Why SEBI Is Not A Tribunal

On April 6, 2021, the Securities Appellate Tribunal dismissed an appeal filed by IL&FS Securities Services. The subject matter of this was a January 2021 order of SEBI, interpreting its own ranking within the wider hierarchy of the justice system by addressing the question of whether SEBI would qualify as a tribunal or a deemed tribunal.

First, we must understand how this all came to pass. The facts concerned a notice issued by SEBI to a securities market intermediary which is part of the beleaguered IL&FS group. Per an interim order dated Oct. 15, 2018 (followed by a confirmatory order in March 2020), a moratorium was issued by the NCLAT staying institution or continuation of proceedings against the IL&FS group “in any Court of Law/Tribunal…”. So when the time came for SEBI’s adjudicatory process to commence, expectedly the threshold line of inquiry was whether SEBI, when exercising judicial powers, would qualify as a tribunal. If yes, then no proceedings could lie before it during the effective period of the moratorium.

In support of this proposition, the key argument advanced was that as a regulator with a trifecta of powers, SEBI’s quasi-judicial avatar is statutorily empowered to make decisions that directly impact the rights and liabilities of parties. In doing so, SEBI is also bound to act judicially and follow principles of natural justice, which imbue the regulator with the trappings of a court, and consequently, ascribe its orders with quasi-judicial characteristics. When its role is to hear and resolve disputes, could it not be accurately characterised as a tribunal?

The outcome, at the SEBI as well as the SAT level, was not surprising. Both forums held that SEBI and its whole-time members do not come within the definition of ‘tribunal’ and are, therefore, not bound by the NCLAT stay. A succinct yet lucid order which has now been upheld by the SAT articulates reasons why equating the securities market regulator to a tribunal, would be untenable. The pith of both SEBI and SAT’s reasoning rests on the fact that tribunals exist to support courts in efficient conflict resolution and hence, are bestowed with judicial powers and independence by the legislature.

The SEBI Act itself, as the parent statute, formulates a heterogenous identity for SEBI and does not conceive its primary role to be akin to a judicial forum. Of course, SEBI has a duty to act judicially and must indeed remain zealously devoted to natural justice principles, but at its core, it is a regulator with multiple roles, only one of which is adjudication and enforcement, and hence it cannot be elevated to the stature of a tribunal. The orders also note that the appointment process contemplated for members of a tribunal is very different from those applicable to SEBI officers, strengthening the inference that the entity could never have been envisioned as a court or a tribunal.

Judicial recognition of SEBI’s structure is time-honoured; over the years, the Supreme Court itself has parsed through the regulator’s three embodiments - administrative, rule-making and quasi-judicial- and consistently endorsed its governance design. What makes these orders noteworthy though, is not the unique, difficult circumstances of its petitioner, but of how SEBI has made astute use of this opportunity to better define its own attributes and fortify for looming contingencies.

A case in point is SEBI’s broader jurisdictional play with the insolvency regime. Consistent re-assertion of its distinctive regulatory status is tactically aligned with the securities market regulator’s position that SEBI’s determination of liability for recovery actions, treatment of assets in trust, etc., must be outside the purview of IBC moratoriums, much like it is for the Securities Exchange Commission in the United States. By acknowledging that exercise of its quasi-judicial powers is merely an extension of its executive function and necessary for overall market regulation, its regulatory personality remains both distinct and indivisible, strengthening its case to push for exemptions analogous to the U.S. SEC, within the wider insolvency and resolution framework.

For instance, the recent Data Protection Bill exempts consent requirements for data processing, if such data is needed to ensure compliance with any order or judgments of courts/tribunals. But the tribunal characterisation would, on the other hand, have launched another avenue of appeal under Article 136 of the Constitution, which allows the Supreme Court to exercise discretion and permit appeals from any determination or findings from lower courts and tribunals. Although the SAT almost always qualifies as the most efficacious alternative, had SEBI itself been considered a tribunal, a new battleground under Article 136 appeals would have surely opened up to test the propriety of its orders.

Having said all of this, there is some critical competing perspective to bear in mind too. SEBI has a formidable artillery of penal powers at its disposal, in terms of the nature of fines, penalties, and other substantive restraints and if appealed, the Supreme Court will no doubt, be implored to sharpen focus on SEBI’s role when it dons its judicial robes and evaluate it in substance, not going by form alone. Attention may also be drawn to the SEBI Act, which ousts jurisdiction of civil courts from matters which SEBI is empowered to deal with, another important indicia to measure its judicial prerogative.

Until the final word is out, one can only wonder whether this conclusion would have been any different if, in line with an idea that has been championed for a few decades now, the legislature had institutionally severed SEBI’s ‘hear and determine’ powers from its executive/rule-making functions and marshalled an independent cohort of administrative judges.

Shruti Rajan is a Partner in the Mumbai office of Trilegal, and a regulatory and enforcement lawyer in the financial services space. Disclaimer: The author was previously part of a team of lawyers that advised these petitioners on related issues.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.