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Gaurav Aswani, Varun Soni

In Summary: SEBI’s Proposed Regulation 30A is a Portent for Intermediaries

[Gaurav and Varun are students at National Law School of India University.]


The Securities and Exchange Board of India (SEBI) has proposed significant amendments to its existing regulatory framework on summary proceedings through a Consultation Paper on the Proposed Legal Provisions for Summary Proceedings. Central to this proposal is the expansion of the violations, powers, and parties encompassed by Regulation 30A of the SEBI (Intermediaries) Regulations 2008 (Intermediaries Regulations). The current Regulation 30A is limited in scope, which applies only to specific cases involving stockbrokers, clearing members and depository participant(s). However, the proposed regulation aims to proliferate the ambit of summary proceedings, the range of intermediaries and the categories of violations. Coupled with this, the proposed regulation confers greater discretionary powers on the competent authority. This article analyses the proposed Regulation 30A, identifies the potential challenges that it is susceptible to, and examines how it belies the ends of transparency, integrity and efficiency.


Broadening the Ambit of Summary Proceedings


The proposed Regulation 30A seeks to extend its reach in three critical areas: the range of affected parties, the variety of violations covered, and the discretionary powers of the competent authority.


Wider range of affected parties


Under the current regulatory framework, Regulation 30A is applicable exclusively to stockbrokers, clearing members and depository participants. The proposed amendment, however, extends the regulation to include all intermediaries as defined under Regulation 2(1)(g) of the Intermediaries Regulations, read with Sections 11(b), 11(ba), and 12 of the Securities and Exchange Board Act 1992 (SEBI Act). This expanded definition subsumes a diverse array of entities: stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and other intermediaries associated with the securities markets. Additionally, depository participants, custodians of securities, foreign institutional investors, credit rating agencies, and any other intermediaries specified by SEBI through notification are also included.


Expansion of covered violations


The proposed Regulation 30A expands the scope of violations that may trigger summary proceedings. It includes instances where an intermediary has made a claim of return or performance not permitted by SEBI, where an intermediary is not traceable, or has failed to pay fees to SEBI, or “has violated any of the provisions of the securities law”. These violations are detailed in Regulation 30A(1). This represents a significant departure from the current regulation, which is limited to cases where a stockbroker, clearing member or depository participant has already been expelled by the respective stock exchange(s), clearing corporation(s) or depository(s). It is to be noted here that a pre-existing expulsion limits the factual enquiry that SEBI must undertake, thereby making a summary procedure suitable in such cases.


Enhanced discretion for the competent authority


The proposed regulation allows the competent authority to pass “any other order, deemed fit” in response to a violation. In contrast, under the current Regulation 30A, the designated authority’s power is confined to cancelling the certificate of registration of stockbrokers, clearing members, or depository participants which have already been expelled from all the stock exchanges, clearing corporations, or depositories they were a member of respectively. The proposed regulation significantly expands this discretion, enabling the competent authority to cast a wider net of sanctions on a greater array of intermediaries. 


Suitability of Summary Proceedings for the Violations Covered


The proposed regulation raises several concerns regarding the suitability of summary proceedings for the violations it covers. The inclusion of certain provisions, such as Regulations 30A(1)(f), 30A(1)(g), and 30A(1)(h), poses significant risks to intermediaries. To elucidate, Regulation 30A(1)(h) subjects intermediaries that have “admitted  to  have  violated  any  of  the  provisions  of  the securities laws or directions, instructions or circulars issued by the Board” to summary proceedings. When an advisor admits to making an advertisement that misleads an investor, “directly or by implication”, an act which is prohibited under SEBI’s Advertisement Code for Investment Advisers and Research Analysts, it would violate Regulation 30A(1)(h).


Adjudication of such violations would involve a thorough examination of facts. In effect, the competent authority would be deciding triable issues under the proposed regime. The Supreme Court of India, in Sudin Dilip Talaulikar v. Polycap Wires Private Limited, emphasized that leave to defend must be granted when a defendant raises triable issues in summary proceedings. The proposed Regulation 30A deviates from this principle of civil procedure by denying the intermediary an adequate opportunity to defend itself in a hearing. Given that the competent authority has ample discretionary powers to pass “any order, as deemed fit”, the lack of an adequate opportunity to defend oneself exacerbates the potential harm to the intermediaries.


Challenges to the Proposed Regulation 30A


The scheme of the proposed regulation, specifically the lack of any obligation on SEBI to serve material particulars on the noticee, gives rise to a constitutional challenge for an Article 14 violation, and a challenge to Regulation 30A for overreaching the vires of the SEBI Act. 


Regulation 30A could be challenged for violating Article 14 of the Constitution of India


Unlike Regulation 25(4) of the Intermediaries Regulations, the proposed Regulation 30A(2) does not mandate that SEBI attach the documents relied upon to support its allegations. Instead, the regulation only requires that the noticee be informed of "the grounds for initiation of the proceedings"  and “the violation alleged to have been committed."


The Supreme Court in Union of India v. Tulsiram Patel held that the principle of audi alteram partem - the right to be heard - includes the right of a person, against whom an order may be passed, to know both the documentary and oral evidence which might form the basis for the order. Similarly, the Delhi High Court in Shakti Shiva Magnets Private Limited v. Assistant Commissioner set aside an order suspending a GST registration by an Assistant Commissioner of the Delhi GST Department as it lacked material facts and reasoning supporting the allegations. The Hon’ble High Court directed the GST Commissioner to issue a practice direction so that any show cause notice issued in the future would not be bereft of any material particulars or reasons. The proposed Regulation 30A lacks these safeguards, as it does not require the SEBI to provide any material particulars or evidence when issuing a notice.


In Biecco Lawrie Limited v. State of West Bengal, the court held that a proper notice must be clear and precise, providing the other party with sufficient information to prepare an effective defense. The proposed Regulation 30A neither mandates that the relevant evidence be given to substantiate allegations, nor does it allow the noticee to rebut the evidence before a decision is made. It follows that the proposed regulation could be challenged for violating the principles of natural justice, and therefore, Article 14 of the Constitution of India.


Regulation 30A could be challenged as being ultra vires the SEBI Act


The lack of any requirement to furnish material information also leaves the proposed Regulation 30A open to a challenge for being ultra vires the provisions of the parent legislation. Section 12(3) of the SEBI Act confers powers on the SEBI to pass orders of suspension and cancellation of a certificate of registration as per SEBI Regulations. The proviso to this section explicitly states that no such order shall be passed without providing the person concerned with a reasonable opportunity of being heard.


It has been held in CB Gautam v. Union of India that a reasonable opportunity of being heard connotes the opportunity to rebut an adverse presumption that is raised against the assessee.  In the present regime, there exists strong prima facie grounds for initiating summary proceedings; pre-existing expulsions of stock brokers, clearing members, and depository participants. On the other hand, the proposed Regulation 30A applies to all intermediaries, even for violations without a strong prima facie case, who can be proceeded against in a summary fashion. Fatally, Regulation 30A does not prescribe for relied-upon documents to be attached to the show-cause notice. In certain cases, there may not be any evidence for the noticee to rebut an adverse presumption raised against them. Further, Regulation 30A(5) denies any opportunity of being heard, other than the reply to the show-cause notice. 


In toto, the proposed regulation denies a reasonable opportunity of being heard to a noticee, which is in contravention to the proviso to Section 12(3) of the SEBI Act.  


The Supreme Court in Council of Architecture v. Mukesh Goyal reiterated that if the provisions of delegated legislation are inconsistent with those of the parent legislation, the latter must prevail. Consequently, Regulation 30A in its amended form could be challenged in the courts for being ultra vires the SEBI Act.


Proposed Regulation and Contradictions with SEBI’s Objectives


The proposed Regulation 30A(7) is particularly concerning for intermediaries, as it grants the competent authority the power to pass “any other order, as deemed fit.” Additionally, Regulation 30A(3) allows intermediaries only three weeks to file a written response to a notice issued under Regulation 30A(2), with Regulation 30A(4) explicitly prohibiting any extensions—this is a marked departure from the current Regulation 30A.


The competent authority’s extensive powers to pass orders in cases involving triable issues, without providing supporting documents or reports is prejudicial for intermediaries. Such orders could halt their business operations. As a consequence, affected intermediaries would likely appeal the orders passed under Regulation 30A(7). The proposed regulation has the potential to transfer caseload from the competent authority to the Securities Appellate Tribunal (SAT). The surge in appeals would defeat the stated goals of introducing the amendment, i.e., “to handle violations in an expeditious and more efficient manner”.


Conclusion


The proposed Regulation 30A, in its attempt to broaden the ambit of summary proceedings, seeks to adjudicate triable issues without allowing intermediaries a reasonable opportunity to be heard and inspect the evidence against them. Given the multitude of grounds on which the proposed regulation can be challenged—ranging from being ultra vires the SEBI Act to violating the principles of natural justice—it is likely that orders under the proposed Regulation 30A will be appealed frequently. This would exacerbate caseload at the SAT which would undermine the very purpose of summary proceedings.


The proposed regulation grants the competent authority significant discretionary powers, including the ability to pass any order it deems fit. The erosion of safeguards, coupled with the increasing power of the competent authority, stands in stark contrast with the Consultation Paper’s stated goals of ensuring integrity, transparency, and efficiency in the securities market.

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