Monday, June 1, 2015

Dissecting SEBI’s Powers Under Section 11B of the SEBI Act, 1992: Part 1

[The following guest post is contributed by Kanwardeep Singh Kapany, a 5th year B.S.L.LL.B student at ILS Law College, Pune. The author can be contacted at kanwardeepskapany@gmail.com.

In this three-part series, the author analyzes the provisions of Section 11B of the SEBI Act, 1992 which confers wide powers on SEBI to regulate the capital markets. This provision has been used extensively by SEBI due to which it has been subjected to interpretation by the courts. This series would operate as a primer on SEBI’s powers under the provision.]

INTRODUCTION

A spurt in the participation of the public in the capital market was instrumental in its tremendous growth.[1] In order to fortify the said interest of investors in the capital market, preservation of investor's confidence became of fundamental importance. This is how the seeds of investor protection were sown. With this aim, the Government decided to clothe the Securities and Exchange Board of India (“SEBI” or the “Board”) immediately with statutory powers required to deal effectively with all matters relating to the capital market. This was fulfilled initially by an ordinance which was promulgated on January 30, 1992 called The Securities and Exchange Board of India Ordinance, 1992 (“Ordinance”). This Ordinance was then converted into an Act by Parliament in April 1992 referred to as The Securities and Exchange Board of India Act, 1992 (“SEBI Act”). Like the Ordinance, SEBI Act unequivocally provided for the establishment of SEBI to fulfill purposes such as protecting the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected there with or incidental thereto.[2]

In the year 1995, certain amendments were carried out (“1995 Amendments”) in the SEBI Act as it was felt there was a need to amend the SEBI Act in respect of certain categories of intermediaries, persons associated with the securities market and companies on matters relating to issue of capital and transfer of securities. The Statements of Objects and Reasons of 1995 Amendments show that one of the objects is to empower SEBI to issue regulations without the approval of the Central Government. Section11B of the SEBI Act, which was introduced by the 1995 Amendment, empowers SEBI to issue directions: in the interest of the investors; for the orderly development of securities market; to prevent the affairs of any intermediary or other persons referred to in section 12 of the SEBI Act being conducted in a manner detrimental to the interest of investors or securities market; and to secure the proper management of any such intermediary or person. Section 11B also provided that the directions can be issued to any person or class of persons referred to in section 12 of the SEBI Act, or associated with the securities market, to any company in respect of matters specified in section 11A of the SEBI Act, as may be appropriate in the interests of investors in securities and the securities market.


ANALYSIS OF SECTION 11B

Scope of Section 11B

The SEBI Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors. It is a well known canon of construction that when Court is called upon to interpret provisions of a social welfare legislation, the paramount duty of the Court is to adopt such an interpretation as to further the purposes of law and if possible, eschew the one which frustrates it.[3] The prime duty in the case of construing the provisions of a beneficial legislation is to adopt a constructive approach; subject to that it should not do violence to the language of the provisions nor go contrary to the attempted objective of the enactment.[4] 

Section 11B is not couched in a manner of conferring adjudicatory power of finding a person guilty or adjudicating upon the rights of a person and making consequential orders as a result of such adjudication on the person concerned de hors the provision governing such impositions of penalties or bringing out certain consequences specified by law.[5] The very fact that directions could be issued not only to persons but also to classes of persons and with respect to specified matters in respect of the company, rules out the directions of the nature of imposing penalty or a power to forfeit any amounts. The term used is not to make “orders” in respect of persons found guilty of a breach of regulation, rule or law, which is a well known terminology in the field of prescribing consequences to be visited in case of breach of law. But the term used is "issue such directions".

The scope of the expression “direction” has not been defined in the Act. However, the expression has been judicially interpreted. The Supreme Court[6] defined the expression to be in the nature of an order requiring positive compliance. Similarly, Securities Appellate Tribunal adopted the definition provided by the Bombay High Court, which defined it to mean guidance or command. Also, in Black's Law Dictionary, the meaning assigned to the expression "direction" is as that which is imposed by directing; a guiding or authoritative instruction order or command.[7] Therefore, the functional object of issuing directions is to issue guidance for the purpose of actions to be taken by the persons to whom directions are made or forbearance for doing certain acts to whom such directions are aimed.

