By Jayant M. Thakur, Chartered Accountant
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Securities Laws
This series of articles introducing securities laws for
listed companies to the lay reader continues . . .
(1) The Securities Appellate Tribunal (‘the SAT’) is a vital
appellate authority. It hears appeals from decisions of SEBI. For most small and
medium entities and persons, it is for all practical purposes, the last
appellate authority, since appeals against decisions of SAT are to be made
directly to the Supreme Court.
(2) Another interesting feature of the Hon’ble SAT is that
its Bench consists of a mix of Members with legal and commercial backgrounds.
SAT, like SEBI, examines issues that are not purely legal and are often
commercial issues where an in-depth knowledge of the current dynamics of the
securities markets is required. Even the procedural rules help the Hon’ble SAT
to ignore at times the highly technical and legal niceties.
(3) Yet another interesting aspect is that SAT is an
all-India appellate body, in the sense that there is a single Bench for the
whole of India. Contrast this with, e.g., the Income-tax Appellate
Tribunal which has state-wise Benches. One advantage of this is that one does
not face the confusion of differing decisions from Benches of the Tribunal.
Undoubtedly, while the SAT may, in its wisdom, reverse its earlier decisions if
it deems fit, generally speaking, SAT follows its earlier precedents. This, once
again, establishes the importance of a person dealing with the securities market
to keep abreast of the decisions of SAT.
(4) Finally, it is necessary for a Chartered Accountant to be
aware of the SAT decisions, because as an auditor he should be able to advise
the auditee of recent developments and he can also appear before SAT.
(6) Mefcom Securities Limited v. SEBI,
(2008) 82 SCL 193 :
(a) SEBI’s framework also requires regular checking of the
compliance of ‘intermediaries’ by auditors. Auditors during the conduct of audit
may come across irregularities which may be both mundane — that is —
non-compliances in documentation and involving serious violation of law. Often,
SEBI itself censures the broker or levies nominal penalties. The logic behind
the requirements are often thought to be procedural — more so when the
irregularities are not in the nature of manipulations or fraud. Of course, some
requirements lie between being merely procedural on the one hand and being a
blatant manipulation/fraud on the other hand. In this background, SEBI’s
decision to levy a hefty penalty of Rs.10 lakhs on a broker and the Hon’ble
SAT’s upholding of the same with reasons make this decision of SAT worthy of
note.
(b) In this decision, the audit resulted in many findings,
such as failure to maintain separate books of account for transactions,
non-maintenance of client agreements, failure to separate clients’ funds from
own funds, dealing with unregistered sub-brokers, etc. SEBI deemed it fit to
levy a penalty of Rs.10 lakhs.
(c) In appeal, the appellant made, inter alia, an
important submission that 83% of its trades were proprietary in nature. Further,
of the remaining 17%, 14% did not result in deliveries and only 3% resulted in
deliveries. Often, it is seen that brokers shun clients and do exclusively or
predominantly own trading, since having even a few clients would need compliance
with several requirements. The appellant also submitted that there was no
complaint made by any client.
(d) However, the SAT upheld the penalty on several grounds.
It did not accept that the defaults were merely technical ones. It explained the
logic of some requirements and the consequences that may result if these are not
complied with. It upheld the whole of such penalty. Consider some extracts from
the decision of SAT :
“The proportion of the trade of the appellant on account of
clients vis-à-vis his proprietary trade has little to do with the
extent of care and skill to be exercised by him in adhering to the regulatory
requirements that are meant to protect the interest of investors. The size of
the clientele is not relevant in this respect, nor is the fact whether there
are complaints from the clients. We also do not agree that the violations of
regulations found during inspection were merely technical in nature. In any
case, the appellant had no reason whatsoever to allow its banker the authority
to transfer funds from and to the accounts of the clients, since this was a
gross violation of a statutory regulation. While some of the infractions are
of procedural nature, others could be quite serious in their consequences. For
example, segregation of every client’s account from the broker’s account as
well as use of unique client code leads to greater transparency in the
business operations of the brokers and thereby enhances the integrity and
quality of the securities markets. It is far from correct to hold that such
requirements are ‘merely’ technical in nature. Similarly, absence of
broker-client agreement would lead to difficulties or even failure in
retrieval of information by regulators during any check or investigation and
this would seriously affect the efficacy of the regulation process. The lapses
on the part of the appellant clearly reflect a lack of exercise of due care,
skill and diligence required of a broker and deserve to be viewed seriously.”
(e) Thus, in one stroke many of the standard defenses pleaded
by brokers have been categorically rejected. One hopes that this decision
removes the complacency often found in ‘intermediaries’ with regard to
compliance with procedural requirements.
(7) Deep Kumar Trivedi v. SEBI, (2008) 82 SCL 209 :
a) The issue in this decision is actually more on facts than of law. SEBI alleged that it had served a summons on the appellant, seeking that he appear before it. When the appellant did not appear, SEBI levied penalty of Rs.10 lakhs on the appellant for such non-appearance. In appeal, the appellant denied that he was served with the summons. The Hon’ble SAT went into the documents and contentions relating to the service of notice. On review of the facts, SAT finally held that it was not conclusively brought out that the summons was indeed served. The SAT also made an important observation that the appellant was not informed at any stage in the related proceedings that a summons was served and that the appellant had not complied with it. The order of penalty was thus set aside.
b) One reason for highlighting this decision is that several such proceedings have been required to be dropped on similar grounds. In several cases, at the level of the Adjudicating Officer itself, the )-proceedings are formally dropped on the ground that no adequate proof existed for summons/notice having been served.
c) Further, often, the distinction between summons for ‘Information’ and summons for ‘Presence’ is forgotten. A summons for information (as the wording of the summons itself clearly brings it out) seeks information that is to be filed with SEBI.The summons does not state at any place that the person served with such summons should appear before the SEBI Officer. Indeed, no date and time is given and, in fact, a last date is usually given for filing of the information. However, though the person concerned files the information, later on, it is alleged that the person should have appeared personally also. Usually, these proceedings are dropped, but the party has to undergo the suffering of the proceedings.
