SC’s rationale on validity of IT Act holds immense significance for the financial sector

The Supreme Court’s decision on a challenge to the has made news for the section it outlawed — Section 66-A of that law. However, the court’s decision refusing to outlaw another provision of the law, and the rationale for that decision, carries immense significance and conveys serious lessons for the financial sector.

In the constitutional challenge to the law, Section 66-A was outlawed for being vague, over-reaching and arbitrary.  However, Section 69-A (which empowers the central government  to issue directions to block public access to electronic content) was saved as being constitutionally valid, on the ground that there were effective procedures and safeguards that could protect against abuse. Directions to block public access to electronic content under Section 69-A can be issued only on specific grounds, and Parliament also required the government to make rules to govern the procedures and safeguards for use of such power.

This is the section under which your access to viewing a documentary such as India’s Daughter can be blocked. Now before you jump to the conclusion that the decision to block that film has been upheld, remember that the court has only ruled that the power to block public access does not by itself violate the Indian Constitution. It does not mean that any and every use of that power is constitutionally valid.  In fact, the court found that the safeguards and procedures enable a mechanism to avoid arbitrariness, and even after those are followed, a challenge under a writ petition can be made. Section 69-A explicitly reproduces the very eight grounds on which reasonable restrictions may be imposed on the fundamental rights to various liberties enshrined in Article 19 of the Indian Constitution. Written rules notified by the government specify that a request for blocking any electronic content has to be made to a “nodal officer” who shall apply his mind to whether or not any of the eight grounds are available in the facts of the case. She then puts up the complaint to a “designated officer” who is authorised to issue such an order.  Meanwhile, a committee of government officers is required to examine the complaint, arrive at a view on whether the blocking of access may be considered to be reasonable (i.e. whether any of the eight grounds are available).

The committee is also required to give a hearing to any person who has generated or stored the electronic content sought to be blocked so that the arguments against a potential decision to block access can be heard. The case is then placed before the secretary, Ministry of Information and Broadcasting, who could then take a view, after which the designated officer may block access to the content complained of. Over and above this framework, a “Review Committee” is required to meet every two months and examine whether such decisions to block access to electronic content should be continued or not.

The took note of the elaborate framework of procedures and safeguards prescribed in law to protect against arbitrary usage of the power to issue directions, and therefore held 69-A to be constitutionally sound.  Now, juxtapose this with a similar “power to issue directions” granted to the Securities and Exchange Board of India under sections 11(4) and 11B of the Securities and Exchange Board of India, 1992.

First, the sections themselves (unlike 69-A) make no reference to the safeguards set out in the Indian Constitution.  They empower the regulator to issue directions “in the interests of” investors in the securities market – a term that can be understood in as wide a range as a painting of Mother India by M F Husain.

Using this power, any person associated with the securities market can be put out of the securities market until further notice without even a hearing. This measure can simply mean, in practical terms, that one cannot access one’s own savings invested in financial assets so long as such assets are “securities” — practically, almost everything other than what is in one’s bank account.

Second, unlike 69-A, there is no prescribed procedure at all for how the regulator should consider or  reconsider whether directions under Sections 11 and 11B are warranted or justifiable. The need for a post-decisional hearing is often presented as a safeguard. In reality, in the absence of any prescribed procedure or timelines, there can be absolutely no expectation of when such a post-decisional hearing would be afforded.

It can range from a few weeks to several months.  Instances of people being put out of the market on suspicion first, with investigations following later and dragging on for years, are par for the course.

In the 20-year history of this power, neither has a single rule been made by government nor has any regulation been made by on its own, to govern the usage of this all-important power similar to those in anti-terrorism laws.

Third, there is no review at all of whether a direction issued is required to be continued even when months and years go by. There is no review committee, no independent mind, or any other such safeguard to review whether or not a direction issued should be continued.  Over the years, the norm  has degenerated to the regulator almost never lifting a direction once issued.

Worse, the evidence shows that more and more strident tones are adopted regardless of content, in the delivery of the message continuing the directions.  These tones prejudice “collective conscience”, which in turn, influences judges.  So much so, that when directions are lifted by Sebi of its own accord, corruption is assumed. Provisions similar to sections 11(4) and 11B are contained in every legislation governing the financial sector — first found in the Banking Regulation Act and replicated in every legislation including recent ones such as those governing the insurance and pension regulators.

The Sebi is the regulator that has used it the most. None of these legislation has safeguards akin to those in 69-A. In the collective conscience of our society, the constitutional rights of those in business, have always been perceived as less worthy, perhaps due to the sub-conscious belief that these are the folks who otherwise subvert the law.

The European Court of Human Rights has recently seriously interdicted such powers of the Italian securities regulator. Until India brings order in this space, doing business in India will remain very difficult.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)  

(This piece was published in the March 30, 2015 edition of Business Standard)

Tweets @SomasekharS 

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