[Philip Oommen is a lawyer based in Mumbai, and a graduate of the National Institute of Securities Markets]
The regulatory landscape of the Indian securities market currently exhibits a noticeable lack of uniformity, as demonstrated by the divergence in decisions rendered by the Securities and Exchange Board of India (“SEBI”). This divergence in decision-making underscores the inherent inconsistencies within the system, raising critical questions about the efficacy of the current regulatory process. The inconsistencies under scrutiny pertain to the orders passed by the quasi-judicial authorities within SEBI, specifically the Adjudicating Officers (“AO”) and Whole Time Members (“WTM”). The need for a comprehensive analysis becomes more pressing considering the recent Supreme Court decision, which demonstrated immense faith in SEBI by exercising judicial restraint. The instant analysis will delve into the existing discrepancies, identify underlying causes, and propose effective solutions for rectification.
The “Enforcement” tab on the SEBI website displays various types of orders issued by SEBI. These comprise orders of Chairperson/Members (“WTM orders”) and orders of Adjudicating Officer (“AO orders”), which are currently being examined.
Initially, the scope of WTM orders passed under sections 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) was limited to issuing directions which were remedial in nature. Conversely, SEBI could appoint an AO under section 15-I to adjudicate and levy penalties following an enquiry. This established a clear demarcation between the roles of the AO and the WTM, with the former being penal and the latter being remedial. Despite this demarcation, there existed a potential for inconsistencies to emerge in the findings of the AO and the WTM. However, the situation deteriorated following the coming into effect of the Finance Bill, 2018, wherein the purview of WTM orders expanded due to the authority conferred to levy penalties, a power previously solely within the AO’s jurisdiction under section 15I. This was accomplished through the incorporation of clauses (4A) and (2) into sections 11 and 11B of the SEBI Act, respectively, thus blurring the demarcation between the scope of the AO and the WTM orders.
The Inconsistency Conundrum
In numerous cases before the Securities Appellate Tribunal (“SAT”), the verdicts went against SEBI owing to the discrepancies in the adjudication methodology. The root of this conundrum lies in the simultaneous initiation of proceedings by both the AO and the WTM, each addressing the same set of facts. Essentially, this implies that two authorities, possessing overlapping roles and powers, are adjudicating based on the same set of facts and laws to reach a conclusive decision. Despite the distinct nature of both proceedings, the challenge arises from the fact that, in the absence of a decipherable internal hierarchy within SEBI, orders of both AO and WTM are equally significant. Consequently, in situations of conflict, the order of precedence cannot be ascertained. Primarily, the discrepancies in the orders of the AO and the WTM can be broadly classified into two main categories:
Duality in Application of the Law
In MPF Systems Limited v. SEBI, the appeal involved three distinct orders issued by SEBI. One of these orders was passed by an AO, while the other two were issued by WTMs. By way of an order dated February 28, 2020, the AO levied a penalty of Rs. 22 lakhs for the violation of several regulatory provisions, including regulations 16, 17, 18, and 19 of the Listing Obligations and Disclosure Requirements Regulations, 2015 (the “LODR Regulations”). On the same cause of action, by way of an order dated April 20, 2020, the WTM returned a contradictory finding that regulations 16, to 19, were not violated, in view of regulation 15(2) of the LODR Regulations. Adding to the complexity, another WTM, through an order dated December 22, 2020, enhanced the penalty from Rs. 22 lakhs to Rs. 34 lakhs considering the minimum penalty prescribed under sections 23H/23E of the Securities Contracts (Regulation) Act, 1956. Such enhancement was justified by noting that violation persisted in provisions of LODR Regulations, other than regulations 16 to 19. The SAT annulled the penalties imposed along with the subsequent enhancement and remitted the matter to AO since the imposition of the penalty was based upon the violation of regulations 16 to 19 of the LODR Regulations.
In Nirmal N Kotecha v. SEBI, the appeal involved orders of AO and WTM. While the WTM order directed debarment for violating the regulatory provisions, the AO order held that no regulations were violated and exonerated the appellant. The SAT held that separate proceedings by AO and WTM can be validly initiated by SEBI. However, once an issue on the same facts and between the same parties has been determined, it gives rise to issue estoppel. Moreover, under section 15-I (3) of the SEBI Act, SEBI is authorised to review the orders passed by AOs for specified reasons within the prescribed timeline. If the same is not carried out, the AO order attains finality and the principle of estoppel applies. Such application of issue estoppel results in an absolute bar in relation to all points decided previously. It also observed that a consistent view is required and divergent opinions must be avoided in the interests of the securities markets. Furthermore, the SAT opined that the powers under section 11B ought not to be exercised if the matter can be easily dealt with in the proceedings under section 15-I of the SEBI Act.
Duality in Interpretation of the Law
In Reliance Industries Limited v. SEBI, the issue under consideration was the interpretation of the term “offence” in section 27 of the SEBI Act, as it existed prior to the implementation of the Finance Act, 2018. The specific question was whether this term implied vicarious liability in relation to civil liability incurred by a company. The AO order, which was being contested, affirmed that vicarious liability does indeed arise in instances of civil liability. Interestingly, a compilation of 23 orders of SEBI was presented before the SAT in which SEBI had adopted a contrary stance by asserting that vicarious liability does not emerge in instances of civil liability. This contradiction in the stance of SEBI resulted in an unfavourable outcome.
