No checks and balances? SEBI requires ‘Separation of Powers’

Much to the perversion of its wide ranging powers, SEBI has often been exposed by the courts for the absence of checks and balances, mainly in passing ex-parte orders, where its whole-time members (WTM) issue directives sans any formal hearings. To end such abuse of power, a six-member expert committee appointed by the Supreme Court (SC) this year has suggested implementing the doctrine of "Separation of Powers" within SEBI.

It is a doctrine for dividing the powers of any regulator in different branches, mainly executive and judicial, to guard against the abuse of authority. The executive branch can bring lawbreakers to trial while the judicial branch can issue the directives for punishments, making the regulator more democratic since both these branches can function under different heads.

Just how powerful is SEBI?

In its current form, SEBI officials enjoy a unique power play as they are both 'the police and the judge.' They have been vested with the entire gamut of powers akin to a 'State' — i.e. legislative, executive and judicial — all rolled into one organisation. The scale and scope of the regulator's power can be gauged just by plain reading of Section 11(1) of the SEBI Act that allows it to "regulate the securities market, by such measures as it thinks fit."

An illustrative list of SEBI's reach shows it has the power to not only make subordinate legislation but investigate violations of such legislations with statutory powers at its command; and also launch quasi-judicial adjudications in the violations that it has alleged against the parties — all on its own. 
 
Further reading of the SEBI Act will show that its authority does not only cover registered market intermediaries but even market participants who do not need a certificate of registration from SEBI and are associated with the markets in any way possible.

Due to such a set-up, listed companies and their executives often dance to the tune of high ranking SEBI officials as they can investigate, show-cause and even adjudicate them without having to prior comfort any judge of the accuracy of their action. By the time the company or its officials challenge SEBI's directives, their bank accounts are already frozen, they are barred from the markets and stripped of their hard earned reputation. This is a dangerous trend, since many of SEBI's orders are later overturned or stayed by the courts. Moreover, SEBI officials also call the shots in appointments at key market institutions like commodity and stock exchanges — the step-down regulators that can issue a whip to listed companies and brokers anytime.

Why does the SC committee want division of SEBI's power?

The committee's report mostly aligns with the above perspective, as it says "the quasi-judicial arm of SEBI has to be necessarily ring-fenced so that there is truly check and balance on the executive arm of the regulator. Within SEBI (as indeed any other regulator), the doctrine of separation of powers must be followed in letter and spirit. If performance of the quasi-judicial officers is appraised by the executive arm, the very foundation of separation of powers would be nullified."

This will prevent SEBI from dictating the laws to the public. The committee has rightly acknowledged that "check and balance against SEBI’s actions in its civil proceedings is a post-facto, post-decisional appellate review in the form of first appeal before the Securities Appellate Tribunal (SAT). Further, the appeals from the decisions of the SAT lie in the SC and that too only on the questions of law."

In effect, this means there are no checks and balances on SEBI's actions before an appeal is filed against its order with the tribunal — but then much of the damage is already done.

Therefore, the committee report says, "Cost inflicted with an issuance of direction not to deal in securities cannot be quantified easily and further complexity would be added by the period for which such directions are issued."

As per the committee's report, the proceedings initiated by SEBI in 2021-22 skyrocketed to 7,195 cases compared to 562 cases in 2020-21 and just 249 cases in 2019-20.

On the contrary, SEBI's record in initiating criminal prosecution even in the most grave cases is poor even though it has powers to do so. In a matter as big as the NSE co-location scam that involved data theft and forgery of agreements at India's largest exchange, SEBI avoided bringing criminal charges. 

Why so?

As per the committee report, the adjudication of criminal prosecution alone is kept out of SEBI's hands. "SEBI has to satisfy an independent judge in the criminal justice system, about its allegations of violations having occurred. Whereas, all the other powers of regulatory intervention comport to the civil standard and the judicial authority for determination of the findings of fact and law are vested in the officers of SEBI," the committee notes.

What do former SEBI officials say?

Those who have tracked SEBI for long say such authoritative organisational structure has made posting at SEBI the most coveted one for bureaucrats across streams. It is no secret that SEBI chairperson(s) and WTMs are so influential that several corporate houses and listed companies surreptitiously reserve board and advisory positions for them ahead of their retirements. Thus, the heavy lobbying in New Delhi for the post of SEBI chairperson and WTMs too is well known.

“The apprehensions of the Supreme Court two decades back on the statutory scheme of the SEBI Act are surfacing now. In the Clariant International judgement in 2004 Supreme Court held that the wide jurisdiction of SEBI runs counter to the doctrine of 'Separation of Powers' and integration of power by vesting legislative, executive and judicial powers in the same body, in future may raise several public law concerns.” said Sumit Agrawal, Founder Regstreet Law Advisors and former SEBI officer.

“Non-judges with drastic powers statutorily is a concerning trend in regulatory laws and the regulatory architecture needs to be revisited.” said Agrawal, who is also the author of a book on the SEBI Act. It simply means that even though SEBI officials do not have extensive experience and the restraints of the law as a court judge would know, yet they enjoy all the quasi-judicial powers.

According to Deepak Sancheti, SEBI's former chief of surveillance, the principle of 'Separation of Powers' was crucial in framing India's constitution and it forms an integral part of the constitution's basic structure.

"Authorities like SEBI possess powers to enact laws, conduct investigations, and impose penalties. Since all of this is vested in just one single body, it creates a serious risk for citizens and raises concerns regarding the adherence to constitutional principles," says Sancheti.  

Sancheti goes further to add that appeals against SAT decisions should be allowed in the High Courts. 

"In practical terms, market participants often encounter a tendency within the SEBI quasi-judicial authorities to exhibit undue bias towards SEBI. These authorities frequently rule against individuals or entities under investigation, even in cases where SEBI's arguments are weak. Such practice unnecessarily compels affected parties to approach SAT, which is the sole forum available to such notices before the case moving to the Apex court but by then the stakes involved and cost of fighting SEBI for such individuals goes up significantly, which many may not be in a position to afford. Therefore, it is imperative to either establish 'Separation of Powers' within SEBI" or enact provisions allowing appeals against SAT decisions in High Courts," Sancheti said.

SC committee recommends self discipline first

To impose some discipline, the expert committee has asked SEBI to at least adopt the practices followed by the Competition Commission of India (CCI).

"CCI has segregation of its investigating arm from its quasi-judicial arm," the committee notes.

The CCI passes an order containing a prima facie need to investigate and gives the Director General (DG) of Investigations a period of 60 days to investigate. Indeed, investigations may not conclude in 60 days, but the DG has to provide a status report and seek extension of time to investigate. By this process, the investigation and its status and progress is overseen. Likewise, the legislation contains firm timelines for dealing with applications seeking approval of combinations and these are embedded into the law.

"It would be important for SEBI to study such practices and adopt such a framework into subordinate legislation governing SEBI’s enforcement. Such self-discipline provisions do not need an amendment by Parliament to the SEBI Act," the committee has said.

SEBI did not reply to an email seeking its views and comments on the SC committee's remarks and suggestions on 'Separation of Powers.'