Tuesday, January 12, 2010

SEBI moves the Supreme Court over SAT order

An order by the Securities Appellate Tribunal (SAT) in August last year has again stirred the hornet’s nest with respect to the powers of the regulatory bodies, and the resolution of areas of overlap.

S. Kumars Nationwide, is a company listed on the Bombay Stock Exchange (BSE), and engaged in the business of buying selling, manufacturing and marketing of textile products. In a bid to repay loans of around Rs. 850 crore, one of the lenders filed an application with the Corporate Debt Restructuring Cell (CDR), which is a mechanism provided by the Reserve Bank of India for restructuring debts. The CDR approved the proposed restructuring package, in pursuance to which, the promoters pledged the equity shares held by them with the lending bank. Further, one of the promoters of the company, subscribed to preferential shares valued at Rs. 15 crore, to comply with the conditions. Some other promoters were also allotted preferential shares valued at Rs. 5 crore which were then pledged with the lenders. The company filed an application before BSE seeking an in-principle approval for the issue, allotment and listing of these preferential shares to its promoters, which the BSE denied. The company, S. Kumars Nationwide, appealed against this decision of the BSE to the SAT, under section 22A(1) of the Securities Contracts (Regulation) Act, 1956. Exercising this power, the SAT set aside the order, and directed the BSE to grant the approval. It is this exercise of appellate authority by the SAT that is now being challenged before the Supreme Court by the SEBI (news report available here).

The primary basis of challenge is not the merits of the decision, but that the SAT did not have the jurisdiction to exercise the powers that it did. In arriving at its decision, the SAT relied on the SEBI (DIP) Guidelines, which grant powers to the SEBI to make certain determinations. For instance, one of the bases on which the BSE had refused permission was that the issue violated Guideline 13.3.1(f) (dealing with which persons a company can make a preferential issue of equity shares to). The SAT highlighted Guideline 17.2A.1, which allows the Board to grant an exemption from one of the provisions of the Guidelines, ‘on being satisfied that the violation was caused or may be caused due to factors beyond the control of the applicant’. Based on its finding that the company was in breach of Guideline 13.3.1(f) for ‘no fault of its own’, the SAT exercised this power of the SEBI, and rejected this ground of rejection by the BSE.

Now, the SAT admits in its order that they could have remitted the case back to the Board, but that they did not think it necessary to adopt that course in the circumstances, and that they “can issue the same direction and exercise the same powers which the board could”. With respect, I do not think that this approach adopted by the SAT is the most prudent. Admittedly, in the facts at hand, the SAT may have thought it unnecessary to go through the formality of referring the case to the SEBI. However, there are two major arguments against the SAT assuming such a power for itself:

First, on a pure textual reading of the relevant provisions, the Guidelines provide that if the SEBI is satisfied that the violation of a provision is due to factors out of the control of an applicant, it can waive the Guidelines. Thus, the decision is to be made by the SEBI, and the SEBI alone. Admittedly, the SAT would have appellate authority over the decision of the SEBI under section 15T of the SEBI Act. However, there is an essential difference between exercising review over the satisfaction of another authority, and exercising the satisfaction itself. Further, there may be some dispute over whether this satisfaction of the SEBI is administrative or judicial in nature, which would then affect the extent of review which the SAT would have.

Secondly, in continuation of the first argument, such an assumption of power deprives the company of an important stage in the review process. Let us assume, for the sake of argument, that the SAT had concluded that the violation of Guideline 13.3.1(f) was not due to circumstances beyond the control of the company. The only remedy from such a finding would be an appeal to the Supreme Court. On the other hand, if the case had been sent to the SEBI, there is an extra layer of appeal. It is well accepted that an exercise of judicial authority that has the effect of depriving a person of a level of judicial review is impermissible [Garhwal Mandal Vikas Nigam Ltd. (2008 SC) and Bharat Cooking Coal (2008 SC)].

Thus, while the exercise of the power by the SAT may have been expedient, the legality of the order is seems suspect. However, since there is insufficient clarity in this area, the response of the Supreme Court to this issue is indispensable to understand the precise scope of powers of the SEBI and the SAT and other similar regulatory bodies.


Somasekhar Sundaresan said...

Just one input here. The appellate jurisdiction in this case is not Section 15T of the SEBI Act, which is the provision in the SEBI Act to appeal against orders of SEBI. The jurisdiction here is the appellate jurisdiction in the Securities Contracts (Regulation) Act, which allows appeals against listing-related decisions of stock exchanges.

Therefore, if the stock exchange has the power to disapprove listing, the appellate body can be regarded as having powers to approve listing, in appeal.

Shantanu Naravane said...

Dear Mr. Sundaresan,

Many thanks for your comment.

I am sorry if the post gave the impression that the appeal in this case was under section 15T of the SEBI Act. As you rightly point out, and as I sought to convey through the post, the appeal in this case was under section 22A(1) of the Securities Contracts (Regulation) Act, 1956. However, what I took issue with was the fact that the SAT appeared to waive the application of the SEBI(DIP) Guidelines to the company, which the Guidelines empower only the SEBI to do, if it is satisfied that the circumstances warrant it. It was in that connection that I mentioned that the only supervisory power which the SAT has over the SEBI is the appellate authority under section 15T, and given the nature of this power, it may not have been prudent for the SAT to have made a determination as to something which only the SEBI was entitled to.

Look forward to hearing your views on this.