Similarly, SEBI adopted contradictory stances in the interpretation of the main intent behind the restrictions contained in rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957. While the AO narrowed the purpose and scope of rule 8(3)(f) to mere safeguarding of client funds, the WTM in another matter involving the same question, explicitly disagreed with the opinion of the AO and interpreted the provision strictly. Interestingly, despite the inconsistent approach of SEBI, it appears that the WTM order was not appealed against since a monetary penalty was not imposed.
Additionally, in Krishna Enterprises v. SEBI, the AO order, which was being contested, had considered the violation of section 12A(b)(c) of the SEBI Act and regulation 3(c)(d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 as independent offences and, accordingly, two separate penalties were imposed under section 15HA of the SEBI Act. However, upon scrutiny, the SAT noted that several orders passed by AOs of SEBI treated the two violations as one offence. The SAT remanded the matter to SEBI and noted that the treatment of the violations as one offence or two independent offences “on the sweet will of AO would be hazardous for the securities market”.
The Way Forward
The lack of uniformity in SEBI’s adjudicatory processes has resulted in a cloud of uncertainty that obscures the viewpoint of the impacted parties. Furthermore, the initiation of multiple proceedings by SEBI leads to unnecessary complications and confusion. Common points of confusion include questions such as: Which order is definitive? Which authority holds precedence? Is there an internal appellate mechanism within SEBI that brings finality to the regulator’s decisions? Given the predicament, it may be prudent to consider the implementation of the following recommendations.
Appellate/Review Mechanism Within SEBI
Valuable insights can be gleaned from the practices of the Securities Exchange Commission (“SEC”) in the United States. For most enforcement proceedings initiated by the SEC, an In-house Administrative Law Judge (“ALJ”) is responsible for making the decision. This decision, referred to as an “initial decision”, is subject to a de novo review by the SEC, which may affirm, reverse, modify, set aside the initial decision, or remand it for further proceedings. Moreover, a party involved in the proceedings can petition the SEC for a review, or the SEC may opt to review an initial decision on its own accord. If neither the party petitions for a review nor the SEC orders a review, the SEC will issue an order declaring that the initial decision has become final. Appeals against such decisions can be made to an appropriate U.S. Court of Appeals.
In India, SEBI possesses a restricted scope for reviewing its own decisions. According to section 15-I (3) of the SEBI Act, the review of AO orders is strictly limited to the potential increase of the penalty levied. Furthermore, the lack of a hierarchical relationship between the WTM and the AO precludes SEBI from rectifying any errors in the adjudication process. Notably, the suo moto review of decisions is not unknown to the Indian regulatory ecosystem. For instance, the National Stock Exchange (“NSE”), a SEBI-regulated stock exchange, in rule 17 (Chapter IV) of its Rules, permits the relevant authority to suo moto rescind, revoke, or modify its decisions within 90 days from the date of communication to the broker. Consequently, it is crucial that SEBI institutes appropriate legal provisions that empower it to review its decisions. This ability to self-review, at least at its own discretion, is essential to mitigate the risk of inadvertent errors.
Reduction in Positions Possessing Adjudicatory Authority
At present, the adjudicatory framework of the SEBI is comprised of WTMs and AOs. While the count of WTMs is ascertainable, the AOs can potentially include any SEBI officer of the rank of Deputy General Manager or higher, as stipulated by the delegation made under section 19 of the SEBI Act. According to SEBI’s employee profile for the year 2021-22, there are over 200 officials who meet the qualifications to be appointed as an AO.
One of the cardinal principles that a securities regulator must adhere to, according to the International Organization of Securities Commissions, is that the regulatory processes should be clear and consistent. With numerous adjudicating officials possessing overlapping powers, maintaining consistency in the application and interpretation of law can be challenging. In this regard, the Financial Sector Legislative Reforms Commission had recommended that the adjudication and administrative law functions be executed by administrative law members of the board of the regulator and the specified set of employees designated as administrative law officers. The SEC has also implemented a similar framework, where the decision-making authorities, namely the ALJs, are limited in number. To ensure consistency and accountability in the adjudicatory process, it is imperative that the SEBI limits the number of AOs to a select group of designated officials.
Considering the recommendations proposed, it is evident that a comprehensive restructuring of the SEBI adjudication framework is not only inevitable but also essential. This restructuring is crucial to safeguard the interests of investors and foster the growth of the securities markets. Until such a restructuring is implemented, it is incumbent upon SEBI to ensure consistency by establishing a specialized department tasked with the comprehensive review of orders. This would ensure a degree of uniformity in the interim period.
It is imperative to communicate a clear message to the market: any violation of securities regulations will be met with efficient and effective regulatory action. This message will serve to reinforce the confidence of investors in the stock markets, thereby contributing to their long-term growth and stability. This assurance of accountability is a cornerstone in the foundation of a robust and resilient financial market.
– Philip Oommen