The Supreme Court on Monday reproached the Securities and Exchange Board of India (Sebi) for taking ten years to conclude an investigation into a case involving alleged violation of listing norms and unfair trade practice, calling the market regulator “lax” and cautioning it against “lethargy”.
“Does it take ten years for India’s premier regulator to conclude an investigation? Is it an effective and good regulation practice? Is that the standard you want the world to know of the regulator that you are?” a bench of justices Sanjiv Khanna and Dipankar Datta asked Sebi’s counsel.
It added: “It’s a very sad state of affairs. If this is the standard of the regulator, we don’t know what to say...We aren’t concerned with inconsistency, but you have been utterly lax.”
The court was irked at Sebi taking ten years in issuing a show-cause notice to a finance company over alleged misuse of funds raised through preferential allotment. The preferential allotment was made by Alps Motor Finance Ltd (AMFL) in August 2013. While BSE Ltd took cognisance of the alleged violation of listing norms and misuse of funds in 2016, it took another five years for Sebi to step in. The regulator issued a show-cause notice only in 2023.
“Explain the delay...Why did you take around two years to start the investigation after BSE flagged it? And what did you do between 2018 and 2022? You issued a show-cause notice in 2023. Is this what’s expected from a good regulator? We can’t keep on accepting your lethargy,” the bench told additional solicitor general N Venkatraman, who represented Sebi.
The court added that it appeared that some officers of Sebi were complicit with the wrong doers. “It takes 18 months for you to start an investigation, which takes another 50 months to complete. This is wrong. Your officers must be taken to task. This was done to help them (the company),” the court told the ASG.
Responding, Venkatraman said that there was a batch of over a hundred cases that Sebi was looking into at the time and that the regulator was simultaneously focussing on policy changes. He also referred to a report submitted by Sebi’s executive director (investigation) after holding an inquiry into the episode – as directed by the court in October last year.
But the bench remained firm. “Your report is an absolute cover up and looks like some officers are complicit in all this...you should take action against the officers. They will have to be pulled up,” it told the ASG.
The court said that the law officer ought to convey its displeasure to appropriate authorities in the Union finance ministry for taking suitable action. “It’s not right. What happened to the directors of the company after 2014? Why were no proceedings against them after 2014? The ministry should conduct an inquiry...In some cases, you proceed fast, and in others, you don’t proceed at all. We can see that,” it said.
The court’s strictures came as it dismissed Sebi’s appeal against a July 2023 order of the securities appellate tribunal (SAT), quashing the penalty of ₹6 lakh on the company and ₹20 lakh on Brij Kishore Sabharwal, a director in the company.
The case is related to ₹7.01 crore raised through preferential allotment by AMFL and loans provided to six entities from the proceeds. Subsequently, an investigation was made and the stock exchange submitted the report indicating possibility of the misutilisation of the proceeds in 2016. Based on this report, SEBI carried further investigation in 2019. The adjudicating officer was appointed in December 2022 and the show cause notice was issued on January 5, 2023.
Sebi’s adjudicating officer held the company’s action to be violative of the Listing Obligations and Disclosure Requirement (LODR) Regulations and Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations while imposing the penalty.
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