Section 66A, is only one of many ways in which the State and its entities can unjustly curtail individual freedom. Here is one more example—of SEBI
The social media erupted in jubilation over the Supreme Court (SC) of India’s judgement scrapping Section 66A of the Information Technology Act (IT Act). The elation is well warranted. After all, the 2008 amendment to Section 66A allowed the police, and everyone who could influence them, to arrest, victimise and terrorise us, based on the most specious interpretation of “grossly offensive or menacing messages.”
Unfortunately, this celebration ignores the fact that a nasty government has many more such weapons in its arsenal. Also, many people with power—netas, babus, cops, regulators, investigation agencies, journalists and corporate houses—will ruthlessly curtail the liberty and freedom of ordinary persons, if they can get away with it.
One of the many cases against Section 66A before the SC was filed by www.mouthshut.com, a popular site which allows individuals to post frank reviews of brands, products and services. Its founder, Faisal Farooquie, was forced to approach the apex court to put an end to threats, defamation notices and over 800 ‘takedown orders’ to remove negative content. Many notices demanded the IP addresses of reviewers. Mr Farooquie says, “We were forced to remove content; else we risked exposing our reviewers to potential arrest.” The threats were from businesses whose CEOs usually present a benign face while their legal teams play dirty. Following the SC judgement, courts will determine the content that must be removed.
The Section 66A judgement has, indeed, overturned one of the worst curbs on freedom of expression; but it is just the first step towards undoing the many damages caused by the UPA (United Progressive Alliance) government.
Two other orders, in March 2015, demonstrate the dangerous portends of empowering the Securities & Exchange Board of India (SEBI) with draconian powers to jail individuals, or to destroy companies and shareholder wealth, through capricious actions. Worse, SEBI’s badly conceived actions have probably let off two sets of entities that deserve severe punitive action.
Let’s start with DLF Ltd, where the Securities Appellate Tribunal (SAT) overturned SEBI’s order barring the company and its chairman, KP Singh, and key directors from the capital market for three years. As I have pointed out earlier, SEBI’s investigation dragged on for seven years, when DLF was perceived to be close to the UPA high-command. Once the Modi government came to power, SEBI got cracking on a complaint about misstatements in DLF’s initial public offering (IPO) prospectus of 2007. Its October 2014 ban on DLF was geared to cripple the company at a time when the realty market was saddled with unsold inventories and banks were trying to recover over Rs20,000 crore from DLF. The stock crashed 28% on SEBI’s order.
We have no sympathy for DLF’s arrogant promoters and their attempts to short-change investors. But that is precisely why one expects the regulator to ensure that its enforcement actions stand the scrutiny of legal appeals.
Instead, SEBI repeatedly misled investors by being soft on DLF, even supporting its obfuscation of facts in court. The SAT order, correctly, says that SEBI “cannot suddenly be allowed to take a somersault after 7 years and come to a contrary view,” particularly, at the instance of a complainant who had his own vested interest in the matter and is not even an investor. SAT has also noted the losses caused to investors after the SEBI order and called it a ‘grave miscarriage of justice’. Ironically, it will be a grave miscarriage of justice if DLF promoters get away with their shenanigans and SEBI’s top brass is not held accountable for dragging its feet and its multiple somersaults.
It is pertinent to note that even when Indian courts strike down controversial, or vindictive, orders of regulators or investigation agencies, they rarely pin accountability on specific officials, or question the process of supervision and governance. Payment of costs and damages to those affected by such actions are niggardly, usually. On the other hand, the regulator uses taxpayers’ money to hire the best legal firepower (often a solicitor general or attorney general) and can choose to appeal, or drop cases, without serious accountability.
This is best exemplified by how SEBI exercised its newly acquired power to arrest and jail. This power was granted through a hasty amendment of the SEBI Act at the end of the UPA government’s term. On 18 December 2014, 58-year old Vinod Hingorani, non-executive chairman of Adam Comsoft and Kolar Biotech, was sent to jail for failing to pay a Rs1.10-crore penalty.
The case pertains to three companies that indulged in outrageous market manipulation and cheated investors; these were: Kolar Biotech, Adam Comsoft India and Soundcraft. This is probably why there was no comment or support from industry chambers and law firms over about the manner in which SEBI exercised its powers. All three companies are connected to Raj Kumar Basantani. After a slow, dragging investigation, SEBI ordered a penalty of Rs1.10 crore for fraudulent activities which was not paid for over four years. So, SEBI went after Vinod Hingorani to recover the money (Mr Hingorani is the brother of Raj Basantani’s wife, but claims that he was only an employee).
SEBI first attached his demat and bank account but found just Rs5,160 there. Then, he was issued two quick show-cause notices, on 21 November 2014 and 10 December 2014, asking why he should not be jailed for failing to pay. His passport had already been impounded. After rejecting several other pleas by Mr Hingorani, including one for legal representation, SEBI decided to detain him in its office on 27th December until he submitted a proposal to pay. On 28th December, it sent him to jail when he failed to come up with a payment plan. SEBI’s speed of action would have been highly commendable, only if it had shown the good sense to follow the tax-recovery rules (under which it exercises power of arrest and imprisonment), because it is playing with the life and liberty of an individual.
Mr Hingorani approached the Bombay High Court (HC) which first decided on the jurisdiction issue and then ruled that SEBI had exercised “the power of arrest in total contravention of the provisions” and that the order was “arbitrary, illegal and void.” The HC also noted that SEBI had failed to show that Mr Hingorani had concealed, transferred or removed his property. In a stinging indictment, the HC said, “Rule 73 does not confer power on the Tax Recovery Officer to arrest and detain the defaulter for not giving a proposal for payment of dues. Ordering arrest and detention for not giving a proposal of repayment is a sheer abuse of power. Similarly, in the absence of the finding that the petitioner had means to pay, the mere non-payment of dues does not constitute neglect or refusal to pay.”
Ironically enough, nobody has any sympathy for Raj Kumar Basantani and his fraudulent companies that have cheated a large number of investors. He surely needs to face punitive action. But why did the regulator act with such obscene haste, chase the wrong target and damage a perfectly good case, when thousands of others (such as the Reliance insider-trading case) are allowed to drag for decades? Isn’t it commonsense that you exercise utmost caution while using the power to arrest for the first time? Especially when the law prescribes an elaborate procedure to ensure that the power of arrest is not applied recklessly and vindictively. Unfortunately, such arrogance had become a norm with the UPA government, its regulators and investigation agencies.
Nowhere in the world are regulators allowed to arrest people without intervention from courts. SEBI’s hasty action shows that India, too, needs to put in place some checks & balances to ensure that the regulator exercises its powers in an accountable manner and after following due process. Will the Modi sarkar work to scrap these draconian amendments, or, as in the case of Section 66A, go along with the mess that the UPA-2 has left us in?
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]