The Sec 11B saga

SAT ruling looks set to weaken Sebi’s powers

It is ironical that just as the government is set to amend the Securities and Exchange Board of India Act through an ordinance in order to give the regulatory watchdog more punitive powers, the Securities Appellate Tribunal seems to have dealt a body blow to its very ability to slap any punitive damages against wrong-doers. The amendments proposed by the government will substantially hike the monetary penalty that Sebi can levy, and will empower it to impound documents required for its investigation. However, the SAT order in the Sterlite case has made the quantum of penalty a secondary issue, and signaled the need for another urgent amendment to the Sebi Act. Sebi has passed several hundred orders relying on the powers emanating from Section 11B to issue directions to market intermediaries. These pertain to market manipulation, insider trading, vanishing companies and collective investment schemes. All these cases stand to be thrown out if challenged before the SAT.
Interestingly, although Sebi’s use of the omnibus Sec 11B powers has been challenged in every capital market-related dispute, the high courts have usually upheld the regulator’s action.

The SAT, however, has said that Sec 11B does not even remotely empower the respondent (Sebi) to impose penalties. It argues that penalties have to be provided for in the Sebi Act and not the regulations under the Act. It has also held that since the Act specifically provides for penalties in three instances, Sebi is not empowered to extend its powers by leaning on Sec 11B. The SAT has relied on a Supreme Court judgment that says the imposition of pecuniary liability — which takes the form of penalty or fine — for breach of legal right couldn’t be relegated to mere procedure and machinery, but that such liabilities must be created by clear, unambiguous and express enactment. Though Sebi is set to appeal against the Sterlite judgment before the Bombay high court, at least four other matters relating to the 1998 price ramping and bailout will be decided by the Tribunal well before the appeal is disposed of. If all of these go against Sebi it could only seriously damage the regulator’s credibility and open the floodgates to similar appeals. Another issue that needs introspection is the structure of the SAT itself. Before the SAT came into existence, appeals against Sebi’s orders were referred to a high-powered three-member appellate tribunal of secretaries, including the finance secretary. The SAT, however, is a one-member body. Although the present incumbent who heads the tribunal is known for his integrity and competence, there are those who believe that the SAT has to be strengthened and upgraded into a three-member tribunal.