Obliterating Unnecessarys Delays: SEBI Proposes 10% Mandatory Deposits for Appeal

[Shubham Gupta is a 4th Year Student at the Institute of Law, Nirma University]

The Indian judicial system is grossly afflicted with litigation, some of which tends to be frivolous. The Supreme Court, in its Sahara decision, stated that ‘ways and means need to be evolved to deter the litigants from their compulsive obsession toward senseless and ill-considered claims’.  Therefore, with the aim of obliterating frivolous applications, the capital markets regulator Securities and Exchange Board of India (SEBI) is seeking to introduce a 10% mandatory deposit of the penalty amount of SEBI’s order to file for appeal before the Securities Appellate Tribunal (SAT). This proposal is sought in the backdrop that the SAT has been used as a device to delay enforcement actions rather than as a genuine cause. Thus, this proposal will not only bring about a deterrence effect to false appeals, but also foster the effective disposal system within a reasonable time. This post seeks to critically analyze the amendment sought to be brought to the SEBI Act, 1992 adding a mandatory deposit to file an appeal before SAT.

Background

Frivolous claims and litigation are not new jargon, and courts have relentlessly taken efforts to stop frivolous litigation and claims filed. The Supreme Court in Sanjeev Kumar Jain v Raghubir Saran Charitable Trust, referring to section 35 of Civil Procedure Code, which stipulates the quantum of cost, suggested a hike in the amount of cost to be levied upon to avoid continuing frivolous and vexatious litigation, which are clogging up the justice delivery system. The trend has been such that courts were levying a meagre cost, which was significantly less than the actual cost incurred; therefore, the Court reiterated that not only did this involve awarding nominal cost which is wholly unsatisfactory, but it also encourages filing frivolous suits (see also Ashok Kumar Mittal v. Ram Kumar Gupta). Therefore, in Salem Advocates Bar Association v. Union of India, the Supreme Court held that the cost should be actual costs reasonably incurred by the party, including the cost of time spent by the party.

However, taking a leeway from these judgments, in recent practice, the legislature has sought to mandate pre-deposit rather than a cost imposed afterward. SEBI’s proposal to mandate 10% deposit for appeal can be similarly trailed from the mandatory pre-deposit provisions in the Central Excise Act, 1944, Central Goods and Services Tax Act, 2018 (CGSTA), Real Estate (Regulation and Development) Act, 2016 (RERA) and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

On the contrary, the Sahara judgment has prescribed a different noting and held that:

it is not suggested that the cost of litigation be enhanced. Access to justice and related cost should be as free and as low as possible What is sought to redressed is habituation to press illegitimate claims.

Thus, the Supreme Court suggested a mechanism for a code of compulsory cost wherein the compensation, as a form of realistic costs, would be provided if the party turns out to be unsuccessful. However, in the present setting involving the adjudicatory process, an irresponsible litigant suffers almost no consequences. Also, the post-litigation cost does encourage the filing of the frivolous complaint and, thus, pre-deposit should be made a mandatory provision with some hard restrictions. Also, no coercive action should be allowed if the person has deposited the amount.

SEBI’s Proposal

SEBI has sought an amendment to the SEBI Act 1992 to provide for ‘pre-deposit’ by any entity seeking to challenge its order relating to a monetary penalty, or orders related to funds, recovery, disgorgement, and compounding. The market regulator perceives this provision as excluding frivolous appeals filed before SAT, which has been used as a device to the delay the execution of its order, and would hence expedite disposal of the statutory appeals. The Finance Ministry has also accorded with the proposal fostered by SEBI.

This decision emerged when SEBI tracked its records of appeal before the SAT. According to SEBI’s official data, in the year 2017-2018, 340 appeals were filed; amongst them, 306 appeals were dismissed in favor of SEBI, while 17 were ruled against the regulator. The total number of appeals that were pending amounted to 223 cases as on 31 March 2018. Against the SAT’s orders, SEBI filed 13 appeals before the Supreme Court during 2017-18, while 42 appeals were filed by other parties before the apex court.

Thus, this asymmetric data triggered SEBI’s decision to opt for an effective and expeditious disposal mechanism and, therefore, embarking on the principle of pre-deposit and mandated 10% deposit of the amount or penalty levied. But, the proposal also bestows discretion wherein the SAT is in the opinion that such amount or pre-deposit would cause unnecessary hardship, subject to the necessary condition that would safeguard the interest of the shareholder.

