How stock markets regulator SEBI dislikes being regulated

The Adani-Hindenburg saga has taken a new twist where instead of the alleged suspect- Adani Group; the investigator itself has become the subject of scrutiny. The Securities Exchange Board of India (SEBI) filed an ‘Application for appropriate orders’ with the Supreme Court of India on July 10, 2023, which, in a nutshell, is a point-by-point rebuttal of the recommendations mentioned in the Report given to the Supreme Court (SC) by the Expert Committee, constituted by the Apex Court, to assess the investigation being done by SEBI on the Adani Group.

It is quite baffling as to what SEBI intends to achieve through this Application as it has 'Prayed' to the Court to take SEBI’s views and observations into consideration with respect to the Expert Committee Report and pass ‘an appropriate order’.

In legalese, a 'Prayer' is a specific request for judgment, relief, and/or damages, i.e., compensation, at the conclusion of a complaint or petition. Typically, any prayer to the Court should be specific in nature so that the party seeking the relief gets what it wants and not something that may be counterproductive to the justice sought. In this case, it is surprising that SEBI has made the 'Prayer' to 'Pass an appropriate order', a phrase that is highly open-ended, which carries the risk of the SC Order proving to be cumbersome upon SEBI itself.

The Regulator Does dislike Being Regulated

The Expert Committee was appointed to investigate the regulatory failures in dealing with the alleged contravention of laws pertaining to the Securities Market in relation to the Adani Group as well as propose other recommendations related to the securities market and SEBI.  Its report was submitted to the Supreme Court, as per the Court’s directions, and SC has not commented on its contents in public, so far.

What may have prompted SEBI to file the Application are the points raised in the Expert Committee Report that posed some serious questions about the workings of the Regulator.

The two major aspects that point out the large-scale discretionary powers of SEBI are that the Regulator is not bound by any stipulations of adhering to any timelines while investigating and adjudicating any matter and the fungible nature of its personnel who can perform executive, quasi-judicial, and investigative functions even at the same time.

To start with, the SC-appointed committee report recommends that there should be timelines stipulated for the initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings. SEBI seems to disagree that it should be bound to stipulated timelines of any kind.

The first objection by SEBI reads as thus- ‘Prescribing timelines for initiation of investigation and proceedings may not be appropriate as the Board is mandated to form a prima-facie opinion (reasonable grounds) to appoint an Investigating Authority. The aforesaid decision of the Board to appoint an Investigating Authority is dependent on many factors including when the alleged violation was observed/ came to the knowledge of SEBI, analysis of the information and material available on record, etc.’

Moreover, the regulator also states that since the nature and complexity of each case are different, they all run on different timelines. SEBI also points out that for cases that are dependent on cross-border cooperation, timelines are dependent on other authorities.

At this point, it seems that the SEBI is unaware that all investigating agencies, right from the Directorate of Enforcement (ED) to the police department face the same issues while discharging their duties. All of them are expected to follow timelines and report to higher authorities on the progress of their work. SEBI investigations, like other agencies, are also supposed to be carried out by experts in their field, and dealing with cases of unique complexities is supposed to be a part of their jobs, not extraordinary circumstances. Citing such circumstances to evade putting timelines to their investigative and adjudicatory duties put a question-mark on the competency of SEBI personnel themselves.  

 As for the committee’s remarks about separating the quasi-judicial and executive arms of SEBI, the regulator responds by stating the internal procedures that the Regulator follows. However, it is public knowledge that the Whole Time Members of SEBI perform the duties of members of the Board as well as adjudicators. Also, the SEBI Act allows any person appointed by the Board to become an Investigating Officer. Any SEBI personnel not below the rank of Division Chief can be the Adjudicating Officer for offenses meriting a penalty under the SEBI Act 1992.

SEBI officials also have a wide discretionary range of penalties they can impose in their quasi-judicial capacity.

With Great Power Comes Great Irresponsibility?

On May 12, 2023, SEBI had sought six months’ time from the Supreme Court to complete its probe on the alleged violations by the Adani Group but the Apex Court ordered the Regulator to complete its investigations before August 14, 2023. Rather than focusing on the investigations it seems that SEBI is preparing excuses for delay in investigations by countering the recommendations of the Expert Committee.

On one hand, the Application by SEBI tries to impress upon the Court that all its procedures and internal regulations are sound and immaculate, and on the other hand the Regulator is citing multiple difficulties in adhering to timelines as an investigator.

Refuting the committee’s claims about SEBI not finding any irregularities with Adani Group’s security transactions, the application also impresses the reader with the proposed ways in which SEBI may prove the alleged irregularities.

However, it remains to be seen when the regulator may do so. Time is of the essence for SEBI which was created to maintain the integrity of the securities market because whether it is the Adani Group or the common investors, every party deserves closure. While violators should face the wrath of the law speedily, the innocent do not deserve to be under suspicion of guilt for ages. After all, justice delayed will be justice denied.