Mumbai: India’s stock markets regulator Securities and Exchange Board of India (Sebi) is in a spot because the Securities and Appellate Tribunal (SAT) that hears appeals against orders that Sebi issues, has, in recent months, set aside the regulator’s directives on several high-profile cases.
In the past five months alone, SAT has set aside at least four important Sebi orders. In all these cases, the tribunal has questioned the adjudicating officer’s ability to understand the subject.
Most recently, the tribunal on 29 May waived a Rs25 crore penalty on Swiss cement maker Holcim Ltd that Sebi had imposed for a violation of the country’s takeover code (the penalty was related to Holcim’s acquisition of Everest Industries Ltd.)
Standing tall: An internal exercise conducted by the enforcement department of Sebi in 2007 disclosed that in almost eight out of every 10 cases, SAT upheld the regulator’s judgment.
In yet another case, SAT on 15 May reversed Sebi’s order that imposed a Rs1 crore penalty on Goldman Sachs Investment (Mauritius) Ltd for not submitting information on offshore derivatives instruments in a prescribed format.
Worse, the tribunal not only disapproved the conduct of Sebi’s adjudicating officer, but also directed the regulator to pay Rs1 lakh to the investment banker as litigation cost.
The regulator needs to improve the quality of its orders, says C. Achutan, former presiding officer of SAT. “Any order can survive if it adheres to two parameters: it should be within the regulator’s jurisdiction and all allegations should be supported by facts. Sebi should keep in mind these two things.” He, however, declined to discuss the merits of individual cases.
Although the number of cases where SAT has set aside Sebi’s orders in 2007 was not immediately available, an internal exercise conducted by the enforcement department of Sebi in 2007 discloses that in almost eight out of every 10 cases, the tribunal upheld the regulator’s judgment.
The exercise divided appeals to SAT between 2000 and 2006 into three categories: cases rejected by SAT, cases upheld and cases upheld with reduced penalty. The number of appeals before SAT rose from 12 in 2000 to 261 in 2006, while the percentage of cases where Sebi’s orders were upheld by SAT increased from 58% in 2000 to 89% in 2006.
“The problem is not in the nuances of the securities market. It is in the applicability of the basic principles of law, such as adhering to the principles of natural justice. Ex parte (where only one side of the argument is heard) orders are something which don’t comply with the principles of natural justice because it does not give a hearing,” says Dharmishta Raval, former legal executive director of Sebi. “I think the quality of the orders passed by Sebi will improve if it gives a hearing (to the involved parties),” she adds.
Raval’s observation is based on facts as there have been many instances where SAT has set aside Sebi orders on the ground that the regulator did not hear the involved entities.
For instance, on 4 May, SAT set aside a Sebi order that directed Karvy Stock Broking Ltd to pay for alleged inappropriate gains from the so-called IPO (initial public offering) scam. The tribunal’s presiding officer N.K. Sodhi said the “... impugned order was passed without affording an opportunity of hearing to the appellant and other entities, which have been ordered to disgorge Rs116 crore. The least that was required was to have called upon the appellant to show cause why it should be ordered to disgorge the amount.”
Earlier, in December 2007, SAT had set aside another Sebi order that had asked the National Securities Depository Ltd (NSDL), India’s premier depository, to return Rs45 crore of “illegal profit”, its alleged share from a major IPO scam that rocked the country’s capital markets and involved thousands of fictitious online accounts that cornered shares set aside for small investors. SAT described Sebi’s action as a clear “violation of the principles of natural justice”.
In November 2006, Sebi issued an ex parte disgorgement order against NSDL and a few others, including Karvy, directing them to return Rs116 crore worth of “illegal profits” made from the IPO deals.
Not all experts are disturbed by SAT setting aside Sebi orders. “Some orders should be set aside. Otherwise, what’s the purpose of an appellate tribunal? It is a sign that the appellate process is working. And if it does not happen this way, it will mean that the tribunal is simply rubber-stamping whatever the regulator says,” says Jayanth R. Varma, a professor at Indian Institute of Management at Ahmedabad. Varma was a full-time member of Sebi in 2001.
Varma says there is genuine scope for disagreement in high-profile cases, but adds that the regulator needs to examine if it requires a stronger internal process to see that these orders are not set aside.
“The regulator can set up an independent committee, wh-ich can offer its opinion on the Sebi orders on sensitive cases before the regulator actually passes them. This committee can raise objections, and in such cases, the regulator can always go back and plug the loopholes before passing the orders,” says Varma. According to him, even if it does this, there will still be a significant number of cases where its orders are set aside by SAT.
In a 7 April interview with Mint, Sebi chairman Chandrashekhar Bhaskar Bhave admitted that the regulator had lost some high-profile cases. “One needs three things so that the order becomes an appropriate quasi-judicial order. You must appreciate the evidence correctly; the interpretation of law must be sound; and finally, the order must be reasoned properly. In all these three areas, we need to strengthen our ability,” Bhave had said.
Sebi is currently looking for an executive director to head its legal department. Its last executive director dealing with legal matters, Sandeep Parekh, quit in March.