Synopsis This article touches upon the issue of legal sanctity, enforceability & binding nature of the answers to ‘frequently asked questions’ (FAQs), that are provided by the SEBI. It raises some fundamental questions – whether SEBI has the authority to issue such FAQs, whether these FAQs are binding on SEBI and/or third parties, and can these FAQs override regulations issued by the SEBI?
These challenging questions have been debated in the light of a recent SEBI order where the SEBI-issued FAQS were relied upon & also considered valid in deciding the questions of law. The article, after comprehensive analysis, demonstrates a view that is inconsistent with the view held in the recent SEBI order.
Basic issue
How far are answers by SEBI to Frequently Asked Questions (‘FAQs’) on SEBI Regulations, etc. binding? Can they even be relied on by SEBI? More so, when substantive legal issues are to be decided which may result in grant/rejection of relief to parties or even levy of penalty for violation of Regulations. SEBI has recently passed an Order (dated 30th October, 2014 in matter of Mr. A. B. Gupta) where it relies on the FAQs. Further, SEBI asserts that FAQs are valid and can be relied on by SEBI for answering questions of law.
What are FAQ s?
As is known, SEBI (like many other regulators) issues Frequently Asked Questions (‘FAQs’) from time-to-time (the correct term should be AFAQ – Answers to Frequently Asked Questions, but that is perhaps a semantic issue).
Thus, they are generally answers to specific questions that SEBI anticipates or has received from timeto- time. The answers are usually not reasoned in detail though in some cases, where the Regulation itself answers the question, due reference is given. Often they are answers about how the Regulations would be viewed in practice and also about matters of procedure. Such details may not always be possible to be inserted in Regulations.
However, several questions arise. If the Regulations say one thing and the FAQs something different, or even the opposite, will the FAQs override the Regulations? If the Regulations do not cover certain matters, can the FAQs fill in the gaps and provide for such matters, even if by this it would mean extending or amending the Regulations? In particular, can the FAQs be binding in regard to the Regulations, when these FAQs give clarifications on substantial matters and/or matters which can result in penalty/prosecution or other adverse directions? Indeed, in the other extreme, can SEBI even rely on such FAQs in any manner? ?
How are FAQ s issued?
There does not seem to be any prescribed procedure by which the FAQs are issued. Indeed, as we will see later, there is no legal power or basis to issue FAQs either which gives them any legal sanctity. Generally, they seem to be issued by way of display on its website. It is not clear under whose authority, if any, these are issued – i.e., whether it is issued by the authority of the Board with contents duly confirmed by it, or by the Chairman of SEBI or by a senior official. Further, the FAQs can keep changing from time-to-time and while it appears that at least in a couple of cases, they have highlighted the change and when it was made, it is possible that the FAQs could be changed without any notification. The FAQs can be added to, deleted from, and amended generally from time to time without any notice or even a mention.
SEBI’s order
In this background, let us consider what the recent SEBI Order said.
SEBI, as stated earlier, recently passed an order in which it relied on its own FAQs for arriving at answers to substantive issues of law under the Regulations. While doing so, it made some observations. The case concerns an allegedly hostile takeover and is on some objections made by certain persons against open offer made. The core issues in that case are interesting. However, this post focuses only on one matter and that is on the manner in which SEBI has relied on FAQs (Frequently Asked Questions) on the SEBI (Substantial Acquisition of Shares and Takeovers), Regulations 2011 (the Regulations), released by it.
SEBI relied on the FAQs to arrive at the conclusion on two issues raised. The issues were significant. Depending on which way SEBI had decided it, certain parties could have gained or lost substantial rights. Hence, the Order interpreted the Regulations. Whether the interpretation was correct or not could be a matter of debate. What is worth reviewing here are observations SEBI made while relying on the FAQs.
