The Securities and Exchange Board of India (SEBI) has never been armed with stronger draconian powers over the fate of Indian citizens. A recent opinion of the Supreme Court has held SEBI to be a social welfare organisation, and its powers under Sections 11(4) and 11B of the SEBI Act, 1992 (the Act) as not being “penal” in nature. Consequently, SEBI can issue directions to any person using these powers, even in relation to matters that occurred when these powers did not exist in the Act.
In 1995, Section 11B was introduced into the Act to empower SEBI to issue directions “in the interests of the securities market”. SEBI’s position has been that this provision is very wide, enabling it to issue almost any form of direction, so long as it can argue that such a direction is in the interests of the securities market. For instance, SEBI would direct a person not to deal in securities for a specified period. SEBI would restrain specific persons from associating with the securities market or with other persons associated with the securities market. SEBI would direct companies not to raise funds in the securities market.
Interpreting Section 11B, the Securities Appellate Tribunal (SAT) had held in the late 1990s that the provision could not be used to issue directions that partake the character of a penalty i.e. a considered punishment for wrong done. In other words, the SAT had said that directions that are punitive in nature, restraining persons from normal conduct of their affairs on the ground that it was retribution for misconduct, was effectively a “penalty” – a punishment inflicted on a person for an alleged wrong, after conducting an inquiry, examining evidence and concluding that there was a wrongdoing.
However, the SAT had ruled that Section 11B indeed empowered SEBI to act in an emergency and restrain any person pending conduct of investigations i.e. it was a power that could be used in an emergency or to take remedial action, but not a power that could be used to impose penalties. Higher courts did not rush to stay such an interpretation in the appeals filed by SEBI.
Through a Presidential Ordinance, confirmed later by an Act of Parliament, the Act was amended in 2002, to introduce Section 11(4), which essentially empowered SEBI to issue directions not only when investigations were pending but also after drawing conclusions from a completed inquiry. Effectively, such a power was indeed now given a penal character as well.
In March 2004, using Sections 11(4) and 11B of the Act, SEBI restrained the promoter of a listed company “from associating with any corporate body in accessing the securities market” and from “buying, selling or dealing in securities” for a period of five years. The grounds for such action included alleged misstatement in the prospectus of the listed company that occurred even before 1995 i.e. well before Section 11B ever came into being. The SAT had reversed this decision on the ground that a power that did not exist when the alleged wrongdoing took place could not have been used to punish the alleged wrong-doer. The SC has now ruled that even the infliction of such an injury by the regulator could not be regarded as a penalty.
The court has ruled thus: “The right… of not being convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence. is a fundamental right guaranteed under our Constitution only in a case where a person is charged of having committed an “offence” and is subjected to a “penalty”…. the respondent has not been held guilty of committing any offence nor has he been subjected to any penalty. He has merely been restrained by an order for a period of five years…. even if the law applies prospectively, (SEBI) cannot be prevented from acting in terms of the law which exists on the day (SEBI) passed its order.”
The court analysed the meaning of the term “offence” in the General Clauses Act, 1897 and in the Code of Criminal Procedure to conclude that a direction putting out a person out of the market for five years was not a “punishment” at all. Therefore, SEBI can now put any person out of the market for anything done at any time, arguably even before the SEBI Act came into force, because such restraint is not a “penalty” but is a “mere” restraint. The court also ruled that Section 11B is merely a procedural law and not a substantive law, the court has said there is no question of its retrospective usage being barred.
With highest deference to the SC, the ratio laid down is incorrect and deserves review. The SC is indeed final not because it is right; it is right because it is final. If putting a man out of business for five years is not considered penal in nature, the man in uniform has been given yet again, an unbridled power of meddling with citizens’ rights. The Constitutional check and balance of retrospective operation being barred, is an important character of institutional protection to fundamental rights, and it has now been significantly eroded.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)