Powers and Functions of SEBI

This article provides the “Powers and Functions of SEBI”. SEBI is vested with many powers to fulfil the functions which are vested upon it for the regulation of the securities market.

The basic features of the SEBI Act are contained in Sec 11. The primary objectives of this Act, which are stated in Preamble, are again repeated in subsection 1 of this section i.e. promoting the development of the securities market, regulating the securities market and protecting the interests of those who are willing to invest in securities.

In addition to this, the Act casts a duty upon SEBI to function in order to accomplish these objectives.

TRANSFER OF ASSETS, LIABILITIES, ETC. OF THE EXISTING SECURITIES AND EXCHANGE BOARD TO THE BOARD

The establishment of SEBI in the form of an administrative body was done on 12.04.1988. SEBI works under the administrative control of the Ministry of Finance of the Central Government. SEBI became a statutory body only after the enactment of the SEBI Act, 1992.

Since it has already been working under the auspices of the Central Government, SEBI had accrued various liabilities, assets, entered into contracts, engaged with employees and so on with the objective of proper functioning. Sec 10 has served the purpose of transition by enabling the statutory body to become the statutory successor of the administrative body.

FUNCTIONS OF THE BOARD

SEBI was formed with the motive of regulating the stock market of India. In addition to this, there are various other functions of the securities and exchange board of India.

In spite of the onerous ‘duty’ which is cast upon SEBI by the Act, its failure to pinpoint any deficiency with respect to the disclosure of a fact that SEBI cannot refuse to be ignorant of was adversely commented on by SAT. Not only this but various remarks were also made by SAT despite the standard disclaimers SEBI mandates to be inserted in the offer documents in connection to the adequacy and accuracy of disclosures.[1]

While SAT was interpreting the words of Sec 11, it has also observed that “The Act with the help of Sec 11 enjoins a duty on the Board that it ought to protect the interests of the securities market.

This duty makes an obligation on the Board that it has to ensure that unaccounted/ tainted money should not come into the securities market of India.”[2]

MEANING OF “…such measures…”

Since there is no definition of the expression ‘measure’, it is understood in its general meaning as “ anything which is done or desired with an objective of accomplishing a plan, a course of action or a purpose with the intention of obtaining some course of action, any object adopted or proposed by a Government”. In addition to this, the power to issue directions under Sec 11B has also been held to be relatable to the provisions of Sec 11 (1).[3]

The domain of the expression ‘such measures’ is considered to be very wide in nature due to the words ‘without prejudice to the generality of the foregoing provisions’ with which subsection 2 of sec 11 begins. It has also been stated that the ‘measures’ can also be in relation to the matters provided for under subsection (2) and may also extend beyond those.[4]

MEANING OF “… as it thinks fit …”

Judiciary has recognised the necessity of giving respect to the views or opinions of the body of experts. Along with this, it has also been observed that “considerable amount of recognition should be given to the executive department’s construction of a statutory scheme which it is entitled to administer as well as the principle of deference for interpreting administratively which has been followed by the Courts consistently whenever decision with respect to any meaning or reach of a statute is involved in order to reconcile the policies which are conflicting in nature and a full understanding of the force of the statutory policy in any given circumstance has found its basis on the ordinary knowledge respecting the matters which are subject to the regulations of any agency.”[5] This view has also been subscribed by many Indian courts.[6]

MEANING OF “ … regulate …”

Besides the duty of SEBI to regulate the securities market, as provided under subsection (1), and under clauses (a) (b) (ba) (c) (d) (h) of Subsection (2), It has also been empowered to take ‘measures’ for “regulating” certain statutorily specified matters. To determine the expression regulate, in this context we refer to the Essential Commodities Act, 1955 which expresses, “ power to rule, direct and control, and involves the adoption of a rule or guiding principle to be followed, or the making of a rule with respect to the subject to be regulated.

