[The following guest post is contributed by Kanwardeep
Singh Kapany, a 5th year B.S.L.LL.B student at ILS Law College, Pune. The
author can be contacted at [email protected].
Singh Kapany, a 5th year B.S.L.LL.B student at ILS Law College, Pune. The
author can be contacted at [email protected].
In this three-part series, the author analyzes the
provisions of Section 11B of the SEBI Act, 1992 which confers wide powers on
SEBI to regulate the capital markets. This provision has been used extensively
by SEBI due to which it has been subjected to interpretation by the courts.
This series would operate as a primer on SEBI’s powers under the provision.]
provisions of Section 11B of the SEBI Act, 1992 which confers wide powers on
SEBI to regulate the capital markets. This provision has been used extensively
by SEBI due to which it has been subjected to interpretation by the courts.
This series would operate as a primer on SEBI’s powers under the provision.]
INTRODUCTION
A spurt
in the participation of the public in the capital market was instrumental in its
tremendous growth.[1]
In order to fortify the said interest of investors in the capital market,
preservation of investor’s confidence became of fundamental importance. This is
how the seeds of investor protection were sown. With this aim, the Government
decided to clothe the Securities and Exchange Board of India (“SEBI” or the “Board”) immediately with statutory powers required to deal
effectively with all matters relating to the capital market. This was fulfilled
initially by an ordinance which was promulgated on January 30, 1992 called The
Securities and Exchange Board of India Ordinance, 1992 (“Ordinance”).
This Ordinance was then converted into an Act by Parliament in April 1992 referred
to as The Securities and Exchange Board of India Act, 1992 (“SEBI Act”).
Like the Ordinance, SEBI Act unequivocally provided for the establishment of SEBI
to fulfill purposes such as protecting the interests of investors in securities
and to promote the development of and to regulate the securities market and for
matters connected there with or incidental thereto.[2]
in the participation of the public in the capital market was instrumental in its
tremendous growth.[1]
In order to fortify the said interest of investors in the capital market,
preservation of investor’s confidence became of fundamental importance. This is
how the seeds of investor protection were sown. With this aim, the Government
decided to clothe the Securities and Exchange Board of India (“SEBI” or the “Board”) immediately with statutory powers required to deal
effectively with all matters relating to the capital market. This was fulfilled
initially by an ordinance which was promulgated on January 30, 1992 called The
Securities and Exchange Board of India Ordinance, 1992 (“Ordinance”).
This Ordinance was then converted into an Act by Parliament in April 1992 referred
to as The Securities and Exchange Board of India Act, 1992 (“SEBI Act”).
Like the Ordinance, SEBI Act unequivocally provided for the establishment of SEBI
to fulfill purposes such as protecting the interests of investors in securities
and to promote the development of and to regulate the securities market and for
matters connected there with or incidental thereto.[2]
In the
year 1995, certain amendments were carried out (“1995 Amendments”) in
the SEBI Act as it was felt there was a need to amend the SEBI Act in respect
of certain categories of intermediaries, persons associated with the securities
market and companies on matters relating to issue of capital and transfer of
securities. The Statements of Objects and Reasons of 1995 Amendments show that one
of the objects is to empower SEBI to issue regulations without the approval of
the Central Government. Section11B of the SEBI Act, which was introduced
by the 1995 Amendment, empowers SEBI to issue directions: in the interest of
the investors; for the orderly development of securities market; to prevent the
affairs of any intermediary or other persons referred to in section 12 of the
SEBI Act being conducted in a manner detrimental to the interest of investors
or securities market; and to secure the proper management of any such
intermediary or person. Section 11B also provided that the directions can be
issued to any person or class of persons referred to in section 12 of the SEBI
Act, or associated with the securities market, to any company in respect of
matters specified in section 11A of the SEBI Act, as may be appropriate in the
interests of investors in securities and the securities market.
year 1995, certain amendments were carried out (“1995 Amendments”) in
the SEBI Act as it was felt there was a need to amend the SEBI Act in respect
of certain categories of intermediaries, persons associated with the securities
market and companies on matters relating to issue of capital and transfer of
securities. The Statements of Objects and Reasons of 1995 Amendments show that one
of the objects is to empower SEBI to issue regulations without the approval of
the Central Government. Section11B of the SEBI Act, which was introduced
by the 1995 Amendment, empowers SEBI to issue directions: in the interest of
the investors; for the orderly development of securities market; to prevent the
affairs of any intermediary or other persons referred to in section 12 of the
SEBI Act being conducted in a manner detrimental to the interest of investors
or securities market; and to secure the proper management of any such
intermediary or person. Section 11B also provided that the directions can be
issued to any person or class of persons referred to in section 12 of the SEBI
Act, or associated with the securities market, to any company in respect of
matters specified in section 11A of the SEBI Act, as may be appropriate in the
interests of investors in securities and the securities market.
