A recent decision of the Securities Appellate Tribunal (SAT) has once again underlined the prin-ciple that the power of the Securities and Exchange Board of India (SEBI) to issue directions under Section 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) cannot be used to impose penalties.
If there were one really long-standing controversy around securities law since the inception of the provision in 1995, it is about the scope of usage of the power. Essentially, Section 11B of the SEBI Act empowers SEBI to issue directions in the interests of investors, for the orderly development of the securities market, to prevent the affairs of any market intermediary from being conducted in a manner detrimental to the securities market, or to secure the proper management of the affairs of any market intermediary. SEBI has interpreted this power in a very wide manner – ranging from putting an intermediary out of business for specified periods of time (or even indefinitely, pending investigation) to asking persons who are not even intermediaries with SEBI to refrain from doing a range of actions that SEBI could argue would impact the securities market.
Hearing an appeal against a direction by SEBI to a depository participant to compensate a claimant for loss claimed, the SAT has observed: “It is true that the powers of the Board under section 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to punish a delinquent.”
Observing that punishment can only be meted out under the penal provisions contained in securities laws, the SAT has noted: “Punitive action against any delinquent intermediary could be taken only in accordance with the intermediaries regulations. In this view of the matter, the direction issued by the whole time member directing the appel-lant to compensate respon-dent 3 on the ground that it (appellant) had violated regulation 32 of the regulations cannot be sustained.”
The observations of the SAT put at rest any doubt that may have existed about the scope of the provision and how it can be used. Section 11B and its sister provision – Section 11(4) (which only does away with the requirement to have completed an inquiry before issuance of directions – have long been used by SEBI as a license to inflict any and every form of intervention, and mostly as a penalty provision. SEBI has historically provided detailed cause-and-effect reasoning in its orders, which point out how the actionee has been delinquent, and then proceeds to impose a ban. The clear ruling from the SAT would now require SEBI to demonstrate that the action proposed by it is in fact remedial in nature and a disguised penalty.
Way back in 2003, the SAT, then under a single judge, had laid down a ratio of differentiation between a punitive measure and a remedial measure. The SAT had ten ruled: “Section 11B is not a penal provision but preventive and remedial in its application… preventing the Appellants from accessing and being associated with the capital market for a period of five years is a punitive order. The remedial action is to correct, remove or lessen a wrong and not to impose penalty.”
More From This Section
The scope of usage of Section 11B deserves even closer scrutiny for how it is used as a legislative power as opposed to usage to impose penalties. SEBI routinely issues “circulars” invoking Section 11B and issue directions that are legislative in character. Even measures that require an amendment to law (for example, an amendment to the bye-laws of a stock exchange) are often prescribed by SEBI by issuing letters and circulars invoking this provision, without effecting an amendment to the law. A court would necessarily have to rule on such an approach, if called upon to do so. That would present an even bigger issue for SEBI to handle.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
Email: somasekhar@jsalaw.com