[The author is a practicing lawyer in
Mumbai. Email: [email protected]]
Mumbai. Email: [email protected]]
This post is on a
slew of legislative changes in Securities Laws through three ordinances and
more particularly, Securities Laws (Amendment)
Ordinance, 2014 (“2014 Ordinance”) which has been passed
by the Lok Sabha as Securities Laws (Amendment) Bill,
2014 (“2014
Bill”). Three ordinances were issued in
last two years – the first one on 18th July 2013, second 16th September 2013, and recently 2014
Ordinance, with some additional changes each successive time.
slew of legislative changes in Securities Laws through three ordinances and
more particularly, Securities Laws (Amendment)
Ordinance, 2014 (“2014 Ordinance”) which has been passed
by the Lok Sabha as Securities Laws (Amendment) Bill,
2014 (“2014
Bill”). Three ordinances were issued in
last two years – the first one on 18th July 2013, second 16th September 2013, and recently 2014
Ordinance, with some additional changes each successive time.
Yet again, the Securities Laws
(Amendment) Bill, 2014 (“2014 Bill”) has was introduced in the Lok
Sabha and passed with some modifications from the 2014 Ordinance, with a view
to include more safeguards to balance the new powers of SEBI. In my article in the Economic Times, I had analyzed briefly some of the
new provisions of the Ordinance such as search and seizure powers, collective
investment schemes, and argued for expansion of powers of Securities Appellate
Tribunal. In addition to those issues, there are some more issues that could be
debatable and require wider discussion in the Parliament.
(Amendment) Bill, 2014 (“2014 Bill”) has was introduced in the Lok
Sabha and passed with some modifications from the 2014 Ordinance, with a view
to include more safeguards to balance the new powers of SEBI. In my article in the Economic Times, I had analyzed briefly some of the
new provisions of the Ordinance such as search and seizure powers, collective
investment schemes, and argued for expansion of powers of Securities Appellate
Tribunal. In addition to those issues, there are some more issues that could be
debatable and require wider discussion in the Parliament.
Chapter VIA of SEBI Act (Section 15A
to Section 15HB) deals with monetary penalty and adjudication process. The sections
mentioned therein prescribe penalties to be imposed for various offences. The
three ordinances promulgated earlier did not suggest any amendment to the
penalty sections. These sections only provided maximum penalty without
providing the minimum or any range. It was often argued by SEBI and endorsed by
many judgments of the Securities Appellate Tribunal (SAT) that Section 15J (3
factors to be taken into consideration while adjudging the quantum of penalty)
provides discretion to adjudicating officers to impose penalty amount within
the maxima while exercising judicious discretion. In my Economic Times Article,
I had argued that there is a case for amending penalty sections as well as
enhancing powers of Securities Appellate Tribunal. It seems that Government of
India in the 2014 Bill has suggested no amendment to enhance Tribunal’s powers,
but it has proposed amendment to the penalty sections by prescribing
minimum penalty to be imposed for each violation in addition to the amendments
included in the latest 2014 Ordinance.
to Section 15HB) deals with monetary penalty and adjudication process. The sections
mentioned therein prescribe penalties to be imposed for various offences. The
three ordinances promulgated earlier did not suggest any amendment to the
penalty sections. These sections only provided maximum penalty without
providing the minimum or any range. It was often argued by SEBI and endorsed by
many judgments of the Securities Appellate Tribunal (SAT) that Section 15J (3
factors to be taken into consideration while adjudging the quantum of penalty)
provides discretion to adjudicating officers to impose penalty amount within
the maxima while exercising judicious discretion. In my Economic Times Article,
I had argued that there is a case for amending penalty sections as well as
enhancing powers of Securities Appellate Tribunal. It seems that Government of
India in the 2014 Bill has suggested no amendment to enhance Tribunal’s powers,
but it has proposed amendment to the penalty sections by prescribing
minimum penalty to be imposed for each violation in addition to the amendments
included in the latest 2014 Ordinance.
Constitutionality of Multiple Ordinances
It is reported that two public
interest litigations (PILs) have already challenged the constitutionality of
these Ordinances in two High Courts. According to media reports, one of these PILs has also
challenged the exercise of power by the President to re-promulgate the
ordinance. On the first blush, these three repeated
ordinances may seem to be in the teeth of Supreme Court judgment of D.C. Wadhwa vs. State of Bihar (1986) that held that a
court will invalidate the ordinance that is re-promulgated time and again, and
court may look into propriety, expediency and necessity for judicial review of
the President’s satisfaction.
