SAT criticises Sebi for passing conflicting orders on similar securities law violations

MUMBAI: The Securities Appellate Tribunal took the capital market regulator to task for passing conflicting orders on similar securities law violations. In an unusually strong rebuke to the Securities and Exchange Board of India (Sebi), the tribunal said the regulator was "blindly supporting" adjudicating officers, terming its conduct in a case as "disgraceful."

The Securities Appellate Tribunal (SAT) was hearing the case between Sebi on the one side and Krishna Enterprises and Rajesh Service Centre on the other. The entities had appealed to SAT against Sebi fining them Rs 20 lakh on two securities law violation charges each. The regulator had alleged that the two entities aided Edserve Softsystems in siphoning off proceeds from its initial public offer, thereby causing loss to shareholders.

SAT observed that Sebi had charged the entities with two separate violations and accordingly imposed two separate penalties in the order posted on its website on Friday.

In another case — Kejas Parmar versus Sebi — similar to this one, the regulator had applied provisions relating to two violations together and not separately. This led to the regulator imposing a common penalty.

SAT was irked by Sebi’s lawyer saying that the regulator stood by both its decisions. "We are surprised by the attitude adopted by Sebi," said the three-member SAT bench headed by Justice JP Devadhar.

Passing conflicting orders and defending them doesn’t "promote the development of the securities market," it said.

"The conduct of Sebi in supporting the orders passed by its adjudicating officers which are mutually contradictory in nature and give leverage to the officers to impose penalty as it suits them, clearly shows that Sebi is blindly supporting the orders passed by its officers in spite of the fact that the said orders are detrimental to the interests of the securities market. Such a conduct on part of Sebi is disgraceful to say the least," the bench said.

SAT quashed the regulator’s order and sent the case back to the adjudicating officer.

Securities lawyers cited the ruling to call for a change in laws.

"A strong securities tribunal is the only counter balance to a strong regulator like Sebi," said Manshoor Nazki of Luthra & Luthra Law Offices. "This recent order is an example of the very important role that SAT has to play to ensure that a regulator like Sebi is kept in check while passing penalty orders."

The entire mechanism needs to be reviewed so that adjudicating officers pass orders that are consistent, said Sandeep Parekh, founder, Finsec Law Advisors and a former Sebi executive director.

"Similar quantum of penalty should be imposed for similar offences," said Parekh. "Adjudicating officers are considered independent within Sebi and there is in fact no interference with their working. It is this independent working which causes different outcomes in different places."

Bombay High Court advocate Vaneesa Agrawal agreed. "Without the in-house coordination between various adjudicating officers, these issues are likely to continue. However, Sebi can make its policy view commonly known to all the adjudicating officers to bring uniformity in their orders. In that respect, SAT’s order is a good guidance."