Bar & Bench previously published three articles titled: “Imposition of costs: A tussle between SAT and SEBI”, “Playing with the Fire: SEBI apologizes to the Supreme Court of India in Contempt Proceedings” and “Judicial scrutiny of SEBI: An obstinate regulator?” analysing regulatory orders that attracted costs from the Securities Appellate Tribunal (SAT) and strong comments from the Bombay High Court. These instances highlighted occasions where the Securities and Exchange Board of India (SEBI) could have heeded judicial nudges but chose instead to defend its orders on technical grounds.
This quick article focuses on a recent SAT order where SEBI was admonished for passing a “mechanical order”. The case involved SRBC, a reputed CA firm which served as an auditor for a publicly listed company, Infibeam Avenues. SEBI’s Adjudicating Officer (AO) imposed a ₹10 lakh penalty on SRBC in an order dated June 29, 2022. SAT set aside the penalty, imposed ₹1 lakh costs on SEBI, and advised SEBI authorities to “examine facts holistically and exercise restraint in passing mechanical orders.”
Case overview
The matter arose from an admitted inadvertent error by SRBC, where an email containing Infibeam’s financial information was accidentally sent to an unintended recipient, another client of SRBC. SRBC promptly rectified the mistake by having the recipient delete the email and its attachments, by sending one of its employees personally to meet that unintended recipient.
SEBI, however, contended that this act violated Regulation 3(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), which mandates insiders to handle unpublished price-sensitive information (UPSI) with care and on a strict “need-to-know basis”. SEBI argued that SRBC failed to establish mechanisms to prevent such incidents, alleging a breach of its duties as Infibeam’s auditor.
SAT observed that Regulation 3(1) does not explicitly prescribe any specific mechanism. It rejected SEBI’s interpretation as “imaginary and unsustainable.” Moreover, SAT dismissed SEBI’s assertion that penalties must be imposed irrespective of whether the violation was inadvertent or remedial measures were taken. It emphasised that such an approach would lead to absurd outcomes.
In the case of Piramal Enterprises Limited v. SEBI, a penalty was imposed on Piramal Enterprises Limited (PEL) and its directors for allegedly violating the “need-to-know basis” principle by sharing information with Anand Piramal, who held no position in the company but had prior knowledge of a decision to sell part of PEL to Abbott Laboratories Limited. It was found that Anand was signatory to a non-compete agreement as part of the business transfer agreement and hence needed to know. The SAT, while setting aside SEBI’s order, emphasised that,
“SEBI is the watchdog and not a bulldog…If there is an infraction of a rule, remedial measures should be taken in the first instance and not punitive measures. In the absence of any direct or clinching evidence of insider trading or misuse of UPSI, a reasonable benefit of doubt should be extended to the PEL instead of mechanically imposing a penalty.”
Critique of SEBI’s enforcement approach
SEBI’s reliance on the Supreme Court judgment in SEBI v. Shri Ram Mutual Fund, particularly the phrase “penalty is attracted as soon as the contravention… is established,” has often resulted in rote and context-blind enforcement. SAT, in this order, underscored the importance of context and intent in regulatory adjudication.
This is not an isolated instance. SAT has previously criticised SEBI for its “callous attitude,” and actions amounting to “judicial dishonesty.” It has flagged SEBI’s “harsh and unwarranted” orders and remarked on SEBI’s conduct being “detrimental to the interests of the securities market.” [Umashankar Agarwal vs SEBI.]
In some cases, SAT has noted “gross negligence on part of various officials of SEBI including the concerned WTM of SEBI”, and has either imposed costs or remanded matters, remarking,
“We hope that on remand, SEBI would entrust the matters to some responsible officer who would apply his mind” [Santosh Vishram Ghadshi v. SEBI] in light of the serious irregularities observed.
Need for reform: Towards a Uniform Securities Code
While SEBI’s role in upholding market integrity is crucial, SAT’s rulings highlight the need for proportionate and judicious penalties by the executive branch of the government. This decision is significant in protecting entities from arbitrary penalties while reinforcing accountability in enforcement actions.
In the framework of securities laws, the SAT serves as the primary check on SEBI’s extensive enforcement powers and represents the sole judicial body reviewing SEBI’s actions before matters reach the Supreme Court. However, addressing systemic challenges within this ecosystem requires structural reforms. The industry keenly anticipates the draft of the proposed Uniform Securities Code, as announced by the Finance Minister of India. It is hoped that this legislative initiative will include provisions to:
- Establish definitive time limits for SEBI to complete investigations and issue orders;
- Impose restrictions on the delegation of powers within SEBI and to stock exchanges and depositories;
- Mandate disclosure of conflicts of interest by SEBI’s Chairperson and Whole-Time Members (WTMs);
- Enhance transparency in SEBI’s annual reports, commensurate with its expanded statutory powers;
- Require the Ministry of Law or the Law Commission of India to review instances where SEBI seeks to expand its powers through self-made subordinate legislation; and
- Ensure a clear and genuine separation between SEBI’s adjudicatory and executive wings.
These measures would substantially enhance accountability, transparency, and fairness within the securities regulatory framework. Simultaneously, statutory amendments should focus on strengthening SEBI’s essential powers while curtailing underutilised or redundant powers, guided by data-driven analysis and public feedback.
It is hoped that the Ministry of Finance will take these issues into account and view SAT’s advisory in this matter as an opportunity to strengthen the regulatory framework, rather than treating it as an isolated incident.
Sumit Agrawal is Founder of Regstreet Law Advisors and a former SEBI Officer. This article was prepared with the assistance of Akarsh Tripathi, Associate at Regstreet Law Advisors.
The views expressed are personal.