Moneylife Foundation Study: SEBI Actions Are Capricious and Appellate Tribunal Too Benevolent to Wrongdoers
Investors are often frustrated at the market regulator’s failure to initiate quick deterrent action, even where the most brazen price manipulation, insider trading and disclosure lapses are actively discussed on the social media. And, yet, for those of us who follow regulatory action closely, there is something equally frustrating. In many cases where the market regulator acts, wrongdoers ‘lawyer up’ and have their penalties waived or drastically reduced by a benevolent appellate tribunal.
It needed a dispassionate analysis to verify this widely-held perception that wrongdoers, who can afford to challenge regulator, get major relief. Moneylife Foundation commissioned a study to analyse orders of the securities appellate tribunal (SAT) to assess their impact on investor confidence. It was limited to the study of 30 important cases between 2019 and 2021 where orders of the Securities and Exchange Board of India (SEBI) were appealed. 
The study by Sidharth Pattnaik and Shivani Pattnaik, students of the National Law University, Odisha, owes its clarity to being mentored by advocate PR Ramesh. With over 25 years of experience in the capital markets, including a long stint at SEBI and his practice of securities law, Mr Ramesh ensured that the study showed a fair appreciation of how SEBI as well as the appellate body work.
No Credible Jurisprudence
The findings bring out, in worrying detail, that investor confidence is bound to be impacted by the failure to build credible jurisprudence and set clear legal precedents in handling investigation, adjudication and appeals at SEBI as well as SAT. Over the past three decades, SEBI has acquired immense statutory powers and the technology to track market intermediaries and trading on a real-time basis. Yet, there are few disincentives for violation of rules. Worse, it seems advantageous to appeal adverse SEBI rulings. SEBI’s Annual Report 2019-20 shows a sharp increase in the number of appeals against its orders (see Table 1). The overall impression is that the appellate tribunal acts like an indulgent grandparent who arbitrates with a naughty child’s parents to have the punishment reduced or waived!
This shows a lack of understanding of steep penalties as a deterrent in financial markets. The idea is that penalties should be so heavy (not proportionate) that they deter a person from cutting corners for illegal gains. It is even more applicable to market intermediaries with fiduciary responsibility or those whose actions have a widespread impact on investment decisions (more about this later). 
Unfortunately, many SAT orders show a complete lack of understanding of this. Perhaps, it is because SAT members do not necessarily have significant experience of capital markets, commodities, pensions or insurance matters which they are expected to decide on.
On the other hand, SEBI’s lackadaisical approach to handling cases as well as appointing competent adjudicating officers (AOs) or completing information in a time-bound manner has also been exposed by the SAT orders.
Our study considered 30 specific cases for detailed comment across three distinct segments: cases involving unfair trade practices, disclosure lapses and those impacting a large number of investors. It highlights issues that need to be fixed urgently, if the government wants to foster investor confidence in market regulation and supervision. The study recommends a review of pending cases after a pre-defined time so that there is pressure on the officials to complete investigations. I know, from my experience of tracking SEBI since inception, that it is a chairman-dominated organisation and cases are fast-tracked or put on the back-burner on instructions from the top. Unless regulatory accountability starts at the top, there will be no pressure or incentive for the regulator to change or to appoint competent AOs.
While broad data is available in the table above, this column will focus on a few key findings and cases, along with my personal views which may be expressed far more strongly than those expressed in the study. The complete study, which we have shared with the finance ministry, SEBI and SAT officials, can be accessed here.
Benevolent SAT
Innumerable cases where SAT slashed penalties for market manipulation and disclosure lapses have played a big role in increasing the incidence of appeals, especially since the appellate tribunal has failed to understand the deterrence principle in financial crime and has seldom offered a reasoned explanation for the circumstances under which it would consider penalties excessive.
One case that stands out is Kalpana Dharmesh Chheda vs SEBI (28 March  2019). Although SEBI had established ‘illegal gains’ of Rs35.5 lakh in manipulation of Zodiac Ventures shares by Kalpana Dharmesh Chheda, SAT slashed the penalty to Rs22 lakh signalling that it may be profitable to game the system. Although it was clear that the accused was buying one and two shares above the market, it decided that the transactions were tiny and decided to be benevolent.
Bharti Goyal vs SEBI and Tanuj Khandelwal vs SEBI are similar. Indus Weir Industries Limited, in a repeat of the Sahara realty case, collected Rs33 crore from 32,454 investors through redeemable preference shares without regulatory clearance. SAT benevolently decided that a Rs1-crore penalty was excessive, since the company had ‘suo moto’ stopped mobilising funds after the landmark Sahara order of August 2012.
In Ganesh Singhania vs SEBI, the regulator found that failure to disclose a significant acquisition and make a public announcement under takeover rules caused investors a loss of Rs65 lakh. A penalty of over Rs2 crore was imposed. SAT slashed the penalty, although a serious offence leading to actual loss to investors was established and upheld.
In case of disclosure lapse by PG Electroplast Limited, SAT dubbed it as technical and slashed SEBI’s penalty and action, calling it ‘grossly disproportionate to alleged misconduct’ and a case of the AO exceeding his powers. The order provided no guidance on what would constitute ‘technical violation’ warranting such sympathetic consideration.
