Thursday, August 14, 2014

Securities Appellate Tribunal reads the Riot Act for judicial indiscipline

In an important reminder to regulatory agencies to adhere to judicial discipline, the Securities Appellate Tribunal has passed an order setting aside an adjudication order passed by the Securities and Exchange Board of India for ignoring the ratio laid down in another order passed by another adjudicating officer.  The SAT has directed that the matter be placed before another adjudicating officer who may consider the matter afresh.

Explaining the position in law, the SAT has said this:-

“6. In the present case, the Adjudicating Officer has flatly declined to consider the order passed by another Adjudicating Officer on ground that such an order does not have binding effect and that he would prefer to form an independent view. If every Adjudicating Officer of SEBI passes independent order without bothering to consider decision taken by another Adjudicating Officer of SEBI in similar set of circumstances, then there would be complete chaos and total lawlessness. SEBI being market regulator of the securities market, Adjudicating Officers’ of SEBI cannot afford to pass adjudication orders in each case depending upon the whims and fancies of each Adjudicating Officer. Unless facts and circumstances set out in an order passed by Adjudicating Officer are materially different from the facts and circumstances of the case in hand, it would be just and proper for the Adjudicating Officer to follow the earlier order so that there is uniformity in the quasi judicial orders passed by the Adjudicating Officers’ of SEBI.

7. In the present case, since the Adjudicating Officer of SEBI has committed impropriety of refusing to consider the decision of another Adjudicating Officer which according to the Appellant has direct bearing on the facts of present case, without going into the merits of the case we set aside the impugned order and direct SEBI to pass fresh order by entrusting the matter to any Adjudicating Officer other than the Adjudicating Officer who has passed the impugned order.”

[Emphasis Supplied]

The Adjudicating Officer had said the following in his order:-

“17. I note that the Noticee has relied upon order dated November 27, 2013 passed by an Adjudicating Officer. In this regard, I note that the decision of another Adjudicating Order may not have any binding effect on me and I would, rather, prefer to form an independent view considering the merits of the matter. Therefore, I have not considered the same while arriving at any conclusion in the facts and circumstances of the instant case before me.”

[Emphasis Supplied]

The SAT order is important considering that approach adopted by SEBI in this case is not an extraordinarily alien practice.  In this case, the Adjudicating Officer explicitly stated his position to walk his own path refusing to even consider what SEBI had already said in a precedent.  In other instances, without explicitly stating so, orders get passed disregarding and ignoring ratios laid down by the very same organisation, and worse, even ignoring ratios laid down by appellate bodies.  There are many appeals piled up in the Supreme Court and the SAT on the (wrong) premise that SEBI has not agreed with the SAT’s view and has preferred an appeal in the Supreme Court – despite the Supreme Court not having stayed the SAT Order.  A classic example is of the ratio that merely because a manipulative trade has taken place on the market, the broker whose client executed it does not automatically become complicit in the violation.  Multiple orders have been passed ignoring this ratio, and they are all piled up in appeal.

SEBI is not alone in this regard. Tax authorities are known to have catalyzed the chaotic and lawless circumstances that SAT warns about.  All quasi-judicial and regulatory authorities would do well to read the Supreme Court’s ruling in the case of Union Of India And Others vs. Kamlakshi Finance Corporation [AIR 1992 SC 71].  Similarly warning about chaos, the Supreme Court said this:-

“6. Sri Reddy is perhaps right in saying that the officers were not actuated by any mala fides in passing the impugned orders. They perhaps genuinely felt that the claim of the assessee was not tenable and that, if it was accepted, the Revenue would suffer. But what Sri Reddy overlooks is that we are not concerned here with the correctness or otherwise of their conclusion or of any factual malafides but with the fact that the officers, in reaching in their conclusion, by-passed two appellate orders in regard to the same issue which were placed before them, one of the Collector (Appeals) and the other of the Tribunal. The High Court has, in our view, rightly criticised this conduct of the Assistant Collectors and the harassment to the assessee caused by the failure of these officers to give effect to the orders of authorities higher to them in the appellate hierarchy. It cannot be too vehemently emphasised that it is of utmost importance that, in disposing of the quasi-judicial issues before them, revenue officers are bound by the decisions of the appellate authorities; The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not "acceptable" to the department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.”

[Emphasis Supplied]

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