How far are FAQs on SEBI Regulations, etc. binding or can even be relied on by SEBI? More so, when substantive legal issues are to be decided on which may result in grant/rejection of relief to parties or even levy of penalty for violation of Regulations.
SEBI has recently passed an order on in which it relied on its own FAQs and made some curious observations. The core issues in that case are interesting. However, this post focuses only on the manner in which SEBI has relied on FAQs (Frequently Asked Questions) released by it.
SEBI relied on the FAQs to arrive at the conclusion on two issues raised. The issues were significant. It is another thing what is the correct interpretation of the Regulations. Or how far SEBI relied on the FAQs to arrive at its conclusions. What is worth reviewing here are observations SEBI made while relying on the FAQs.
The complainant objected against SEBI’s relying on FAQs saying they do not have the force of Regulations. SEBI rejected this argument and said:-
“9. The complainant's Advocates acknowledged the existence of SEBI's FAQs as reproduced on pages 15-16 of this Order but argued that FAQs does not have the force of regulations and therefore should not be considered at all. The question before me is whether SEBI can interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it should, otherwise doubts raised about the effect of regulations would bring the entire business to a halt. I am of the opinion that such interpretations are valid so long as these are transparent and applied consistently without discrimination. No case has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise in any other matter, or that SEBI's interpretation was not known publicly.”
Several questions arise. Do FAQs have the force of Regulations? Does SEBI's interpretation expressed through FAQs binding on (i) SEBI & (ii) third parties? Assuming such interpretations are valid, what are pre-requisites for such FAQs – whether it is enough that they are (i) transparent/published and known publicly (ii) applied consistently without discrimination? SEBI seems to have taken a view that the FAQs are binding if they are transparent and applied consistently. On one of the issues raised, it even gave a few examples of similar practices adopted in the past. However, does practice make or amend law in such circumstances?
This is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations 2011, which are the subject matter of this decision, say:-
“These FAQs offer only a simplistic explanation/clarification of terms/concepts related to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification that is provided herein should not be regarded as an interpretation of law nor be treated as a binding opinion/guidance from the Securities and Exchange Board of India [“SEBI”]. For full particulars of laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the Acts/Regulations/Circulars appearing under the Legal Framework Section on the SEBI website.” (emphasis supplied).
Thus, the FAQs themselves clearly say that are not to be regarded as interpretation of law, that they have no binding force or even guidance from SEBI. For knowing the law, it is the actual text of the Regulations, etc. that has to be read.
The Regulations are required to be made – and amended – in the prescribed manner under Section 31 of the SEBI Act, 1992. They have to be released and notified as prescribed under the Act. They have to be then laid before the House of Parliament for prescribed period. Any changes agreed by the Houses have to be duly incorporated.
Further, violations of the Regulations have significant consequences under the Act and the Regulations themselves. These include penalties, prosecution, directions, etc.
SEBI does not have power under the Act to issue such “clarifications” to the Regulations where such clarifications would have binding force of the Regulations, particularly when they contradict the Regulations or result in extended application of the Regulations. Indeed, there is no concept of FAQs under the Act.
There have been several decisions that uphold Regulations over circulars. And that in case of any contradictions between the Regulations and circulars, it will be the Regulations that would apply.
Undoubtedly, the FAQs would help a party, particularly a lay person, in throwing some light at what the Regulations are trying to say. They may even be a sort of guidance of how how SEBI views certain issues, though it seems from the introduction to the FAQs that they may not be binding even on SEBI. In case the Regulations are clear, then FAQs have no relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs could be looked into and the views in the FAQs could apply.
It appears that SEBI has erred in stating that the FAQs have any binding legal status. SEBI, it is submitted, cannot take any adverse action in terms of penalties/prosecution/directions by relying on FAQs that contradict the Regulations. The Regulations are self-contained in this sense; the FAQs cannot add or modify the Regulations.
In conclusion, it is reiterated that the issue here is not whether the interpretation given in the FAQs is correct or not, it is on how much, if at all, can they be considered binding on SEBI and/or parties. The better view seems to be that FAQs cannot be relied on at all while deciding on substantive legal issues.