The study lists several similar cases such as: SPL Industries vs BSE Ltd; Gargi Dash vs SEBI; Nitin Agrawal vs SEBI; Electrosteel Steels vs SEBI; Sky Industries Limited vs SEBI; Susheel Somani vs SEBI; Jubilant Stock Holding Pvt Ltd vs SEBI; and UTI AMC’s stake dilution case where SEBI’s action was upheld but penalties slashed without proper explanation or reasoning for the tribunal’s sympathy.
Double Jeopardy? A third case involving the notorious Nirmal Kotecha (read Ring of Thieves) has a double jeopardy like situation and raises serious questions about SEBI’s investigations. Under investigation from multiple agencies, Mr Kotecha leads a charmed life. SEBI debarred him from the markets for two years for fraudulent trades and creating artificial volumes in certain scrips in March 2018. Interestingly, an earlier AO had investigated the very same matter and concluded that volume of transactions was miniscule and there was no fraudulent intent and let him off.
In this case, SAT correctly questioned the parallel investigations in the same matter when an earlier inquiry had already quashed proceedings against him. It ruled that this gives rise to estoppel, since the earlier action was on identical facts. This is a case where an investigation into actions and decisions of SEBI are called for because it allowed Nirmal Kotecha to get away. Readers need to read this article about Mr Kotecha’s manipulation of SEBI officials and journalists to understand the significance of this case falling apart (Pyramid Saimira Case Rolls On). Is it mere ‘inconsistency’ at SEBI or is there more to it than meets the eye?
Social Media: In Shruti Vora vs SEBI case of June 2020, the SEBI order initially suggested that it has managed to nail a case of using social media to circulate inside information on corporate results. Unfortunately, SEBI did only half an investigation. While it targeted Ms Vora for forwarding messages received by her, it turned out that only some of them had accurately anticipated corporate results and SEBI was also unable to trace the origin of the messages that actually contained inside information. The case fell apart. Inside information continues to be circulated on social media in a big way and, unless SEBI proves it can do a proper investigation, it will continue to thrive.
Hasty and Vindictive: In the middle of the pandemic-related lock-down, SEBI issued an ex-parte order against Udayant Malhoutra, the managing director of Dynamatic Technologies seeking ‘disgorgement’ of alleged gains (over Rs3 crore) for a transaction that had happened in 2016 (Read SEBI’s Insider Trading Orders: Is There Any Method in the Madness?). Since the order was passed by one of SEBI’s senior-most officials, the regulator went to the Supreme Court, only to be snubbed again (read
Long Delays: Kaushik Rajnikant Mehta vs SEBI ( 20 March 2020) was accused of synchronised trading and price manipulation in Well Pack Papers and Containers Ltd in November 2013. An order passed in 2015 imposed a penalty of Rs6 lakh. SAT set aside the order and remanded it back to SEBI for a fresh look. SEBI leisurely appointed another AO in 2018, who again imposed a penalty of Rs5 lakh. SAT was dissatisfied with SEBI’s actions and halved the penalty, although it upheld SEBI’s findings.
Vasudev Ramchandra Kamat vs SEBI (November 2019) is another case that benefited from a SAT appeal, leading to SEBI being asked for a fresh decision and the case was eventually quashed because SEBI’s AO did a shoddy job and had contradictory findings in his order.
ICICI Bank Limited vs SEBI is one where SEBI took eight years to issue a show-cause notice for a one-day delay in disclosure in 2010, while the action against Oasis Securities Ltd also stretched to a decade. In both cases, SAT pulled up the regulator, but the question of regulator’s accountability remains unaddressed.
Fiduciary Institutions: Two cases that stand out are: SAT’s failure to understand the significance in rating agencies failing to keep track of companies they rate and, worse, the delay in rating downgrade which can lead to significant losses to retail and institutional investors. The cases discussed pertain to Brickwork Ratings India Pvt Ltd and CARE Ratings Ltd. In both cases, SAT slashed penalties failing to grasp the fact that major investment decision are entirely dependent on credit ratings. Unfortunately, the Supreme Court has done no better, as I had discussed in this article leaving investors to the mercy of bad ratings and, possibly, compromised rating agencies.
Weak Orders: In certain major cases, while SEBI endeavoured to take early actions through interim orders, the follow-on investigations faltered, resulting in delays and dilution of enforcement actions, finds the study. It cites the algo scam in 2015 at the National Stock Exchange (NSE) as an example. Despite multiple forensic audits and a deep investigation, the show-cause notices as well as SEBI’s initial orders are weak and do not seem to have taken into account many key findings of its own investigations (Read:
The findings of the study are significant for all those involved in financial markets who have to depend on the regulators and appellate bodies doing their job correctly. Since actions of SEBI as well as SAT are questionable, we need better checks & balances, with both organisations being subjected to some public scrutiny and questioning – ideally, public hearings before a parliamentary committee. Until then, things look rather bleak.

9 months ago
This is a perfect reflection of India's incompetent, corrupt, perverse and capricious Constitution, Laws, Government and Judiciary.
Replied to S.SuchindranathAiyer comment 9 months ago
U are aware of 8 crores part payment for securing posting on agencies dealing with corporate matters ... wrong doers would be willing to pay more at second step and not at first
9 months ago
Institutions are not weak per se they are rather made weak becaz of wrong and weak person heading the institution.
9 months ago
Investigative agency, tribunal or Supreme court or High Courts play Hide and Seek game.They should know that final sufferer is common man in this case investors are always at receiving end
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