[Tanuj Sharma is a 5th year B.B.A. LL.B. (Hons.) student and Vanshika Sharma is a 4th year B.B.A. LL.B. (Hons.) student at National Law University Odisha]
The Securities Appellate Tribunal (“SAT”) on 10 July 2023 upheld the decision of the Securities and Exchange Board of India (“SEBI”) barring Subhash Chandra, the then Chairman of Zee Entertainment Enterprises Ltd. (“ZEEL”), and Puneet Goenka, the Managing Director and Chief Executive Officer of ZEEL, from holding the position of a director or a Key Managerial Personnel (“KMP”) in any listed company or its subsidiaries until further notice.
It was alleged that Subhash Chandra had signed a letter of comfort to Yes Bank Ltd. stating that a fixed deposit of Rs. 200 crores shall be available with Yes Bank for squaring off loans availed by the related entities of ZEEL. This was all done without informing, consulting and/or approval of the ZEEL Board. Thus, they were alleged to have violated regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. As a result, the Whole Time Member (“WTM”) of SEBI issued an ex-parte interim order under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 (“Act”) suspending Subhash Chandra and Puneet Goenka from holding any position as KMP. The SAT upheld this order and also directed SEBI to appoint another WTM to further investigate the case.
In this post, the authors attempt to scrutinize the SEBI order which was upheld by SAT and substantiate how it creates a problem for the market and its stakeholders. Further, towards the end the authors propose why the idea of separation of powers within SEBI can be a step to tackle the problem created by the above-mentioned SEBI order.
SEBI’s Power to Pass Ex-parte Interim Orders
The objectives of the Act are to protect the interests of the investors in the securities market and its development. In consonance with these objectives is the scope of ex-parte interim orders passed under sections 11, 11B and 11D of the Act which allows SEBI to issue directions to realize these underlying objectives. These powers can be exercised either at the end of any enquiry or investigation or during its pendency. These powers include:
- suspending the trading of any security in a recognised stock exchange;
- restraining persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities;
- suspending any office-bearer of any stock exchange or self- regulatory organization from holding such position;
- impounding and retaining the proceeds or securities in respect of any transaction which is under investigation; or
- attaching the property of the person who violated the provisions of the SEBI Act, rules, regulations, guidelines, circulars etc.
There has been a plethora of judgments where SEBI has passed ex-parte interim orders against listed companies which have been found to be engaged in insider trading or any other market frauds. An indispensable element across these orders has been the application of the principle of natural justice. This principle was further extended in Pancard Clubs Limited v SEBI where the SAT held that SEBI should exercise great care and caution in addition to following natural justice and fair play in action.
Furthermore, in Dr. Udayant Malhoutra v. SEBI, the SAT upheld the three principles for granting an ex-parte interim order i.e. (i) there shall be a prima facie case made out against the person or party in question, (ii) the balance of convenience must lie in favor of passing the order as against abstaining from doing the same, and (iii) irreparable injury shall be caused if the order is not passed. The SAT further observed that merely by arriving at a prima-facie finding, SEBI cannot pass such orders without considering the balance of convenience and irreparable injury. Further, in Radford Global Ltd., SEBI issued a reasoned order taking into consideration that these three principles are satisfied. This shows that a due process shall be followed by SEBI while passing an ex-parte interim order.
Problem with the SEBI Order
In the present case, SEBI issued an ex-parte interim order relying solely on prima facie findings. However, it is noteworthy that in this order SEBI did not mention about the application of the principles of balance of convenience and irreparable injury, which are fundamental considerations in such matters. Subsequently, the SAT upheld the same order. Moreover, the SAT, in its judgment, did not provide justification for the application or non-application of the aforementioned principles.
In addition, it is important to take into account that the prima facie findings in this case were strengthened by an order issued by SEBI in the matter of Shirpur Gold Refineries in which Puneet Goenka and Subhash Chandra were not parties to the dispute but certain entities associated in the present case were involved. It should be noted that both orders were passed by the same Whole Time Member (WTM). This raises concerns regarding the WTM’s potential reliance on his personal knowledge to reinforce the prima facie findings instead of relying solely on the material available on record, which was even acknowledged by the SAT while upholding the SEBI’s order. Even in cases like Networth Stock Broking Ltd. v. SEBI, Animish Pradip Raje v. SEBI and Sameer C. Arora v. SEBI it has been reiterated that SEBI shall only rely upon the material on record instead of imputing its personal bias. As a result, it appears that SEBI did not follow the laid down principles before issuing this ex-parte interim order, making it bad in law.
The WTM suspended both Puneet Goenka and Subhash Chandra without passing a reasoned order which raises concerns regarding the exercise of power by SEBI while passing ex-parte interim orders. This shows the pressing need to exercise caution and keep a close eye on the powers of SEBI to pass ex-parte interim orders under section 11 of the SEBI Act. It is crucial to ensure a balanced approach that considers the potential repercussions on businesses and individuals involved, particularly when matters are still under examination and the final judgment is pending.
The abovementioned issues are associated with the lack of a clear separation of powers within SEBI, which functions as the executive, legislature, and judiciary, without sufficient checks and balances. As a result, many of the ex-parte interim orders passed by SEBI are reversed by the SAT and the Supreme Court. This problem was even highlighted by the Justice Sapre Committee constituted by the Supreme Court. According to the statistics in the committee’s report, a significant number of adverse orders passed by SEBI are prone to appeal before the SAT and the Supreme Court and if the order is set aside then it results in the sheer wastage of time, resources, and energy of the adjudicating arm of SEBI. In addition, such orders might even lead to an irreparable damage to the reputation of the directors or KMPs involved, if findings of the WTM are reversed by the appellate authorities.
A possible solution to address these underlying problems within SEBI’s regulatory framework could involve separation of powers between its investigative and quasi-judicial arms. This approach would not only help resolve the present lack of checks and balances within SEBI but would also encourage the passing of orders based on material evidence on record as opposed to in the present case. SEBI can even draw inspiration from the regulatory practice of the Competition Commission of India (“CCI”), where the CCI effectively maintains transparency by separation of powers. Specifically, the CCI entrusts the Director General of Investigations with the responsibility of conducting thorough investigations within 60 days. Following the investigation, the Director General submits a status report to the CCI. This separation of powers ensures that the quasi-judicial arm of the CCI maintains a robust check and balance mechanism over the investigative arm.
The present case comes as a setback for ZEEL and its investors as evidenced by the decline in its share price amid its merger with Culver Max Entertainment which may potentially erode investors’ confidence in the securities market. Therefore, if this case goes into appeal before the Supreme Court, the apex court should take into consideration the application of all the three elements required to be fulfilled to pass an ex parte interim order. Moreover, to further enhance the transparency of SEBI’s regulatory practice, it is crucial to adopt the doctrine of separation of power with segregated domains within SEBI. Following the CCI model for separation of powers shall also bolster confidence in the securities market by the stakeholders and will reduce the cases of unchecked exercise of power.
– Tanuj Sharma & Vanshika Sharma