Judicial scrutiny of SEBI: An obstinate regulator?

This week, the actions and oversights of the Securities and Exchange Board of India (SEBI) faced rigorous evaluation by two judicial forums, shedding light on apprehensions regarding its compliance, transparency, and accountability.

Both the Bombay High Court and the Securities Appellate Tribunal (SAT) underscored that the regulator, often quick to accuse, is not beyond scrutiny and far from being regarded as sacrosanct.

Bombay High Court's rebuke (Ashok Dayabhai Shah v. SEBI)

In Ashok Dayabhai Shah v. SEBI, the High Court criticized SEBI for failing to comply with its October order stating that SEBI must act in public interest. The Court had previously directed SEBI to provide specific investigation documents to the petitioners - minority shareholders of Bharat Nidhi Limited - following their complaints about various non-disclosures and securities law violations by the company. Both the company and SEBI had challenged the order before the Supreme Court, but the appeals were dismissed in November.

The minority shareholders had alleged that SEBI's investigation into securities law violations by Bharat Nidhi Limited was a farce, also claiming that they were not provided with the investigation report or the relevant documents so as to ensure fair proceedings.

SEBI had quickly revoked the orders levelling such allegations against the company. It argued in the Bombay High Court that since the settlement order had been revoked, there was nothing left to address in the petitions. However, the High Court expressed dismay at the regulator's “persistent non-compliance”, emphasizing that as a public body, SEBI must act in public interest and adhere to court orders.

The High Court found SEBI's approach “astonishing” and suggested that it could erode investor confidence in the regulatory body. It was found that SEBI has resorted to all possible efforts not to comply with the Court's order. It is relevant to see what exactly irked the High Court:

“…It is quite intriguing to note the approach of the SEBI, as clearly seen from the events which had transpired, and from the obstinate stand taken by the SEBI in not furnishing the documents to the petitioners in relation to respondent Nos.2 to 9. There has been persistent non-compliance of such orders passed by the Court, despite the Special Leave Petition of the SEBI being rejected, is too far to be imagined nay totally unacceptable. SEBI is a public body, it is required to act in public interest, it needs to comply with the orders passed by this Court, more particularly, when the orders have attained finality in the facts and circumstances of the present case, cannot be countenanced that SEBI would resort to such actions only when and / or, as may be, commanded by respondent Nos.2 to 9. Such approach of the SEBI, in our opinion, would cause a dent to the confidence, the investors would repose in the SEBI, which needs to function solely to further the object and purpose, for which it is created by the Act of the Parliament. We are constrained to make such observations being quite astonished by the stand taken by SEBI from time to time, in relation to the present proceedings. Even assuming that the petitioners are not correct on their contentions on the different stands being taken by the SEBI, however, the SEBI needs to be consistent and firm in whatever it proposes to do in such eventuality, and above all, such actions must inspire confidence of the investors as also of the Court….”

The High Court directed SEBI to expeditiously adjudicate the show cause notice issued to the company and ordered the immediate provision of documents to the petitioners, emphasizing SEBI's obligation to comply with the court's orders.

Securities Appellate Tribunal's criticism (Kirloskar Brothers Limited)

In October 2020, SEBI imposed a six-month market access restriction on the appellants in the Kirloskar Brothers Limited case. SAT stayed SEBI's order, provided the appellants undertook not to sell Kirloskar Industries Limited (KIL) shares. On October 12, 2022, SAT quashed SEBI's order, lifting all restrictions on the appellants. Despite this, the appellants' KIL shareholding remained frozen for months. Unsuccessful attempts to unfreeze shares through the National Securities Depository Limited (NSDL) led the appellants to approach SAT again.

SAT criticized SEBI's lack of follow-up, highlighting unaddressed emails from NSDL and the appellants. This raised concerns about SEBI potentially neglecting investor interests, contrary to its mandate.

The judgment emphasized the importance of a proactive regulatory stance and imposed costs of ₹5 lakh on SEBI.

This case mirrored another recent case, Cynthia Pinto De Andrade v. SEBI, where SAT imposed costs on SEBI for not registering and hearing an investor complaint despite a direction by the Appellate Tribunal.

SEBI's frequent appeals to the Supreme Court, often seeking relief from costs, raise questions about regulatory accountability. The ongoing dispute between SEBI and SAT, discussed earlier, highlights the need for a comprehensive evaluation of SEBI's actions and structural changes to ensure accountability.

Drawing parallels with the concept of the corporate veil, the critique of SEBI's decision-making processes underscores the necessity for reforms in delegation and delegated legislation.

While the Supreme Court has been lenient in overturning or staying costs, the question arises whether such leniency should be considered a given by a regulatory body without learning from judicial forums.

From a policy perspective, India is still deliberating whether administrative officers or technical experts, who are expected to perform quasi-judicial functions, possess the necessary capabilities to handle the extensive powers granted to a regulator by statute. The Supreme Court has asserted in the past that only judges and advocates should be considered for appointment as judicial members of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT).

Not too long ago, SEBI engaged in contentious actions that led to an apology to the Supreme Court of India during contempt proceedings. SEBI was reprimanded for unjustly "cherry-picking" by selectively disclosing information and providing documents, contrary to the Supreme Court's direction. SEBI played with fire as it resisted providing complete documents even after the dismissal of its review petition by the highest court of the country.

The current legal scrutiny underscores the immediate need for SEBI to review its methodologies, guarantee transparency and accountability, and commit to safeguarding public interest. Essential reforms in regulatory frameworks are crucial to instill investor confidence and preserve the integrity of financial markets.

A draft of Finance Minister Nirmala Sitharaman's proposal for the Securities Market Code, aimed at consolidating all laws pertaining to the specific market, is pending release for public consultation. It is hoped that there are statutory safeguards within the code to ensure accountability of the markets regulator.

Sumit Agrawal is the Founder of Regstreet Law Advisors. He is the author of a book on SEBI Act and a former SEBI Officer. Views are personal.