The Securities Appellate Tribunal(Sebi) has spoken. The Tribunal has ruled that extreme powers to take extreme measures should be used with extreme caution.Sections 11 and 11B of the Sebi Act, 1992, which represent the equivalent of anti-terror laws such as TADA and POTA, have been liberally and frequently used since their inception - the mid-1990s.
The jurisprudence on these powers has kept swinging, with regulators getting governments convinced that blanket powers to "issue such directions as deemed fit" are critical for effective regulation of markets. Section 11B was inserted into the Sebi Act in 1995 - about four years after Sebi got statutory powers. It empowered Sebi to issue such directions as it deems fit in the interests of investors in the securities market.
This power has historically been used to issue ex parte (without giving the person acted against, any chance to have a say) directions of varying creativity. These include directions not to deal in securities, not to access the capital markets, not to be associated with market intermediaries, not to deal in specific securities, not to sit on the boards of listed companies (just to name some examples).
Once an ex parte direction is given, it is but human frailty to do one's best to bend over backwards to justify and demonstrate how the original direction was not wrong. After the initial order, one can scamper to start asking questions, collecting facts and enquiring into the case.
Often the directions are "confirmed" after a personal hearing, and even more often, "final orders" are passed concluding that the directions should be imposed like a penalty even while other proceedings continue "uninfluenced by the observations in the order" containing the directions.
Extraordinary facts lead to extraordinary law, and courts have by and large been supportive of the power whenever Sebi has used it in extraordinary and provocative circumstances - holding that even post-decisional hearings would render such usage to be legitimate.
In short, these directions were used in the nature of arrest and suspension of liberties when investigations were underway. When deployed in circumstances that were not really provocative, or in a situation that was not an emergency, courts ruled that Section 11B was an emergency power and should not be used as a punitive measure and should only be used as a response to an emergency.
That led to the regulator lobbying to get Section 11(4) into the Sebi Act, which was introduced in 2002 (this time, the provision rode the back of the Ketan Parekh scam). Under this section, the power to issue directions could be used either pending investigations or upon completion of investigations - thereby removing the emergency nature of the powers under Section 11B. Some courts ruled that even Section 11B could be used even as a final measure after investigation. The usage then became even more liberal. When a policeman arrests a person, he has to satisfy a magistrate that the suspension of liberty was critical to enable custodial interrogation, or to prevent the accused from tampering with evidence or intimidating witnesses. The usage of Sections 11 and 11B did not need any court to approve of their usage - the regulator could use the power at will, the only remedy being a statutory right to appeal in the Tribunal or a writ petition in a constitutional court. Typically, the only defence of an ex parte order to present would be to show how bad the facts are, without having to justify how the restraint is linked to aiding the investigations.
The provisions that enabled these powers were not pulled out of the hat. They were first found in Section 35A of the Banking Regulation Act, which enabled the Reserve Bank of India to issue directions in the interests of depositors of banks. Identical powers are now replicated for every regulator of every sector that has a regulator. The most creative of usage has been by Sebi since 1995. The RBI is not known to have used this liberally, perhaps contained in its approach by the risk of spreading panic even while intending to protect depositors. Other regulators are yet to get develop an appetite for using the power.
"Power of the kind that the Respondent possesses begets a monumental responsibility and needs to be exercised with great care and caution…giving every party an opportunity of being heard is one of the most significant limbs of natural justice. Although, Sebi does have the power to pass ex-parte interim orders in certain cases, it must do so only upon showing the existence of circumstances which warrant such a drastic measure," the Tribunal has said in a recent ruling.
"It is indeed accepted that the necessity for speed may call for immediate action in a given case and the need for promptitude may exclude the duty of giving a pre-decisional hearing to the person affected. At the same time, in such situations, there is an inherent need to show that the danger to be averted or the act to be prevented is so imminent that the pre-decisional hearing must be dispensed with."
Disclosure: The author represents actionees in securities law enforcements.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.