Dissecting SEBI’s Powers Under Section 11B of the SEBI Act, 1992: Part 2

following guest post is contributed by Kanwardeep Singh Kapany, and is a
continuation of a previous post in
Section 11B was introduced to the
statute through the 1995 Amendments with effect from January 25, 1995. In a
certain case before the Supreme Court of India,[1]
the misconduct had taken place in the months of October and November 1993. When
directions were issued under section 11B, the company opposed
the same by contending that section 11B, being
prospective in its application, cannot be applied to transactions undertaken
prior to January 25, 1995. The said contention was based on the cardinal
principle of protection against an ex post facto law, which is crystallised as a
fundamental right guaranteed by the Constitution of India.[2]
The said fundamental right provides for the right of a person of not being
convicted of any offence except for violation of a law in force at the time of
the commission of the act charged as an offence and not to be subjected to a
penalty greater than that which might have been inflicted under the law in
force at the time of the commission of the offence.
The Supreme Court held that merely
being restrained, by a direction passed under Section 11B, from associating
with any corporate body in accessing the securities market and also being
prohibited from buying, selling or dealing in securities for a certain time
period shall not attract the protection granted by the aforementioned
fundamental right, as the said direction neither amounts to holing a person
guilty of committing any offence nor does it amount to subjecting the person to
any penalty.[3] The
Supreme Court also held Section 11B to be procedural in nature and
that no person has a vested right in any course of procedure,[4]
reiterating the time honoured principle that if the law affects matters of
procedure, then prima facie it applies to all actions, pending as well as
future. Therefore, provisions of Section11B can be applied retrospectively.
of the expression “Persons Associated with the Securities Market”
The persons to whom directions can be
issued under section 11B, as mentioned previously, are very lucidly provided
for, with the only ambiguity being caused by the expression “persons associated
with the securities market”. Indeed the said expression has a wide import. Therefore
an exhaustive explanation, or a straight jacket answer as to who are persons
associated with the securities market, is not possible. However, a minimalistic
understanding of the said expression is both possible and desired. The words “persons
associated with” denote a person having a connection or having interaction with
the “other”. In the present case that “other” with whom a person is
to have connection or interaction is the securities market. The expression
“securities” has not been defined under the SEBI Act. Therefore, one has to
borrow the definition from the Securities (Contracts) Regulation Act, 1956 (“SCRA”), because that is the definition
of “securities” adopted under the SEBI Act.[5]
The expression “market” as
understood in common parlance is a place or institution where the business of
selling or buying of securities is carried on. Selling, buying or dealing with
securities is the essential ingredient of a securities market. Though
“securities market” has not been defined, the definition of
“stock exchange”[6] can be
made use of. It means anybody of individuals whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities. “Securities”
has been defined to include shares, scrips, stocks, debentures, debenture stock
or other marketable securities of like nature in or of any incorporated company
or other body corporate, etc.[7] What is
noticeable is that it refers to “marketability”. A stock exchange is
more than a mere selling, buying or dealing place for securities, but adorns
the role of an assisting agency in the smooth conduct of securities business by
a suitable regulating or controlling authority. Nonetheless, a market cannot be
conceived of without sellers or buyers who are the primary persons for whose
purpose the market exists. All activities of business of selling and buying are
related to the seller or the buyer. Therefore, it is inconceivable to think
that a buyer or seller of a scrip is not a person associated with the
securities market, where or through which he transacts his business, whether as
trader or as investor, of selling or buying the required scrip.[8]
of Pre-Decisional Hearing
Pre-decisional hearing with respect to
provisions of Section 11B refers to the stage prior to issuing of directions by
SEBI on it being satisfied that conditions mentioned in the said section are
met. The two-fold issue that can arise for consideration is whether audi
alteram partem
rule can be excluded at the pre decisional hearing stage and,
if not, whether an offer for a post decisional hearing can cure the defect of
not having provided a pre decisional hearing.
A prior hearing is required to be given
as a part of the rule of natural justice, with these rules operating only in
areas not covered by any law validly made.[9]
A pre-decisional hearing becomes all the more applicable where the necessity of
prior hearing is readable into the statute itself. It is only where the
necessity of prior hearing cannot be read into the statute either on account of
there being express provision for post-decisional hearing or in the absence of
necessary provision for pre-decisional hearing in the rule itself that it can
be held that the purpose of exercise of the power may itself be defeated if
pre-decisional hearing is insisted upon and the post-decisional hearing is
required to be given and if that is done in such cases the exercises of power
would not be vitiated. [10]
Section 11B, to which power to issue
directions are traced, empowers SEBI to issue directions only on its being
satisfied about the conditions referred to in the provision, as a result of
making or causing to be made an enquiry. The very fact that before issuing
directions an enquiry is required to be made and conclusions are to be reached
necessarily implies a pre-decisional hearing before the conclusion of enquiry.
Section 11B by itself does not exclude the application of rules of natural
justice during hearing nor does it speak about giving post-decisional hearing.
Therefore, directions issued under the said section will be vitiated for want
of pre decisional hearing and the offer of post-decisional hearing will be no cure
to the defect of doing away with pre decisional hearing.[11]
can only be preventive or remedial in nature
The legislature has in a lucid fashion
spelt out penal provisions in the SEBI Act at three places, which are (i) section
12(3), which provides for suspension or cancellation of the certificate of
registration granted to the market intermediaries in the event of their proven
misconduct, (ii) provisions under Chapter VIA, which provide for imposition of
monetary penalty for certain offences specified therein, and (iii) section 24,
which empowers courts to award punishment for violation of offences under the
Act, etc. Since the legislature has deliberately chosen to create specific
offences and penalties thereto in the SEBI Act, it is untenable in law to
propose that SEBI is competent to impose penalties under section 11B while
issuing directions, as neither a pecuniary liability can be imposed nor an
offence created by mere implication,[12]
the same has to be statutorily warranted[13]
as prescribing an offence and its punishment is an essential plenary function
of the legislature.[14]
However, SEBI is convincingly competent to issue directions which are preventive
and or remedial in nature.[15]
Let us, with an illustration understand
when direction issued by SEBI amounts to being preventive and or remedial and
when amounts to be a penalty, the former direction being within the scope of
Section 11B, the latter being not and hence bad in law. For instance, if SEBI
prohibits a public listed company, shares of which are listed/traded in the
stock exchanges even to this day, which is alleged to have committed market
manipulation, from accessing the capital market for a certain time period, say two
(2) years, this would mean that the said company cannot enter the capital
market for issuing and or offering securities. That being the case, preventing
the said company from raising further capital/offering shares to the public for
the next two years will in all probability lead to debilitating the company
alleged of having committed market manipulation, but not as a mode of
preventing further market manipulation. Similarly it is preposterous to accept
that the debarring of the said company would be remedial in nature as the
prospective barring of a public issue cannot remedy an act of market
manipulation that has already occurred. The said direction issued by SEBI, in
the above illustration, would be punitive in nature and not preventive or
The purport of a preventive or remedial
direction can very well be understood with the aid of regulation 12 of the
erstwhile Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market, 1995[16] (“1995
”). The 1995 Regulations provided that direction(s) may be
issued by SEBI for attaining the purposes such as directing the person not to
deal in securities in any particular manner; requiring the person concerned to
call upon any of its officers; other employees or representatives to refrain
from dealing in securities in any particular manner; prohibiting the concerned
person from disposing of any of the securities acquired in contravention of the
1995 Regulations; directing the concerned 
person to dispose of any such securities acquired in contravention of
1995 Regulations in such manner as SEBI may deem fit for restoring the status-quo
[Continued in Part 3]
Singh Kapany

