It is good that the capital market watchdog had the sagacity to defuse, with an unconditional apology, an ugly situation with dangerous portends. It was also mature of the Securities Appellate Tribunal (SAT) to accept the apology and close the matter in order to protect the regulator’s standing with market participants (on 26th July). But is it okay for the Securities & Exchange Board of India (SEBI) to be repeatedly caught making irresponsible use of its regulatory powers, only to backtrack when it is rapped hard by a high court or an appellate tribunal? Here is what happened this time.
In May 2016, SAT had asked SEBI to give a hearing to Adventz Finance and dispose of the matter within seven weeks or by 24 June 2016. Since then, SAT granted SEBI at least three opportunities to produce the order passed by its whole-time member (WTM). After much subterfuge and trying to pass off a letter by a chief general manager as an order, SEBI finally admitted that no formal order had been passed. Even then, SAT first asked the member to pass an order immediately, only to be informed that he was travelling. A livid SAT ordered SEBI to pay a fine of Rs1 lakh to the appellant for giving him the ‘run around’ and ordered a different WTM to hear and decide the Adventz Finance matter. It also expressed distress at the manner in which SEBI’s WTM had ‘discharged his quasi-judicial’ duties and asked that its ruling be forwarded to the finance minister and the SEBI chairman. After SEBI tendered an unconditional apology, SAT has relented and withdrawn the fine and permitted the WTM, Rajeev Kumar Agarwal (not named in the order), to pass a proper order within a week. This is not the first time that SEBI’s conduct as a quasi-judicial body has been questioned. Consider two examples.
1. In March 2015, the Bombay High Court set aside SEBI’s first ever exercise of its newly acquired power of arrest in the case of Vinod Hingorani. The Court said that it had exercised “the power of arrest in total contravention of the provisions” and its order was “arbitrary, illegal and void.” In fact, the Court had called it an ‘abuse of power’.
2. In April this year, SAT had rapped SEBI for passing contradictory and inconsistent orders and penalties for similar offences. It was especially disturbed by a SEBI lawyer’s stand that the regulator stood by ‘both orders’. While SAT castigated SEBI’s conduct as ‘disgraceful’, the problem lies at a level much higher than that of the lawyer who was probably following instructions from the top.
Significantly, it is SAT rather than the regulator, who seems concerned that SEBI’s contradictory orders are “detrimental to the interests of the securities market.” The need for confidence in the market and its regulation ought to be a national concern. There should be consequences for those who fail to understand the responsibility and gravity of their role as regulatory body and as a quasi-judicial authority. SEBI is now armed with enormous powers of search, seizure, arrest, freezing of bank accounts, barring entities from the market and stoppage of operations that can damage businesses and irreparably destroy reputations. Only the very brave or well-funded intermediaries have the courage to challenge the regulator legally and risk vengeful action in the form of interim orders that can shut down a business, with no obligation on SEBI to provide a hearing or issue a time-bound order.
Indeed, many are silently crushed due to their reluctance to challenge the regulator. SEBI’s misguided policies, cumbersome procedures and constant tinkering with the rules is only making people fearful, confused and frustrated. The capital market thrives on information and savvy investors slowly learn to separate the grain from the chaff of insiders and speculators. But SEBI’s rules often end up gagging open discussion in public forums even while it is unable to monitor or check shady tipsters who use social media and SMS with impunity to entrap gullible and ignorant investors.