved. The Supreme Court, in a judgment authored by Justice J.B. Pardiwala, partly allowed SEBI's appeals, settled the central legal question in SEBI's favour, and remanded the fraud question back to SAT for fresh adjudication within six months.

The Buyback That Fell Well Short

On 26 November 2013, Vedanta Limited passed a special resolution to buy back 17.09 crore equity shares at a maximum price of Rs. 335 per share, with a total outlay of Rs. 5,725 crore through the open market. A public announcement followed on 14 January 2014. The buyback period ran from 23 January 2014 to 22 July 2014—123 trading days.

Before the offer opened, Vedanta deposited Rs. 143.124 crore, being 2.5% of the maximum buyback size, into an Axis Bank escrow account as required by the Buyback Regulations.

By late June 2014, with five of the six months elapsed, Vedanta had bought back only 3.6 crore shares—21.48% of the target—deploying Rs. 1,225 crore. It wrote to SEBI seeking an extension of the buyback period. SEBI declined, finding no provision in the Buyback Regulations for such an extension.

In July 2014, Vedanta informed SEBI that it could not achieve the minimum 50% buyback size mandated by Regulation 14(3) of the Buyback Regulations, and applied for release of the Rs. 143.125 crore held in escrow under Regulation 15B(8).

Two Investigations, a Released Escrow, Then a Fraud Charge

SEBI's Investigation Department (IVD) conducted a preliminary investigation. Its report dated 11 June 2015 concluded that Vedanta had met the conditions for escrow release under Regulation 15B(8)(a)—specifically, that the volume weighted average market price during the buyback period had been higher than the buyback price—and recommended the matter not be pursued further.

SEBI's Committee of Inter-Divisional Chiefs (CIDC) deliberated and referred the matter to the Legal Affairs Division (LAD). The LAD, in an internal noting dated 29 December 2015, opined that Regulation 15B(8)(a) appeared attracted, escrow forfeiture was therefore not applicable, and that it would be “doubtful and legally difficult” to sustain a PFUTP case on the same facts. However, the LAD left the ultimate recommendation to the CIDC.

A fresh IVD report dated 3 February 2016 confirmed the escrow was exempt from forfeiture, but noted that investigation into possible PFUTP violations was proceeding separately. The escrow was released. SEBI's letter to the merchant bankers, Standard Chartered Securities (India) Ltd. and Morgan Stanley India Company Pvt. Ltd., confirmed only that SEBI had decided to release the cash escrow—it made no finding on fraud.

A separate investigation report dated 17 March 2017 concluded that Vedanta had made a false buyback announcement without intent to fulfil it, violating Regulations 3(a), (b), (c), (d), 4(1), 4(2)(k), and 4(2)(r) of the PFUTP Regulations and Regulation 19(1)(a) of the Buyback Regulations. A Show Cause Notice was issued on 19 January 2018.

The Adjudicating Officer, by order dated 19 May 2021, found fraud established. Key findings included: Vedanta had 54 favourable trading days on NSE (when the share price was at or below Rs. 335) out of 123; on 24 of those days, no buy orders were placed at all; on several other favourable days only negligible orders were placed; 67 crore shares were available for purchase on NSE on favourable days against a buyback requirement of only 17.09 crore shares, yet Vedanta bought only about 5% of shares available. The AO imposed a penalty of Rs. 5.25 crore on Vedanta and Rs. 15 lakh each on respondent nos. 2, 3, and 4 (individual directors who had signed the public announcement).

SAT Sets Aside the Penalties

Vedanta and the individual directors appealed to SAT. On 5 October 2023, SAT allowed both appeals and set aside the AO's order, holding violations of the PFUTP Regulations and Buyback Regulations were not proved. SAT reasoned, among other things, that the market price had remained above the price cap of Rs. 335 for a substantial part of the buyback period, constraining execution; that the Buyback Regulations prescribed no mandatory methodology or frequency for placing buy orders; that Rs. 1,225.45 crore spent was not a paltry sum indicative of a sham; that aggressive buying could itself have artificially raised the market price; that SEBI's own earlier investigation had found no material impact on market price or volume from the buyback announcement; and that the public announcement was therefore not misleading.

SEBI appealed to the Supreme Court by way of Civil Appeal Nos. 25–26 of 2024.

The Core Legal Question

The Court framed the sole question as: whether the release of the escrow amount pursuant to the exceptions listed under Regulation 15B(8) of the Buyback Regulations precludes or otherwise bars an independent allegation, inquiry, or finding of fraud under the PFUTP Regulations.

Vedanta's central argument was that once SEBI had accepted the conditions for escrow release were met, a subsequent fraud allegation on the same facts could not stand. The respondents contended that SEBI would not have released the escrow if they had truly violated the PFUTP Regulations.

The Court's Analysis: Two Separate Statutory Regimes

The Court rejected the respondents' argument comprehensively. It began with the LAD noting. The LAD's internal office note dated 29 December 2015 had expressed the view that a PFUTP case would be legally difficult to sustain. The Court held this carried no legal weight. Citing M/s Sethi Auto Service Station & Anr. v. Delhi Development Authority & Ors. (Civil Appeal No. 6143 of 2008), the Court reiterated that notings in departmental files do not have the sanction of law to be effective orders. The LAD noting was an internal opinion, not addressed to Vedanta, not a final adjudication, and it expressly left the matter to the CIDC for fresh consideration.

