When the regulator is the violator

The Securities Appellate Tribunal has ruled that a minor cannot be held liable for not making an open offer under the takeover regulations. This is not a unique juvenile justice moment in the securities market. The tribunal simply reminded the Securities and Exchange Board of India (Sebi) of the law declared by the Supreme Court in another case involving securities regulation, and reiterated that the Sebi must not act against minors in whose names majors would have engaged in securities transactions and not complied with attendant obligations.

The tragedy in the case is that the Supreme Court ruling had been rendered way back in 2008. The court had ruled that a minor who is incapable under law to contract cannot be held liable for violation of securities regulations governing public issue of securities. Yet, nearly a decade later, in 2017, the Sebi issued a show-cause notice to another minor — this time for alleged violation of the takeover regulations. That tells a story of judicial indiscipline — of not adhering to the law declared by the last court of the land.

Courts in India are liberal when faced with breach of judicial discipline. Judgements tend to use verbiage in being critical and in issuing strictures to scold lower courts and regulatory authorities who violate judicial discipline by not following the precedents and the law declared by higher courts. Rarely does that translate into anything of consequence for a serious disincentive to the authorities below to ignore the law declared by higher courts. Some judges impose costs on state agencies, while other judges tend to promptly admit challenges when a state agency has been visited with costs. In any case, there is no metric to measure insubordination of judicial rulings, in the course of performance appraisal of regulatory officials. In fact, most senior management of regulators do not have performance appraisal at all.

Regulatory authorities — themselves mini-states with legislative, executive and quasi-judicial power all rolled into one — tend to be the worst offenders when it comes to judicial indiscipline. Despite the law being declared by courts, trenchant judicial indiscipline abound. A simple example is the denial of inspection of the record to a person accused of violating the regulations. Courts have time and again ruled that full inspection of the material on record — not just material used to level the accusations but also material that would undermine the allegations — must be provided. 

When a regulator accuses you of violating the law, the regulator must not just tell you what it has against you, but must also give you access to all the material so that you are able to use it to undermine the accusations. If one can show that the material available with the regulator would lead no reasonable man to concluding that there is a violation, that is the process by which the truth is arrived at. Yet, in practice, even in this day and age, a clear and fair inspection of the entire record continues to be denied.  

On a case by case basis, depending on the degree of aggression or timidity of the person accused of violation, courts have to be approached to get access to the basic material on record during an inspection process. A sweeping rejection of any request for inspection remains par for the course. A stellar exception to the rule is the Competition Commission of India, which has even codified a standard operating procedure for conducting a file inspection. Other regulators, such as the capital market regulator, are known to demonstrate an arbitrary variance in the approach of different officers and different whole-time members in how they would enable inspection.

When courts are approached, the regulator is prone to argue that the investigation material entails a lot of confidential information that cannot be shared. Courts could then direct that the report be provided with “sensitive” portions being blanked out. In one instance it so transpired that the same investigation report was inspected in two parallel proceedings only to find that the report that was provided in one of the proceedings had blanked out every finding of exoneration by the investigation team.   

Likewise, despite superior courts having clearly declared the law, the authority below can keep reiterating its stance, blithely arguing that the decision has been appealed against. The Supreme Court has often ruled that such an approach is abhorrent, but with no one having to face any consequence for unleashing such chaos, the rulings remain mere exhortations. When the law is declared by a higher court with its interpretation, society is entitled to arrange its affairs in a manner that is consistent with known compliance. Yet, when regulators violate the interpretation laid down by the superior courts, society gets fearful — not of the law but of the law enforcer.  

The Ease of Doing Business rankings can never model for this kind of unease with conduct of business in any jurisdiction. It is only when state agencies see value in the rule of law that they would be able to attract real investment into business without having to tout the rankings that a statistical model throws up.


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