Saturday, February 19, 2011

Exclusion of Jurisdiction of Civil Courts under the SEBI Act

Legally India has made available certain expert witness statements filed before US Courts in the class action litigation concerning Satyam, which was recently settled. One of the witness statements, by Mr. Sandeep Parekh, makes an interesting point; but I am not entirely sure of the tenability in law of that point. Mr. Parekh’s declaration / statement as an expert witness is available here. I am concerned in this post particularly with the claim made by Mr. Parekh in para 11(a) of his statement: “Private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act.” Essentially, this means that a private party cannot maintain a suit in tort in respect of the “Satyam fraud”. Mr. Parekh’s reasoning is effectively based on the bar on jurisdiction in Section 15Y and Section 20A of the SEBI Act. He also places reliance on a Bombay High Court judgment in support of this proposition. With great respect, it is submitted that none of these reasons are strong enough to support Mr. Parekh’s conclusion.

Section 15Y says:
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

The key phrases here are, (a) “no court shall have jurisdiction” (b) “to entertain any suit or proceeding” (c) “in respect of any matter which an adjudicating officer appointed under this Act… is empowered by or under this Act to determine.” The issue turns on the scope of (c) above. Are tort claims within the scope of “any matter” which an adjudicating officer or SAT is entitled to determine? In my submission, no. The adjudicating officer is entitled to examine violations of the Act; he has no powers to determine any tortuous liability whatsoever. The same facts which give rise to a statutory violation may very well also constitute a tort claim – this does not mean that the adjudicating officer has jurisdiction to hear and decide the tort claim as well as the statutory violation.

To get over this reasoning, Mr. Parekh relies on the judgment of the Bombay High Court in Kesha Appliances v. Royal Holdings Services Ltd. He relies specifically on this sentence: “The contention of the learned counsel for the plaintiff that there was a pre-existing common law right under section 9 of the CPC and that pre-existing common law right is not taken away by the provisions of sections 15Y and 20A also cannot be accepted.” In Kesha, however, the right in question was a right of rectification. The very next sentence in the judgment says, “It is because the common law right of rectification which is sought to be enforced and exercised by the plaintiff in the present case arises out of the right conferred on the basis of Take Over Regulations and once the provisions of the Take Over Regulations are invoked then the entire jurisdiction by virtue of the provisions of Section 15Y and 20A is exclusively conferred on the SEBI authorities.” 

The right to maintain an action in deceit or in negligence does not arise out of any provision in the SEBI Act. In Kesha Appliances, the case of the plaintiff was that certain preference share allotments to one defendant by another defendant were violative of Regulation 12 of the Takeover Regulations and hence illegal. Accordingly, the plaintiff sought for rectification. Thus, the actual right which the plaintiff was exercising was a right arising out of statute/regulation – in other words, the statutory violation was an essential basis for challenging the allotment and seeking for rectification. 

The case with a tort situation is in my submission completely different. The Kesha judgment itself clarifies, “Though it is not necessary still I feel it is important to clarify that when the rectification of the share register is dehors the provisions of the Takeover Regulations or any other provisions of the SEBI Act and rules and regulations made thereunder then the court would certainly have jurisdiction to entertain and try such a suit under Section 9 of the CPC. It is because what is barred under section 15Y and 20A is only those acts which falls either under the said Act or under the regulations framed thereunder.” The reason why in Kesha it was ultimately held that there is a bar on jurisdiction is this: “the entire suit is based on the sole ground of violation and/or breach of the Take Over Regulation and no other ground has been invoked for rectification of the Share Register.

In one of the footnotes to his statement, Mr. Parekh also relies on the decision of the Delhi High Court in M.R. Goyal v. Usha International. In that decision, too, it was found that “on the basis of the averments made in the plaint and the contents of the application, it is apparent that the main thrust of the case of the plaintiffs is that the impugned notice issued by defendant No. 1 is in violation of the guidelines issued by the Sebi Act and the rules and regulations framed thereunder.

In my view, these decisions are clearly distinguishable from a case where the cause of action is not a statutory/regulatory violation but a tort. If at all, clarificatory observations in Kesha support the proposition that a tort claim can be decided in civil courts notwithstanding the SEBI Act bar on jurisdiction.

Mr. Parekh then highlights the fact that any penalties collected by SEBI would go to the SEBI and not to shareholders of Satyam. This is eminently logical if the shareholders are entitled to a remedy in tort. Thus, the fact that penalties would go to the SEBI would – if at all relevant – tend to support the argument that civil claims are not barred.

It is submitted that, with great respect, a legally untenable result will be reached if one says that the SEBI Act bars a suit in tort in the circumstances. 


Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

From Sathish K R:

Dear Mihir, I fully support your view. The law is clear that a private person cannot seek remedy under the SEBI Act or SCR Act as the jurisdiction of the civil courts has been barred. This is not the case in some countries such as the UK (Sec 150 of the FSM Act. Soon I will write on this in my new blog However Indian law does not prevent anyone seeking remedy under the tort or consumer protection law. See the Indian Financial Sector Assessment of 2008 where SEBI itself says that private action is available under Consumer Protection Act. ...

Shiva Santosh said...


But is not a case of codification of existing tortuous principles with specific regard to fraud in Securities Law? Don't SEBI Act (15Y and 20A) and SCRA(22E)override common-law principles on specific issues.
Is there any case-law on the basis of the cause of action being common-law principles when there is a statutory prohibition on such a cause of action?

Sathish said...

Dear Shiva

A single event may lead to cause of actions under several laws. For example, failure to deliver securities or make payment by a stock broker may lead to action u/s 15F of SEBI Act and also under the Consumer Protection Act for deficiency of service.

S15Y of the SEBI Act says that no civil court shall entertain any suit or proceeding in respect of any matter over which only Adjudicating Officer or SAT is
empowered to exercise jurisdiction. That means a claimant cannot approach a civil court / destrict forum claiming default of the stock broker u/s 15F.

Conversely adjudicating Officer or SAT cannot entertainment any petition under CPA and therefore the claimant can approach a district forum against the stock broker alleging deficiency in service under CPA. However, unlike SEBI Act, CPA does not provide strict liability regime and therefore evidential burden is high.

You can find India's Financial Sector Assessment here ( See Vol IV Page 326 which says that action under CPA is available...


Shiva Santosh said...

The viewpoint that notwithstanding the SEBI and SCR bar on jurisdiction, a tortuous remedy exists may lead to a special law v. General Law debate.
Herein, the ambit of fraud as defined under the FUTP regulations 2003 is wider than that of Common Law and hence, it can be argued that the statutory provisions override tortuous fraud as they are with specific regard to the Securities and not generic in nature as in common law fraud.
Also, In Midas Touch Investor Association v. Satyam Computer Services Ltd, a class action suit in NCRDC was rejected. The appeal at SC was also dismissed.

Sathish said...

Dear Shiva

While I respect your point, I am of the firm view that these 2 are independent remedies. If a claimant approaches a court / consumer forum alleging breach of 15F of SEBI Act, it will simply reject the petition because it does not have the jurisdiction. On the other hand, if he alleges services deficiency, then the consumer forum will entertain because it is a different remedy falling under CPA. There are umpteen number of cases where consumer forums have entertained petitions and granted reliefs against stock brokers and other market intermediaries under CPA.

You seem to have not gone through Indian Financial Sector Assessment of 2008 which has been prepared jointly by SEBI, RBI, IRDA, Ministry etc as per the mandate of the World Bank. This report identifies this aspect.

It should be distinguished that many countries allow private parties to sue under the Securities Act itself (in addition to general law). This is one of the test prescribed by IOSCO which India unfortunately does not satisfy.

sathish said...

Dear Mihir,

I have posted a brief discussion on the comparative law in relation to the same subject today in my blog -


Shiva Santosh Kumar.Y said...


While having taken note of the provision which mentions remedy under the CPA, it is also pertinent to note that the summary procedural requirements in CPA do not allow for a detailed examination of an event in the nature of a Securities Fraud.

Anonymous said...

N.P.Ponnuswami v. Returning Officer, Namakkal, AIR 1952 SC 64,69:
"It is now well-recognised that where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by the statute only must be availed of. This rule was stated with great clarity by Willes J. in Wolverhampton New Water Works Co. v. Hawkesford [1859] 6 CB (NS) 336, at page 356, in the following passage:
'There are three classes of cases in which a liability may be established founded upon statute. One is, where there was a liability existing at common law, and that liability is affirmed by a statute which gives a special and peculiar form of remedy different from the remedy which existed at common law; there, unless the statute contains words which expressly or by necessary implication exclude the common law remedy, the party suing has his election to pursue either that or the statutory remedy. The second class of cases is, where the statute gives the right to sue merely, but provides no particular form of remedy; there, the party can only proceed by action at common law. But there is a third class, viz., where a liability not existing at common law is created by a statute which at the same time gives a special and particular remedy for enforcing it...... The remedy provided by the statute must be followed, and it is not competent to the party to pursue the course applicable to cases of the second class. The form given by the statute must be adopted and adhered to.'"

sathish said...

Shiva - Of course you are right. Every law is designed to achieve certain purpose and general law may not be as efficient as the special law to deal with the securities fraud. But that is not what Mr. Parekh says. His blunt assertion that civil court is precluded from entertaining a petition even under the common law is wrong and misplaced. Mr. Ahmadi, by contrast, swore in the same case that Indian law provides redress under common law tort principles is in deed correct.

Anonymous - N.P.Ponnuswami v. Returning Officer has no application here as Section 32 of SEBI Act clearly says that "the provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force."