Rapping the watchdog: Delhi HC order questions Sebi's penalty proceedings

Sebi. (Photo: Kamlesh Pednekar)
A recent ruling by the Delhi High Court (HC), questioning the Securities and Exchange Board of India’s (Sebi’s) adjudication proceedings, could have implications for thousands of cases pending before the market regulator.

The case pertains to a show cause notice issued by Sebi to Amit Jain (petitioner), who held over five per cent stake in a listed-company Himalaya Granites, but failed to make disclosures under the Prohibition of Insider Trading (PIT) norms.

The petitioner contested the move on the ground that the Sebi board didn’t follow the prescribed procedure. 

According to him, the group of assistant managers of Sebi recommended proceedings against the entities without taking whole-time member’s opinion and therefore, the appointment of adjudicating officer was without jurisdiction. Further, the penalty was imposed without a prior order under the PIT regulation.

Considering the merit of the case, the high court set aside Sebi’s impugned order and asked the Sebi board or a whole-time member to examine the case as per the laws and accordingly pass a fresh order.

The court is of the view that a whole-time member (WTM) has not formed “independent opinion’ on whether there are grounds for adjudication in the said matter.

Citing the Sebi (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, the high court said that it is apparent that formation of an opinion by the board is a pre-condition for the appointment of the adjudicating officer. “It follows that in absence of such an opinion, an adjudicating officer (AO) cannot be appointed and any such appointment will be without jurisdiction,” order reads.

Typically, a whole-time member independently takes a call whether the case is fit for the adjudication, irrespective of the suggestion expressed by his juniors. If the board/member is of opinion that there are grounds for the adjudging, then accordingly it appoints an AO to hold an inquiry.

“There was no scope for inferring formation of such opinion merely for reason that an AO has been appointed and other officers have forwarded their recommendations for such an action,” the high court noted.

Sebi counsel said that adjudication was initiated after the member was prima facie satisfied that there are sufficient grounds to inquire into the matter and adjudicated upon the alleged violations.

“This judgement rightly brings focus to the procedural aspects of law. The prescribed procedures ensure that authorities exercise their statutory powers carefully and consciously after satisfying themselves that the necessary conditions allowing exercise of powers have been met,” said a Mumbai-based advocate Deepak Sanchety.

To clear the backlog of pending cases, Sebi is in the fast track mode of passing adjudicating orders.

Rapping the watchdog

- HC sets aside Sebi order in the Himalaya Granite matter
- Directs Sebi board to examine the case if required and pass fresh order
- Observes that adjudicating proceeding was not followed under prescribed norms
- WTM has not formed an independent opinion required to adjudging the matter 
- Sebi issues show cause notice to Amit Jain & others for violating insider trading norms

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