Securities Law

SC Quashes Costs Imposed on SEBI by SAT Yet Again: Going in the Wrong Direction

The Hon’ble Supreme Court of India has set aside the order for imposition of costs of Rs. 50,000 by the Securities Appellate Tribunal (“SAT”) on the Securities and Exchange Board of India (“SEBI”) for imputing manipulative intent upon the Appellant, a trader, despite there being ‘no shred of evidence’ to conclude the same and letting its ex-parte order continue for a year without application of mind. SEBI, to secure such relief had argued that the imposition of costs would affect the effective, independent and fearless discharge of official duties imposed on it for protection of investors. History has repeated itself as under similar circumstances in 2012, SC had reversed costs of Rs. 1,00,000 imposed upon SEBI by SAT.

In this article, I aim to establish why the imposition of costs on SEBI is a valid proposition and why SEBI ought to welcome it, in the interest of the investors and the securities market which it is tasked to protect.

[Note: This article does not comment on the merits of the matter or seek to defend the negative remarks by SAT about the conduct of SEBI’s Whole Time Member]

 

Background

In a case relating to artificial inflation of the price of scrips by the promoters of a company to dump their own shares, SEBI had barred the promoters of the company whose scrip prices had been inflated form accessing the securities market through an ex-parte order. One Mr Sanjay Gupta had vehemently denied his role in this manipulation and provided convincing explanation and evidence to this effect. This included his having resigned from the company 3 years prior to the event and his numerous disputes with the company and its promoters. Despite this and after a year, SEBI confirmed the ex-parte order passed against the promoters.

On appeal by Sanjay Gupta, SAT pulled up SEBI for acting without application of mind, letting its ex-parte order continue for a year despite there not being  “a shred of evidence” against Sanjay Gupta. Furthermore, SAT had imposed costs on SEBI to the tune of Rs. 50,000 for such serious lapses while making adverse remarks against the Whole Time Member of SEBI who had dealt with the matter.

 

What are “Costs”?

According to the 240th Law Commission on Costs in Civil Litigation, costs “signify the sum of money which the court orders one party to pay another party in respect of the expenses of litigation incurred.” Definitionally, costs are awarded as compensation from the losing side to the successful side as costs of litigation. [1] Unlike the principle of damages, however, the principle of restitutio in integrum, that is to say, to bring back to the original position, does not exists. It is completely the discretion of the Court/Tribunal to impose costs. Other than this, there are special costs that are imposed upon parties for specific actions that prejudice and cost the other party, like seeking of adjournments at the last moment, failure to file documents, other procedural lapses, etc. Costs can either be compensatory or exemplary in nature.

 

Analysis

1. Why Costs are Can Validly be Imposed on SEBI

Imposition of costs is done for the purpose of tackling vexatious, speculative and frivolous litigation.[2] The Government or the Regulator are not above the principle of costs and are completely amenable to the same. As the 240th Law Commission had noted that underlying principle behind costs is that “costs follows the event” and the same cannot be ignored merely because the entity on the receiving end of the costs, is a sectoral regulator. There is even a peculiar example where the Hon’ble High Court of Kolkata had imposed costs on itself for its administration having wrongfully imposed compulsory retirement on a District Judge.

Another variant of the imposition of costs was shown by the Apex Court in the case of State of Kerala vs. Thressia & Anr where it had imposed exemplary costs on the Government with a direction that the same is to be collected from the officer concerned and the counsel who had recommended the filing of the SLP.

2. Imposition of Costs Does not Prejudice the Discharge of Duties by SAT

It was argued by the Petitioners in this case that the imposition of costs on SEBI would be in prejudice of effective, independent and fearless discharge of official duties by SEBI officers for the protection of investors. With all due respect to the counsels, in the matter, the regulator should not be allowed a higher pedestal lest it be at the peril of people. Power corrupts, but absolute power corrupts absolutely and with the enormous powers that SEBI enjoys, it is not unfair for it to be made accountable for its actions.

A SEBI officer’s bias, in this case, cannot be ignored. The officers responsible for the costs would in fact be liable for the imposition of costs upon SEBI whether in the form of personal recovery from him or in the form of marring of his personal record for promotions. However, an officer cannot be given impunity for his actions merely because further negative ramifications would ensue on the responsible officer.

The principal consideration behind the imposition of costs is to create a deterrence against vexatious, frivolous and speculative litigation/prosecution. It is an important tool in the effective and equitable administration of justice. It instils accountability in the judicial process and leaves wrongful parties to bear the costs of their own wrongs, errors and inaction. These sound principles cannot be bent merely because a regulator is at the receiving end of the Costs or that the responsible officer would be detrimentally affected. The object behind the imposition of costs in this instance would be to make the regulator and its officers think twice or reassess its position before taking any steps to the prejudice of parties and entities.[3] This only goes to strengthen the regulatory process and is very much in the interest of the securities market and its constituents.

 

Conclusion

I do not seek to be too harsh on SEBI. It is a well-intentioned regulator with the mammoth mandate of regulating the securities market. However, SEBI currently follows a catch-all kind of prosecution. It aims to cast a swift and wide net, a situation that is exacerbated by delays and a bureaucratic structure.

However, SEBI has shown a history of disdain towards the imposition of costs to it by the SAT. But, why should it? Deterrence and self-restraint are two sides of the same coin. SEBI is a watchdog, not a bulldog and so it should not seek to try to battle principles of propriety, rather, it should welcome them and give a second thought to or tread thoughtfully in conducting its proceedings and in adopting coercive and punitive measures. The higher court/tribunal cannot be toothless in the face of injustice or abuse of power by of the regulator, merely because the latter is one. This would be truly detrimental to the investors, market intermediaries and the market on the whole.

 


Endnotes:

[1] Johnstone v. The Law Society of Prince Edward Island, 2 PEIR B-28 (1988). (Canadian Court of Appeals)

[2] Vinod Seth vs. Devinder Bajaj,

[3] Vinod Seth vs. Devinder Bajaj, (2010) 8 SCC 1.


 

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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