[The author is a practicing lawyer in Mumbai. Email: firstname.lastname@example.org]
This post is on a slew of legislative changes in Securities Laws through three ordinances and more particularly, Securities Laws (Amendment) Ordinance, 2014 ("2014 Ordinance") which has been passed by the Lok Sabha as Securities Laws (Amendment) Bill, 2014 ("2014 Bill"). Three ordinances were issued in last two years - the first one on 18th July 2013, second 16th September 2013, and recently 2014 Ordinance, with some additional changes each successive time.
Yet again, the Securities Laws (Amendment) Bill, 2014 ("2014 Bill") has was introduced in the Lok Sabha and passed with some modifications from the 2014 Ordinance, with a view to include more safeguards to balance the new powers of SEBI. In my article in the Economic Times, I had analyzed briefly some of the new provisions of the Ordinance such as search and seizure powers, collective investment schemes, and argued for expansion of powers of Securities Appellate Tribunal. In addition to those issues, there are some more issues that could be debatable and require wider discussion in the Parliament.
Chapter VIA of SEBI Act (Section 15A to Section 15HB) deals with monetary penalty and adjudication process. The sections mentioned therein prescribe penalties to be imposed for various offences. The three ordinances promulgated earlier did not suggest any amendment to the penalty sections. These sections only provided maximum penalty without providing the minimum or any range. It was often argued by SEBI and endorsed by many judgments of the Securities Appellate Tribunal (SAT) that Section 15J (3 factors to be taken into consideration while adjudging the quantum of penalty) provides discretion to adjudicating officers to impose penalty amount within the maxima while exercising judicious discretion. In my Economic Times Article, I had argued that there is a case for amending penalty sections as well as enhancing powers of Securities Appellate Tribunal. It seems that Government of India in the 2014 Bill has suggested no amendment to enhance Tribunal's powers, but it has proposed amendment to the penalty sections by prescribing minimum penalty to be imposed for each violation in addition to the amendments included in the latest 2014 Ordinance.
Constitutionality of Multiple Ordinances
It is reported that two public interest litigations (PILs) have already challenged the constitutionality of these Ordinances in two High Courts. According to media reports, one of these PILs has also challenged the exercise of power by the President to re-promulgate the ordinance. On the first blush, these three repeated ordinances may seem to be in the teeth of Supreme Court judgment of D.C. Wadhwa vs. State of Bihar (1986) that held that a court will invalidate the ordinance that is re-promulgated time and again, and court may look into propriety, expediency and necessity for judicial review of the President’s satisfaction. However, it is my view that, various scams in the securities market could be used to justify the necessity of repeated Ordinance to bestow certain powers on SEBI to effectively deal with these scams. But such repeated ordinances should be considered to be an exception rather than a norm. At the same time, it is arguable whether all the powers - such as retrospective power to settle securities laws violations, retrospective power to enter into MoUs with foreign regulators was ‘emergent’.
Powers Granted to SEBI
Collective Investment Schemes
One aspect that requires a closer look is the deeming provision in the Bill that provides that any pooling of funds that involving a corpus of more than Rs. 100 crore would be deemed to be a collective investment scheme (CIS). This provision could bring a wide range of business activity that do not contain any of the four elements of CIS specified in section 11AA(2) within the ambit of CIS, requiring registration from SEBI. This provision should be considered in light of the fact that only one CIS has been registered with SEBI since the CIS Regulations were brought into force in 1999, and that CIS is also yet to launch a scheme. One needs to debate that the Ordinances have provided power to “regulate” or “prohibit” such schemes.
Review of Adjudicating Officer’s order
The latest Ordinance and 2014 Bill has introduced new section 15-I(3) which provides that SEBI can call for and examine an order passed by an adjudicating officer if it considers that the order is erroneous to the extent that it is not in the interest of the securities market. In such cases, SEBI can make a fresh inquiry and enhance the quantum of penalty imposed by the adjudicating officer. This is effectively nothing but a review of the Adjudicating Officer’s order. It has been proposed that such a review should take place within three months of the Adjudicating Officer’s decision or disposal of an appeal against his decision by the Securities Appellate Tribunal.
The review of penalty orders of Adjudicating Officers by SEBI may undermine the scheme of the securities laws, which currently envisages that an adjudicating officer would be independent of SEBI and its orders will be reviewed not within the organization, but by the Securities Appellate Tribunal. Rather than this structure, SAT’s suggestion in Mathew Easow and Opee Stock cases may be the way forward. To quote from Opee Stock matter, SAT held that:-
“ …It is not in dispute that directions under section 11B of the Act are issued by the Board whereas proceedings under Chapter VI-A are conducted by an adjudicating officer who is a subordinate officer of the Board and it is he who passes the final order. As both sets of proceedings are independent of each other, as is often argued on behalf of the Board, the possibility of conflicting views on the same set of facts cannot be ruled out. In a given case, the whole-time member may hold the delinquent guilty of the charge levelled and the adjudicating officer may completely absolve him of the same or vice versa. Such anomalous situations could arise and these would not be in public interest. We feel that if only one enquiry is held against the delinquent and on the basis of the findings recorded therein, the same body is given the power to issue directions and impose monetary penalties as well, it would not only expedite matters but also avoid conflicting opinions. This would obviously require an amendment in the Act which is in the exclusive domain of Parliament.