[1] SEBI
v. Ajay Agarwal, (2010) 3 SCC 764.
The Constitution of India, 1949, art 20(1).
[3] SEBI
v. Ajay Agarwal, (2010) 3 SCC 764
[4] Union
of India
v. Sukumar Pyne 1966 SCR (2) 34.
Securities and Exchange Board of India Act, 1992, sec 2(2).
Securities Contracts (Regulation) Act, 1956, s 2(j).
Securities Contracts (Regulation) Act, 1956, s 2(h).
[8] Karnavati
Fincap Ltd
. v. Securities and Exchange Board of India [1996] 87
CC 186 (Guj).
[9] Swadeshi
Cotton Mills
v. Union of India, 1981 SCR (2) 533.
[10] Charan
Lal Sahu
v. Union of India, 1990 AIR 1480.
[11] Alka
Synthetics Ltd.
v. SEBI, 1995 95 Comp Cas 663 Guj.
[12] Khemka
and Co.(Agencies) Pvt.Ltd
v. State of Maharashtra, AIR 1975 SC 1549.
[13] Delux
Land Organisers
v. State of Gujarat, MANU/GJ/0160/1992.
[14] D.N.Ghosh
& Anr.
 v. Addl. Sessions
, AIR 1959 Cal 208.
SAT v. Videocon International Ltd., MANU/SB/0027/2002.
Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market Regulations, 1995 has been repealed by the Prohibition of Fraudulent and
Unfair Trade Practices Relating to Securities Market Regulations, 2003

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.

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