Delhi High Court allows Midas Touch Investors Association to be impleaded into the public interest litigation against SEBI’s artibrary Consent Orders

Sucheta Dalal

Despite strenuous objections by the Securities & Exchange Board of India (SEBI) the Delhi High Court has allowed Midas Touch Investors Association’s application for impleadment in the public interest litigation (PIL) challenging the regulator’s powers to settle cases through its ‘Consent’ orders. 

The original PIL filed by one Deepak Khosla against SEBI in 2011 had brought the entire consent proceedings to a halt. Mr Khosla had challenged the very statutory basis of SEBI consent mechanism. 

Interestingly, on 8th August, the Delhi High Court bench of justices AK Sikri and Rajiv Sahai Endlaw, overruled some strenuous objections and pleadings by SEBI and allowed the investor association to be impleaded in the case. SEBI’s counsel had argued that Midas should file a fresh PIL in the matter and that its action in impleading itself was ‘motivated’ and filed “with a view to lend credibility to the petition” and gain publicity. SEBI had clearly been hoping that its revised consent guidelines would be accepted by the high court and with it the original PIL filed by Mr Khosla, a businessman, would not survive. 

This is ironic, since it is Midas Touch’s celebrated case in the 1990s after the Harshad Mehta scam that forced bank mutual funds such as Canbank Mutual Fund’s Canstar to pay the ‘assured’ returns it had promised investors. It is also well-known for its PIL in the aftermath of the IPO (initial Public Offerings) mania in what is better known as the “Vanishing Companies saga”. These are companies which looted investors by floating public issues and vanishing with the funds. Midas Touch, also a SEBI accredited investor association, has been running an Investor Helpline supported by the ministry of corporate affairs.

In the impleadment application [CM No 4200 of 2012 in WP(C ) No 6949 of 2011] Ms Madhumita Bhattacharjee, the counsel for Midas Touch said that the NGO can bring additional facts before the court and assist in dispensing justice. The court, while allowing the application, said that Midas “shall not repeat the contentions raised in the PIL”.

Midas Touch has said that consent guidelines issued by SEBI, besides being illegal, have been grossly abused. It referred to the  recommendations of  a Joint Parliamentary Committee (JPC) constituted in the wake of the Ketan Parekh scam. The JPC had identified certain corporate entities that colluded with Ketan Parekh (identified as the central figure of the securities scam) and asked SEBI, the ministry of corporate affairs as well as investigation and enforcement agencies to investigate the nexus between them. 

Instead of investigating these as asked by the JPC, several of these have been settled using the consent mechanism. In effect, the cases have been selttled “in defiance of the will of the Parliament”, says the NGO. It cites the example of Himachal Fututristic Communications whose matter was settled by SEBI through consent order on payment of Rs10 rore in 2010, and the entire consent process spanning nearly two years, was not reported to the Parliament in the Action Taken Reports. (The cases against Global Tele has also be disposed off by SEBI, while that of the Zee Group was settled via adjudication proceedings and it was let off with a warning and no penal action whatsoever). 

Midas’ application stated that the PIL petition of Deepak Khosla has not raised the fact of constitution, investigation, report, recommendations of JPC and action taken reports thereon laid before the Parliament. Midas Touch Investors pointed out that it was one of the eight unconnected organizations/individuals invited by the JPC to depose before it on the scam. Hence, impleading it in the case, would enable it to help the court dispense justice, said Midas’ counsel.

Virendra Jain, president of Midas Touch points out that the revision of consent guidelines subsequent to its impleadment application does not make the mechanism legal. The Delhi High Court decision, we believe, has considerably strengthened the case against SEBI’s consent regime. It is important to remember that Midas Touch and investor associations such as Moneylife Foundation (which is a sister entity of Moneylife magazine and a not-for-profit organization) are not the only ones to believe that the consent mechanism is used by SEBI to let off the guilty. Dr Mohan Gopal, a legal luminary, who was a director on the SEBI board has also criticized its working in an explosive letter to the prime minister of India. Please read: Dr Mohan Gopal’s explosive exposé of SEBI’s functioning under Bhave.

Moneylife has repeatedly pointed out how the spirit of the consent mechanism has been vitiated by SEBI, by allowing the same persons, entities or intermediaries to file consent and get away by paying a fine. In most cases, the details of the charges filed by SEBI are unclear since the consent order is deliberately opaque; worse, and similar offenses have led to widely divergent payments under the consent terms. 

Also read  Con by Consent.