Investor Interest   Exclusive
Beyond Section 66A: Draconian Laws & Their Implementation Need Review
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])
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    COMMENTS

    Shri Gopal Soni

    5 years ago

    Organisations,in India, have learnt the fine art of legal jugglary.
    The writ petition is basically a protection of law to a citizen whose fundamental rights are affected by order of a Government agency/state. However,consequent to the 29.4.2008 directions of Central Vigilance Commission "to ensure that no harassment is caused to
    complainant" I am slapped with two stay orders from two different high courts filed on
    behalf of an agency of state to deny fundamental rights to an honest citizen. https://twitter.com/revribhav

    MG Warrier

    5 years ago

    Exactly. Section 66A and its dropping attracted attention because of the ‘social media’ implications. There are several pieces of obsolete laws being ‘selectively’ used/abused from time to time. Apex Court or the Law Ministry should cause a review of laws applicable to each sector. The purpose will be served only if the review is comprehensive, focused and done by experts who do not have ‘constituency’ interests.

    SuchindranathAiyerS

    5 years ago

    All of Indian law is "theoretical", contradicting itself, constructed to prevent the crimes portrayed on Film Theater and TV screens by a bunch of Ball Beaters, Bollywoodies and Criminals. The laws were constructed since inception of the Indian Republic to make the ruling scum wealthy have lots at the expense of the haves and have nots while suppressing and oppressing them. The laws are used as and when convenient to maintain this tradition. India has achieved the impossible and transported an entire nation back across time and space to medieval Europe! That said, create a fit for purpose Judiciary Police Force and enforce equality under law and rule of law without exception to proactivey eliminate the thousand rebellions that thrive across India. But that may never happen for a century after introducing universal primary and secondary education AND doing away with reservations and extortion (aka corruption)

    S Hariharan

    5 years ago

    We're concerned that the Aadhaar project itself may curtail the civil liberty. Besides, doubts have been raised on the feasibility of such a huge project. Supreme Court too has put down heavily that it cannot be mandatory. UID is criticised as an infringement of civil liberties. The UK government cited higher costs, impracticality and ungovernable breaches of privacy as reasons for the cancellation of the National ID project.

    SEBI bars Networth Marketing from collecting any more money from investors

    Networth Marketing Limited was mobilising funds from investors under its schemes for sale and purchase of real estate (plots in sq. metres) without being registered with SEBI

     

    SEBI passed an Order directing Networth Marketing Limited (NML), and its directors viz., Anis Mohamad Kazi, Bhaskar Bhao Vasage, Mahendra Mahadeo Bhuvad, Nuruddin Shaikh, Bhalerao Yashwant Misal and Partha Ghosh  not to collect any fresh money from investors under its existing scheme and not to launch any new schemes or plans or float any new companies to raise fresh money. They are also directed to immediately submit the full inventory of the assets owned by NML obtained through money raised by NML.

    NML was mobilising funds from investors under its schemes for sale and purchase of real estate (plots in sq. metres) without being registered with SEBI and has hence violated the provisions of the SEBI Act and SEBI (Collective Investment Schemes) Regulations, 1999.
    SEBI had received references/ complaints alleging that NML mobilise monies from the public with promise of a high rate of return. SEBI started an inquiry and wrote to NML formally seeking information.
     
    Based on the investigation, SEBI found that it was a collective investment scheme and not any real estate activity. The SEBI member has justified it with the following paragraph in the SEBI Order: “It is noted that SEBI vide letter dated 22 July 2014 sought details of investors on whose name land has been registered with documentary proof. NML vide letter dated 5 August 2014 replied that no land has been registered in the name of the investors as they are having the option of registering the land at the end of term if they find it worth. However, investors also have the option of third party sale or NML buy back at agreed value. NML has launched schemes ranging from 3 years to 21 years, but till date no piece of land has been registered in the name of investors, which suggests that the allotment of land is nothing but a farce as there is no intention of NML to transfer any land in the name of applicant/ investors. Therefore, I am of the view that NML is engaged in the mobilisation of funds from public under its various plans, which is in the nature of 'collective investment scheme' as defined under Section 11AA of the SEBI Act.”
     
    Hence, SEBI passed a strict order and applied the following restrictions on the company and its directors:
     
    (a) not to collect any fresh money from investors under its existing scheme;
     
    (b) not to launch any new schemes or plans or float any new companies to raise fresh moneys;
     
    (c) to immediately submit the full inventory of the assets obtained through money raised by NML;
     
    (d) not to dispose of or alienate any of the properties/assets obtained directly or indirectly through money raised by NML;
     
    (e) not to divert any funds raised from public at large, kept in bank account(s) and/or in the custody of NML;
     
    (f) to furnish all the information/details sought by SEBI within 15 days from the date of receipt of this order.
     
     
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    SEBI cancels certificate of registration of PineBridge Mutual Fund

    PineBridge Mutual Fund has transferred its schemes to Kotak Mahindra Mutual Fund

     

    Securities and Exchange Board of India (SEBI) has cancelled the certificate of registration of PineBridge Mutual Fund on 27 March 2015, and has withdrawn the approval granted to PineBridge Investments Asset Management Company (India) Private Limited, to act as the Asset Management Company to the Mutual Fund.
     
    This is pursuant to the transfer of schemes of PineBridge Mutual Fund to Kotak Mahindra Mutual Fund and the cancellation is at the request of PineBridge Mutual Fund.
     
    Consequently, PineBridge Mutual Fund, PineBridge Investments Trustee Company (India) Private Limited and PineBridge Investments Asset Management Company (India) Private Limited cannot carry out any activity as a Mutual Fund, Trustee Company and Asset Management Company respectively.
     
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