Analysing SEBI’s Powers to Issue Ex-Parte Interim Orders – VIPS LAW BLOG

Though SEBI is required to exercise this power cautiously, there have been cases when the Courts have questioned its interim orders. The urgency of the matter should be proved, and since, what is an urgent matter is dependent on case-to-case basis, it is very subjective. SEBI itself has revoked its directions against seven former officials of Multi Commodity Exchange Ltd. and found no valid stance in passing an ex-parte order passed by it in the previous hearing. In Videocon International Ltd. v. SEBI and BPL Ltd. v. SEBI, the Securities Appellate Tribunal (SAT) set aside the orders of SEBI banning Videocon International and BPL from accessing capital markets. SAT held that this order was not in the interests of investorsand ruled that “in the absence of material evidence to prove that the two companies had directly or indirectly indulged in market manipulation, the market regulator’s order holding them guilty cannot be sustained.” Therefore, it is pertinent for SEBI to rely on material evidence for a judgement to be good in law.

Through these cases, various lacunae come to the limelight and the reality and practicality of the provision is much more different than what the bare provision of Sections 11 and 11B tells. Immediate justice is the aim that SEBI propounds to have. Therefore, various considerations must be considered by SEBI which the court through its various judgments are pointing towards. Many cases have been reversed by the SAT and the Supreme Court due to want of clearly defined criteria.

The interplay between natural justice and ex-parte orders

Natural justice is considered to be of great significance in the judicial system and it implies procedural fairness and equality. In common law, there are three principles of natural justice –

1. ‘Nemo judex in causa sua’, which means, ‘no one should be made a judge in his own cause’, and
2. ‘Audi alteram partem’, which means, ‘hear the other side’.
3. There should be a reasoned order.

The interplay between natural justice and ex-parte powers has also become a topic for debate.

The main cause of concern is that in ex-parte orders, the other side is not heard; thereby violating the fundamental tenet of natural justice. In legal terms, there is no pre-decisional hearing taking place. Even though SAT has reiterated in a number of cases that in such situations, post decisional enquiry should be done. However, they have also observed that it is nothing more than a mere ‘eyewash’. The Courts, despite recognising the loopholes in Section 11, have not reversed the provision. It is an exception that they have carved out, namely “in the interests of investors”. It is a generalised statement and has a wide potential for misuse. The High Courts and the Supreme Court have time and again reiterated the main purpose of the SEBI and that its exercise of due diligence has to be monitored carefully. On a bald pretext of ‘urgency’, the decision that SEBI might give without hearing the other side can have wide consequences on the financial and prospective interests of a company. Therefore, an interim order passed in haste, can have serious consequences on a person’s profession or trade whose unfair trade practices SEBI is trying to curb, and therefore, the urgency of the matter should be prime facia established. The urgency must be determinative of various factors like large-scale manipulation, unfair and corrupt trade practices, etc. SEBI has to follow due process while issuing ex-parte interim orders and cannot surpass the inviolable principles of natural justice.

The Way Forward

Even though the power is given to SEBI to pass an ex-parte interim order, there is a need to determine various factors that come into play behind giving such orders. The objective of giving these powers to SEBI is to curb mischief and protect the securities market. Reasonable justification should be provided for passing such orders. The opportunity of hearing is the fundamental right of parties; the principles of natural justice, being inviolable, cannot be compromised. The interests of the business should also be taken into account and any delay, temporary it can be, can cause financial loss. What is an urgent matter, of course, is dependent on the facts and circumstances of each case. Whatever the circumstance, clear guidelines have to be formulated to prevent causing injustice. If such guidelines are hard to form, care must be taken that a broad and liberal approach is taken by SEBI while adjudicating such orders.

The power to “issue such directions as deemed fit” as mentioned in Section 11, is an all-embracing generalised statement and an abstraction that needs to be dealt with caution. Its specific modalities need to be determined. Therefore, SEBI has the authority to step in to settle issues of urgency. But the key question is, which issues are urgent? Which circumstances give powers to SEBI to justify their acts in violation of the principle of audi alteram partem? Reasonable justification should be an important aspect while passing such orders. A possible solution to this can be the separation of powers within SEBI, that is, there should be a separate framework for dealing with quasi-judicial matters or matters where it involves going against the principles of natural justice. Further, there is a need to increase transparency in SEBI’s regulatory practices. SEBI can come up with a Consultation Paper to bring about these reforms and it will be a place where the stakeholders can have a say on the issue and can propound their mutual interests. This can bring confidence among the stakeholders in the securities market and can ensure healthy competition. As Chief Justice of India, DY Chandrachud said, “When the law is wielded with compassion, it is capable of producing justice, when it is wielded with a sense of arbitrary power it yields injustice. The law is the same, the outcomes depend on who wields the law in their hands.”

* [The author is a fourth-year BA LL.B. student at O.P. Jindal Global University.]