How
far are FAQs on SEBI Regulations, etc. binding or can even be relied on by
SEBI? More so, when substantive legal issues are to be decided on which may
result in grant/rejection of relief to parties or even levy of penalty for
violation of Regulations.
SEBI
has recently passed an order
on in which it relied on its own FAQs and made some curious observations. The
core issues in that case are interesting. However, this post focuses only on the
manner in which SEBI has relied on FAQs (Frequently Asked Questions) released
by it.
has recently passed an order
on in which it relied on its own FAQs and made some curious observations. The
core issues in that case are interesting. However, this post focuses only on the
manner in which SEBI has relied on FAQs (Frequently Asked Questions) released
by it.
SEBI
relied on the FAQs to arrive at the conclusion on two issues raised. The issues
were significant. It is another thing what is the correct interpretation of the
Regulations. Or how far SEBI relied on the FAQs to arrive at its conclusions.
What is worth reviewing here are observations SEBI made while relying on the
FAQs.
relied on the FAQs to arrive at the conclusion on two issues raised. The issues
were significant. It is another thing what is the correct interpretation of the
Regulations. Or how far SEBI relied on the FAQs to arrive at its conclusions.
What is worth reviewing here are observations SEBI made while relying on the
FAQs.
The
complainant objected against SEBI’s relying on FAQs saying they do not have the
force of Regulations. SEBI rejected this argument and said:-
complainant objected against SEBI’s relying on FAQs saying they do not have the
force of Regulations. SEBI rejected this argument and said:-
“9. The complainant’s Advocates acknowledged the
existence of SEBI’s FAQs as reproduced on pages 15-16 of this Order but
argued that FAQs does not have the force of regulations and therefore should
not be considered at all. The question before me is whether SEBI can
interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it
should, otherwise doubts raised about the effect of regulations would
bring the entire business to a halt. I
am of the opinion that such interpretations are valid so long as these are
transparent and applied consistently without discrimination. No case
has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise
in any other matter, or that SEBI’s interpretation was not known publicly.”
existence of SEBI’s FAQs as reproduced on pages 15-16 of this Order but
argued that FAQs does not have the force of regulations and therefore should
not be considered at all. The question before me is whether SEBI can
interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it
should, otherwise doubts raised about the effect of regulations would
bring the entire business to a halt. I
am of the opinion that such interpretations are valid so long as these are
transparent and applied consistently without discrimination. No case
has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise
in any other matter, or that SEBI’s interpretation was not known publicly.”
Several
questions arise. Do FAQs have the force of Regulations? Does SEBI’s
interpretation expressed through FAQs binding on (i) SEBI & (ii) third
parties? Assuming such interpretations are valid, what are pre-requisites for
such FAQs – whether it is enough that they are (i) transparent/published and
known publicly (ii) applied consistently without discrimination? SEBI seems to
have taken a view that the FAQs are binding if they are transparent and applied
consistently. On one of the issues raised, it even gave a few examples of
similar practices adopted in the past. However, does practice make or amend law
in such circumstances?
questions arise. Do FAQs have the force of Regulations? Does SEBI’s
interpretation expressed through FAQs binding on (i) SEBI & (ii) third
parties? Assuming such interpretations are valid, what are pre-requisites for
such FAQs – whether it is enough that they are (i) transparent/published and
known publicly (ii) applied consistently without discrimination? SEBI seems to
have taken a view that the FAQs are binding if they are transparent and applied
consistently. On one of the issues raised, it even gave a few examples of
similar practices adopted in the past. However, does practice make or amend law
in such circumstances?
