Merits of a Financial Services Appellate Tribunal

(The following column by Somasekhar Sundaresan appeared in today’s Business Standard)

Newspapers have recently reported that a proposal has been mooted in government to convert the Securities Appellate Tribunal (SAT) into a “Financial Services Appellate Tribunal” to hear grievances against orders passed by various sub-sectoral regulators. Currently, the SAT hears appeals only against orders passed by the Securities and Exchange Board of India (‘SEBI’).

India has not opted for a single integrated regulatory approach unlike the United Kingdom, which has the Financial Services Authority as the sole regulator. We do not even have a “twin-peak” model where regulatory oversight is divided between the role of market development and safety and the role of conduct-of-business regulation. We have a combination of a functional approach (where you are regulated on the basis of the function you carry out) and an institutional approach (where you are regulated by a regulator depending on the nature of your institution).

While there may be no single “correct” approach, in India, the ground reality is that individual institutions are regulated by multiple regulators. For example, a firm or group of firms (all consolidated as far as balance sheet strength is concerned) may be a member of stock exchanges, commodity exchanges, provide advisory or distribution services for mutual funds and insurance companies, investment banking services and also be an intermediary in the money markets. We have numerous cases of commercial banks regulated by the Reserve Bank of India (RBI) also carrying on depository participant business, regulated by SEBI. Each function played by an institution has a regulator and the same compliance team ends up having to be conversant with the idiosyncrasies and peculiarities of multiple regulators.

Each of these sub-sectors in the financial system may have its own raison de etre and therefore each regul-ator may have its own turf. However, the persons who are regulated are one and the same. A financial disaster affecting one role can impact the risks faced by the other role. While there are numerous argum-ents for and against having different regulators for different roles, an important feature of any good regulatory system having an effective check and balance on the regulator’s role in the form of an appellate process as a matter of right. An appellate mechanism keeps regulators on their toes and improves regulation.

Presently, SEBI is the only regulator that is subjected to a statutory right to appeal against its orders. The SAT is a creature formed by the SEBI Act, 1992, with powers to hear appeals against any decision of SEBI by which any person is aggrieved. The SAT was set up in 1995 with a far more limited role. A parallel appellate body then sat in the Ministry of Finance, taking decisions but failing to contribute to well-articulated jurisprudence. However, over time, the SAT has developed into a robust institution – truly one of the best specialised tribunals in the country.

The RBI, which administers banking regulations and exchange controls does not have any regulator overseeing its functioning. Indeed, the scope of an appellate oversight of the RBI ought not to include appeals against its decisions to raise or lower interest rates, or its decisions on whether to support the Indian Rupee or to let it depreciate. However, the RBI increasingly takes decisions that affect a significantly wider band of people with every passing year.

In the antiquated days of the Foreign Exchange Regulation Act (FERA), excha-nge controls had a very narrow constituency – not many bought foreign excha-nge, not many set up shop outside India, and in fact, not many even travelled outside India. Today, the picture is completely different.Any person can remit $200,000 abroad. Indian tourists visit the rest of the globe. Indian companies are liberally up shop abroad. Foreign investors freely set up shop in India. The sheer number of people whose lives are affected by RBI’s decisions has expanded exponentially.

The RBI does a number of things that SEBI does – it writes regulations on its own, issues circulars, issues show cause notices, initiates enforcement action, and even has powers to compound offences. Yet, there is no appellate oversight over such regulatory functions of the RBI. Therefore, the only recourse for anyone affected by a wrong decision of the RBI is to file a writ petition. Writ courts, by definition, are not expected to consider merits in detail but would only examine if due process has been followed. For example, recently some banks have been penalised by the RBI for breach of know-your-client norms through terse and inarticulate ord-ers from the RBI, with no appellate recourse, and yet the same bank’s depository participant business, when penalised by SEBI, is subject to the important safeguard of an appeal.

The RBI is but an example. The Insurance Regulatory and Development Authority (IRDA), which regulates the insurance sector has a Parliamentary mandate identical to that of SEBI – to protect the interests of pol-icyholders and to promote the orderly development of the insurance sector. Commodity exchanges, once the preserve of commodity merch-ants is now a wide market with numerous investors trading in commodity derivatives. The Forward Markets Commission (FMC) takes a number of decisions that impact members of commodity exchanges and even the exchanges themselves. Yet, the IRDA and FMC are not subject to appellate oversight.

There may be a compelling case to have different horses run different course for the primary regulation of various sub-sectors. However, the appellate process and the factors that would weigh with an appellate body in judging a decision would be very similar, and primarily a function of well established principles of administrative law. Therefore, consolidating all the potential appellate powers in one single tribunal without creating multiple tribunals would be a very welcome measure.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • The idea of bringing all the financial market regulators under the purview and scrutiny of a single appellate authority would be much appreciated by all the market players. This will be another colossal step taken by the government to separate regulatory and judicial powers of the governmental bodies. It must however be noted that the commodities market should be under the appellate jurisdiction of another such body. There remains a slight difference between the financial and commodities market which cannot be unified.

  • Everything looked balance in the article well placed till I read the conclusion – I would say, first house-keeping in the financial services regulation / supervision space by the government before thinking of herdsman.

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