The Securities and Exchange Board of India (SEBI) is often viewed as a regulator known for its consistency and strict enforcement. Empowered under the SEBI Act, 1992 (SEBI Act) and allied enactments, SEBI is tasked with protecting investors’ interests, promoting orderly development of the securities market, and regulating its functioning. It carries a statutory mandate to safeguard the investing public and preserve the integrity of the capital market.
SEBI’s powers are primarily set out in Section 11 of the SEBI Act. Under Section 11(4), SEBI may issue interim directions, whether as Interim orders, ad-interim ex parte orders, or show-cause-cum-interim orders, enabling urgent preventive action in the interest of investors or the market. The SEBI (Delegation of Statutory and Financial Powers) Order, 2019 delegates this authority to SEBI’s Whole-Time Members (WTMs).
Ex-parte ad-interim orders are issued based on prima facie findings. Often, these orders are framed as show-cause notices, providing the noticee an opportunity to respond to the preliminary observations. Upon completion of the investigation, SEBI may confirm or set aside the earlier findings, depending on the material available on record.
The purpose of passing Interim Orders, as clarified by the Hon’ble Bombay High Court in Anand Rathi v. SEBI, is to serve as “an interim measure to prevent further possible mischief of tampering with the securities market.”
However, such orders have periodically come under scrutiny by the Hon’ble Securities Appellate Tribunal (SAT), particularly for inordinate delays in issuance, which undermine the objective of urgent preventive action.
In cases of trade-based manipulation, SEBI generally issues directions such as:
Restraining entities from accessing or participating in the securities market
Impounding alleged unlawful gains into an escrow account
Restricting the disposal of personal assets, either absolutely or with SEBI’s approval
Traditionally, SEBI’s interim directions imposed absolute restraints prohibiting entities from buying, selling, or dealing in securities pending inquiry. However, recent interim orders reveal a discernible shift in SEBI’s regulatory approach. Increasingly, SEBI has adopted a conditional framework, directing entities to deposit 100% of the alleged unlawful gains into an interest-bearing escrow account. Upon such deposit, trading activities are permitted to resume.
This evolution is largely driven by the Hon’ble SAT, which has repeatedly moderated SEBI’s heavy-handed interim measures.
In Arshad Warsi & Ors. v. SEBI (Sadhna Broadcast case), SAT replaced SEBI’s absolute ban with conditional relief, permitting trading (except in Sadhna) upon depositing 50% of alleged gains into an interest-bearing escrow account with a lien in favour of SEBI.
In Yayaati Hasmukhary Nada & Ors. v. SEBI & Anr. (Unison Metals case), SAT stayed SEBI’s restraint, allowing trading (except in Unison) subject to the deposit of 100% of the impounded amount into an interest-bearing escrow account with a lien in favour of SEBI.
Following the SAT’s precedents, SEBI has gradually institutionalised the practice of permitting market access upon the deposit of alleged unlawful gains. This is evident in the interim order against Dhanmata Realty Private Limited, where SEBI directed Noticees No. 01 to 09 to impound ₹21,15,78,005, representing alleged gains from front-running activities.
SEBI clarified that upon deposit of the impounded amount into an interest-bearing escrow account with a lien in its favour, the restraint on trading would cease to operate. This approach secures investor interests upfront while avoiding criticism of imposing an “economic death penalty” prior to adjudication.
While the “deposit and trade” model improves upon blanket restraints, it is not without limitations. Positively, it secures investor interests by impounding alleged gains and allows entities dependent on market participation to resume trading. Uniform adoption also reduces allegations of arbitrariness, strengthening SEBI’s credibility before appellate forums.
However, requiring a 100% deposit of alleged gains risks presuming illegality before adjudication, raising due process concerns. It may disproportionately burden smaller entities lacking liquidity, effectively resulting in the same outcome as a blanket ban. Moreover, reputational damage from interim directions remains unaddressed, potentially harming market standing regardless of the final outcome.
A pressing concern is the inconsistency in applying this framework. In the Jane Street Index Manipulation matter, involving alleged gains of ₹4,800 crore, SEBI permitted trading upon deposit of the full amount.
In contrast, in the case of M/s Patel Wealth Advisors Pvt. Ltd. (PWAPL), involving alleged gains of ₹3.22 crore, SEBI refused similar relief. This disparity raises questions of fairness and consistency, potentially violating Article 14 of the Constitution, which prohibits arbitrariness in state action. Without transparent criteria, the “deposit and trade” model risks being perceived as selective enforcement.
SEBI’s evolving interim enforcement framework reflects a conscious attempt to balance investor protection with fairness. By shifting from absolute bans to conditional access, SEBI seeks to avoid over-regulation while safeguarding potential disgorgement.
Yet, the framework remains imperfect. Full upfront deposits risk presuming guilt, burden smaller intermediaries, and fail to mitigate reputational harm. Most critically, inconsistent application, evident in the Jane Street and PWAPL matters, undermines regulatory credibility. Every interim order remains subject to challenge before SAT, where fairness, proportionality, and due process are rigorously tested.
The central question remains: Does SEBI’s “deposit and trade” approach genuinely balance market integrity with fairness, or does it risk becoming punishment before trial? Unless SEBI develops clear and transparent criteria, its new framework may not withstand judicial scrutiny, and what is intended as investor protection could itself be judged a denial of due process.
About the authors: Akshaya Bhansali is the Managing Partner of Mindspright Legal. Keshav Taori is an Associate at the Firm.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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