There is an impression — little exaggerated of course — that SEBI can punish anyone for any thing it deems wrong and in any manner it deems fit ! This belief seems to have its basis if one considers some of the amendments made and laws introduced over a period of time. This belief is further reinforced by decisions supporting these wide powers of SEBI.
For example, there is a term commonly used in securities laws — ‘person associated with securities markets’ — this term almost gives an omnibus power to cover any person directly or indirectly connected with securities markets. Investors, auditors and even independent directors have been held to be ‘persons associated with securities markets’ and thus action has been taken against them for alleged wrongs. It is important to highlight this since there are many persons such as insiders, acquirers which have been specifically defined in securities laws — who can be acted against only if it is first demonstrated that they do fall within the definition.
This impression is further supported by the areas in which SEBI can issue directions. These terms are also of wide import — for example:
Directions can be issued for purposes such as ‘in the interests of investors’ or ‘orderly development of securities markets’.
A clause in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 reads that “no person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner”.
‘Power to issue Directions’ — this term is capable of a fairly wide interpretation.
‘Power to punish’ may mean penalty, suspension or cancellation of registration, debarring a person from dealing in securities for a specified period.
Provision prohibiting indulging in ‘fraudulent or an unfair trade practice in securities’. There are numerous acts/omissions specifically listed which are deemed to be fraudulent or unfair trade practices. It is often found in actual cases that several of these provisions in the law are thrown at the alleged culprit and even the final order usually lists a long list of provisions that are said to have been violated by a single act/omission.
However, a well-settled principle of law is that the crime and punishment both have to be well defined and the person who is supposed to obey the law also has to be specified. This principle is obviously applicable even to securities laws and thus one occasionally sees decisions that strike down an order of SEBI on this ground. The recent decision of the Securities Appellate Tribunal (‘SAT’) in the case of G. M. Bosu & Co. Private Limited v. SEBI and others, (Appeal No. 183 of 2010, dated 15th February 2011) is worth reviewing in this context.
The facts of the case show a long series of steps a defrauded investor had to take to get back her money. Simplifying the facts a little, it appears that an investor was defrauded by a person who sold her shares in the open market by taking her signature on some forms. These signatures were taken on the pretext that they were required incidental to transfer of shares from her deceased husband’s name to her name. Such person, who was an ex-employee of a depository participant, then allegedly sold the shares in the market and thus defrauded the investor. On a police complaint being made, he confessed his guilt and agreed to compensate the investor. However, he died without compensating her. The investor then initiated a long legal battle in which the essential argument was that she should be compensated by the depository. The legal basis for this was a provision in Regulation 32 (though amended later on) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 which requires that the depository should ensure that payment has been received by the investor before the shares are transferred to a third party.
It is worth mentioning here that the investor had to petition multiple authorities multiple times including finally facing, albeit indirectly, the SAT. Suffice it is to state that SEBI investigated the matter and held the depository participant concerned (DP) (which was the appellant here) responsible for the lapse in non-complying with the said Regulation 32. It ordered the DP to credit the account of the investor with the 100 shares with all benefits accrued on the shares (incidentally, the 100 shares had become 1500 shares by then). This direction was issued by SEBI exercising powers under sections 11 and 11B of the SEBI Act.
The DP went in appeal to the SAT pointing out that SEBI did not have any powers to direct the DP to give such compensation to the investor u/s. 11B of the Act. It pointed out that Regulation 64 of the SEBI Depositories Regulations clearly stated that in case if a depository participant who “contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations . . . . shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008”. In other words, it was argued that action could only be taken under the said SEBI (Intermediaries) Regulations, 2008 and resorting to section 11B and requiring payment of compensation by way of credit of the shares to the account of the investor was not in accordance with the law.
The SAT noted:
Firstly, the obligation of complying with Regulation 64 was on the depository and not on the depository participant.
Secondly, even assuming that there was a violation by the DP, the provisions of Regulation 64 and thereby the provisions of the SEBI (Intermediaries) Regulations should have been followed in taking action against the DP. This is what the SAT observed:
“Assuming (though not holding) that there was such a violation, Regulation 64 of the regulations requires that the depository or a participant who contravenes any provision of the regulations “shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.” The word ‘manner’ means that the procedure laid down in Chapter V of the intermediaries regulations shall have to be followed. Regulations 24 to 30 in that chapter provide the detailed manner/procedure according to which the delinquents are to be dealt with. These provisions envisage a two-stage inquiry before taking any action against the delinquent. A designated authority is required to be appointed which shall issue a show-cause notice to the delinquent and after holding an inquiry, a report shall be submitted. The report will then be considered by the designated member after issuing a notice to the delinquent who will also be furnished with a copy of the report. It is only then that the designated member can take any one or more of the actions referred to in Regulation 27 of the intermediaries regulations keeping in view the facts and circumstances of the case. Admittedly, this procedure has not been followed and neither the appellant nor the depository were dealt with in the manner prescribed in Chapter V of the intermediaries regulations. Instead, directions have been issued u/s. 11B of the Act to compensate respondent 3.”
Finally, the question was whether the powers u/s. 11B were wide enough to order such a compensation being made by the DP. The SAT observed as follows:
“It is true that the powers of the Board u/s. 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to pun
