Your Company Is Under SEBI Investigation: A Step-by-Step Guide to What Happens Next

SEBI's investigative machinery has grown substantially more sophisticated in recent years. The establishment of the Forensic Division, expanded powers under the SEBI (Amendment) Act 2014, and the use of data analytics to detect market misconduct mean that investigations are triggered faster, pursued harder, and concluded with stronger evidence than a decade ago. If your company has received a SEBI summons, a show cause notice, or is aware that it is being scrutinised, the response strategy begins immediately. ## How SEBI Investigations Begin SEBI initiates investigations through several channels: **Surveillance alerts**: SEBI's automated surveillance system flags unusual trading patterns — price movements ahead of corporate announcements, abnormal volume spikes, circular trading patterns. An alert triggers a preliminary examination; if suspicion is confirmed, a formal investigation order is passed. **Complaints**: Investor complaints, whistleblower disclosures, and Stock Exchange referrals can trigger investigation. The Quality of complaints has improved as SEBI's SCORES portal processes more sophisticated grievances. **Concurrent filings**: Discrepancies between price sensitive information filings and market movements are a common trigger. The time gap between an event occurring and its disclosure to the Exchange is scrutinised closely. **Referrals from other regulators**: The Enforcement Directorate, Income Tax Department, MCA, and RBI refer matters to SEBI where securities law violations are suspected. ## The Summons: What It Means and How to Respond A SEBI summons under Section 11C of the SEBI Act 1992 compels the recipient to: - Appear before the investigating officer - Produce documents, accounts, and records - Provide information in writing **Critical point**: Non-compliance with a SEBI summons is a criminal offence under Section 11C(6), punishable with imprisonment up to one year and/or a fine. Do not ignore a summons. When a summons arrives, immediate steps are: 1. **Identify the scope**: The summons should specify the matter under investigation. If it does not, seek clarification in writing — documenting all correspondence from the outset 2. **Preserve documents**: Suspend any routine document destruction processes immediately. Destruction of documents after a summons constitutes obstruction and will be treated as evidence of consciousness of guilt 3. **Retain legal counsel**: Attend the investigation with counsel — SEBI's investigating officers are experienced; your senior management is not 4. **Coordinate internally**: Identify who will speak, ensure all witnesses are aligned on factual accuracy, and do not coach witnesses to deviate from facts ## Search and Seizure Under Section 11C Section 11C(7) of the SEBI Act empowers SEBI to conduct search and seizure operations without prior notice. The power requires prior authorisation from a designated court. If SEBI officers arrive for a search: - Ask to see the search warrant and verify it covers your premises - Do not obstruct or delay entry — this aggravates your position - Ensure a senior officer of the company is present throughout - Prepare a contemporaneous inventory of all documents and devices seized - Issue a panchanama (seizure memo) dispute if any items are seized without proper documentation - Retain counsel immediately The seized material forms the evidentiary basis of the investigation. Your ability to contest the investigation will depend, in part, on establishing what was taken and how it was handled. ## The Insider Trading Allegation Insider trading investigations under the SEBI (Prohibition of Insider Trading) Regulations 2015 follow a specific logic. SEBI establishes: 1. That the individual was a "connected person" or had access to unpublished price sensitive information (UPSI) 2. That trading occurred when UPSI was in existence 3. That the trading was inconsistent with normal patterns The regulations create a rebuttable presumption: if a connected person trades when UPSI exists, the burden shifts to that person to demonstrate the trades were unconnected to the UPSI. This is a significant procedural burden. Common defences that counsel should explore: - The information was publicly available (not UPSI) - The trades were pursuant to a pre-existing investment plan documented before the UPSI arose - The individual was not, in fact, a connected person within the definition - The trading pattern is consistent with historical behaviour unrelated to the corporate event **The trading window**: Listed companies must maintain trading windows and ensure promoters, directors, and designated persons trade only during permitted windows. Window violations, even where no actual UPSI exists, attract proceedings under the Regulations. ## The Adjudication Process If the investigation concludes with adverse findings, SEBI issues a show cause notice specifying the alleged violations and proposed penalty. The adjudication process then proceeds: 1. **Show cause notice**: Received by the accused entity/individual 2. **Written reply**: Must be filed within the specified timeframe — typically 21 days 3. **Personal hearing**: The accused has the right to appear and make submissions before the Adjudicating Officer 4. **Adjudication order**: The Adjudicating Officer passes a reasoned order with penalty quantum **Penalties under SEBI Act Section 15**: The penalty structure has been revised to "three times the amount of profits made or losses averted" as an alternative to the fixed ceiling, making penalties in insider trading cases potentially very large. ## The SAT Appeal Orders of SEBI and its Adjudicating Officers can be challenged before the Securities Appellate Tribunal (SAT). SAT proceedings are structured as formal legal proceedings with pleadings, evidence, and arguments. Key SAT practice points: - Appeals must be filed within 45 days of the order (with discretion to condone delay) - SAT can stay the operation of a SEBI order on application — stay applications are critical where penalties are large or operational restrictions are imposed - SAT's record on overturning procedurally flawed orders is reasonably strong - High Court jurisdiction lies after SAT under Article 226 — though the Supreme Court has cautioned against bypassing SAT ## Settlement: The Consent Mechanism SEBI's consent mechanism under Section 15JB allows parties to settle proceedings without admission of guilt. Consent orders are increasingly used for first-time violations, technical breaches, and matters where the quantum of harm is limited. The settlement amount is negotiated based on SEBI's prescribed formula, the nature of the violation, and any mitigating factors. A well-structured consent application, filed at the right stage, can be more cost-effective than full adjudication. ## Protecting Directors and Officers Where the company is under investigation, individual directors and designated employees face personal exposure. D&O insurance is relevant but carries significant exclusions — particularly for intentional violations. Counsel must assess: - Whether individual officers require independent representation (conflicts between company and individual interest are common) - Whether voluntary disclosure of any violations to SEBI, before formal investigation, is available and advisable - Whistleblower protection implications where internal reporting has occurred Corpus Juris Legal's Regulatory & Compliance practice has advised listed companies, their promoters, and designated employees through SEBI investigations, adjudications, and SAT appeals. If a summons or show cause notice has arrived, the quality of your response in the first 72 hours shapes everything that follows.