Could SLAPPs be given a regulatory slap?

Large amount of funds is in investor protection funds of stock exchanges and Sebi

An editor of a prestigious publication had to step down after a large corporate group, irked by a negative article, sent legal notices. Another young news website, publishing strong stories, has been dragged to a court in Mizoram. A few months earlier, a minority shareholder was dragged to another small town court for questioning a listed company’s bankrolling of the lavish lifestyle of its promoter.

Such tactics are neither new nor peculiar to Indian corporations. They are so common that they have been dedicated an acronym: SLAPPs (Strategic Lawsuits Against Public Participation). By definition, SLAPPs are intended to censor, intimidate and silence critics, by burdening them with the cost of legal defence.

While this resulting in the resignation of an editor is rare, some large groups have effectively used pending litigation as a continuing deterrent against any potential critical coverage. Taking this tradition ahead, a large company, earlier known for high corporate governance standards, has threatened to invoke the Securities and Exchange Board of India’s (Sebi’s) Prohibition of Fraudulent and Unfair Trade Practices Regulations against a reporter. The reporter’s fault was that he was writing on things which the management did not want written about.

As companies and their ever-burgeoning legal teams explore new ways to muzzle criticism and control news flow, Sebi and frontline regulators cannot be unmindful of the larger impact these moves have on the integrity of the market. One of the key elements of this is the quality of information flow. Regulators spend significant time and effort in ensuring there is no asymmetry of information in the market by prescribing and monitoring disclosures by companies and taking punitive action in case of violations.

Journalists, especially those working for financial publications, and broadcasters, analysts and, of late, proxy advisory firms further break down this information and make it accessible for lay investors.

Often, what the managements want to say reaches the media faster. But, what they do not want to say has to go through several hoops such as the “attempts to balance” by the public relations machinery of the company, veiled threats by its legal team and if the stakes are higher, a Rs 500-crore SLAPP. This creates a large asymmetry in the corporate information that floats around in the media. The Satyam Computer scandal and the way the company was glorified in the preceding days were a shining example of such a deceptively rosy picture.

When journalists seek information, they are not exercising any special right. They are, in turn, invoking the right of public shareholders to know all material facts about their company. SLAPPs strike at this taproot of market capitalism. The regulators have a duty to counter this attack, without attracting allegations of overreach.

A large amount of funds – running into hundreds of crores – is in the investor protection funds of stock exchanges and Sebi. Under the Sebi Investor protection and Education Fund Regulations, there is a provision for legal aid for investor associations, when they take up matters of investor interest. Detailed guidelines have also been framed on application, approval and payments. A portion of these funds could be set aside to provide legal assistance on SLAPPs. A proper mechanism can be put in place for selection and approval of deserving cases. That would help in giving SLAPPs what they deserve—one tight slap.