India: With Great Power Comes Great Responsibility

Last Updated: 26 October 2016
Article by Somasekhar Sundaresan

Courts have, by and large, been supportive of power whenever Sebi has used it in extraordinary circumstances.

The Securities Appellate Tribunal (Sebi) has spoken. The Tribunal has ruled that extreme powers to take extreme measures should be used with extreme caution. Sections 11 and 11B of the Sebi Act, 1992, which represent the equivalent of anti-terror laws such as TADA and POTA, have been liberally and frequently used since their inception - the mid-1990s.

The jurisprudence on these powers has kept swinging, with regulators getting governments convinced that blanket powers to "issue such directions as deemed fit" are critical for effective regulation of markets. Section 11B was inserted into the Sebi Act in 1995 - about four years after Sebi got statutory powers. It empowered Sebi to issue such directions as it deems fit in the interests of investors in the securities market.

This power has historically been used to issue ex parte (without giving the person acted against, any chance to have a say) directions of varying creativity. These include directions not to deal in securities, not to access the capital markets, not to be associated with market intermediaries, not to deal in specific securities, not to sit on the boards of listed companies (just to name some examples).

Once an ex parte direction is given, it is but human frailty to do one's best to bend over backwards to justify and demonstrate how the original direction was not wrong. After the initial order, one can scamper to start asking questions, collecting facts and enquiring into the case.

Often the directions are "confirmed" after a personal hearing, and even more often, "final orders" are passed concluding that the directions should be imposed like a penalty even while other proceedings continue "uninfluenced by the observations in the order" containing the directions.

Extraordinary facts lead to extraordinary law, and courts have by and large been supportive of the power whenever Sebi has used it in extraordinary and provocative circumstances - holding that even post-decisional hearings would render such usage to be legitimate.

In short, these directions were used in the nature of arrest and suspension of liberties when investigations were underway. When deployed in circumstances that were not really provocative, or in a situation that was not an emergency, courts ruled that Section 11B was an emergency power and should not be used as a punitive measure and should only be used as a response to an emergency.

That led to the regulator lobbying to get Section 11(4) into the Sebi Act, which was introduced in 2002 (this time, the provision rode the back of the Ketan Parekh scam). Under this section, the power to issue directions could be used either pending investigations or upon completion of investigations - thereby removing the emergency nature of the powers under Section 11B. Some courts ruled that even Section 11B could be used even as a final measure after investigation. The usage then became even more liberal. When a policeman arrests a person, he has to satisfy a magistrate that the suspension of liberty was critical to enable custodial interrogation, or to prevent the accused from tampering with evidence or intimidating witnesses. The usage of Sections 11 and 11B did not need any court to approve of their usage - the regulator could use the power at will, the only remedy being a statutory right to appeal in the Tribunal or a writ petition in a constitutional court. Typically, the only defence of an ex parte order to present would be to show how bad the facts are, without having to justify how the restraint is linked to aiding the investigations.

The provisions that enabled these powers were not pulled out of the hat. They were first found in Section 35A of the Banking Regulation Act, which enabled the Reserve Bank of India to issue directions in the interests of depositors of banks. Identical powers are now replicated for every regulator of every sector that has a regulator. The most creative of usage has been by Sebi since 1995. The RBI is not known to have used this liberally, perhaps contained in its approach by the risk of spreading panic even while intending to protect depositors. Other regulators are yet to get develop an appetite for using the power.

"Power of the kind that the Respondent possesses begets a monumental responsibility and needs to be exercised with great care and caution...giving every party an opportunity of being heard is one of the most significant limbs of natural justice. Although, Sebi does have the power to pass ex-parte interim orders in certain cases, it must do so only upon showing the existence of circumstances which warrant such a drastic measure," the Tribunal has said in a recent ruling.

"It is indeed accepted that the necessity for speed may call for immediate action in a given case and the need for promptitude may exclude the duty of giving a pre-decisional hearing to the person affected. At the same time, in such situations, there is an inherent need to show that the danger to be averted or the act to be prevented is so imminent that the pre-decisional hearing must be dispensed with."

Originally published by Business Standard, December 8, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.