In view of the observations made in para 8 above, we direct that a copy of this order be sent to the Finance Secretary, Government of India, New Delhi for information and whatever necessary action that he may deem fit...”
Therefore, what SAT had suggested was that if only one enquiry is held against the delinquent and on the basis of the findings recorded therein, the same body is given the power to issue directions and impose monetary penalties as well, it would not only expedite matters but also avoid conflicting opinions.
A case for enhancement of SAT’s powers
The Parliament should also deliberate whether express provisions for enhancement of powers of Securities Appellate Tribunal are required in the Bill.
While dealing with section 15T(2) of the SEBI Act in the recent case of Reliance Industries Limited v. SEBI (2014), which has been omitted by the Ordinance, the Tribunal observed that:
“Section 15T(2) of SEBI Act stipulates that no appeal would lie before this Tribunal from an order of SEBI made with the consent of the parties, it is apparent that the bar is restricted to an order passed on merits of the consent application and would not apply to an ex-parte order passed in breach of the principles of natural justice. In other words Section 15T(2) prohibits appeal against an order which is passed after considering the consent proposal put forth by the applicant during the discussion with the IC of SEBI.”
As the Ordinance provides that no appeal shall lie against any order passed by SEBI in settlement proceedings (and not just orders passed with the consent of the parties), the Tribunal expressed inability to entertain an appeal from an order of SEBI in view of a provision of the Ordinance. While dismissing the appeal, the Tribunal held that:
“In other words, by deleting Section 15T(2) and inserting Section 15JB as also Section 30A, legislature has sought to make partial bar under Section 15T(2) into complete bar under Section 15JB with retrospective effect from April 20, 2007 in relation to appeals against orders passed in consent/settlement proceedings. Since Section 15JB(4) expressly bars appeal against any order passed in settlement proceedings from April 20, 2007, in our opinion it would not be open to this Tribunal to entertain present appeal against impugned order passed in consent proceedings, even though the appeal was filed before promulgation of any of the Ordinance stated above.”
Following the principle of estoppel, a party is generally barred from appealing against an order passed with his consent. For example, section 96(3) of the Civil Procedure Code, 1908 expressly provides that no appeal shall lie from a decree passed by the Court with the consent of parties. However, the order of the Tribunal clarifies that under the new provision, no appeal is possible even from an ex-parte order of SEBI.
On one hand, it is perceived that Consent orders hinders the development of the jurisprudence of securities laws, as they do not provide detailed reasons for settlement; on the other, even rejection of consent application would not be appealable now in view of the ordinance.
Search and seizure Powers
The SEBI Act before the slew of ordinances had allowed SEBI to conduct search and seizure operations on a suspected violator’s premises after obtaining permission from a First Class Judicial Magistrate. The successive ordinances removed the need for a Magistrate’s permission, and instead empowered the SEBI Chairman to authorise such operations. The 2014 Bill reinstates the judicial oversight of the process by requiring SEBI to obtain permission from the Magistrate or Judge of a court in Mumbai as designated by the government.
Validity of Regulations under Ordinances
SEBI had framed various regulations drawing powers under the Ordinances such as and . In view of the lapse of Ordinances, whether SEBI can exercise these powers as these regulations are deemed repealed is another question that needs to be answered. Interestingly, these regulations have already repealed certain earlier norms (such as Consent Circular). Clause 57 of the 2014 Bill does propose to validate anything done or any action taken under the 2014 Ordinance as the 2014 Ordinance had ceased to operate from the 18 July 2014.
Power of Disgorgement
The Ordinance also retrospectively validates SEBI’s powers of disgorgement. However, the Ordinance provides that the amount disgorged would be credited to the Investor Protection and Education Fund, but it doesn’t provide guidance regarding the utilization of the amounts that have been disgorged. The newly inserted section 11(5) of the SEBI Act, 1992 gives the power to SEBI to frame regulations on how the disgorged amounts would be utilized. Using this power, SEBI has amended the IPEF Regulations to provide that the disgorged amount would primarily be utilized for restitution to eligible and identifiable investors. Any amounts that are left would then be used for investor protection and education. However, as the Sahara case has demonstrated, it is difficult to identify eligible investors in many cases.