Sucheta Dalal :Sebi gets more elbow room to enforce discipline
Sucheta Dalal

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Sebi gets more elbow room to enforce discipline  

May 29, 2006

It comes following a Supreme Court order laying down a set of principles for trying financial crime


Over the past decade, the Securities Appellate Tribunal (Sat) has overturned dozens of significant regulatory actions by applying exacting standards of criminal justice to civil cases involving transgression of financial regulations which attracted monetary penalties. Last week, the Supreme Court upheld the Securities and Exchange Board of India’s (Sebi) imposition of a Rs 5 lakh penalty on Shriram Mutual Fund and Rs 2 lakh on its asset management company for violating certain trading limits. More important, it established a set of principles for trying financial crime that will go a long way in strengthening Sebi’s punitive powers. The degree of violation in the Shriram Mutual Fund case was not significant, but the apex court ruling has immense implications for the capital market.


Quashing a 2003 Sat order, Justices AR Lakshmanan and Lokesh Singh Panta said: “In our opinion, mens rea (criminal intention) is not an essential ingredient for contravention of the provisions of a civil act” and “breach of a civil obligation which attracts penalty under the provisions of an act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not.” The judges also made it clear that the “Tribunal had set a wrong precedent and the powers of the Sebi to impose penalty were severely curtailed” by Sat’s order.


For several years now, Sat has given a lot of grief to the market regulator by quashing scores of orders for failure to establish criminal intent. Top business houses have often spent more money on expensive lawyers to get rid of the stigma of a Sebi indictment than the penalty imposed on them. After the apex court’s ruling, procedural violations of Sebi rules will, hopefully, be treated like traffic offences, where you are punished for speeding or jumping a signal, whether you did it intentionally or were merely careless and distracted.


The Supreme Court has held that “the intention of the parties” violating the Sebi Act is “wholly irrelevant” and that the Sat order had, in fact, set the stage “for various market players to violate statutory regulations with impunity and subsequently plead ignorance of law or lack of mens rea to escape the imposition of penalty.” Consequently, legal eagles have been expanding their business by focussing on technicalities and absurd precedents to get their guilty clients off the hook.


• In the past decade, many important Sebi orders have been overturned by Sat

• Sat would either strike down or reduce the penalties imposed by Sebi

• SC has said Sat was setting a wrong precedent by setting aside Sebi orders


In one case, Sat even decided to “rehabilitate” an appellant indicted of insider trading, saying: ‘‘Taking into account the peculiar facts and circumstances of the case and in order to rehabilitate the appellant, this Tribunal desires that the impugned order should not be treated as a stigma.”


Financial regulation around the world is based on the principle that crippling financial penalties are more effective in dealing with financial crime by creating a disincentive to “profit” by breaking the rules, cutting corners and indulging in insider trading. That is why the powerful Securities and Exchange Commission (SEC) in the US closes cases through hefty “financial settlements” where the charge and its settlement amount is widely publicised but without an explicit admission or denial of guilt.


In India, Sebi has no powers to settle cases. But, even when the government amended the Sebi Act in 2002 to permit it to impose hefty penalties going upto three times the illegal profit, Sat has been busy striking down penalties or slashing these to a fraction of those imposed by Sebi. These orders often showed no understanding of the power of penalties or public disgrace in ensuring compliance with the rules. That is exactly what the Supreme Court said last week when it declared that: “The Tribunal has miserably failed to appreciate that by setting aside the order of the adjudicating officer (of Sebi), the Tribunal was setting a serious wrong precedent whereby every offender would take shelter of alleged hardships to violate the provisions of the Act.”


The apex court’s order will give more elbow room to the regulators to enforce market discipline, but it must ensure that its adjudicating officials act with maturity and do not vitiate their powers by imposing absurdly high penalties for minor violations.


-- Sucheta Dalal