Civil courts have no jurisdiction over Sebi Act

WITHOUT CONTEMPT

One controversy in relation to the Securities and Exchange Board of India (Sebi) Act, 1992 that has consistently eluded resolution, has finally been resolved by the Bombay High Court.

The simple question that arose was whether civil courts have jurisdiction to try matters that fall within the ambit of regulatory action by Sebi. The court has held that it has no jurisdiction.

In other words, Sections 15Y and 20A of the Sebi Act oust the jurisdiction of every civil court over matters for which Sebi has been empowered to act.

The matters for which adjudicating officers of the Sebi or the Securities Appellate Tribunal (SAT) have been empowered are also out of the reach of civil courts. Further, no injunction may be granted by any civil court in respect of anything done using the powers under the Act.

The idea here is that Sebi has been empowered as an expert body to deal with various matters. Civil courts have been stopped by Parliament from interfering in these matters, and a specialised tribunal (SAT) has been set up to hear appeals against orders passed by Sebi.

An appeal from the SAT on a question of law lies directly in the Supreme Court (earlier, it could be filed before the high courts on questions of law and questions of fact).

Therefore, the only avenue for a civil court to hear any matter relating to the Act is for the SAT to hear appeals, and or the Supreme Court to hear appeals against decisions of the SAT.

Of course, the "writ jurisdiction" of high courts (extraordinary jurisdictionconferred by the Constitution to protect against arbitrary legislative or executive action) can never be ousted by any law, but the extent of relief that a writ court can grant, particularly in a specialised area such as the securities market, is very limited.

Yet, civil courts have often usurped jurisdiction over such matters. Not too long ago, another single judge, and later a division bench, of the Bombay High Court itself, sat in judgment over a very laborious and contentious set of issues relating to the Takeover Code (the dispute between liquor barons Vijay Mallya and Kishore Chhabria over Herbertsons).

When the issue of ousted jurisdiction arose, the court asked parties to make up their mind on whether they wanted the suit tried. Believing perhaps that they would be better off arguing before the court, rather than be before Sebi, the party that claimed that the court had no jurisdiction, filed affidavits waiving all objections to jurisdiction.

The division bench went on to hear extensive arguments on various matters governed by the Act and the Takeover Code, reserved orders for nearly a year, and passed a very detailed and voluminous interim order interpreting various provisions of the Act and the Takeover Code, injuncted voting rights on shares acquired in alleged breach of the Takeover Code, and then asked Sebi to determine matters uninfluenced by its observations.

The Supreme Court admitted an appeal against this order, and wanted to consider whether parties to a dispute could confer jurisdiction on a court against the express statutory ouster of jurisdiction in the Act.

Meanwhile, Sebi went on to rely on the very observations of the high court and argued that the court's interpretations were final and binding. Sebi ordered the alleged violator to sell all the shares acquired in violation of the law.

Appeals against this order of Sebi were filed in the SAT, which independently agreed with the factual findings of Sebi, but sharply disagreed with the nature of the discretionary directions issued.

The SAT directed a post-facto open offer with payment of compensatory interest to acquire public shareholding since the violation of the Takeover Code meant that public shareholders ought to have received an open offer when the alleged violation took place. This too was appealed against in the Supreme Court, and was clubbed with the appeal against the earlier Bombay High Court order.

Fortunately, for the parties, and unfortunately for the law, the dispute got settled and the Supreme Court never had to interpret Sections 15Y and 20A of the Act.

The recent verdict by a single-judge bench of the Bombay High Court too arose in a suit based on alleged violations of the Takeover Code, seeking similar reliefs such as cancellation of the allotment.

The court has taken a view that the earlier decision of the division bench is not comparable since the parties in those proceedings waived all objections to jurisdiction under Sections 15Y and 20A of the Act and, therefore, these provisions were never interpreted in the earlier decision.

The court found that the Takeover Code now empowers Sebi to issue various directions upon discovery of a violation under Regulation 44 of the Takeover Code, including cancellation of a violative allotment.

The court has observed that these provisions did not exist during the Herbertsons proceedings when the Bombay High Court had dealt extensively with the Takeover Code.

Rejecting all arguments that civil courts could assume jurisdiction since the violations could be acted against on grounds of equity and common law as opposed to powers under the Act, the court has squarely interpreted Sections 15Y and 20A to mean that no court can sit in judgment so long as Sebi has been empowered under the Act on such a matter.

This is a welcome development. Repeated interference from civil courts slows down Sebi's administrative machinery and also costs taxpayers dearly. Sebi's strong and sweeping legal powers do not need civil courts as a check and balance. The specialised SAT should be given better administrative support to be an effective remedy.

The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own somasekhar@jsalaw.com