Mumbai: India’s capital market regulator has started allowing firms and individuals that have allegedly broken its laws to cross-examine those that have raised complaints against them, in an effort aimed at strengthening its adjudication process.
Typically, the Securities and Exchange Board of India (Sebi) sends show-cause notices to firms and individuals against whom complaints have been filed. It takes action only after hearing them out, but they are not allowed to cross-examine witnesses or review their statements and other documents filed.
According to law firms, the Securities Appellate Tribunal (SAT), the body that hears appeals against Sebi’s rulings, has been asking the regulator to give the alleged offenders a chance to cross-examine witnesses and complainants, but Sebi, citing multiple reasons, including delays in the investigation process, had refrained from doing so.
A lawyer who has been appearing for clients before SAT for about seven years, said he got his first chance to cross-examine a complainant before Sebi in late June. He asked not to be identified and also refused to talk about the case.
In two recent cases, Sebi gave the alleged offenders a chance to cross-examine complainants within 15-20 days of the former filing a request.
The cross-examination is done in front of one of the three whole-time members of Sebi or the adjudicating officer. In a change from its previous policy, it is only after this cross-examination that the market regulator will decide on whether or not it needs to investigate the case.
Sebi didn’t respond to an email seeking comment.
“When Sebi relies on complaints and statements to make allegations or frame charges, the rules of natural justice require it to permit cross-examination of the complainant or the person who made the statement,” said Joby Mathew, a securities market lawyer.
The fact that the appellate body has set aside a few orders of Sebi, including a recent one in the matter of Price Waterhouse regarding the audit of Satyam Computer Services, may have prompted the regulator to start this.
In a separate case, in December, SAT had overruled Sebi for not allowing cross-examination in the case of Bharat Jayantilal Patel, a Sebi-registered stock broker. One of Patel’s clients had filed a complaint to Sebi, alleging irregular transactions.
“We think it is necessary to intervene to avoid another round of litigation between the parties in the already more than nine-year-old case… The appellant is entitled to cross-examine the persons on whose statements strong reliance has been placed in the show-cause notice to establish charges levelled against him,” SAT had said then.
The tribunal further noted that if it did not step in, the enquiry officer would proceed with the case and the order against the appellant, resulting in another appeal before SAT—a situation it wanted to avoid. “The only way truth can come out is to allow cross-examination of those who have deposed against him,” it said.
In the Price Waterhouse case, the regulator didn’t allow the audit firm to cross-examine all the witnesses it wanted to.
“The practice may have been prompted by the fact that the tone of SAT’s orders in this regard has become stronger and Sebi would find it embarrassing to resist it further,” said Somasekhar Sundaresan, partner at J Sagar Associates.
In November, Price Waterhouse had requested Sebi for statements of certain persons recorded by the market regulator and cross-examination of witnesses whose statements had been relied upon.
In December, then Sebi whole-time member M.S. Sahoo accepted Price Waterhouse’s request to cross-examine some of the witnesses, but denied the same in case of others such as Satyam’s former chairman B. Ramalinga Raju, his brother B. Rama Raju and Satyam’s then chief financial officer Vadlamani Srinivas.
Sahoo had said the “noticees” cannot be permitted to “unnecessarily delay the proceedings in the guise of observance of principles of natural justice”. Price Waterhouse appealed in the tribunal against this order.
Though lawyers welcome the Sebi move, the concerns Sahoo raised in his order remain valid in certain situations.
“The law is grey on the subject and whether a person has a right of cross-examination would depend on the facts of each case. Whether the facts are disputed and complex, and whether the accused would be prejudiced without such a right being given are some of the factors to be considered,” said Sandeep Parekh, founder of Finsec Law Advisors, a law firm that specializes in the financial sector. “There is no single answer as to whether cross-examinations are always allowable or not.”