An “ad interim, ex parte” order passed by SEBI, directing companies in the Sahara Group not to raise funds by way of placement of their debentures, led to a debate here over interim reliefs granted by courts, after the Allahabad High Court stayed SEBI’s order. The Supreme Court has now refused to stay the stay granted by the Allahabad High Court.
Sections 11 and 11B of the SEBI Act, 1992 confer extraordinary powers on SEBI to issue orders without hearing the parties that would be affected by the order – an exception to the general rule of natural justice. Courts have indeed held that a post-decisional hearing would remedy what would otherwise be considered to be a deviation from the settled principle of natural justice i.e. of hearing a party before condemning it. Therefore, these provisions in the SEBI Act should indeed be read as conferring on SEBI the power to step in and take urgent action.
Therefore, the key issue is: When would circumstances justify a bending of the principle of natural justice, and permit an ex parte regulatory intervention, to be remedied by a post-decisional hearing? In my view, putting a person out of the market, or asking him not to deal in securities, or not to carry on business of a certain nature, until further notice, is a serious intervention and therefore should not be lightly invoked.
These are interventions that may be well-intentioned, but whether they are necessary, is an issue that one should have to answer every single time. Over the past ten years, the practice of SEBI restricting a person’s constitutional right to carry on business and to lead life by way of ex parte orders has gained currency. For example, a few years ago, a fund manager was asked not to deal in securities until further notice. The reason used to justify the intervention was that the media reported that he had plans to start a mutual fund – an activity that in any case cannot be conducted without a license from SEBI, which itself entails a huge process of scrutiny by SEBI. Another example is the repeated assertion by SEBI that a particular depository was “complicit”, “negligent”, “fraudulent” and part of a “device” in the occurrence of what is called the “IPO scam”. Even requests for a hearing were ignored and more and more “ad interim” orders were passed. (Disclosure: both these examples are of clients represented by me).
Emergency powers are not unheard of. Even preventive detention of a person (impeding his constitutional right to move about the nation) has been upheld as constitutional but always subject to stringent safeguards. An economic equivalent of such detention, equally, ought to be subject to serious safeguards, and such powers should be used more as an exception to deal with exceptional cases, rather than as a norm, to be used routinely in all cases.
Any regulator or policeman or arm of the State should have very good reasons to put a person out of freedom without even hearing his side of the story. Ideally, regulators such as SEBI (other regulators too have similar powers – it is only SEBI that is thankfully subject to quasi-judicial review of its orders) should develop a transparent and publicly known policy on the parameters within which it would inflict a serious intervention into a person’s life.
Such power should be used in rarest of rare cases, and the regulator should demonstrate what harm would be caused to its regulatory constituency but for such intervention.