Sebi circulars cannot be challenged in SAT, rules Supreme Court

In what could ease the judicial load on the market regulator, the Supreme Court (SC) has ruled that circulars issued by the Securities and Exchange Board of India (Sebi) cannot be challenged before the Securities and Appellate Tribunal (SAT).  

Circulars, which can be administrative and legislative orders, are not quasi-judicial in nature and hence cannot be appealed in the SAT, the apex court said while pronouncing an order in the case between Sebi and National Depository Services (NDSL).

SAT is a quasi-judicial body that hears appeals against Sebi entities aggrieved by Sebi orders.

“Administrative orders such as circulars issued under the present case referable to Section 11(1) of the Act are obviously outside the appellate jurisdiction of the tribunal…..the preliminary objection taken before the SAT is sustained. The judgment of the SAT is, accordingly, set aside,” said SC in the order dated March 7.

NDSL and Sebi were at odds over an administrative circular issued in 2005. The circular—captioned ‘review of dematerialization charges’—had asked depository to amend its regulations. The circular was challenged by the depository in the year 2007.  The grievance of the appellant (NDSL) was that it is a company and the law permits it to make profits and distribute the dividend to its shareholders. Sebi, without any justification, interfered with its functioning, NSDL had argued. Moreover, it had been debarred from levying fees/charges when it is rendering service to the investors who hold demat accounts with it, it had further stated.

Sebi has raised an objection on the appeal filed by NDSL and contends that since the “impugned circular” is “administrative in nature” and has been issued under section 11(1) of the Act to protect the interests of the investors in the securities.

Although, SAT turned down the regulator objection and said: “The expression ‘order’ is extremely wide and there is nothing in the act to restrict the appeal only against quasi-judicial order, as appeals would lie against all three types of orders under the Sebi Act i.e. administrative orders, legislative orders as well as quasi-judicial orders."

Legal experts say the SC verdict would help reducing pendency which is mostly due to unordinary delay by SAT in hearing appeals and disposing of appeals challenging interim and preventive orders of Sebi. While this will also reduce the abuse of tribunal route to challenge administrative order (circulars), it would also reduce the case burden on the tribunal.

“The court has ruled that circulars are not orders for them to be challenged before the tribunal. They represent policy and can be challenged in a high court.  While this is logical, it also will bring to focus the abuse of circulars as a vehicle that communicates orders. Regulators are in a far more mature place now.  Besides, the contents of a circular can indeed be challenged in a writ petition before the high courts or Supreme Court," said Somasekhar Sundaresan, an independent counsel.

Yogesh Chande, partner, Shardul Amarchand Mangaldas said: “The judgment will provide much-needed relief to Sebi and to the SAT litigation division within the concerned enforcement department of Sebi, which acts as an interface between Sebi and the appellate tribunal. The judgement will also ensure that the potential appellants do not file appeals in SAT based on administrative orders of Sebi which will lead to further increase in efficiency of the system.”

According to Sebi annual report of 2015-16, the number of appeals filed in SAT against Sebi orders in 2013-14 was 182, which jumped to 520 in 2014-15 and rose further to 591 in 2015-16. Meanwhile, the pendency rate has increased nearly five-fold. In 2012-13, 86 appeals were pending before SAT, which rose to 423 in 2015-16.