Why SEBI's powers are not all-encompassing

D. Sampathkumar

ARE SEBI's powers to issue directions to market participants all-encompassing? While SEBI itself felt so, the Securities Appellate Tribunal (Tribunal) thinks otherwise. That is the inference that one draws from the latest ruling of the appellate body in the Sterlite Industries' case.

The company was accused of manipulating its share price and, under the powers conferred on it under the law, SEBI ruled that it shall not access the capital market for a period of two years. The Tribunal, after an examination of the law and relevant principles, ruled that such a power (to issue directions) cannot be extended to an order _ essentially punitive in nature _ directing a company to desist from undertaking an activity.

The law constituting the Securities and Exchange Board of India (SEBI) casts an obligation on SEBI to protect the interests of investors. It also casts a burden on the body to promote the development of the securities market and to regulate its functioning. And how is it supposed to do this? The Act merely says that SEBI can take such measures as it deems fit.

Further, it also stipulates that the agency shall specifically formulate regulations aimed at prohibiting fraudulent and unfair trade practices relating to securities. Regulations in this regard would thus seem to be clearly within the purview of investor protection and development of the securities market. Viewed thus, any direction issued by SEBI in this context would be well within its powers.

But why does the Tribunal think the SEBI order prohibiting Sterlite from accessing the capital market for two years is ultra vires its powers? One, because the order is neither preventive nor remedial in nature in the context of market manipulation. Two, while the law empowers SEBI to issue such directions as it deems fit in the interest of investor protection or orderly conduct of securities transactions in the market, it has also entered a caveat.

The power to issue directions are circumscribed by the requirement that such directions be within the provisions of the SEBI Act. The ban on accessing the capital market is punitive in nature, but only specific penalties for specific offences have been spelt out in the SEBI Act. The ban on Sterlite is outside the penal provision in the Act.

In the Tribunal's view, the SEBI direction is not preventive in nature as prohibiting the company from accessing the market does not in any way inhibit it from indulging in market manipulation, which is what the company stood accused of. Barring a company from accessing the capital market cannot remedy an act of market manipulation indulged in three years ago.

The Tribunal thus held that SEBI exceeded its brief in imposing such a penalty. It is a penalty because it takes away the company's right to mobilise money from the public to carry on its business. The Tribunal also contends that the SEBI order should be seen as a penalty as it has been made in the light of the violation of a regulation; and punishment, by definition, is something imposed for violation of a law or rule.

Interestingly, a Division Bench of the Gujarat High Court ruled that a SEBI order impounding the proceeds of some money due from a stock exchange for concluded transactions is within the powers of SEBI. Viewed in the light of reasoning advanced by the Tribunal, one can argue that impounding of proceeds does not in any way prevent the company from indulging in manipulative transactions if we assume that the offender had other means to continue with such unfair practices. Nor does it remedy the wrong of past manipulation.

What is a preventive measure? Criminal jurisprudence has attested to the efficacy of exemplary punishment as a deterrent to wrong-doing by others. In that sense, telling Sterlite it cannot access the market for the next two years is a preventive measure, as it could act as a deterrent against market manipulation by any other entity. That is, assuming that Sterlite is indeed guilty as ruled by SEBI.

But that is not now how the Tribunal sees it. Clearly, it would like to adduce a somewhat narrow meaning to the power conferred on SEBI to issue directions to market participants. In its view, SEBI's power to issue to directions could only be of such a nature as applies across all market participants _ such as directions on corporate information disclosure, or revised trading rules.

Alternatively, any participant-specific direction could only be of the general `cease-and-desist' kind the MRTP Commission issues in cases of restrictive trade practices. But SEBI would like such directions to be all-encompassing. If SEBI were a matrimonial authority entrusted with the task of promoting the ethical treatment of spouses, the Tribunal's view of a statutory power to issue to directions would be restricted to issuing `cease-and-desist' type orders for prospective assault rather than any direction prohibiting remarriage (assuming bigamy is permitted) for past instances of spouse-beating.

The legislative intent is rather unclear at this stage. The legislature has been known to render the regulatory authorities effete by denying them any substantive powers. Viewed thus, the Tribunal may be closer to the truth in interpreting legislative intentions in a somewhat narrow fashion.

On the other hand, in an increasingly complex world, the empowerment of regulatory authorities so that they carry out their mandate in a dynamic manner may be the best course of action. The time has come for Parliament to let the public know where it stands in the matter of rule-making powers of such parastatal authorities.