Much ado about nothing

The penalty imposed by Sebi on NHAI for not declaring financial results within the stipulated time seems like an exercise in tokenism

The Securities and Exchange Board of India (Sebi) is in the news for the imposition of a penalty of Rs 7 lakh on the National Highways Authority of India (NHAI). Some have been breathless asking how a regulator could penalise another regulator while others are hailing it as a landmark event. Neither is warranted since it is the Sebi’s duty to ensure that issuers of securities that are listed on stock exchanges and traded by the public in the market, adhere to compliance conditions imposed by law.

However, this piece is not about the merits of the case. It is about regulatory attitudes to compliance and regulatory attitudes to imposition of penalty. For not being able to declare financial results within 45 days of the end of the half-yearly period for four years in a row, the penalty imposed by the Sebi is a princely sum of Rs 7 lakh, at the rate of just Rs 1 lakh for every delay. The NHAI is said to have raised Rs 15,000 crore through the issuance of listed bonds.  While some delays were in the order of four days, there has also been a delay of as high as 78 days (beyond the 45-day period, meaning the NHAI could not even declare its basic financial results for four months).

The NHAI’s answer on merits seems to have been that its directors were preoccupied and board meetings could not be held in time. The NHAI seems to have raised technical legal arguments such as the need for government sanction to prosecute a state agency (this was not a criminal prosecution but a civil penalty proceedings) and that the Sebi ought to have identified officers in default (something that would lead to the busy bureaucrats who could not attend to the governance of the NHAI).

From a private sector issuer, such arguments would have enraged the regulator. With a private sector issuer, such a penalty would have been considered an exercise in tokenism. Not giving the market financial results in time for four years in a row – despite a warning in between to get the act together – would have attracted a far more severe regulatory intervention. Chances are the issuer and its promoters would have been put out of the market from making future issuances of capital or even be directed not to deal in securities including mutual fund units, instead of mere financial monetary penalty proceedings being taken up. Perhaps the directors would have been directed not to associate with any other listed company for whatever period felt appropriate.

To give a sense of the situation, even with monetary penalty, the law permits penalty of Rs 1 lakh per day with a cap of Rs 1 crore for every violation. Therefore, for a maximum penalty of Rs 7 crore, the penalty imposed is Rs 7 lakh. With any private sector issuer, the principle of regulatory intervention is often that the bigger an institution, the greater the expectations from it with regard to compliance requirements. In fact, even with monetary penalty, when adjudicating officers penalise offenders, the Sebi Act permits a review of the penalty for an upward revision if the institution feels the quasi-judicial officer ought to have imposed a higher penalty. Perhaps the Sebi would use this power and reconsider the penalty. Perhaps, in its wisdom, the Sebi may not do so.

It is a well known adage that when the crown enters the marketplace, it has to deal with the law like any other subject.  A token slap on the wrist to a representative of the crown does nothing to inspire a perception of equality before the law. In fact, if the treatment is so materially different, checking the box with a penalty can actually erode confidence that the law is put to work in an even manner. To repeat, this is not about the merits – it is about attitude and approach.

The author is an advocate and independent counsel; Twitter: @SomasekharS