Regulating Through Litigating: Quandary of SEBI

BY ANSH CHAURASIA, A THIRD-YEAR AT RMLNLU, LUCKNOW

Introduction

Recently, the securities market regulator Securities and Exchange Board of India (‘SEBI’), equipped with broad powers, had difficulty defending its quasi-judicial orders. For instance, the Supreme Court (‘SC’) rejected SEBI’s appeal against the order of the Securities Appellate Tribunal (‘SAT’) in the matter of Apollo Tyres. SEBI was reprimanded by the SC for imposing a penalty for violation of SEBI (Buy Back of Securities) Regulations, 1998, but only after the show cause notice was issued to the respondent after more than a decade in 2014 for a cause of action that arose way back in 2003. SEBI passed the order imposing the maximum penalty in 2016, which was set aside by the SAT on grounds that it was not justified in imposing the maximum penalty. Subsequently, the revised penalty was quashed by SAT, against which SEBI approached the apex court. The SC affirmed the decision of SAT on the grounds of inordinate delay, a point of law entirely overlooked by the SEBI during the whole proceedings, right from the commencement of the investigation in 2014 to its appeal before the court on 4 December 2023. Although the SEBI Act has no limitation period per se for the issuance of show cause notice or the completion of the adjudication proceedings, the court’s earlier decision settled the position that such exercise of power must be done within a reasonable time.

The aforementioned failure of SEBI in appealing before SC is part of a larger trend. At the heart of this regulatory struggle lies the legally untenable orders of SEBI and consequential litigation before SAT and SC. The redundancy of SEBI’s regulatory role resulting from such orders being litigated and decided against affects its credibility and has far-reaching implications for the key market regulator.

The detrimental litigation

The legislative history and precedent of the SC lucidly point to the cases appropriate for the appeal. The unamended Section 15Z, the appellate remedy to the High Court, was provided on any question of law or fact. After the amendment in 2002, the appellate court was changed from the High Court to the Supreme Court, and the grounds for appeal were limited to only questions of law, making it the current position. The SC interpreted the phrase ‘question of law’ in the backdrop of Section 15Z to arise when there is either erroneous construction or interpretation of the legal provisions of the statute or the general principles of law. The court also held that the power under Section 15Z has to be exercised while keeping in mind the sectorial laws and policy evolved by the tribunal acting under Section 15T through its interpretation of the Acts, Rules and Regulations. Therefore, the scope of the appeal and criteria of the cases appropriate for appeal are settled propositions of law.

In its attempt to enforce its order, SEBI has appealed multiple times to the apex court despite a clear scope. In WhatsApp leaks case, SEBI imposed a penalty upon noticees for forwarding messages containing information about financial results. However, the order lacked any finding with respect to the originator of the message. SEBI’s order completely overlooked the fact that noticees merely forwarded the messages with sensitive information, which resulted in SAT overturning the order and vindicating SAT’s finding by the SC.

In Tata Steel case, SEBI appealed to SC after its order to impose a penalty was set aside by SAT. SC refused to interfere because the order of SAT clearly established that the show-cause notice did not impute any charge upon the noticees. Consequently, the penalty was set aside. SC also remarked whether SEBI appealed only because their ‘ego was hurt’.

In NSE Dark fibre case, SEBI appealed to SC after a setback from SAT when the disgorgement order for Rs 625 crore with interest was quashed due to a lack of nexus between the disgorgement order and the wrongdoing as required under Section 11B. Another order of fine was set aside by SAT in this case due to inadequate reasons to impose a maximum fine under Section 15J. Consequently, SAT reduced the quantum of the penalty. The move of SEBI demanding a stay on SAT’s order delineates an approach centred on recourses to enforce its orders rather than introspecting on its quasi-judicial adjudication process. Frequent dismissals in appeals whose fate could have been easily determined pinpoints the obdurate nature of the regulator.

The ramifications of SEBI donning a litigator’s mantle

The inefficiency of the adjudicatory process becomes apparent when shortcomings in SEBI’s order are pointed out by SAT and vindicated by SC. This directly dents the investor confidence that SC regards to be directly dependent upon the effectiveness of the regulatory mechanism. In SEC v Zandford, investor confidence was held to be the key objective behind the introduction of the Securities Exchange Act. Investors should not perceive the market as a system stacked against them. The Sisyphean undertones in SEBI’s approach to taking the case to the apex court, which has now been frequently falling to the ground, negate the fundamental credibility that the legislature intended to imbibe in the eyes of the investors.

The SC interpreted the statutory right of appeal incorporated under Section 15T as scrutiny of SEBI’s broad power and emphasised the crucial role of the tribunal in the structural and consistent evolution of sectorial laws. Overlooking the shortcomings pinpointed by the order of SAT or requesting a ‘stay’ on its order before the apex court erodes the parliamentary intent and development of sectorial law.

Against this backdrop, the problem of complying with basic technicalities is also a glaring issue. A lackadaisical approach in passing orders without providing adequate and sound reasons and bypassing the jurisprudence enunciated by SAT decisions is concerning.

However, at the outset, SEBI incurs a financial burden every time it decides to go against an order of SAT, and the imposition of a similar burden on the opposite party is problematic. Justice Madan B. Lokur lamented this approach of government agencies litigating for the sake of litigating in a 2018 judgment. SEBI itself passed a proposal in 2019 mandating the appellants before SAT to deposit 10 per cent of the penalty so it could curb the appeals solely aimed at delaying the execution of its order. Therefore, SEBI does acknowledge the hardened mindset to resort to appeal, if not within itself yet among the parties aggrieved by its order, and it rightly points to the consequences of such an approach.

The ripple impact of this approach is now perceptible as affecting institutional integrity. The SC reprimanded SEBI in the Suzlon case, asking the regulator to ‘regulate rather than litigate’. Although the SC granted the relief to SEBI, clarifying that the contested order would not be treated as precedent, it proceeded to remark. In Apollo Tyres case, SEBI was criticised for appealing against every order that went against them and directed to submit an affidavit of appeals they have filed.

Conclusion

The SEBI is a unique statutory body that has the role of regulating, investigating, adjudicating, and deterring the offender. We see an amalgamation of executive, legislative, and quasi-judicial functions within the SEBI. The broad powers conferred upon it have to be exercised to protect the interest of the investors and inspire confidence among the public. SEBI ought to weigh the above considerations before moving to the apex court. SEBI brought itself into this position where it has been reprimanded multiple times for ascertaining the cases only to meet the on-paper requirements. However, the situation requires adherence in spirit. This obstinacy on the part of SEBI is a Faustian bargain where it is giving up institutional credibility for no change in consequences and further losing an opportunity to look into regulatory mechanisms. Any decision to appeal must pass the muster of the requirements of appeal irrespective of the fact that SEBI has been aggrieved at the hands of the SAT.

The striking similarity in all cases challenged before SC and quashed before SAT is SEBI’s failure to substantiate its allegations and insistence on enforcing its order. Changes in its regulatory and investigatory mechanism can lower the recurrence of these defects. Recently, the SC expert committee constituted to investigate the Adani-Hindenburg made significant suggestions for the prudent and effective exercise of the broad power at SEBI’s disposal. It suggested an ‘effective enforcement policy’ to lay down criteria by which SEBI must decide whether to initiate the proceeding either to impose a monetary penalty, to take a remedial action, or to take a punitive action. Such criteria should be clear and non-arbitrary. Laying down criteria would delineate an objective requirement of specific conditions to initiate proceedings, consequently leading to a proportionate exercise of regulatory powers.