Why SAT orders are an eye-opener for SEBI

KS Badri Narayanan Chennai | Updated on September 14, 2019 Published on September 14, 2019

Some Securities Appellate Tribunal orders draw clear boundaries on the jurisdiction and responsibilities of the regulator

The quashing of SEBI’s order against Price Waterhouse in the infamous Satyam Computer Services scam case by the Securities Appellate Tribunal might have left many market participants puzzled.

Given the magnitude of the scam, the general belief among market participants was that the tribunal might uphold SEBI’s order that had barred Price Waterhouse from undertaking any fresh audit or issuing any certificate of audit to listed companies.

Read more: SAT junks SEBI’s order against PriceWaterhouse

However, the SAT bench of Justice Tarun Agarwala and CKG Nair, in a scathing attack, questioned SEBI’s authority to regulate auditing firms and said that a fraud cannot be proved on the basis of recklessness or negligence in audit. All audit firms in the country are regulated by the Institute of Chartered Accountants of India.

“SEBI has no authority to look into the quality of audit and auditing services. SEBI can only take remedial and preventative action. The direction issued is neither remedial nor preventive. But punitive,” SAT said.

Khoday episode

Some of the other SAT orders also draw clear boundaries on the jurisdiction and responsibilities of SEBI. While quashing a SEBI order against Khoday India, which pursued the reduction of capital route to meet the minimum public shareholding norm, the tribunal said the market regulator does not have any power to question the reduction of share capital under Sections 100 to 104 of the Companies Act.

Khoday India was pursuing the capital reduction route to meet SEBI’s minimum public shareholding of 25 per cent. However, SEBI (through interim and final orders) directed freezing of voting rights and corporate benefits such as dividend, rights, bonus shares, split, etc, with respect to the excess of proportionate promoter/promoter group shareholding till such time these companies comply with the minimum public shareholding requirement.

In another instance, the tribunal had also directed SEBI to use its powers to pass “ex parte interim order” sparingly and only in “extreme urgent cases”. While setting aside SEBI’s March 1 ex parte order against large commodity traders, including North End Foods Marketing (NEFM), RK Commodities and 24 others, SAT reprimanded the regulator “for not following the principles of natural justice by giving the parties a chance of hearing.”

An ex parte injunction is mainly a direction, command to restrain, granted after hearing only one party in matters of ‘urgency’, without a notice to the other parties involved.

SAT had observed that although SEBI was empowered to take measures “as it deemed fit” for investor protection under Section 11A/11B, “it does not mean that in every case, an ex parte interim order should be passed on the pretext that it was imminent to pass such interim order to protect the interest of the investor or securities market.”

Need for dos & don’ts

These are some instances which clearly point out SEBI’s powers and functions. The market regulator should stick to the rule book while passing orders to avoid unnecessary embarrassment. A clear set of dos and don’ts for adjudicating officers, whole-time members and officers while passing orders could help SEBI breach the SAT wall. SEBI can also seek an informal guidance or advice from SAT (or other legal experts) on certain cases, which could help it in better decision-making.

Published on September 14, 2019

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