ANALYSIS OF SECTION 11B
Scope of Section 11B
The SEBI
Act is pre-eminently a social welfare legislation seeking to protect the
interests of common men who are small investors. It is a well known canon of
construction that when Court is called upon to interpret provisions of a social
welfare legislation, the paramount duty of the Court is to adopt such an
interpretation as to further the purposes of law and if possible, eschew the
one which frustrates it.[3]
The prime duty in the case of construing the provisions of a beneficial
legislation is to adopt a constructive approach; subject to that it should not
do violence to the language of the provisions nor go contrary to the attempted
objective of the enactment.[4]
Act is pre-eminently a social welfare legislation seeking to protect the
interests of common men who are small investors. It is a well known canon of
construction that when Court is called upon to interpret provisions of a social
welfare legislation, the paramount duty of the Court is to adopt such an
interpretation as to further the purposes of law and if possible, eschew the
one which frustrates it.[3]
The prime duty in the case of construing the provisions of a beneficial
legislation is to adopt a constructive approach; subject to that it should not
do violence to the language of the provisions nor go contrary to the attempted
objective of the enactment.[4]
Section
11B is not couched in a manner of conferring adjudicatory power of finding a
person guilty or adjudicating upon the rights of a person and making consequential
orders as a result of such adjudication on the person concerned de hors the
provision governing such impositions of penalties or bringing out certain
consequences specified by law.[5] The very fact that
directions could be issued not only to persons but also to classes of persons
and with respect to specified matters in respect of the company, rules out the
directions of the nature of imposing penalty or a power to forfeit any amounts.
The term used is not to make “orders” in respect of persons found guilty of a
breach of regulation, rule or law, which is a well known terminology in the
field of prescribing consequences to be visited in case of breach of law. But
the term used is “issue such directions”.
11B is not couched in a manner of conferring adjudicatory power of finding a
person guilty or adjudicating upon the rights of a person and making consequential
orders as a result of such adjudication on the person concerned de hors the
provision governing such impositions of penalties or bringing out certain
consequences specified by law.[5] The very fact that
directions could be issued not only to persons but also to classes of persons
and with respect to specified matters in respect of the company, rules out the
directions of the nature of imposing penalty or a power to forfeit any amounts.
The term used is not to make “orders” in respect of persons found guilty of a
breach of regulation, rule or law, which is a well known terminology in the
field of prescribing consequences to be visited in case of breach of law. But
the term used is “issue such directions”.
The scope
of the expression “direction” has not been defined in the Act. However, the
expression has been judicially interpreted. The Supreme Court[6]
defined the expression to be in the nature of an order requiring positive
compliance. Similarly, Securities Appellate Tribunal adopted the definition
provided by the Bombay High Court, which defined it to mean guidance or
command. Also, in Black’s Law Dictionary, the meaning assigned to the
expression “direction” is as that which is imposed by directing; a
guiding or authoritative instruction order or command.[7] Therefore, the functional
object of issuing directions is to issue guidance for the purpose of actions to
be taken by the persons to whom directions are made or forbearance for doing
certain acts to whom such directions are aimed.
of the expression “direction” has not been defined in the Act. However, the
expression has been judicially interpreted. The Supreme Court[6]
defined the expression to be in the nature of an order requiring positive
compliance. Similarly, Securities Appellate Tribunal adopted the definition
provided by the Bombay High Court, which defined it to mean guidance or
command. Also, in Black’s Law Dictionary, the meaning assigned to the
expression “direction” is as that which is imposed by directing; a
guiding or authoritative instruction order or command.[7] Therefore, the functional
object of issuing directions is to issue guidance for the purpose of actions to
be taken by the persons to whom directions are made or forbearance for doing
certain acts to whom such directions are aimed.
