05 March 2010

Supreme Court empowers SEBI

Hot off the press is a Supreme Court ruling (SEBI v AjayAgarwal) which discusses the omni-present S.11B action by SEBI. The section is used by SEBI to pass a whole range of actions against persons who violate securities laws. The only limitation in using the power is that it cannot be penal in nature.

The issue before the Supreme Court was whether the directions under S. 11B could be retrospective in nature. When an act of misrepresentation occurred before the amendment in the Act which brought in the section, could the section be used?

51. The appellate Tribunal made a manifest error by not appreciating that Section 11-B is procedural in nature. It is a time honoured principle if the law affects matters of procedure, then prima facie it applies to all actions, pending as well as future.

Even more importantly it decides that the S.11B direction/order "restraining a person from accessing the securities market or prohibiting any person associated with securities market to buy, sell or deal in securities" is not a penalty.

However, this ruling on the latter point should not be read too broadly. Such a direction would in specific facts not be considered as a penalty, but in others can be. The key test is whether the order seeks to protect the market, or punish the wrongdoer. The line between the two can often be quite thin.

No comments: