The crisis that SAT is heading towards

On November 1, 2012, this blog had a poston a writ petition relating to the absence of a Presiding Officer in the Securities Appellate Tribunal (“SAT”).   I wrote a piece in the Business Standard in my columnon November 12, 2012 about how the SAT needs to be handled with care.

Since then, some more facts have become apparent.  One of the remaining two members of the SAT will retire right after Christmas, which would render the SAT as a dysfunctional one-man tribunal again – a position it was placed in, around January 2009.   It would not be open to the SAT to then conduct any final hearing, and it may only admit appeals and grant interim relief.

Worse, members of the SAT are selected by a committee comprising the Union Finance Secretary, the Reserve Bank of India Governor and the Presiding Officer of the SAT.  The Presiding Officer chairs this committee.  Now, there is no Presiding Officer and therefore, appointment of another member, could itself be rendered difficult, and could lead to litigation in the current environment, where any statutory appointment is prone to being a subject matter of challenge.

Exclusion of Jurisdiction of Civil Courts under the SEBI Act

Legally India has made available certain expert witness statements filed before US Courts in the class action litigation concerning Satyam, which was recently settled. One of the witness statements, by Mr. Sandeep Parekh, makes an interesting point; but I am not entirely sure of the tenability in law of that point. Mr. Parekh’s declaration / statement as an expert witness is available here. I am concerned in this post particularly with the claim made by Mr. Parekh in para 11(a) of his statement: “Private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act.” Essentially, this means that a private party cannot maintain a suit in tort in respect of the “Satyam fraud”. Mr. Parekh’s reasoning is effectively based on the bar on jurisdiction in Section 15Y and Section 20A of the SEBI Act. He also places reliance on a Bombay High Court judgment in support of this proposition. With great respect, it is submitted that none of these reasons are strong enough to support Mr. Parekh’s conclusion.

Section 15Y says:

“No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.”

The key phrases here are, (a) “no court shall have jurisdiction” (b) “to entertain any suit or proceeding” (c) “in respect of any matter which an adjudicating officer appointed under this Act… is empowered by or under this Act to determine.” The issue turns on the scope of (c) above. Are tort claims within the scope of “any matter” which an adjudicating officer or SAT is entitled to determine? In my submission, no. The adjudicating officer is entitled to examine violations of the Act; he has no powers to determine any tortuous liability whatsoever. The same facts which give rise to a statutory violation may very well also constitute a tort claim – this does not mean that the adjudicating officer has jurisdiction to hear and decide the tort claim as well as the statutory violation.

To get over this reasoning, Mr. Parekh relies on the judgment of the Bombay High Court in Kesha Appliances v. Royal Holdings Services Ltd. He relies specifically on this sentence: “The contention of the learned counsel for the plaintiff that there was a pre-existing common law right under section 9 of the CPC and that pre-existing common law right is not taken away by the provisions of sections 15Y and 20A also cannot be accepted.” In Kesha, however, the right in question was a right of rectification. The very next sentence in the judgment says, “It is because the common law right of rectification which is sought to be enforced and exercised by the plaintiff in the present case arises out of the right conferred on the basis of Take Over Regulations and once the provisions of the Take Over Regulations are invoked then the entire jurisdiction by virtue of the provisions of Section 15Y and 20A is exclusively conferred on the SEBI authorities.” 

The right to maintain an action in deceit or in negligence does not arise out of any provision in the SEBI Act. In Kesha Appliances, the case of the plaintiff was that certain preference share allotments to one defendant by another defendant were violative of Regulation 12 of the Takeover Regulations and hence illegal. Accordingly, the plaintiff sought for rectification. Thus, the actual right which the plaintiff was exercising was a right arising out of statute/regulation – in other words, the statutory violation was an essential basis for challenging the allotment and seeking for rectification. 

The case with a tort situation is in my submission completely different. The Kesha judgment itself clarifies, “Though it is not necessary still I feel it is important to clarify that when the rectification of the share register is dehors the provisions of the Takeover Regulations or any other provisions of the SEBI Act and rules and regulations made thereunder then the court would certainly have jurisdiction to entertain and try such a suit under Section 9 of the CPC. It is because what is barred under section 15Y and 20A is only those acts which falls either under the said Act or under the regulations framed thereunder.” The reason why in Kesha it was ultimately held that there is a bar on jurisdiction is this: “the entire suit is based on the sole ground of violation and/or breach of the Take Over Regulation and no other ground has been invoked for rectification of the Share Register.”

