Many of us missed this 22nd November report, where the securities appellate tribunal (SAT), once again, imposed a penalty of Rs1 lakh on the Securities & Exchange Board of India (SEBI) for passing a ‘mechanical order’ against Ms SRBC & Co. LLP (SRBC) a joint auditor of Infibeam Avenues Ltd (Infibeam).
Here is what happened. A whistle-blower alerted SRBC to alleged violations by Infibeam. Based on this, SRBC sought additional information from the company. Instead of complying, Infibeam officials threatened to sack the audit firm and asked it to resign. When SRBC rightly refused to resign, Infibeam filed a complaint against it alleging violations under the Insider Trading Act. Compounding the issue, two SRBC employees inadvertently emailed Infibeam’s financial information to a third party with a similar name to the Infibeam CEO (Hiren Patel instead of Hiren Padhya). The mistake was quickly rectified by asking the recipient to delete the information. But SEBI argued that SRBC lacked the mechanism to prevent such ‘inadvertent’ mistakes that employees ‘entrusted’ with auditing sensitive information had a duty to ‘take appropriate care’ and, once the violation is admitted, the regulator had ‘no choice but to impose penalty’. SAT found this argument illogical and if accepted, ‘would result in absurd consequences’.
The implications of this order are significant. The credibility of a regulator is built on its ability to act impartially and enforce rules without fear or favour. Ethical concerns regarding conflict of interest, selective enforcement and lack of transparency have plagued SEBI from time to time. Isn’t it strange that the logic applied by SEBI officials to employees of an audit firm doesn’t extend to the chairperson, who enjoys blanket protection from the government, even to errors or misjudgement apparent in her own statements!
Interestingly, SEBI’s functioning has attracted comment and criticism both by the present and likely future chief justice of India. In Apollo Tyres case of 2018, Justice Sanjiv Khanna criticised SEBI for appealing against every order that went against it and directed the regulator to file a list of all such appeals filed against SAT orders on affidavit. Justice Khanna also sought an explanation from the officer concerned for the significant delay of 15 years after the alleged violation. (SC upholds SAT order setting aside SEBI penalty against Apollo Tyres)
In 2023, a bench led by justice BR Gavai, remarked that SEBI was filing frivolous cases. “We have seen that rather than doing regulating work, you are litigating only” he said, in a case pertaining to Suzlon Energy and its failure to disclose price-sensitive information during 2006-2009. SAT has frequently overturned SEBI’s orders, citing procedural lapses, disproportionate penalties and a lack of due diligence. Some illustrative examples include:
1.NimainCharan Biswal vs SEBI (2020): SAT had criticised SEBI for passing an order ‘without application of mind’ and imposed costs of Rs50,000. SEBI appealed and got the costs waived and adverse remarks expunged even though this was an extraordinary case of repeated miscarriage of justice where Mr Biswal’s name was misused by a dodgy company called Neesa Technologies, but he was harassed for over five years incurring huge legal costs (Miscarriage of Justice: Six Years of Trauma, a Dodgy Promoter and a Callous SEBI and RoC) .
2.Doel Saha vs Harishchandra Gupta (2014): SAT criticised SEBI’s ‘callous attitude’, leading to unnecessary litigation. This case underscored SEBI’s failure to exercise proportionality and discretion.
3.Yatin Pandya HUF vs SEBI (2021): SAT accused SEBI of ‘judicial dishonesty’, reflecting poorly on the regulator’s integrity. The tribunal’s scathing remarks pointed to systemic flaws in SEBI’s decision-making processes.
4.Sanjay Gupta vs SEBI (2019): SAT imposed costs on SEBI for mechanically passing a ‘harsh and unwarranted’ ex-parte order that continued for over a year and was confirmed ‘without any application of mind and without considering the relevant documents’ (SAT Imposes Rs50,000 Cost on SEBI for ‘Mechanically’ Passing an Ex-parte Order in 2017). Significantly, this order was passed by the present chairperson, then designated as whole-time member (WTM). Far from being embarrassed, SEBI’s counsel immediately asked for the paltry cost of Rs50,000 to be waived on the grounds that it would have a negative effect on the organisation. Clearly, nothing of this sort happened, since the person has gone on to head SEBI and her actions are vigorously defended by the government.
There are plenty of other examples such as Adventz Finance Pvt Ltd vs SEBI (2016) where SAT imposed costs on SEBI for its apathy leading to prolonged and unnecessary litigation; or Umashankar Agarwal vs SEBI (2018) where SAT remarked (https://indiankanoon.org/doc/98761489/), “We sincerely hope that SEBI would take appropriate remedial measures in the matter and ensure that its credibility as an efficient market regulator is not eroded.” It said it was refraining from imposing ‘heavy’ costs on the regulator only because it has remanded the case back to SEBI for fresh orders.
A recurring criticism about SEBI is its tendency to appeal every order against it, even when it is completely in the wrong. Its ability to hire expensive and powerful legal firms has often worked in having costs and strictures expunged by the Supreme Court, but not always.
In the Apollo Tyres case, the SC rapped SEBI for ‘indiscriminately’ appealing SAT decisions that highlighted delays and inefficiencies in its enforcement actions. The same issue is at the centre of the Adani controversy.
The only time that SEBI apologised to the apex court was in a case where SAT had set aside its Rs25 crore penalty on the Ambani family, because it retroactively applied regulations enacted in 2015 to alleged violations of 2000 (SAT Sets Aside SEBI Order Imposing Rs25 Crore on Ambani Family & Reliance Promoter Entities). Here, too, SEBI had not hesitated to appeal.
Double Standards
The lack of oversight over SEBI by Parliament and finance ministry has allowed SEBI to enjoy unfettered power and employ double standards in its dealings with regulated entities—a fact noted by several lawyers who have previously worked with the market regulator.
For instance, advocate Sumit Agarwal, in an article for Bar & Bench, points to SEBI’s contradictory stance of recovery of legal costs. On the one hand, SEBI has repeatedly questioned SAT’s jurisdiction to impose costs on a statutory regulator, even when its own actions have led to egregiously unfair decisions.
At the same time, SEBI itself has imposed a penalty on the National Highway Authority of India (NHAI) which is a listed entity and a regulator. SEBI’s stance in penalising NHAI after repeated warnings is certainly correct; its claim that cost cannot be imposed on itself is the problem. Especially when SEBI recovers legal costs from investors and market participants in settlement of disputes without admitting or denying wrongdoing. These costs, says Mr Agarwal, who has previously worked at SEBI, remain with the regulator and are not credited to the consolidated fund of India.
Importantly, SEBI’s expensive legal battles are funded by public money and SEBI often ensures that it is represented by the attorney general or solicitor general of India, signalling righteous action on its part. Since the finance ministry is busy defending the regulator against legitimate questions in Parliament, there is no effort at making cost-benefit analysis of the waste of public resources just to defend SEBI against strictures by SAT or high courts, nor has it been asked to prepare an objective framework of proportionality that aligns penalties/settlement amounts to the severity of violations.
Far from blocking a discussion about SEBI, the finance ministry needs to make SEBI more accountable through enhanced disclosure of enforcement actions, investigation timelines, managing conflict of interest and greater parliamentary oversight. Failure to do so will erode the regulator’s credibility and investor confidence.
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