Constitutional Validity

There are three fundamental rights in the Constitution which are of prime importance and which breathe vitality in the concept of the rule of law: they are Articles 14, 19 and 21,[8] collectively called the golden triangle,[9] which is considered to stand between the “heaven of freedom” and the “abyss of unrestrained power”.[10] This very golden triangle as a whole or some of its constituents have been used to challenge the constitutional legitimacy of section 11B.[11]

Section 11B is an enabling provision, enacted to empower SEBI to protect the interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations.[12] Such an enabling provision must be construed so as to serve the purpose for which it is enacted, as it is a well accepted canon of statutory construction that it is the duty of the Court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed, and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it.[13] In the same breath, it is a firmly established rule that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective.[14] Without an iota of doubt, power which has been conferred by Section 11B to issue directions is of the widest possible amplitude and carries with it, by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective. Therefore, the said section does not fall foul of the Constitution of India.

Even outside the court room, concerns over the constitutional validity of Section 11B have been raised. A very recent article titled “How Constitutional are SEBI Directions”,[15] (which has also been posted on this blog) enlisted inter alia the following pertinent grounds for challenging the constitutional validity of the section such as absence of safeguards in the said section as required by the Constitution of India, lack of a review mechanism to reconsider the justifiability of directions, no regulation having been formulated by SEBI to govern the power to issue directions under the said section even after the said power having come into operation for about two decades. The author in the said article also relies heavily on the principles laid down by the Supreme Court of India in the case of Shreya Singhal vs. Union of India[16] to buttress the aforementioned arguments.

I humbly submit that the aforementioned concerns presented by the author do not put a question mark on the constitutional validity of Section 11B. The law recognises the latitude with which one views economic laws to be greater than laws touching civil rights such as freedom of speech, religion, and the like. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. If not judicial deference, then at least judicial self restraint is expected for good reasons such as complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of experts, and the like. Also, there is judicial support for allowing the legislature some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is especially warranted in case of legislations dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature.[17] Therefore, even though crudities and inequities might be present in complicated economic legislation, on that account alone it cannot be struck down as invalid. 

[Continued in Parts 2 and 3]

Kanwardeep Singh Kapany





[1] Securities & Exchange Board of  India Act, 1992, Statements of  Objects and Reasons.
[2] Securities & Exchange Board of  India Act, 1992, Preamble.
[3] Bank of Baroda v. SEBI, [2000] 26 SCL 532 (SAT – MUM).
[4] Lucknow Development Authority v. M.K.Gupta, (1994) SCC (1) 243.
[5] Alka Synthetics Ltd. v. SEBI, 1995 95 Comp Cas 663 Guj.
[6] Rajendranath v.CIT, (1979) 4 SCC 282.
[7] Videocon International Ltd. v. SEBI, [2002] 38 SCL 422 (SAT - MUM).
[8] Bachan Singh v. State of Punjab, (1982) 3 SCC 24.
[9] T.R. Kothandaraman v. T.N. Water Supply & Drainage Board, (1994) 6 SCC 282.
[10] Minerva Mills Ltd. & Ors. v. Union of India & Ors., 1981 SCR (1) 206.
[11] Ramrakh R. Bohra, Harvest Deal v. SEBI, 1999 96 Comp Cas 623 Bom;  M/S Cyberinfo Zeeboomba Com & Ors. v. Union Of India And Ors., Writ Petition No. 4581/2010, decided on 29 October, 2010.
[12] Nikhil T. Parikh v. Union of India 2014 GLH (2) 582.
[13] Reserve bank of India & Ors. v. Peerless General Finance and Investment Company Ltd. & Anr. 1996 SCC (1) 753.
[14] ITO v. M. K. Mohammed Kunhi, AIR 1969 SC 430).
[15] How Constitutional are SEBI Directions available at: http://www.business-standard.com/article/opinion/how-constitutional-are-sebi-directions-115032900678_1.html; http://indiacorplaw.blogspot.in/2015/03/financial-sector-legislation-anti.html (visited on 31 May 2015).
[16] [2015] 2 COMP. LJ 143 (SC).
[17] R.K. Garg v. Union of India, [1998] 4 SCC 675 (690).

No comments: