In an important development, the Securities Appellate Tribunal has recently said unlike regulations made by the Securities and Exchange Board of India, guidelines cannot mandate a procedure, a violation of which could entail a penal consequence.
Although, in an order in the Toubro Infotech and Industries Ltd vs Sebi case, the SAT rejected the contention of the appellant that Sebi's guidelines had no force of law and observed that the violation of a guideline ought not to lead to any punitive action unlike the violation of a regulation.
This ruling is important. It highlights a number of problems currently faced by the capital market due to certain provisions in guidelines comprising securities laws.
When Parliament delegates a power to make a law to a subordinate law-making authority (in this case, Sebi), it always places a check and balance in the form of oversight to look over the subordinate lawmaker's shoulder.
The Sebi Act has such a framework too in the form of Section 31, which requires every rule made by the Union government and every regulation made by Sebi to be tabled in Parliament.
Such rule or regulation could get nullified if both Houses of Parliament veto it. Both Houses of Parliament may modify such rule or regulation, and the modified version will take effect.
However, any action taken by Sebi under a rule or regulation before Parliament rejects or modifies it is protected under Section 31.
It is important to note that initially, regulations made by Sebi required prior consent of the Union government. Such requirement was removed as early as 1995, and Sebi was given free powers to make regulations and directly table it in Parliament.
But curiously all the guidelines that are operational today have been made after 1995. These include the Sebi (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (ESOP guidelines), the Sebi (Disclosure and Investor Protection) Guidelines, 2000 (DIP guidelines), and the Sebi (Delisting of Securities) Guidelines, 2003 (delisting guidelines).
These guidelines have prescribed some very substantive and onerous obligations.
To name a few: The entire gamut of preferential allotment, and the lock-in on shares, is contained in the DIP guidelines. The onerous obligation of reverse book-building for delisting from stock exchanges is set out in the delisting guidelines.
The ESOP guidelines contain a number of peculiar provisions including a retrospective amendment in 2003 requiring all stock option plans formulated even prior to the amendment to be ratified once again by shareholders.
It is equally true that these guidelines have witnessed amendments with far greater ease, often leading to a yo-yo in the policy making as seen in the DIP guidelines. It is arguable that the absence of the check of having to table the body of law in Parliament makes it easy to keep changing the law.
A senior counsel appearing for Sebi recently quipped in the SAT about how book publishers used a new colour for the cover of every amended Sebi manual, but the pace of amendments would soon result in the publishers running out of colour choices.
An unintended but welcome fallout of the SAT ruling is the resolution of conflict between provisions of the take-over code and the delisting guidelines over what the correct minimum public shareholding ought to be.
A violation of the take-over code being in the nature of regulations would have penal consequences, but the violation of the confusing and conflicting delisting guidelines would not attract penal consequences. Which body of law should prevail is obvious.
The SAT ruling is a good opportunity for Sebi to rectify this situation. The anomalies in the provisions of the delisting guidelines leading to a direct conflict with the take-over code ought to be removed, and the delisting guidelines should be converted into regulations. The DIP guidelines too should be upgraded to the status of regulations, lending some stability to policy.
Tailpiece: A curious development in the capital market is a recent directive requiring all brokers to publish a cartoon in their stationery.
Although entitled 'Empowering Investors: A Sebi Initiative,' the cartoon depicts a lay investor sitting in front of a treasury box, looking utterly confused and muddled.
If one suspected that the graphic depicted an empowered investor, the doubts are instantly removed by the cartoon helpfully depicting question marks swirling all around his head.
A securities lawyer recently warned his broker-client against what she thought was a poor attempt at poking fun at Sebi, but was stumped when informed that the cartoon had in fact been commissioned by the regulator.
The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal.