Role of Regulators: An Analysis in the Light of Reliance Industries Limited v. SEBI
[Mahadev is a student at Gujarat National Law University.]
Regulation of markets of any kind is a very tricky affair. Securities markets are no different. A laissez-faire market approach can manifest in under-regulation – leading to illegal practices such as securities fraud and insider trading, etc. On the other hand, an over-regulated and constrictive market would make investors uninterested and hesitant in investing in the securities market. The challenge, therefore, lies in striking a balance between securities market regulation and activity. It is the job of the government, the regulator, i.e., the Securities and Exchange Board (SEBI) in India, and, to some extent, even the judiciary to ensure this balance is preserved and sustained. It is through the sustenance of this balance that a country can grow leaps and bounds economically.
In India, the regulator of stock markets, i.e., SEBI, has been given much-needed autonomy and authority to handle matters relating to the security markets to protect the investors and engage in market development and regulation. Under the Securities and Exchange Board of India Act 1992 (SEBI Act), SEBI has been given widespread powers. However, such powers can have an adverse effect if exercised unfairly, as it can stifle the involvement and activity of market participants. However, the Supreme Court of India (SC) and the High Courts often keep a check on such practices when such matters are brought to their notice. A case in point is the SC’s ruling in Reliance Industries Ltd (RIL) v. SEBI, wherein the SC observed that a regulator must act fairly.
This article discusses the facts and the ruling in the case, along with its wider implications on understanding the SEBI’s role and functions.
The moot issue, in this case, dates to 1994 and is concerned with some share transactions carried out by RIL pertaining to "fraudulent allotment of equity shares to promoters and group companies". Reliance had requested for disclosure of certain internal documents in possession of SEBI, including the opinions of the former SC judge Justice BN Srikrishna and a chartered accountant.
When SEBI denied this request, RIL filed a writ petition before the Bombay High Court (Bombay HC). This was dismissed in 2019. SEBI lodged a criminal complaint before Special Judge, Mumbai against RIL for offences under the SEBI Act and other relevant regulations. The complaint was rejected, and thereafter a revision petition was filed in the Bombay HC. Reliance filed an interlocutory application praying for disclosure of the above-mentioned documents on 28 March 2022. The Bombay HC adjourned this application stating that it can be considered along with the main revision petition. Hence, a special leave petition was filed before the SC.
Analysis by SC
The SC laid down that since SEBI is a regulator, it owes the duty to act fairly while it conducts its proceedings or initiates any actions against parties. SEBI is an institute that is quasi-judicial in nature, and because of this, SEBI is constitutionally mandated to act in a fair manner that aligns with the rules given under the law. A regulator is dutybound to deal with issues instead of finding means to get around the rule of law to nail successful convictions. This duty is tied crucially and inseparably with the principles of natural justice, according to which a party must be given a reasonable opportunity to defend its case.
The hesitation by SEBI to disclose such documents raises eyebrows about the fairness and transparency of the trial. Such practices taint the trials with prejudice and partiality. The SC said, “opaqueness is antithetical to “transparency.” In a country that is based on the rule of law, institutions must compulsorily adopt procedures that back the "democratic principles" of accountability and transparency.
Another important aspect of this judgment was that the SC added a word of caution against initiating frivolous criminal litigation against large corporations. The SC held that initiation of such criminal proceedings in commercial matters must be done after a lot of circumspection, and the courts must act as "gatekeepers" in such matters. The reasoning given by the SC behind this word of caution was that such criminal actions would lead to adverse economic consequences for the nation over a more extended period. Hence, the regulator must exercise caution before initiating such actions.
Implications of the Decision
This decision passed by the SC is one in the right direction as it is an indication of the attitude of the SC that balance must be maintained in the regulation of various players in any market and that all the regulators must exercise their powers cautiously in a manner not obstructive to the freedom and flexibility envisaged by the law of the land. This decision also comes in line with other decisions passed by the SC, such as Swadesi Cotton Mills v. Union of India, wherein it was held that “irrespective of whether the power conferred on a statutory body or tribunal is administrative or quasi-judicial, a duty to act fairly, that is in consonance with the fundamental principles of substantive justice is generally implied, because the presumption is that in a democratic polity wedded to the rule of law, the State or the Legislature does not intend that in the exercise of their statutory powers its functionaries should act unfairly or unjustly." The above case was also referred to by SEBI in Shri D.A Gadgil v. SEBI and Others, which is an encouraging sign for all the players in the market as it shows the attitude of SEBI favouring fairness.
If the legal landscape of a country is such that corporations would feel a lack of freedom to carry out ventures due to harsh consequences such as criminal cases, then it would eventually create a trend where no more investments would be attracted. Such a result would be disastrous to the economy of a country. The fear of frivolous criminal proceedings (or any such draconian measures, for that matter) against a corporation would create an environment where corporations would eventually stop investing more money, which could lead to collateral issues like unemployment and whatnot, especially in a country with an enormous population like India.
SEBI as an institution has been given wide powers under the SEBI Act, and rightly so, considering the various scams that have happened in the past, which have had gruesome on various investors, the stock market, and the economy. Hence, a regulator like SEBI is very much necessary. However, such vast powers can turn out to be risky for the economy if they are too restrictive or if the regulator abuses such powers. Naturally, companies and other players in a market would be apprehensive about the possible consequences of their decisions. If the deterrence caused by the regulator's power goes beyond a certain level, the balance will be disturbed, and obviously, the economy will suffer.
Therefore, such a decision passed by the SC shows that SEBI and other regulators need to keep their powers in check and must not use them at their whims and fancies. As stated above, transparency and fairness must be the cornerstone of any action taken by SEBI. As much as it is the role of SEBI to prevent any wrongdoings in the security market, it is also SEBI's imperative to do so within the principles of natural justice also and while ensuring the welfare of the securities market, which has a massive impact on the economy of the country itself. These duties and these rationales apply to all regulators, too, as the judgment discussed above talks about regulators in general and not SEBI individually.