In one of the footnotes to his statement, Mr. Parekh also relies on the decision of the Delhi High Court in M.R. Goyal v. Usha International. In that decision, too, it was found that “on the basis of the averments made in the plaint and the contents of the application, it is apparent that the main thrust of the case of the plaintiffs is that the impugned notice issued by defendant No. 1 is in violation of the guidelines issued by the Sebi Act and the rules and regulations framed thereunder.”

In my view, these decisions are clearly distinguishable from a case where the cause of action is not a statutory/regulatory violation but a tort. If at all, clarificatory observations in Kesha support the proposition that a tort claim can be decided in civil courts notwithstanding the SEBI Act bar on jurisdiction.

Mr. Parekh then highlights the fact that any penalties collected by SEBI would go to the SEBI and not to shareholders of Satyam. This is eminently logical if the shareholders are entitled to a remedy in tort. Thus, the fact that penalties would go to the SEBI would – if at all relevant – tend to support the argument that civil claims are not barred.

It is submitted that, with great respect, a legally untenable result will be reached if one says that the SEBI Act bars a suit in tort in the circumstances. 

Use Ex Parte Powers Abstemiously

An “ad interim, ex parte” order passed by SEBI, directing companies in the Sahara Group not to raise funds by way of placement of their debentures, led to a debate here over interim reliefs granted by courts, after the Allahabad High Court stayed SEBI’s order. The Supreme Court has now refused to stay the stay granted by the Allahabad High Court.

Sections 11 and 11B of the SEBI Act, 1992 confer extraordinary powers on SEBI to issue orders without hearing the parties that would be affected by the order – an exception to the general rule of natural justice. Courts have indeed held that a post-decisional hearing would remedy what would otherwise be considered to be a deviation from the settled principle of natural justice i.e. of hearing a party before condemning it. Therefore, these provisions in the SEBI Act should indeed be read as conferring on SEBI the power to step in and take urgent action.

Therefore, the key issue is: When would circumstances justify a bending of the principle of natural justice, and permit an ex parte regulatory intervention, to be remedied by a post-decisional hearing? In my view, putting a person out of the market, or asking him not to deal in securities, or not to carry on business of a certain nature, until further notice, is a serious intervention and therefore should not be lightly invoked.

These are interventions that may be well-intentioned, but whether they are necessary, is an issue that one should have to answer every single time. Over the past ten years, the practice of SEBI restricting a person’s constitutional right to carry on business and to lead life by way of ex parte orders has gained currency. For example, a few years ago, a fund manager was asked not to deal in securities until further notice. The reason used to justify the intervention was that the media reported that he had plans to start a mutual fund – an activity that in any case cannot be conducted without a license from SEBI, which itself entails a huge process of scrutiny by SEBI. Another example is the repeated assertion by SEBI that a particular depository was “complicit”, “negligent”, “fraudulent” and part of a “device” in the occurrence of what is called the “IPO scam”. Even requests for a hearing were ignored and more and more “ad interim” orders were passed. (Disclosure: both these examples are of clients represented by me).

Emergency powers are not unheard of. Even preventive detention of a person (impeding his constitutional right to move about the nation) has been upheld as constitutional but always subject to stringent safeguards. An economic equivalent of such detention, equally, ought to be subject to serious safeguards, and such powers should be used more as an exception to deal with exceptional cases, rather than as a norm, to be used routinely in all cases.

Any regulator or policeman or arm of the State should have very good reasons to put a person out of freedom without even hearing his side of the story. Ideally, regulators such as SEBI (other regulators too have similar powers – it is only SEBI that is thankfully subject to quasi-judicial review of its orders) should develop a transparent and publicly known policy on the parameters within which it would inflict a serious intervention into a person’s life.

Such power should be used in rarest of rare cases, and the regulator should demonstrate what harm would be caused to its regulatory constituency but for such intervention.