The Court then examined the statutory scheme. Regulation 14(3) of the Buyback Regulations obliges a company to utilise at least 50% of the earmarked buyback amount. Regulation 15B(8) provides for consequences of non-compliance—specifically, potential forfeiture of the escrow—unless one of three exceptions applies: (a) the volume weighted average market price exceeded the buyback price; (b) inadequate sell orders despite buy orders placed; or (c) circumstances beyond the company's control that the Board considers merit consideration.

The Court held that the language of Regulation 15B(8) “neither defines nor determines the existence of fraud.” The enquiry under Regulation 15B(8) is confined to whether the escrow is liable to be forfeited. Satisfaction of the conditions for escrow release means only that the escrow cannot be forfeited—nothing more. It does not answer the distinct question of whether the company's conduct was fraudulent or manipulative under the PFUTP Regulations.

The Court put it directly: the release of escrow is not necessarily equivalent to the absence of fraud. Adopting the respondents' interpretation would convert escrow release into a blanket immunity from the PFUTP Regulations—an outcome for which there was no warrant in the statutory scheme. The two regimes operate in entirely different fields.

Precedents on Fraud in Securities Markets

Before turning to the specific facts of the fraud allegation, the Court surveyed the legal standards for establishing fraud under the PFUTP Regulations. It drew on four decisions.

In KSL Industries v. The Chairman, SEBI (2003 SCC OnLine SAT 32), SAT had held that fraud cannot be established merely on conjectures and surmises, and that a real nexus between the alleged fraudster and the act of manipulation must be established.

In SEBI v. Kishore R. Ajmera, reported in (2016) 6 SCC 368, the Court had held that where buy and sell orders are placed within seconds of each other in identical quantities and at identical rates, over a sustained period, constituting a substantial proportion of total traded volume in an illiquid scrip, the confluence of circumstances can sustain an inference of manipulation even without direct evidence of a meeting of minds. The standard for civil liability under the PFUTP Regulations is preponderance of probabilities, not proof beyond reasonable doubt.

In SEBI v. Kanaiyalal Baldevbhai Patel, reported in (2017) 15 SCC 1, the Court held that front running on the basis of privileged information, with knowledge of its privileged character, constitutes fraud under Regulation 3 of the PFUTP Regulations, provided the ingredients are established as per applicable standards rather than on conjectures and surmises.

In Deccan Chronicle Holdings Ltd. v. SEBI (2023 SCC OnLine SAT 939), SAT had found that announcing a buyback without adequate free reserves, coupled with manipulation of the company's accounts, amounted to fraud. The Court also referred to its own recent decision in SEBI v. Terrascope Ventures Ltd. (2026 SCC OnLine SC 403), where diversion of preferential issue proceeds immediately upon receipt, for purposes other than those disclosed, was held to disclose fraudulent intent under the PFUTP Regulations.

Why the Fraud Question Must Go Back to SAT

Having settled the law, the Court declined to resolve the factual fraud question itself. Two material infirmities in the record required SAT's attention.

First, the very trading data on which the AO's fraud finding rested was disputed. The respondents had pointed to at least three specific instances of apparent inconsistency between the investigation report's figures and data actually furnished by NSE and BSE. For example, for the NSE entry dated 17 February 2014, the investigation report recorded sell quantity at or below Rs. 335 at over 1.31 crore shares, whereas NSE's own data for the same date reflected only slightly over 30 lakh shares—a difference of more than four times. Neither the AO nor SAT had adjudicated this discrepancy. The Court held this was a disputed question of fact going to the very root of the fraud finding, and the proper forum for its resolution was SAT.

Second, there was an internal contradiction within SEBI's own investigative record. The investigation report dated 3 February 2016 had found no material impact on price or volume attributable to Vedanta's corporate announcements. The investigation report dated 17 March 2017 proceeded to record a finding of fraud on materially the same set of facts. Neither the AO nor SAT had addressed this contradiction. The Court held SAT was better placed to call upon SEBI to explain it.

The Court noted that SAT, under Section 15U of the SEBI Act, has powers equivalent to a civil court, including the power to summon and examine witnesses on oath, require production of documents, receive affidavit evidence, and issue commissions. This Court, exercising statutory appellate jurisdiction under Section 15Z of the SEBI Act, is ordinarily confined to questions of law and is not the appropriate forum for resolving disputed trading data.

Order

The Supreme Court partly allowed Civil Appeal Nos. 25–26 of 2024. The Court held that the release of the escrow under Regulation 15B(8) of the Buyback Regulations creates no statutory bar to proceedings or findings of fraud under the PFUTP Regulations. The matter was remanded to SAT for fresh adjudication on the question of fraud alone, with four specific directions:

(i) SAT shall scrutinise the trading data placed by both parties, including data furnished by NSE vide letter dated 10 December 2014, determine which version is free from discrepancy, and record specific findings on each instance of discrepancy noted by the Court and any others brought to its notice.

(ii) SAT may, in exercise of its powers under Section 15U(2) of the SEBI Act, summon and examine on oath officers of Vedanta, the merchant bankers, or any other person acquainted with the facts, and require discovery and production of relevant documents.

(iii) SAT may examine whether corroborating circumstances beyond the historical trading data exist on the record and bear on the fraud question.

(iv) SAT shall render fresh findings on fraud under the PFUTP Regulations, uninfluenced by any observations made by the Supreme Court on the merits, save the principles of law discussed in the judgment, and shall dispose of the matter within six months. Pending applications, if any, were disposed of.