[The following guest post is contributed by Kanwardeep Singh Kapany, and is a continuation of a previous post in Part 1]
Section 11B was introduced to the statute through the 1995 Amendments with effect from January 25, 1995. In a certain case before the Supreme Court of India, the misconduct had taken place in the months of October and November 1993. When directions were issued under section 11B, the company opposed the same by contending that section 11B, being prospective in its application, cannot be applied to transactions undertaken prior to January 25, 1995. The said contention was based on the cardinal principle of protection against an ex post facto law, which is crystallised as a fundamental right guaranteed by the Constitution of India. The said fundamental right provides for the right of a person of not being convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence and not to be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.
The Supreme Court held that merely being restrained, by a direction passed under Section 11B, from associating with any corporate body in accessing the securities market and also being prohibited from buying, selling or dealing in securities for a certain time period shall not attract the protection granted by the aforementioned fundamental right, as the said direction neither amounts to holing a person guilty of committing any offence nor does it amount to subjecting the person to any penalty. The Supreme Court also held Section 11B to be procedural in nature and that no person has a vested right in any course of procedure, reiterating the time honoured principle that if the law affects matters of procedure, then prima facie it applies to all actions, pending as well as future. Therefore, provisions of Section11B can be applied retrospectively.
Meaning of the expression “Persons Associated with the Securities Market”
The persons to whom directions can be issued under section 11B, as mentioned previously, are very lucidly provided for, with the only ambiguity being caused by the expression “persons associated with the securities market”. Indeed the said expression has a wide import. Therefore an exhaustive explanation, or a straight jacket answer as to who are persons associated with the securities market, is not possible. However, a minimalistic understanding of the said expression is both possible and desired. The words “persons associated with” denote a person having a connection or having interaction with the “other”. In the present case that "other" with whom a person is to have connection or interaction is the securities market. The expression “securities” has not been defined under the SEBI Act. Therefore, one has to borrow the definition from the Securities (Contracts) Regulation Act, 1956 (“SCRA”), because that is the definition of "securities" adopted under the SEBI Act.
The expression "market" as understood in common parlance is a place or institution where the business of selling or buying of securities is carried on. Selling, buying or dealing with securities is the essential ingredient of a securities market. Though "securities market" has not been defined, the definition of "stock exchange" can be made use of. It means anybody of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. "Securities" has been defined to include shares, scrips, stocks, debentures, debenture stock or other marketable securities of like nature in or of any incorporated company or other body corporate, etc. What is noticeable is that it refers to "marketability". A stock exchange is more than a mere selling, buying or dealing place for securities, but adorns the role of an assisting agency in the smooth conduct of securities business by a suitable regulating or controlling authority. Nonetheless, a market cannot be conceived of without sellers or buyers who are the primary persons for whose purpose the market exists. All activities of business of selling and buying are related to the seller or the buyer. Therefore, it is inconceivable to think that a buyer or seller of a scrip is not a person associated with the securities market, where or through which he transacts his business, whether as trader or as investor, of selling or buying the required scrip.
Requirement of Pre-Decisional Hearing
Pre-decisional hearing with respect to provisions of Section 11B refers to the stage prior to issuing of directions by SEBI on it being satisfied that conditions mentioned in the said section are met. The two-fold issue that can arise for consideration is whether audi alteram partem rule can be excluded at the pre decisional hearing stage and, if not, whether an offer for a post decisional hearing can cure the defect of not having provided a pre decisional hearing.
A prior hearing is required to be given as a part of the rule of natural justice, with these rules operating only in areas not covered by any law validly made. A pre-decisional hearing becomes all the more applicable where the necessity of prior hearing is readable into the statute itself. It is only where the necessity of prior hearing cannot be read into the statute either on account of there being express provision for post-decisional hearing or in the absence of necessary provision for pre-decisional hearing in the rule itself that it can be held that the purpose of exercise of the power may itself be defeated if pre-decisional hearing is insisted upon and the post-decisional hearing is required to be given and if that is done in such cases the exercises of power would not be vitiated. 
