The Securities and Exchange Board of India (SEBI) has established the “SEBI Complaints Redress System” (SCORES) for receiving investor complaints in respect of listed companies, collective investment schemes and other SEBI-regulated entities. The question of whether an appeal lies from SEBI’s disposal of an investor complaint through SCORES came up for consideration before the Securities Appellate Tribunal (SAT) in Ashok Dayabhai Shah v. Securities and Exchange Board of India. In an order issued yesterday, the SAT not only clarified that appeals lie to it from SEBI’s disposal of investor complaints on SCORES, but that on the facts of the case SEBI’s action was not in accordance with the law. Hence, the SAT set aside the communication or order of SEBI on SCORES and directed the investors to file a consolidated complaint before SEBI, which it is required to decide within six weeks of receipt of the complaint.
The complainants are minority shareholders in three listed companies, viz., (i) Bharat Nidhi Limited (BNL); (ii) PNB Finance and Industries Limited (PNBF); and (iii) Camac Commercial Company Limited (Camac), collectively referred to as the “three intermediate companies”. These three intermediate companies hold 24.41%, 9.29% and 13.30% respectively of Bennett, Coleman & Co. Ltd. (BCCL), a media conglomerate. While Mr. Vineet Jain and Mr. Samir Jain are managing directors of BCCL, they are said to exercise control over the three intermediate companies and, as a result, have effective control over BCCL. The precise complaints of the minority shareholders of the three intermediate companies, which they expressed via SCORES, is that they failed make proper disclosures regarding their promoters’ shareholding and also did not comply with the minimum public shareholding norms. They contend that SEBI either significantly delayed the treatment of their complaints or that it disposed them unsatisfactorily. For example, the SCORES order in question, which SEBI passed on 3 August 2019, stated:
The information provided by you will be treated as market intelligence. This information shall be treated as confidential. This information will be analysed and if found necessary, further action will be taken. The status of information cannot be ascertained as SEBI conducts the investigations confidentially in a holistic manner. In order to aid SEBI to carry out its surveillance activity, you are encouraged to provide correct and complete information. SEBI will neither confirm nor deny the existence of any investigation. Any regulatory actions taken by SEBI are published at SEBI website.
Dissatisfied with SEBI’s action, the minority investors in the three intermediate companies preferred an appeal before the SAT. Two legal questions arose on appeal: (i) whether an appeal is maintainable from SEBI’s disposal of an investor complaint via SCORES; and (ii) if the answer to the first question is in the affirmative, whether SEBI’s action in the specific case was sustainable.
On the maintainability question, SAT was required to consider whether SEBI’s disposal of a complaint through SCORES was an “order” in terms of section 15T of the SEBI Act, 1992. Both sides placed several decisions in support of their position, including the landmark Supreme Court decision in National Securities Depository Limited v. Securities and Exchange Board of India (2017) 5 SCC 517. After considering the arguments, the SAT concluded that aggrieved persons can prefer an appeal from SEBI’s disposal of investor complaints through SCORES. It noted:
15. Having heard the learned senior counsel for the parties at some length we are of the opinion that an order / communication by the respondent disposing of the complaint of the appellants on the SCORES platform is an appealable order under Section 15T of the SEBI Act. If the complainants are aggrieved by the disposal of the complaint on the SCORES platform the said complainants have a right to file an appeal under Section 15T of the SEBI Act. We are further of the opinion that the computer generated communication by the respondent on the SCORES platform, even though it may be an administrative communication is nonetheless an order since it disposes of the lis between the parties and disposes of the complaint and the issues raised by the complainants. The said communication / order as the case may be, in our opinion, is appealable. In the light of the aforesaid, the decisions cited by the respondents are distinguishable and not applicable in the instant case. The preliminary objection thus raised by the respondents is rejected.
After resolving the maintainability question, the SAT came down heavily on SEBI’s disposal of investor complaints in the specific case:
16. In the instant case, we find that written complaints made to SEBI from 2013 onwards has not been disposed of as yet but complaints filed on the SCORES platform has been disposed of without deciding / settling the issue that was raised in the complaints. Thus, disposal of the complaints by the respondents on the SCORES platform is no disposal in the eyes of law. It is merely an eye wash without disposing of the complaints and without settling the controversy involved in the complaints.
20. We find the approach adopted by the respondents to be a strange one. Such computer generated disposal of a serious complaint speaks volume on the conduct of the respondents in treating the minority shareholders in this shabby manner. It seems that the respondents have lost sight of the mandate provided to them under Section 11 of the SEBI Act which mandates SEBI to safeguard the interest of the investors. Disposal of the complaint in this manner in the instant case indicates non-application of mind and non-consideration of the interest of the investors. We have no hesitation in stating that the SEBI as a regulator in the instant case has not performed its duties and has kept the complaint pending for more than six years which speaks volumes by itself. The Tribunal fails to fathom as to why the complaint could not have been decided unless SEBI officials had a vested interest in not deciding the matter.
Although the issues before the SAT related to very specific legal questions, its ruling has wider consequences. At the outset, the scenario involved is symptomatic of promoter-controlled companies where there are agency conflicts between the controlling shareholders and the minority shareholders. Here, securities laws play an important role in minimizing the agency conflicts by protecting the interests of the minority shareholders. More importantly, the rigour of the corporate governance norms and securities regulation depends largely on the extent to which they are effectively enforced. This episode exposes concerns relating to the enforcement of investor protection measures.