Under Section 11(2) of the SEBI Act, 1992, SEBI receives an anonymous complaint that a large investment advisory firm has been providing personalized investment advice to retail investors without obtaining the mandated written agreement required under SEBI regulations. SEBI's Director initiates an informal inquiry by telephoning the firm's compliance officer and requesting copies of select client files (approximately 50 files out of 5,000 total clients). The advisory firm provides these files voluntarily during the phone call conversation without insisting on a formal inspection notice. Subsequently, based on information in these files, SEBI suspects potential violations involving unregistered research analysts providing research reports. SEBI then issues a formal inspection notice seeking ALL client files and internal communications for the last five years. Which of the following correctly applies Section 11(2) to this scenario ?

Explanation: Section 11(2) of the SEBI Act provides that SEBI "may undertake following steps to achieve the objectives mentioned in sub-section (1): (vi) undertake inspection and investigation of the books, records, other documents of intermediaries and any person associated with the securities market." This power, while broad, is not unlimited. Judicial interpretation (Supreme Court decisions) has established that: (i) inspection must be based on reasonable cause/application of mind; (ii) the scope must be proportionate and relevant to the suspected violation; (iii) fishing expeditions or blanket inspections are impermissible; (iv) confidentiality of irrelevant or privileged information must be protected. In SEBI's case: The informal inquiry on alleged missing written agreements is reasonable. However, demanding five years of ALL client files (5,000 files) for a complaint involving potential unregistered research analyst communications may exceed proportionate scope. SEBI should specify: which files are relevant, what time period is necessary, and what documents are essential to the investigation. Courts have struck down inspection notices that demand excessive/unrelated documentation or extend beyond the reasonable scope of alleged violations. The voluntary submission during informal inquiry does not preclude formal inspection but does not waive SEBI's duty to issue a targeted, proportionate notice. Thus, option (B) correctly applies Section 11(2)'s scope with proportionality constraints.