At first, SEBI relied on the FAQs while answering the issues raised. The complainant objected to SEBI’s reliance on FAQs saying they do not have the force of Regulations. SEBI rejected this argument and said:-
“9. The complainant’s Advocates acknowledged the existence of SEBI’s FAQs as reproduced on pages 15-16 of this Order but argued that FAQs does not have the force of regulations and therefore should not be considered at all. The question before me is whether SEBI can interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it should, otherwise doubts raised about the effect of regulations would bring the entire business to a halt. I am of the opinion that such interpretations are valid so long as these are transparent and applied consistently without discrimination. No case has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise in any other matter, or that SEBI’s interpretation was not known publicly.”
Several questions arise.
– Do FAQs have the force of Regulations?
– Is SEBI’s interpretation expressed through FAQs binding on third parties?
– Does SEBI’s interpretation bind SEBI itself?
Assuming such interpretations are valid, what are pre-requisites for reliance on such FAQs – whether it is enough that they are (i) transparent/published and known publicly (ii) applied consistently without discrimination?
SEBI seems to have taken a view that the FAQs are binding if they are transparent and applied consistently. On one of the issues raised, it even gave a few examples of similar practices adopted in the past where it had applied in practice the same interpretation that it was applying in the present case. However, does practice make or amend law in such circumstances?
Nature of FAQ s as per the FAQ s
Firstly, let us examine the FAQs themselves. This is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations 2011, which are the subject matter of this decision, say:-
“These FAQs offer only a simplistic explanation/ clarification of terms/concepts related to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification that is provided herein should not be regarded as an interpretation of law nor be treated as a binding opinion/ guidance from the Securities and Exchange Board of India [“SEBI”]. For full particulars of laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the Acts/ Regulations/Circulars appearing under the Legal Framework Section on the SEBI website.” (emphasis supplied).
Thus, the FAQs themselves clearly say that are not to be regarded as interpretation of law. Further, they are not binding on SEBI or third parties nor do they have the status of any guidance from SEBI. For knowing the law, it is the actual text of the Regulations, etc. that has to be read.
Nature of Regulations and manner of their issue
The SEBI Act, 1992 empowers SEBI to issue Regulations for certain specified purposes. The Regulations are required to be made – and amended – in the prescribed manner u/s. 31 of the SEBI Act, 1992. They have to be released and notified as prescribed under the Act. They have to be then laid before the House of Parliament for prescribed period. Any changes agreed by the Houses have to be duly incorporated.
Further, violations of the Regulations have significant consequences under the Act and the Regulations them- selves. These include penalties, prosecution, directions, etc. Thus, there is a clear basis of Regulations as a law, clear prescribed procedure of how they are to be made and notified. Finally, it is this clear basis which gives them a force of law such that violations of Regulations have adverse consequences in law.
Whether There is any Power To issue FAQs?
SEBI does not have power under the Act to issue such “clarifications” to the Regulations where such clarifications would have binding force of Regulations, particularly when they contradict the Regulations or result in extended application of the Regulations. Indeed, there is no concept of FAQs under the Act.
There have been several decisions of the Courts and even the Securities Appellate Tribunal that uphold Regulations over circulars. And that in case of any contradictions between the Regulations and circulars, it will be the Regulations that would apply.
Undoubtedly, the FAQs would help a party, particularly a lay person, in throwing some light at what the Regulations are trying to say. They may even be a sort of guidance of how SEBI views certain issues, though it seems from the introduction to the FAQs themselves that they may not be binding even on SEBI.
In case the Regulations are clear, therefore, it is submitted then FAQs have no relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs could be looked into and the views in the FAQs could apply.
It appears that SEBI has erred in stating that the FAQs have any binding legal status. SEBI, it is submitted, cannot take any adverse action in terms of penalties/prosecution/directions by relying on FAQs that contradict the Regulations. The Regulations are self-contained in this sense; the FAQs cannot add or modify the Regulations.
In conclusion, it is reiterated that the issue here is not whether the interpretation given in the FAQs is correct or not, it is on how much, if at all, can they be considered binding on SEBI and/or parties. The better view seems to be that FAQs cannot be relied on at all while deciding on substantive legal issues. They are neither binding on SEBI nor they are binding on any third party.