The power to regulate implies the power to check and may imply the power to prohibit under certain circumstances, as where the best or only efficacious regulation consists of suppression” 1 and is inclusive of the power to prevent within its fold should the circumstances so demand.[7]

MEANING OF “… without prejudice to the generality of the foregoing provisions …”

Subsection 2 of section 11 which begins with the words ‘ without prejudice to the generality of the foregoing provisions’, speaks about those cases which the Board may provide for. This provision has to be read as illustrative and not exhaustive of the matters that can be heard by the Board while discharging all its duties as provided by subsection (1).[8]

The Board is also allowed to take various other measures which may not be enlisted under subsection (2) but are not in contravention with the duties, which are cast on it.[9] The wide scope of subsection (1) is not narrowed down or restricted by the subsection (2).

STOCK EXCHANGE AS ‘STATE’ UNDER CONSTITUTION

In the matter of Delhi Stock Exchange & Anr. v. KC Sharma & Ors.,[10] the Delhi High Court has ruled after the extensive survey of the case laws that stock exchanges come under the purview of ‘state’ as defined under Art 12 of the Constitution. In addition to it, the Court has also ruled that the stock exchange also carries out important public/ state function which revolves around completely regulating and controlling those actions relating to the transactions of securities in the country.

Similarly, in the case of National Stock Exchange of India Ltd. v. Central Information Commission,[11] stock exchange was given the status of a ‘ public authority’ as defined by sec 2(h) of Right to Information Act, 2005. In relation to this, it was also observed that SEBI is an authority which cannot be approached in order to procure the information from stock exchanges with the primary motive of providing that information to any person who wants to seek it as a public authority under the provisions of Right to Information Act, 2005 can only be approached to seek information that it holds.[12]

POWERS OF CIVIL COURT

Securities Laws (Amendment ) Act, 1995 (Act No. 9 of 1995) was used to insert the subsection 3 of section 11, which provides for the powers of civil court in order to strengthen the powers of SEBI that were given under the then-existing section 11(2)(i). Before any amendment was brought to the provisions of this Act in 2002, Section 11(2)(i) was the prime source of all the powers to conduct investigating that was vested in SEBI.

By this amendment of 2002, all the powers that are vested in a Civil Court as per the Code of Civil Procedure, 1908 were extended to SEBI as well with the purpose of summoning witness under section 11(3).[13] The framework for the elicitation of true documents and facts were provided by the powers relating to the discovery and production of documents.

MEANING OF “… any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry …”

These words indicate that SEBI can undertake any specified measures during the pendency of the enquiry or investigation or upon completion. Subsection (4) explicitly enables SEBI to undertake swift measures as per the need of the situation. However, prior to the commencement of inquiry or investigation, the Board is not allowed to undertake any measure that is specified in this provision.[14]

It has also been observed by the Calcutta High Court that clauses (a) to (d) of subsection 11 that are similar to clauses (a) to (d) of Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003 are just interim in their nature.[15]

In Bhoruka Financial Services Ltd. v SEBI, SAT has interpreted the words ‘inquiry’ or ‘investigation’ and it was held that the word ‘investigation’ as per this provision speaks about the investigation as referred to under Section 11C though this provision was introduced in 2002 with the help of SEBI (Amendment) Act, 2002 in addition to section 11(4).

Further, it was also held that the expression ‘inquiry’ as per this section refers to the enquiry commenced for the purposes of adjudication under the provisions of SEBI ( Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.[16]

MEANING OF “ … either before or after passing such orders, give an opportunity of hearing … “

The second proviso, which is appended towards the ending of the provision, is a proviso to the entire subsection (4). The requirement of observing the principles of Natural Justice is fulfilled by the words ‘ an opportunity of hearing’. Supreme Court has once observed with the help of its judgment that “ subject to some of the necessary limitations, natural justice is now a brooding omnipresence although varying in its play.”[17]

It is not important that in all circumstance the opportunity to be heard has to be provided prior to taking the decisions to any affected person. Sometimes because of the urgency and sometimes, because the hearing is of a nature that can frustrate the entire objective of the purpose needed, the principle of audi altrem partem can be followed post-decision. With the help of post decisional hearing, a balance is created between such competing claims of ‘hearing and hurry’.[18]

MEANING OF “ … for reasons to be recorded in writing …”