Constitutional Validity
There are
three fundamental rights in the Constitution which are of prime importance and
which breathe vitality in the concept of the rule of law: they are Articles 14,
19 and 21,[8] collectively called the
golden triangle,[9]
which is considered to stand between the “heaven of freedom” and the “abyss of
unrestrained power”.[10] This very golden triangle
as a whole or some of its constituents have been used to challenge the constitutional
legitimacy of section 11B.[11]
three fundamental rights in the Constitution which are of prime importance and
which breathe vitality in the concept of the rule of law: they are Articles 14,
19 and 21,[8] collectively called the
golden triangle,[9]
which is considered to stand between the “heaven of freedom” and the “abyss of
unrestrained power”.[10] This very golden triangle
as a whole or some of its constituents have been used to challenge the constitutional
legitimacy of section 11B.[11]
Section 11B
is an enabling provision, enacted to empower SEBI to protect the interest of
investors and to promote the development of and to regulate the securities
market and to prevent malpractices and manipulations.[12] Such
an enabling provision must be construed so as to serve the purpose for which
it is enacted, as it is a well accepted canon of statutory construction that it
is the duty of the Court to further Parliament’s aim of providing a remedy for
the mischief against which the enactment is directed, and the court should
prefer a construction which advances this object rather than one which attempts
to find some way of circumventing it.[13] In the same breath, it is
a firmly established rule that an express grant of statutory power carries with
it by necessary implication the authority to use all reasonable means to make
such grant effective.[14] Without an iota of doubt,
power which has been conferred by Section 11B to issue directions is of the
widest possible amplitude and carries with it, by necessary implication, all
powers and duties incidental and necessary to make the exercise of these powers
fully effective. Therefore, the said section does not fall foul of the
Constitution of India.
is an enabling provision, enacted to empower SEBI to protect the interest of
investors and to promote the development of and to regulate the securities
market and to prevent malpractices and manipulations.[12] Such
an enabling provision must be construed so as to serve the purpose for which
it is enacted, as it is a well accepted canon of statutory construction that it
is the duty of the Court to further Parliament’s aim of providing a remedy for
the mischief against which the enactment is directed, and the court should
prefer a construction which advances this object rather than one which attempts
to find some way of circumventing it.[13] In the same breath, it is
a firmly established rule that an express grant of statutory power carries with
it by necessary implication the authority to use all reasonable means to make
such grant effective.[14] Without an iota of doubt,
power which has been conferred by Section 11B to issue directions is of the
widest possible amplitude and carries with it, by necessary implication, all
powers and duties incidental and necessary to make the exercise of these powers
fully effective. Therefore, the said section does not fall foul of the
Constitution of India.
Even
outside the court room, concerns over the constitutional validity of Section
11B have been raised. A very recent article titled “How Constitutional are SEBI
Directions”,[15]
(which has also been posted on this blog) enlisted inter alia the following
pertinent grounds for challenging the constitutional validity of the section
such as absence of safeguards in the said section as required by the
Constitution of India, lack of a review mechanism to reconsider the
justifiability of directions, no regulation having been formulated by SEBI to
govern the power to issue directions under the said section even after the said
power having come into operation for about two decades. The author in the said
article also relies heavily on the principles laid down by the Supreme Court of
India in the case of Shreya Singhal vs.
Union of India[16] to buttress the
aforementioned arguments.
outside the court room, concerns over the constitutional validity of Section
11B have been raised. A very recent article titled “How Constitutional are SEBI
Directions”,[15]
(which has also been posted on this blog) enlisted inter alia the following
pertinent grounds for challenging the constitutional validity of the section
such as absence of safeguards in the said section as required by the
Constitution of India, lack of a review mechanism to reconsider the
justifiability of directions, no regulation having been formulated by SEBI to
govern the power to issue directions under the said section even after the said
power having come into operation for about two decades. The author in the said
article also relies heavily on the principles laid down by the Supreme Court of
India in the case of Shreya Singhal vs.
Union of India[16] to buttress the
aforementioned arguments.
I humbly submit
that the aforementioned concerns presented by the author do not put a question
mark on the constitutional validity of Section 11B. The law recognises the
latitude with which one views economic laws to be greater than laws touching
civil rights such as freedom of speech, religion, and the like. The Court
should feel more inclined to give judicial deference to legislative judgment in
the field of economic regulation than in other areas where fundamental human
rights are involved. If not judicial deference, then at least judicial self
restraint is expected for good reasons such as complexity of economic
regulation, the uncertainty, the liability to error, the bewildering conflict
of experts, and the like. Also, there is judicial support for allowing the
legislature some play in the joints, because it has to deal with complex
problems which do not admit of solution through any doctrinaire or straight
jacket formula and this is especially warranted in case of legislations dealing
with economic matters, where, having regard to the nature of the problems
required to be dealt with, greater play in the joints has to be allowed to the
legislature.[17]
Therefore, even though crudities and inequities might be present in complicated
economic legislation, on that account alone it cannot be struck down as
invalid.
