(1) The Supreme Court has
recently laid down a principle in securities laws that can have far-reaching
effects for existing and future cases. Essentially, it has held that prohibiting
a person from operating in the securities markets is not a ‘punishment’, nor is
it a penalty. That being so, even if SEBI did not have power to so prohibit when
the act complained of took place, and though such power was derived many years
later, such prohibition can still be made for such act. Undoubtedly, this is
because of the peculiar nature of securities laws and their objectives.
Nevertheless, this decision requires us to view securities laws in a different
light and in a special way and hence this decision, though a few months old now,
is worth discussing.
(2) In an extreme sense (and
even to exaggerate a little), SEBI now does not need powers to punish. A change
in the law is sufficient to cover even old violations. Now, SEBI cannot complain
that it does not have enough teeth to deal with wrongdoers !
(3) Let us summarise the
issues involved first. The law gives powers to SEBI to issue various types of
orders against persons who are found to have violated any of the securities
laws. As it happens with experience, the Parliament modifies from time to time
the law and thus the powers may get enhanced or modified later on. Will SEBI be
able to use such enhanced powers even in respect of violations prior to such
amendment ? Will the constitutional protection under Article 20 against
retrospective amendment of law providing for punishment in respect of offences
be available in such a case ? The Supreme Court has answered this question in
the positive in the context of securities laws in the matter of SEBI v. Ajay
Agarwal.
(4) A brief review of the
facts as stated in the decision is first made. The chronology of events would
particularly need to be noted, since they have direct bearing on the issues
raised and the final decision of the Court.
(5) It appears that the
respondent is the promoter of a company (Appellant is SEBI) that made a public
issue. Without going into more details, it can be summarised that, as per the
decision, there was a factual finding that there were certain material
false statements in the prospectus for the public issue. Pursuant to this,
SEBI held inquiries and after proceedings SEBI passed the final order (‘the
Order’) in 2004.
(6) The chronology of
important events is as follows. The company issued a prospectus in October 1993
and the public issue was made in November 1993. Thereafter, certain incorrect
statements were found in the prospectus relating to disclosures of pledge of
shareholding of the promoters, dividends, etc. Apparently, these were not
disputed. Finally, SEBI passed an order debarring the respondent from buying,
selling, etc. in the securities markets for 5 years.
(7) This order finally
reached the Supreme Court. The essential issue was, since the order was passed
under certain provisions of the SEBI Act that came into force only in 2002,
whether an order could be made in respect of violations committed in 1993.
SEBI’s point was that the order was passed in 2004, i.e., after the law
was amended. It may be added that there were some prior proceedings and issues
but the Supreme Court was concerned with the final order passed in 2004.
(8) This raises a
fundamental constitutional issue (in the words of the Supreme Court) “the right
of a person not to be convicted of any offence except for violation of a law in
force at the time of the commission of the act charged as an offence and not to
be subject to a penalty greater than that which might have been inflicted under
the law in force at the time of commission of the offence”.
(9) The Supreme Court noted
that for this protection under Article 20 to be available, first, there has to
be an offence and, secondly, such offence should be subject to a
penalty.
(10) The Supreme Court noted
that the respondent was not subjected to any penalty. The Supreme Court first
observed, :
“In the instant case, the
respondent has not been held guilty of committing any offence nor has he been
subjected to any penalty. He has merely been restrained by an order for a
period of five years from associating with any corporate body in accessing the
securities market and also has been prohibited from buying, selling or dealing
in securities for a period of five years.”
(11) Then, the Supreme Court
turned to the issue whether the violation in respect of which SEBI had passed
the order was an ‘offence’ as defined in law. The Supreme Court held as
follows :
“The word ‘offence’ under
Article 20 sub-clause (1) of the Constitution has not been defined under the
Constitution. But Article 367 of the Constitution states that unless the
context otherwise requires, the General Clauses Act, 1897 shall apply for the
interpretation of the Constitution, as it does for the interpretation of an
Act.
If we look at the
definition of ‘offence’ under the General Clauses Act, 1897 it shall mean any
act or an omission made punishable by any law for the time being in force.
Therefore, the order of restrain for a specified period cannot be equated with
punishment for an offence as has been defined under the General Clauses Act.”
(12) The Supreme Court then
analysed the history and object of the SEBI Act and observed as follows :
“If we look at the legislative intent for enacting the said Act, it transpires that the same was enacted to achieve the twin purposes of promoting orderly and healthy growth of securities market and for protecting the interest of the investors. The requirement of such an enactment was felt in view of substantial growth in the capital market by increasing participation of the investors. In fact such enactment was necessary in order to ensure the confidence of the investors in the capital market by giving them some protection.
40. The said Act is pre-eminently a social welfare legislation seeking to protect the interests of common men who are small investors.
41. It is a well-known canon of construction that when the Court is called upon to interpret provisions of a social welfare legislation, the paramount duty of the Court is to adopt such an interpretation as to further the purposes of law and if possible eschew the one which frustrates it.
42.Keeping this principle in mind if we analyse some of the provisions of the Act, it appears that the Board has been established u/s.3 as a body corporate and the powers and functions of the Board have been clearly stated in Chapter IV and u/s.11 of the said Act.”
13. Then the Court considered the real nature of the powers that enabled SEBI to pass such an order of restraint. The Court held that this was a procedural Section and any procedural Section can apply to pending as well as future proceedings. The Supreme Court observed:
“Provisions of S. 11-B being procedural in nature can be applied retrospectively… The Appellate Tribunal made a manifest error by not appreciating that S. 11-B is procedural in nature. It is a time- honoured principle if the law affects matters of procedure, then prima facie it applies to all actions, pending as well as future.”
14. Thus, the Supreme Court upheld the order of SEBI restraining the respondent in the manner stated earlier.
15. One observation of the Supreme Court, though may be held as obiter dicta, is still worth noting as it could be taken in an extreme sense by SEBI and applied in its proceedings. It is stated in paragraph 37 of the order of the Supreme Court that:
“Even if penalty is imposed after an adjudicatory proceeding, person on whom such penalty is imposed cannot be called an accused.”.
This statement is not taken further to a logical conclusion perhaps because this was not the issue before the Court. But it would be interesting to see how SEBI views this statement in its later decisions. One can imagine that even if power to levy penalties through adjudicatory orders is procedural, then the powers of SEBI would be even stronger and more discretionary and with lesser safeguards than one would expect.
16. To conclude, the Supreme Court has laid an important precedent not just in terms of the subject matter of this decision, but also in the approach towards interpretation of securities laws and how securities laws should be treated differently. Securities laws, thus, is well on its way to becoming a special and very distinct subject by itself to which many general rules of interpretation may not apply.
