This article has been written by Nooransh Grover, 4th year law student at Gujarat National Law University, Gandhinagar
The Indian securities market has undergone an overhaul, so much so the Securities and Exchange Board of India (‘SEBI’), in the course of a few decades. Post 1992, SEBI, by virtue of the SEBI Act, 1992, got tremendous powers to regulate the Securities Market. After the Securities Market Scam of 1992 or popularly known as the Harshad Mehta Scam, the government of the day felt the dire need to regulate the stock markets and transform SEBI from a non-statutory body to a full-fledged regulator of the Securities market. Successive amendment to the SEBI Act gave more powers to the SEBI. Rightly so, the changing dynamics of the Indian economy demanded such changes. The incoming of foreign players into the market bringing along Foreign Direct Investments along with widening the scope of foreign portfolio investments into India, SEBI’s jurisdiction had to be widened as well as strengthened.
How Provisions of SEBI Act violate Principles of Natural Justice
A careful reading of the provisions of the Securities and Exchange Board of India Act, 1992 poses a question with regards to the powers vested with the SEBI and does it conform to the principles of rule of law and natural justice. The principle of natural justice entails within itself two foundational sub-principles which can be elucidated in these two maxims namely ‘Audi Alterum Partem’ and ‘Nemo Judex in Causa Sua’. A bare reading of the SEBI Act portrays that the principle of Audi Alterum Partem is incorporated into the essence as well as the procedures elucidated in the Act. But the Act puts the principle of Nemo Judex in Causa Sua to a toss. The principle of Nemo Judex in Causa Sua means that ’No one should be a judge in his own cause’
Various provisions of the Act are clearly in violation of this principle of Natural Justice. The SEBI Act provides the Securities and Exchange Board of India with Administrative as well as Judicial powers. SEBI is empowered to issue rules, regulations. SEBI also has the power to issue directions to any person or company as given under Section 11B of the SEBI Act.
SEBI also has the power implement those directions as well as check on its non-implementation and impose penalty as given under Section 11C, Section 11D and provisions under Chapter VIA. Section 11C empowers the SEBI to look into the violations of the provisions of the SEBI Act and the rules and regulations made thereunder. Upon violation, SEBI can order the Investigating Authority to investigate the matter and can issue summon order, seize books of accounts, registers, record and can also search premises upon approval from Magistrate. The SEBI can also issue cease and desist order to the offenders as per Section 11D.
SEBI also has the power to adjudicate matters before it and can appoint officers not below the rank of Division Chief as enumerated under Section 15-I of the SEBI Act. SEBI also has the power to initiate criminal proceedings against offenders and impose penalty up to 25 crores or pronounce imprisonment for 10 years or both as provided under Section 24. The Section states that “Without prejudice to any award of penalty by the adjudicating officer [or the Board] under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to [ten years, or with fine, which may extend to twenty-five crore rupees or with both].
Principles of Natural Justice’s convergence with provisions of SEBI Act
These provisions highlight the lacunae in the SEBI Act and its non-conformity to the principles of Natural Justice. The Securities and Exchange Board of India can formulate rules and regulations, issue directions, adjudicate upon violation of its own rules, regulations and directions and moreover can order punishments. This is undoubtedly a blatant violation of the principles of Natural Justice. As elucidated under Gullapalli Nageswara Rao v. APSRTC and A.K Kraipak v. Union of India, upon an element of administrative, personal or any form of bias, a decision can be struck down.
In A.K Kraipak v. Union of India, the acting Chief Commissioner of Forest was a member of the selection committee formulated for the task of appointing UPSC member in which his relative was a candidate. The Court held that there is an element of personal bias and hence the decision is liable to be struck down.
In Gullapalli Nageswara Rao v. APSRTC, the government’s decision to nationalize road transport was challenged. One of the grounds for challenge was that the Secretary of the Transport Department, who presided over the hearing, was biased, as he was the architect of the programme and the chief of the department responsible for its implementation. The court vacated the order on the grounds that, under the circumstances, the Secretary’s partiality precluded an impartial hearing.
The Way Ahead
It is a well settled principle of law and jurisprudence that elements of bias vitiate rule of law in a society governed by the same. India has been a witness as well as a victim of vesting of arbitrary power. The SEBI along with arbitrary vesting of powers, has been overburdened by the same responsibilities. The number of pending cases is piling as well as the number of rules and regulations has made the functioning of the market more cumbersome.
There is a need to devise a separate judicial hierarchy for SEBI as was done in the case of Competition Appellate Tribunal (COMPAT) by virtue of Finance Act, 2017 and Intellectual Property Appellate Tribunal (IPAB) by virtue of Tribunal Reform Act, 2021. The smooth functioning of SEBI shall not only benefit SEBI itself but it shall also be virtuous for the Indian economy as a whole.
India has become the sweet spot for foreign investors. To attract investments for India, it is pivotal that Indian redressal mechanism instills confidence in investors with regard to settlement of disputes and claims in an effective manner. In India’s pursuit to become an economic superpower, it is important that the capital markets are responsive and responsible and not overburdened and cumbersome. Abiding by the principles of natural justice is a way, the goal is to achieve economic supremacy and the SEBI Act needs to be amended for constitutional, legal and economic reasons.