that the aforementioned concerns presented by the author do not put a question
mark on the constitutional validity of Section 11B. The law recognises the
latitude with which one views economic laws to be greater than laws touching
civil rights such as freedom of speech, religion, and the like. The Court
should feel more inclined to give judicial deference to legislative judgment in
the field of economic regulation than in other areas where fundamental human
rights are involved. If not judicial deference, then at least judicial self
restraint is expected for good reasons such as complexity of economic
regulation, the uncertainty, the liability to error, the bewildering conflict
of experts, and the like. Also, there is judicial support for allowing the
legislature some play in the joints, because it has to deal with complex
problems which do not admit of solution through any doctrinaire or straight
jacket formula and this is especially warranted in case of legislations dealing
with economic matters, where, having regard to the nature of the problems
required to be dealt with, greater play in the joints has to be allowed to the
legislature.[17]
Therefore, even though crudities and inequities might be present in complicated
economic legislation, on that account alone it cannot be struck down as
invalid.
– Kanwardeep Singh Kapany
[1] Securities & Exchange Board of India Act, 1992, Statements of Objects and Reasons.
[2] Securities & Exchange Board of India Act, 1992, Preamble.
[3] Bank of Baroda v. SEBI,
[2000] 26 SCL 532 (SAT – MUM).
[2000] 26 SCL 532 (SAT – MUM).
[4] Lucknow Development Authority v. M.K.Gupta,
(1994) SCC (1) 243.
(1994) SCC (1) 243.
[5] Alka Synthetics Ltd. v. SEBI,
1995 95 Comp Cas 663 Guj.
1995 95 Comp Cas 663 Guj.
[6] Rajendranath v.CIT, (1979)
4 SCC 282.
4 SCC 282.
[7] Videocon International Ltd. v. SEBI,
[2002] 38 SCL 422 (SAT – MUM).
[2002] 38 SCL 422 (SAT – MUM).
[8] Bachan
Singh v. State of Punjab, (1982) 3 SCC 24.
Singh v. State of Punjab, (1982) 3 SCC 24.
[9] T.R.
Kothandaraman v. T.N. Water Supply & Drainage Board, (1994) 6 SCC 282.
Kothandaraman v. T.N. Water Supply & Drainage Board, (1994) 6 SCC 282.
[10] Minerva Mills Ltd. & Ors. v. Union
of India & Ors., 1981 SCR (1) 206.
of India & Ors., 1981 SCR (1) 206.
[11] Ramrakh R. Bohra, Harvest Deal v.
SEBI, 1999 96 Comp Cas 623 Bom; M/S Cyberinfo Zeeboomba Com & Ors. v. Union
Of India And Ors., Writ Petition No. 4581/2010, decided on 29 October,
2010.
SEBI, 1999 96 Comp Cas 623 Bom; M/S Cyberinfo Zeeboomba Com & Ors. v. Union
Of India And Ors., Writ Petition No. 4581/2010, decided on 29 October,
2010.
[12] Nikhil T. Parikh v. Union of
India 2014 GLH (2) 582.
India 2014 GLH (2) 582.
[13] Reserve bank of India & Ors.
v. Peerless General Finance and Investment Company Ltd. & Anr. 1996
SCC (1) 753.
v. Peerless General Finance and Investment Company Ltd. & Anr. 1996
SCC (1) 753.
[14] ITO v. M. K. Mohammed Kunhi,
AIR 1969 SC 430).
AIR 1969 SC 430).
[15] How Constitutional are SEBI Directions available
at: http://www.business-standard.com/article/opinion/how-constitutional-are-sebi-directions-115032900678_1.html;
http://indiacorplaw.blogspot.in/2015/03/financial-sector-legislation-anti.html
(visited on 31 May 2015).
at: http://www.business-standard.com/article/opinion/how-constitutional-are-sebi-directions-115032900678_1.html;
http://indiacorplaw.blogspot.in/2015/03/financial-sector-legislation-anti.html
(visited on 31 May 2015).
[16] [2015] 2 COMP. LJ 143 (SC).
[17] R.K. Garg v. Union of India,
[1998] 4 SCC 675 (690).
[1998] 4 SCC 675 (690).