This
is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations
2011, which are the subject matter of this decision, say:-
is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations
2011, which are the subject matter of this decision, say:-
“These FAQs offer only a simplistic explanation/clarification
of terms/concepts related to the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification
that is provided herein should not be
regarded as an interpretation of law nor be treated as a binding
opinion/guidance from the Securities and Exchange Board of India
[“SEBI”]. For full particulars of
laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the
Acts/Regulations/Circulars appearing under the Legal Framework Section
on the SEBI website.” (emphasis supplied).
of terms/concepts related to the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification
that is provided herein should not be
regarded as an interpretation of law nor be treated as a binding
opinion/guidance from the Securities and Exchange Board of India
[“SEBI”]. For full particulars of
laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the
Acts/Regulations/Circulars appearing under the Legal Framework Section
on the SEBI website.” (emphasis supplied).
Thus, the FAQs themselves clearly
say that are not to be regarded as interpretation of law, that they have no
binding force or even guidance from SEBI. For knowing the law, it is the actual
text of the Regulations, etc. that has to be read.
say that are not to be regarded as interpretation of law, that they have no
binding force or even guidance from SEBI. For knowing the law, it is the actual
text of the Regulations, etc. that has to be read.
The Regulations are required to be
made – and amended – in the prescribed manner under Section 31 of the SEBI Act,
1992. They have to be released and notified as prescribed under the Act. They
have to be then laid before the House of Parliament for prescribed period. Any
changes agreed by the Houses have to be duly incorporated.
made – and amended – in the prescribed manner under Section 31 of the SEBI Act,
1992. They have to be released and notified as prescribed under the Act. They
have to be then laid before the House of Parliament for prescribed period. Any
changes agreed by the Houses have to be duly incorporated.
Further, violations of the
Regulations have significant consequences under the Act and the Regulations
themselves. These include penalties, prosecution, directions, etc.
Regulations have significant consequences under the Act and the Regulations
themselves. These include penalties, prosecution, directions, etc.
SEBI does not have power under the
Act to issue such “clarifications” to the Regulations where such clarifications
would have binding force of the Regulations, particularly when they contradict
the Regulations or result in extended application of the Regulations. Indeed, there
is no concept of FAQs under the Act.
Act to issue such “clarifications” to the Regulations where such clarifications
would have binding force of the Regulations, particularly when they contradict
the Regulations or result in extended application of the Regulations. Indeed, there
is no concept of FAQs under the Act.
There have been several decisions
that uphold Regulations over circulars. And that in case of any contradictions
between the Regulations and circulars, it will be the Regulations that would
apply.
that uphold Regulations over circulars. And that in case of any contradictions
between the Regulations and circulars, it will be the Regulations that would
apply.
Undoubtedly, the FAQs would help a party, particularly a lay person, in
throwing some light at what the Regulations are trying to say. They may even be
a sort of guidance of how how SEBI views certain
issues, though it seems from the introduction to the FAQs that they may not be binding even on SEBI. In case the Regulations are clear, then FAQs have no
relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs
could be looked into and the views in the FAQs could apply.
throwing some light at what the Regulations are trying to say. They may even be
a sort of guidance of how how SEBI views certain
issues, though it seems from the introduction to the FAQs that they may not be binding even on SEBI. In case the Regulations are clear, then FAQs have no
relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs
could be looked into and the views in the FAQs could apply.
It appears that SEBI has erred in stating that the FAQs have any binding
legal status. SEBI, it is submitted, cannot take any adverse action in terms of
penalties/prosecution/directions by relying on FAQs that contradict the
Regulations. The Regulations are self-contained in this sense; the FAQs cannot
add or modify the Regulations.
legal status. SEBI, it is submitted, cannot take any adverse action in terms of
penalties/prosecution/directions by relying on FAQs that contradict the
Regulations. The Regulations are self-contained in this sense; the FAQs cannot
add or modify the Regulations.
In conclusion, it is reiterated that the issue here is not
whether the interpretation given in the FAQs is correct or not, it is on how
much, if at all, can they be considered binding on SEBI and/or parties. The
better view seems to be that FAQs cannot be relied on at all while deciding on
substantive legal issues.
whether the interpretation given in the FAQs is correct or not, it is on how
much, if at all, can they be considered binding on SEBI and/or parties. The
better view seems to be that FAQs cannot be relied on at all while deciding on
substantive legal issues.