A statutory obligation of passing speaking orders is cast upon the Board. It was observed by the Supreme Court that reasoned decisions passed by the adjudicatory bodies leads to the promotion of public confidence in the administrative process, minimises arbitrariness, introduces clarity and also becomes a mode of satisfaction for the parties to whom the order is delivered.[19]

Normally, it is noted that there are sufficient reasons in the orders passed by SEBI even at the interim stages and due to this, any occasion to examine the result of mere failure to record reason has never arisen.[20]

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[1] JM Mutual Fund and JM Capital Management Private Limited v SEBI, Appeal No. 39- 39A/ 2004, SAT Order dated 22.11.2004

[2] Shailesh M Ved v Adjudicating Officer, SEBI; Appeal No. 63/ 2011, SAT Order dated 06.07.2011

[3] SEBI v Alka Synthetics, AIR 1999 Guj 221 (Later set aside by the Supreme Court in Alka Synthetics v SEBI, [2005] 62 SCL 82 (SC)); See also, M/s Integrated Amusement Limited v SEBI, Appeal No. 07/ 2000, SAT Order dated 08/09/2001.

[4] Karnavati Fincap Ltd. and Alka Spinners Ltd v SEBI, [1996] 87 Comp Cas 186 (Guj). See also, Anand Rathi v SEBI, [2002] 110 Comp Cas 837 (Bom).

[5] Chevron USA Inc. v Natural Resources Defense Council, Inc. et. al. 467 US 837 ( 1984)

[6] R K Garg v Union of India, (1981) 4 SCC 675; See also, Shri Sitaram Sugar Co. Ltd. v Union of India, (1990) 3 SCC 233; Dalmia Cement & Ors. v Union of India & Ors., (1996) 10 SCC 104

[7] K Ramanathan v State of Tamil Nadu & Anr., (1985) 2 SCC 116

[8] Price Waterhouse & Co. and Ors. v SEBI, [2010] 103 SCL 96(Bom)

[9] Karnavati Fincap Ltd. and Alka Spinners Ltd v SEBI, [1996] 87 Comp Cas 186 (Guj)

[10] MANU/DE/0514/2002. Supreme Court had upheld the finding that stock exchange is a state in KC Sharma v Delhi Stock Exchange & Ors (2005) 4 SCC 4. See also, Anil Kr Agarwal v UP Stock Exchange Association Limited, [2004] 53 SCL 119 (All); S Trilochana K Doshi v Stock Exchange of India (2000) 1 Bom LR 642, where it was observed by Bombay High Court that Mumbai Stock Exchange is amenable to writ jurisdiction.

[11] [2010] 100 SCL 464 (Del)

[12] Ravi D Ochani v CPIO, SEBI; Appeal No. 1177/ 2011, Appellate Authority under Right to Information, dated 09.06.2011.

[13] Advance Hovercrafts & Composites India Ltd., Delhi v The Adjudicating and Enquiry Officer, SEBI; Appeal No. 61/ 2005, SAT Order dated 25.05.2005. See also, Padmini Technologies Ltd. v SEBI, Appeal No. 46/ 2005, SAT Order dated 28.06.2005

[14] Bhoruka Financial Services Ltd. v SEBI, [2006] 68 SCL 495 (SAT)

[15] Raj Kr Kishorepuria v SEBI, [2005] 63 SCL 1 (Cal)

[16] It may be noted that SEBI ( Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 have been repealed and replace by SEBI (Intermediaries) Regulation, 2008. Only Chapter V and VI of the said regulations have however been brought into force yet.

[17] Mohinder Singh Gill v Chief Election Commissioner, (1978) 1 SCC 405

[18] Swadeshi Cotton Mills v Union of India, (1981) 1 SCC 664.

[19] M P Industries v Union of India, AIR 1966 SC 671

[20] M J Patel v SEBI, Appeal No. 04/ 2002. SAT Order dated 08.07.2002. See also, LKP Securities v SEBI, [2003] 41 SCL 1; Share deal Financial Consultations Pvt. Ltd. v Chairman, SEBI, [2003] 44 SCL 613; Diwakar Gandhi v SEBI, [2006] 69 SCL 263.

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