Principles of Pre-deposit Waiver

A waiver is allowed if undue hardship has been caused. As noted in S Vasudeva v State of Karnataka, undue hardship means ‘something which is not merited by the conduct of the party or is very disproportionate to it.’ For establishing undue hardship, the claimant has to prove that the particular burden to observe or perform the requirement is out of proportion to the very nature of the requirement itself.

Following are principles to be observed while determining pre-deposit waiver:[1]

  1. Prima Facie case;
  2. Balance of Convenience ;
  3. Irreparable loss;
  4. Interim order ought not to be granted merely because the prima facie case has been shown;
  5. The balance of convenience must be clear in favor of the appellant and there should not be a slightest indication as to prejudice to public revenue;
  6. Twin requirement of undue hardship and safeguards to investors must be considered; and
  7. The appellate tribunal, being a creature of statute, cannot ignore the statutory guidance while exercising general power or expressly conferred incidental powers.

Second Appeal

In preferring the second appeal to Supreme Court or any other body, the Customs Act mandates pre-deposit of 20% of the duty demand. In case Santani Sales Organisation vs Central Excise, Customs, it was held that 20% would be inclusive of the 10% amount filed at the first appeal. However, SEBI did not discuss the pre-deposit requirement as to the second appeal. However, given the limited number of cases going to the Supreme Court from the SAT, it would be hard to impose pre-deposit for the second appeal.

Provisions in other Legislation

The right to appeal is a statutory right but clothed with some limitations. One of the core limitations is a pre-deposit requirement. However, it may often be the case that the appellant succeeds in the appeal; in that case, the hardship would fall on such a person. Hence, tax law has been mandated with pre-deposit, to discourage any frivolous appeal and also safeguard the bona fide interest of both revenue and taxpayers.

Section 35F of the Central Excise Act, 1944 and section 129E of the Customs Act, 1962 have been instituted to provide for mandatory pre-deposit as a percentage of the duty demanded. In these legislation, discretion was earlier conferred upon the Commissioner to waive the pre-deposit on the grounds of request or any hardship, but the effect from the date of institution of new sections is that no discretion is now available with the Commissioner (Appeals) or the Customs Excise and Service Tax Appellate Tribunal (CESTAT). In other words, if pre-deposit is not made at the time of filing an appeal, the appeal is liable to be dismissed. However, SEBI proposes to forego the amount if the appellant is able to show that it will cause hardship.

In the CGSTA, section 107(6) provides that no appeal shall be filed unless the appellant has paid ‘the sum equal to the remaining amount of the tax in dispute arising from the said order, in relation to which the appeal has filed’

In RERA, the proviso to section 43(5) mandates that 30% of the minimum deposit of the amount in content is mandatory to exercise an option of appeal. The Maharashtra RERA appellate tribunal ordered that no exception can be claimed from mandatory provisions, as that would defeat the legislative intent.[2] Therefore, the ground of hardship has been shunned and it has been held that failing to deposit the required amount would give no right to statutory appeal.

According to section 18(1) of the SARFESI Act, no borrower shall be allowed to file an appeal until the deposit of 50% of the debt owed has been deposited with the authority. The Delhi High Court has ruled that, looking at the purpose of the legislation, this provision is applicable only to borrowers and guarantors, and not any other aggrieved person (see India Bulls Housing Finance Ltd v Vaibhav Jhawar).

Lensing out the above provisions, the Court has taken only a purposive interpretation, as to making the deposit provision mandatory in all aspects and failing that it would lead to dismissal of the appeal. However, SEBI has contemplated giving discretion to tribunal members while determining any hardship. However, in another case, the provision would be held to be mandatory and obligatory.

Conclusion

The mandatory provision clothed with necessary restriction as to safeguarding the interest of investors would not only address the frivolous appeal concern but would also lessen the logistics required by the tribunal. The lesser burden would help in properly accounting for the reformatory measures that could be taken to enhance the justice delivery system. This provision will enhance greater integrity in the market due to an expeditious disposal mechanism.

Shubham Gupta

[1] SQL Star International Pvt. Ltd. v CESTAT (2011) 7 TMI 868.

[2] Avarsekar Realty Pvt. Ltd. v L&T Financial Consultant (Maharashtra RERA Appellate Tribunal, 1 February 2019).

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