However, it is my view that, various scams in the securities market could be
used to justify the necessity of repeated Ordinance to bestow certain powers on
SEBI to effectively deal with these scams. But such repeated ordinances should
be considered to be an exception rather than a norm. At the same time, it is
arguable whether all the powers – such as retrospective power to settle securities
laws violations, retrospective power to enter into MoUs with foreign regulators
was ‘emergent’.
interest litigations (PILs) have already challenged the constitutionality of
these Ordinances in two High Courts. According to media reports, one of these PILs has also
challenged the exercise of power by the President to re-promulgate the
ordinance. On the first blush, these three repeated
ordinances may seem to be in the teeth of Supreme Court judgment of D.C. Wadhwa vs. State of Bihar (1986) that held that a
court will invalidate the ordinance that is re-promulgated time and again, and
court may look into propriety, expediency and necessity for judicial review of
the President’s satisfaction.
However, it is my view that, various scams in the securities market could be
used to justify the necessity of repeated Ordinance to bestow certain powers on
SEBI to effectively deal with these scams. But such repeated ordinances should
be considered to be an exception rather than a norm. At the same time, it is
arguable whether all the powers – such as retrospective power to settle securities
laws violations, retrospective power to enter into MoUs with foreign regulators
was ‘emergent’.
Powers Granted to SEBI
Collective Investment Schemes
One aspect that
requires a closer look is the deeming provision in the Bill that provides that
any pooling of funds that involving a corpus of more than Rs. 100 crore would
be deemed to be a collective investment scheme (CIS). This provision could
bring a wide range of business activity that do not contain any of the four
elements of CIS specified in section 11AA(2) within the ambit of CIS, requiring
registration from SEBI. This provision should be considered in light of the
fact that only one CIS has been registered with SEBI since the CIS Regulations
were brought into force in 1999, and that CIS is also yet to launch a scheme.
One needs to debate that the Ordinances have provided power to “regulate” or
“prohibit” such schemes.
requires a closer look is the deeming provision in the Bill that provides that
any pooling of funds that involving a corpus of more than Rs. 100 crore would
be deemed to be a collective investment scheme (CIS). This provision could
bring a wide range of business activity that do not contain any of the four
elements of CIS specified in section 11AA(2) within the ambit of CIS, requiring
registration from SEBI. This provision should be considered in light of the
fact that only one CIS has been registered with SEBI since the CIS Regulations
were brought into force in 1999, and that CIS is also yet to launch a scheme.
One needs to debate that the Ordinances have provided power to “regulate” or
“prohibit” such schemes.
Review of Adjudicating Officer’s
order
order
The latest Ordinance and 2014 Bill
has introduced new section 15-I(3) which provides that SEBI can call for and
examine an order passed by an adjudicating officer if it considers that the
order is erroneous to the extent that it is not in the interest of the
securities market. In such cases, SEBI can make a fresh inquiry and enhance the
quantum of penalty imposed by the adjudicating officer. This is effectively
nothing but a review of the Adjudicating Officer’s order. It has been proposed
that such a review should take place within three months of the Adjudicating
Officer’s decision or disposal of an appeal against his decision by the
Securities Appellate Tribunal.
has introduced new section 15-I(3) which provides that SEBI can call for and
examine an order passed by an adjudicating officer if it considers that the
order is erroneous to the extent that it is not in the interest of the
securities market. In such cases, SEBI can make a fresh inquiry and enhance the
quantum of penalty imposed by the adjudicating officer. This is effectively
nothing but a review of the Adjudicating Officer’s order. It has been proposed
that such a review should take place within three months of the Adjudicating
Officer’s decision or disposal of an appeal against his decision by the
Securities Appellate Tribunal.
The review of penalty orders of
Adjudicating Officers by SEBI may undermine the scheme of the securities laws,
which currently envisages that an adjudicating officer would be independent of
SEBI and its orders will be reviewed not within the organization, but by the
Securities Appellate Tribunal. Rather than this structure, SAT’s suggestion
in Mathew Easow and Opee Stock cases may be the way forward. To
quote from Opee Stock matter, SAT
held that:-
Adjudicating Officers by SEBI may undermine the scheme of the securities laws,
which currently envisages that an adjudicating officer would be independent of
SEBI and its orders will be reviewed not within the organization, but by the
Securities Appellate Tribunal. Rather than this structure, SAT’s suggestion
in Mathew Easow and Opee Stock cases may be the way forward. To
quote from Opee Stock matter, SAT
held that:-
“ …It is not in
dispute that directions under section 11B of the Act are issued by the Board
whereas proceedings under Chapter VI-A are conducted by an adjudicating officer
who is a subordinate officer of the Board and it is he who passes the final
order. As both sets of proceedings are independent of each other, as is often
argued on behalf of the Board, the possibility of conflicting views on the same
set of facts cannot be ruled out. In a given case, the whole-time member may
hold the delinquent guilty of the charge levelled and the adjudicating officer
may completely absolve him of the same or vice versa. Such anomalous
situations could arise and these would not be in public interest. We feel
that if only one enquiry is held against the delinquent and on the basis of the
findings recorded therein, the same body is given the power to issue directions
and impose monetary penalties as well, it would not only expedite matters but
also avoid conflicting opinions. This would obviously require an amendment
in the Act which is in the exclusive domain of Parliament.