8) HFCL Infotel Ltd. v. SEBI, 82 SCL 199 (2008) :
a) Often, a difficulty is faced by parties who have proceedings initiated against them under one or more provisions of securities laws. While these proceedings are pending, the party may need to – approach SEBI for one or more clearances, registrations, etc. SEBI is naturally in a dilemma. If it does not give such clearances, etc., and if it is ultimately found that the party has not violated securities laws as alleged, then there would be injustice. However, in the reverse situation, if the party was indeed guilty, by allowing it further access to securities markets, SEBI would have effectively allowed it perhaps to commit more irregularities.
b) As the decision cited above shows, it is not uncommon that such a party may find that its proposals before SEBI may be held up indefinitely. In fact, the party may have to suffer because SEBI itself may take quite a long time to complete the proceedings. Having said that, it is also interesting to note that SEBI has framed guidelines on how to expeditiously dispose such matters. So let us consider this case to know what SAT spoke on these issues.
c) The facts of the case were that the appellant company was the result of a merger between an unlisted company and a listed company. The unlisted company was of far greater size than the listed company. Without going into more details, it may be stated here that a requirement was placed on the appellant to make an offer of a certain number of shares to the public. The appellant initiated the process for this and filed an offer document in 2003. The offer document was held up by SEBI, because SEBIhad initiated proceedings against the company and other parties in relation to alleged violations of the SEBI FUTP Regulations. Till the offer was not made, the shares of the appellant that were issued pursuant to the merger could not be listed. The appellant appealed to SAT against the holding up of such clearance.
d) The Hon’ble SAT noted the fact that there was an undue delay. A huge quantity of shares got held up for listing on account of a small quantity of shares that were required to be offered to the public. The Hon’ble SAT also pointed out that SEBI itself has framed Guidelines for its guidance in such matters and the delay in the present case was against these very Guidelines.
e) The following were some extracts from the Guidelines:
“2. Treatment where show-cause notice has been issued. – Where a show-cause notice has been issued to the entities, observations on draft offer document(s) filed by the issuer with the Board shall be kept in abeyance for a period of 90 days from the date of show-cause notice or filing of draft offer document with the Board, whichever is later. The appropriate authority shall, in a fit case, within the period of 90 days, pass an appropriate interim or final order after hearing the person affected;
Provided that where there is any pending show-cause notice as on the date of issuance of this General Order, the period of 90 days shall begin from the date of issuance of this General Order:
Provided further that any time taken by such entities/notice(s) shall be excluded while computing the 90 days period.
Where no such interim or final order is passed within the period of 90 days, the Board may process the draft offer document for the purpose of issuance of observations subject to relevant disclosures in the offer document about receipt of the show-cause notice and the possible adverse impact of the order on the entities.”
9. Allowing the appeal and directing SEBIto dispose of the application within six weeks, the SAT observed as follows :
“The Board itself observes in this order that no person is presumed to be guilty unless proved to be so and, therefore, it would be in the interest of the investors and the securities market that their application for the consideration of offer documents be considered and disposed of within a reasonable period even when proceedings against such entities are contemplated or have been initiated. The guidelines framed by the Board provide that the offer documents are to be disposed of within a period of 21 days, but in the case of entities against whom proceedings are either contemplated or have been initiated, the same shall be disposed of within a period of 90 days. This period has long expired and no action has been taken. There is logic in what the Board has said in the general order. In the case of offer documents presented by entities against whom any regulatory action is contemplated or to whom show-cause notices have been issued, the Board insists that they ‘should make all relevant disclosures in the offer document including the receipt of show-cause notice and the possible adverse impact it could have, so that the investing public is adequately informed. The purpose of these disclosures is to enable the investing public to make informed investment decisions. It follows and the Board is aware that in the case of such entities, the consideration of the offer document is not to be withheld till the disposal of the proceedings against them, but relevant disclosures are to be insisted upon. In the case in hand, the Board should and, we have no doubt that it shall, insist for such disclosures and leave it to the public to invest or not. Whoever then invests shall do so with eyes open and will have no cause to complain later. The guidelines also provide for such disclosures. This is in accordance with the scheme of the Act, different regulations and guidelines framed thereunder. The Board as a regulator has a duty to protect the interest of the investors and to promote the development of and to regulate the securities market by such measures as it thinks fit. It thought fit in its wisdom to issue the general order, which in our opinion, is in the interest of investors and the securities market and there is a recital to this effect in that order. In view of the general order passed by the Board, it should have itself disposed of the letter of offer as per the procedure stated therein.”
a) In conclusion, I may add that parties do not merely face the problem of delay of clearances, etc. but often, a more serious issue arises, viz., if, during pendency of such proceedings, the party has to make an application for renewal of registration or they propose to make an application for registration as another form of intermediary, the entity faces the possibility of its application being rejected on the ground that it is not a ‘fit and proper’ person (see the column in this series for September 2007 issue of BCAJfor several such examples). ‘Justice delayed is justice denied’ may sound to be a cliche, but the impact of this denial of justice is really experienced only by persons whose proposals are indefinitely put on hold or, worse, rejected, on account of such pending proceedings.
Hence, speedy disposal of such issues is advocated and this is what SAT suggests in this decision.
