By Somasekhar Sundaresan
The securities market is running helter-skelter, regulator downwards. A short judgment of the Supreme Courtinterpreting the Securities and Exchange Board of India (Sebi) Act, 1992, has ruled that Sebi had no discretion at all in computing the quantum of monetary penalty for some violations between 2002 and 2014. Sebi is reported to have sought a review and a clarification from the court, and everyone in the market is waiting with bated breath.
The apex court’s order is an interpretation of carelessly drafted provisions in the Sebi Act that deal with imposition of monetary penalty for failure to furnish information. In 2002, the penalty for such failure (Section 15A) was changed from Rs 1.5 lakh for every failure to Rs 1 lakh per day of failure with a cap of Rs 1 crore. The language used was that a violator “shall be liable” to the stipulated penalty. In 2014, the same provision was amended to provide that the penalty “shall” be at least Rs 1 lakh but “may extend to” Rs 1 lakh per day of continuing non-compliance with a cap of Rs 1 crore.
The Supreme Court has ruled that between 2002 and 2014, there was no scope for Sebi to impose anything but Rs 1 lakh per day and where the violation continued for over a hundred days, the penalty would get capped at Rs 1 crore. Now, the process for imposing such penalties is through the initiation of “adjudication proceedings” under which an “adjudicating officer” adjudicates whether the violation alleged has indeed occurred, and whether the person accused of the violation has any valid defence. Once the occurrence of the violation is established, the officer proceeds to determine the penalty amount.
The Sebi Act provides for three objective criteria for determination of the penalty amount (Section 15J), namely, any unfair advantage or disproportionate gain made as a result of the default, the loss caused to any investor due to the default and the repetitive nature of the default. Disagreeing with Sebi’s plea that Section 15J shows legislative intent for discretion in assessing the quantum of penalty, the Supreme Court ruled that the provision had become redundant between 2002 and 2014, although it had not been repealed.
Now, let’s say the company secretary of a listed company who is in charge of filing a document under the listing requirements dies in an emergency and the company misses the deadline. The filing is forgotten and by the time the other officers get their act together, more than 100 days go by. If the adjudicating officer has no discretion at all, such a company would have to pay a penalty of Rs 1 crore without any gain being made, loss being caused, and even if the default were the first ever in its history. Another violator who deliberately disregards the filing obligation for the same period and complies only after coercive threats would be treated on a par with the former. According to the court’s judgment, all violations of this nature between 2002 and 2014 would enable no discretion at all to vary the penalty on the basis of the gravity of the facts. A person who deliberately defaulted would be treated on the same footing as a person who inadvertently defaulted.
There are numerous decisions of the Supreme Court that point to adopting a purposive interpretation of the law based on which the words “shall be liable” would mean “may be liable”. Indeed, the converse reading, too, would be possible by looking at the purpose of the legislation. Generally, no provision of law is lightly read as being redundant. All provisions are attempted to be read harmoniously to give the legislation its potentially intended meaning. This is how courts have read this provision for nearly 20 years, in a purposive manner, ruling that monetary penalties from Sebi would need to be fair, rational and equitable. They would test the quality of the discretion but not adopt the stance that discretion was absent.
The irony is that the observations of the court have come in a case where the court actually lowered the penalty originally imposed by Sebi. In the case before the court, there was a blatant violation in furnishing information sought by Sebi despite repeated reminders. Sebi imposed a penalty of Rs 1 crore against one person and Rs 75 lakh on five others. The Securities Appellate Tribunal had reduced the penalty to Rs 60,000 in one case and to Rs 15,000 each in five cases, taking into account the reality that the violators were near-bankrupt, had become dormant and were even left with no staff.
The court ruled that the tribunal could not have taken into account such factors. The court also ruled that the original date of the violation was prior to the 2002 amendments and that Sebi, too, was wrong in imposing a penalty of Rs 1 crore. The court reduced the penalties to Rs 1.5 lakh on each person, adopting the pre-2002 position of the law when the reference to non-disclosure being a continuing offence was absent.
Both Sebi and market players are stumped. The outcome of the fight over one case has laid down an interpretation of the law for all alleged violations that took place over this 12-year period – typical of uncertain outcomes for an entire market from litigation involving one case of violation.
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 Information Technology Act 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 Supreme Court 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 Sebi 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.
(This piece was published in the March 30, 2015 edition of Business Standard)