Cairn buyback case: SC sends Sebi penalty matter back to appellate tribunal to decide on fraud

The Supreme Court on Wednesday sent back to the Securities Appellate Tribunal (SAT) a case involving a ₹5.25-crore penalty imposed by the Securities and Exchange Board of India (Sebi) on Cairn India, now part of Vedanta Ltd, over its 2014 share buyback.

The top court asked the appellate forum to reconsider the question of fraud under Sebi’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations and decide on the matter in the next six months.

A bench of Justices J.B. Pardiwala and K.V. Viswanathan partly allowed Sebi’s appeals against SAT’s October 2023 order, which had set aside the penalties, but did not decide the fraud issue. The bench asked SAT to reconsider the matter after examining disputed trading data and other facts.

“The appeals are partly allowed, and the matter is remanded to SAT for fresh adjudication on the question of fraud, in terms of the directions contained hereinabove,” the judgement said.

The court found that important factual issues required further examination. It also noted a discrepancy between the historical trading data relied upon by Sebi and data furnished by the National Stock Exchange (NSE) in a December 2014 letter. The court said this disputed question of fact went to the “very root” of the finding of fraud and had not been properly examined.

The court also pointed to a contradiction in Sebi’s probe. An investigation report dated 3 February 2016, had recorded that there was no material impact on Cairn India’s share price or trading volume attributable to the company’s corporate announcements. However, a subsequent investigation report dated 17 March 2017, concluded that the buyback announcement was fraudulent. The Supreme Court noted that neither the adjudicating officer nor SAT had addressed this contradiction.

The court directed SAT to first determine which version of the historical trading data is accurate and examine the discrepancies. It said the tribunal can summon company officials, merchant bankers and other persons and seek relevant documents. It can also examine other circumstances, apart from the trading data, that may support or weaken Sebi's fraud allegation.

The Supreme Court also clarified that the earlier release of Cairn India’s escrow amount does not, by itself, prevent Sebi from examining allegations of fraud under the PFUTP Regulations. The escrow provisions deal with forfeiture of money and are separate from an inquiry into fraudulent conduct.

The ruling now leaves open the question of whether Cairn India committed fraud for SAT to decide afresh. The ₹5.25-crore penalty has not been finally restored, while SAT’s 2023 order setting aside the penalty will also not be the final word on the fraud issue.

Queries have been mailed to Vedanta and Sebi. Their response is awaited.

The buyback plan

In January 2014, Cairn India announced a plan to buy back up to 17.08 crore shares at a maximum price of ₹335 apiece, involving a total amount of up to ₹5,725 crore. The buyback was scheduled to run from 23 January to 22 July 2014.

However, the company eventually bought back only 3.67 crore shares, spending ₹1,225.45 crore—about 28.59% of the announced buyback size. Under the applicable buyback rules, at least 50% of the earmarked amount was required to be utilised.

Sebi subsequently investigated Cairn's trading activity during the buyback period. The regulator alleged that the company made a misleading public announcement without genuinely intending to complete the buyback, thereby violating the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations and the buyback regulations. Sebi also alleged that Cairn's buy orders were inadequate despite favourable liquidity in the market.

In May 2021, Sebi imposed a ₹5.25-crore penalty on Cairn India— ₹5 crore for alleged PFUTP violations and ₹25 lakh for violation of buyback regulations. It also imposed ₹15 lakh each on three former Cairn officials: P Elango, Aman Mehta and Neerja Sharma, who had signed the buyback advertisement. Cairn India had by then merged with Vedanta in 2017.

Cairn challenged the regulator's order before SAT. The company argued that it could not have anticipated the sharp rise in its share price when the buyback was announced. According to its case, the stock traded above the maximum buyback price of ₹335 for a substantial part of the buyback period, making purchases at the announced price unattractive or impossible.

SAT accepted the core of Cairn's argument and, in October 2023, set aside Sebi's order and the ₹5.25-crore penalty. It also quashed the ₹15 lakh penalties imposed on the three former officials. The tribunal held that the material before it did not conclusively establish that Cairn had no intention of successfully completing the buyback. It also observed that the company could not have predicted the bullish market trend or known when it announced the buyback that the stock would trade above ₹335 on a large number of trading days.

Sebi then challenged the SAT order before the Supreme Court. In November 2024, the apex court refused to stay the SAT order and issued notice on Sebi's appeal, allowing the matter to proceed for final adjudication.