Section 11B, to which power to issue directions are traced, empowers SEBI to issue directions only on its being satisfied about the conditions referred to in the provision, as a result of making or causing to be made an enquiry. The very fact that before issuing directions an enquiry is required to be made and conclusions are to be reached necessarily implies a pre-decisional hearing before the conclusion of enquiry. Section 11B by itself does not exclude the application of rules of natural justice during hearing nor does it speak about giving post-decisional hearing. Therefore, directions issued under the said section will be vitiated for want of pre decisional hearing and the offer of post-decisional hearing will be no cure to the defect of doing away with pre decisional hearing.
Directions can only be preventive or remedial in nature
The legislature has in a lucid fashion spelt out penal provisions in the SEBI Act at three places, which are (i) section 12(3), which provides for suspension or cancellation of the certificate of registration granted to the market intermediaries in the event of their proven misconduct, (ii) provisions under Chapter VIA, which provide for imposition of monetary penalty for certain offences specified therein, and (iii) section 24, which empowers courts to award punishment for violation of offences under the Act, etc. Since the legislature has deliberately chosen to create specific offences and penalties thereto in the SEBI Act, it is untenable in law to propose that SEBI is competent to impose penalties under section 11B while issuing directions, as neither a pecuniary liability can be imposed nor an offence created by mere implication, the same has to be statutorily warranted as prescribing an offence and its punishment is an essential plenary function of the legislature. However, SEBI is convincingly competent to issue directions which are preventive and or remedial in nature.
Let us, with an illustration understand when direction issued by SEBI amounts to being preventive and or remedial and when amounts to be a penalty, the former direction being within the scope of Section 11B, the latter being not and hence bad in law. For instance, if SEBI prohibits a public listed company, shares of which are listed/traded in the stock exchanges even to this day, which is alleged to have committed market manipulation, from accessing the capital market for a certain time period, say two (2) years, this would mean that the said company cannot enter the capital market for issuing and or offering securities. That being the case, preventing the said company from raising further capital/offering shares to the public for the next two years will in all probability lead to debilitating the company alleged of having committed market manipulation, but not as a mode of preventing further market manipulation. Similarly it is preposterous to accept that the debarring of the said company would be remedial in nature as the prospective barring of a public issue cannot remedy an act of market manipulation that has already occurred. The said direction issued by SEBI, in the above illustration, would be punitive in nature and not preventive or remedial.
The purport of a preventive or remedial direction can very well be understood with the aid of regulation 12 of the erstwhile Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market, 1995 (“1995 Regulations”). The 1995 Regulations provided that direction(s) may be issued by SEBI for attaining the purposes such as directing the person not to deal in securities in any particular manner; requiring the person concerned to call upon any of its officers; other employees or representatives to refrain from dealing in securities in any particular manner; prohibiting the concerned person from disposing of any of the securities acquired in contravention of the 1995 Regulations; directing the concerned person to dispose of any such securities acquired in contravention of 1995 Regulations in such manner as SEBI may deem fit for restoring the status-quo ante.
[Continued in Part 3]
- Kanwardeep Singh Kapany
 SEBI v. Ajay Agarwal, (2010) 3 SCC 764.
 The Constitution of India, 1949, art 20(1).
 SEBI v. Ajay Agarwal, (2010) 3 SCC 764
 Union of India v. Sukumar Pyne 1966 SCR (2) 34.
 Securities and Exchange Board of India Act, 1992, sec 2(2).
 Securities Contracts (Regulation) Act, 1956, s 2(j).
 Securities Contracts (Regulation) Act, 1956, s 2(h).
 Karnavati Fincap Ltd. v. Securities and Exchange Board of India  87 CC 186 (Guj).
 Swadeshi Cotton Mills v. Union of India, 1981 SCR (2) 533.
 Charan Lal Sahu v. Union of India, 1990 AIR 1480.
 Alka Synthetics Ltd. v. SEBI, 1995 95 Comp Cas 663 Guj.
 Khemka and Co.(Agencies) Pvt.Ltd v. State of Maharashtra, AIR 1975 SC 1549.
 D.N.Ghosh & Anr. v. Addl. Sessions Judge, AIR 1959 Cal 208.
 Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 1995 has been repealed by the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003