dispute that directions under section 11B of the Act are issued by the Board
whereas proceedings under Chapter VI-A are conducted by an adjudicating officer
who is a subordinate officer of the Board and it is he who passes the final
order. As both sets of proceedings are independent of each other, as is often
argued on behalf of the Board, the possibility of conflicting views on the same
set of facts cannot be ruled out. In a given case, the whole-time member may
hold the delinquent guilty of the charge levelled and the adjudicating officer
may completely absolve him of the same or vice versa. Such anomalous
situations could arise and these would not be in public interest. We feel
that if only one enquiry is held against the delinquent and on the basis of the
findings recorded therein, the same body is given the power to issue directions
and impose monetary penalties as well, it would not only expedite matters but
also avoid conflicting opinions. This would obviously require an amendment
in the Act which is in the exclusive domain of Parliament.
In view of the observations made in para 8 above, we direct that a copy
of this order be sent to the Finance Secretary, Government of India, New Delhi
for information and whatever necessary action that he may deem fit…”
of this order be sent to the Finance Secretary, Government of India, New Delhi
for information and whatever necessary action that he may deem fit…”
Therefore, what SAT had suggested was
that if only one enquiry is held against the delinquent and on the basis of the
findings recorded therein, the same body is given the power to issue directions
and impose monetary penalties as well, it would not only expedite matters but
also avoid conflicting opinions.
that if only one enquiry is held against the delinquent and on the basis of the
findings recorded therein, the same body is given the power to issue directions
and impose monetary penalties as well, it would not only expedite matters but
also avoid conflicting opinions.
A case for enhancement of SAT’s powers
The Parliament should also deliberate
whether express provisions for enhancement
of powers of Securities Appellate Tribunal are required in the Bill.
whether express provisions for enhancement
of powers of Securities Appellate Tribunal are required in the Bill.
While dealing with
section 15T(2) of the SEBI Act in the recent case of Reliance Industries Limited v. SEBI (2014), which has been omitted by the Ordinance,
the Tribunal observed that:
section 15T(2) of the SEBI Act in the recent case of Reliance Industries Limited v. SEBI (2014), which has been omitted by the Ordinance,
the Tribunal observed that:
“Section
15T(2) of SEBI Act stipulates that no appeal would lie before this Tribunal from
an order of SEBI made with the consent of the parties, it is apparent that the
bar is restricted to an order passed on merits of the consent application and
would not apply to an ex-parte order passed in breach of the principles of
natural justice. In other words Section 15T(2) prohibits appeal against an order which is passed after
considering the consent proposal put forth by the applicant during the
discussion with the IC of SEBI.”
15T(2) of SEBI Act stipulates that no appeal would lie before this Tribunal from
an order of SEBI made with the consent of the parties, it is apparent that the
bar is restricted to an order passed on merits of the consent application and
would not apply to an ex-parte order passed in breach of the principles of
natural justice. In other words Section 15T(2) prohibits appeal against an order which is passed after
considering the consent proposal put forth by the applicant during the
discussion with the IC of SEBI.”
As the Ordinance
provides that no appeal shall lie against any order passed by SEBI in
settlement proceedings (and not just orders passed with the consent of the
parties), the Tribunal expressed inability to entertain an appeal from an order
of SEBI in view of a provision of the Ordinance. While dismissing the appeal,
the Tribunal held that:
provides that no appeal shall lie against any order passed by SEBI in
settlement proceedings (and not just orders passed with the consent of the
parties), the Tribunal expressed inability to entertain an appeal from an order
of SEBI in view of a provision of the Ordinance. While dismissing the appeal,
the Tribunal held that:
“In other
words, by deleting Section 15T(2) and inserting Section 15JB as also Section
30A, legislature has sought to make partial bar under Section 15T(2) into
complete bar under Section 15JB with retrospective effect from April 20, 2007
in relation to appeals against orders passed in consent/settlement proceedings.
Since Section 15JB(4) expressly bars appeal against any order passed in
settlement proceedings from April 20, 2007, in our opinion it would not be open
to this Tribunal to entertain present appeal against impugned order passed in
consent proceedings, even though the appeal was filed before promulgation of
any of the Ordinance stated above.”
words, by deleting Section 15T(2) and inserting Section 15JB as also Section
30A, legislature has sought to make partial bar under Section 15T(2) into
complete bar under Section 15JB with retrospective effect from April 20, 2007
in relation to appeals against orders passed in consent/settlement proceedings.
Since Section 15JB(4) expressly bars appeal against any order passed in
settlement proceedings from April 20, 2007, in our opinion it would not be open
to this Tribunal to entertain present appeal against impugned order passed in
consent proceedings, even though the appeal was filed before promulgation of
any of the Ordinance stated above.”
Following the
principle of estoppel, a party is generally barred from appealing against an
order passed with his consent. For example, section 96(3) of the Civil
Procedure Code, 1908 expressly provides that no appeal shall lie from a decree
passed by the Court with the consent of parties. However, the order of the
Tribunal clarifies that under the new provision, no appeal is possible even
from an ex-parte order of SEBI.
principle of estoppel, a party is generally barred from appealing against an
order passed with his consent. For example, section 96(3) of the Civil
Procedure Code, 1908 expressly provides that no appeal shall lie from a decree
passed by the Court with the consent of parties. However, the order of the
Tribunal clarifies that under the new provision, no appeal is possible even
from an ex-parte order of SEBI.
On one hand, it is
perceived that Consent orders hinders the development of the jurisprudence of
securities laws, as they do not provide detailed reasons for settlement; on the
other, even rejection of consent application would not be appealable now in
view of the ordinance.
perceived that Consent orders hinders the development of the jurisprudence of
securities laws, as they do not provide detailed reasons for settlement; on the
other, even rejection of consent application would not be appealable now in
view of the ordinance.
Search and seizure Powers
The SEBI Act before
the slew of ordinances had allowed SEBI to conduct search and seizure
operations on a suspected violator’s premises after obtaining permission from a
First Class Judicial Magistrate. The successive ordinances removed the need for
a Magistrate’s permission, and instead empowered the SEBI Chairman to authorise
such operations. The 2014 Bill reinstates the judicial oversight of the process
by requiring SEBI to obtain permission from the Magistrate or Judge of a court
in Mumbai as designated by the government.
the slew of ordinances had allowed SEBI to conduct search and seizure
operations on a suspected violator’s premises after obtaining permission from a
First Class Judicial Magistrate. The successive ordinances removed the need for
a Magistrate’s permission, and instead empowered the SEBI Chairman to authorise
such operations. The 2014 Bill reinstates the judicial oversight of the process
by requiring SEBI to obtain permission from the Magistrate or Judge of a court
in Mumbai as designated by the government.
Validity of Regulations under Ordinances
SEBI had framed
various regulations drawing powers under the Ordinances such as SEBI
(Procedure for Search and Seizure) Regulations, 2014 and SEBI
(Settlement of Administrative and Civil Proceedings) Regulations, 2014.
In view of the lapse of Ordinances, whether SEBI can exercise these
powers as these regulations are deemed repealed is another question that needs to
be answered. Interestingly, these regulations have already repealed certain
earlier norms (such as Consent Circular). Clause 57 of the 2014 Bill does
propose to validate anything done or any action taken under the 2014 Ordinance
as the 2014 Ordinance had ceased to operate from the 18 July 2014.
various regulations drawing powers under the Ordinances such as SEBI
(Procedure for Search and Seizure) Regulations, 2014 and SEBI
(Settlement of Administrative and Civil Proceedings) Regulations, 2014.
In view of the lapse of Ordinances, whether SEBI can exercise these
powers as these regulations are deemed repealed is another question that needs to
be answered. Interestingly, these regulations have already repealed certain
earlier norms (such as Consent Circular). Clause 57 of the 2014 Bill does
propose to validate anything done or any action taken under the 2014 Ordinance
as the 2014 Ordinance had ceased to operate from the 18 July 2014.
Power of Disgorgement
The Ordinance also
retrospectively validates SEBI’s powers of disgorgement. However, the Ordinance
provides that the amount disgorged would be credited to the Investor Protection
and Education Fund, but it doesn’t provide guidance regarding the utilization
of the amounts that have been disgorged. The newly inserted section 11(5) of
the SEBI Act, 1992 gives the power to SEBI to frame regulations on how the
disgorged amounts would be utilized. Using this power, SEBI has amended the
IPEF Regulations to provide that the disgorged amount would primarily be
utilized for restitution to eligible and identifiable investors. Any amounts
that are left would then be used for investor protection and education. However,
as the Sahara case has demonstrated, it is difficult to identify eligible
investors in many cases.
retrospectively validates SEBI’s powers of disgorgement. However, the Ordinance
provides that the amount disgorged would be credited to the Investor Protection
and Education Fund, but it doesn’t provide guidance regarding the utilization
of the amounts that have been disgorged. The newly inserted section 11(5) of
the SEBI Act, 1992 gives the power to SEBI to frame regulations on how the
disgorged amounts would be utilized. Using this power, SEBI has amended the
IPEF Regulations to provide that the disgorged amount would primarily be
utilized for restitution to eligible and identifiable investors. Any amounts
that are left would then be used for investor protection and education. However,
as the Sahara case has demonstrated, it is difficult to identify eligible
investors in many cases.
– Vaneesa Abhishek
