SEBI’s Power to issue Supplementary Show Cause Notices: A Despotic Excessive Delegation of Power?

[By Mainak Mukherjee]

The author is a student of National Law University and Judicial Academy, Assam.

Introduction

Delegated legislation acts as a tool for the legislature to reduce the burden from its shoulder. However, considering the thin line that separates delegated legislation from excessive delegation of power, it is pertinent for the legislature to exercise more control over the executive even when legislative powers have been delegated. Moreover, delegated legislation can often lead to a lack of transparency and accountability as the administrative bodies are not subjected to a similar level of scrutiny and debate as laws made by the legislature. One such example of excessive delegation of power is the Securities and Exchange Board of India’s (SEBI) power to issue Supplementary Show Cause Notices at any given point of a proceeding. SEBI undertakes quasi-judicial proceedings based on the principle of natural justice, and notices serve an essential function to heed natural justice as it allows the other side to know the charges that are being labeled against them. That being said, the question still beckons: if there should be a regulatory framework for SEBI to issue Supplementary Show Cause Notices—after a show cause notice has already been issued—especially when the statute remains silent about the same. In this article, the author will first discuss SEBI’s power to arbitrarily issue Supplementary Show Cause Notices at any given point of a proceeding. In the latter half of the article, he will analyze how the Parliament has not conferred SEBI with the power to issue Supplementary Show Cause Notices and why a properly laid-down framework for the same is the need of the hour.

The curious case of Supplementary Show Cause Notices issued by SEBI

Nemo judex causa sua and Audi alteram partem are essentially two essential principles of any quasi-judicial proceeding. As mentioned earlier, issuing a notice—in this case: Supplementary Show Cause Notices—to the concerned person, informing them about the charges framed, and the actions to be taken is sine qua non of a fair hearing. Nevertheless, not having a proper regulatory framework on Supplementary Show Cause Notices—as in, when it can be served—can go against the very principle of natural justice. For example, when a matter has already gone before adjudication based on the Show Cause Notice, and the noticee has prepared their defense, and suddenly they get hit by a Supplementary Show Cause Notice adding new facts to the case.

Power can often transform into misusage. In this scenario, the power to issue Supplementary Show Cause Notices, without a just regulatory framework, can be used as a tool by SEBI to post facto improve its case. Further, a Supplementary Show Cause Notice can also defeat the explanations put forth by the noticee in their reply to the Show Cause Notice. The same arguments were raised by the noticees in Adjudication Order in respect of NSE in the matter of Karvy Stock Broking Limited. The noticees argued that SEBI uses the Supplementary Show Cause Notice at a later stage of a proceeding to improve its case, which defeats the purpose of the show cause notice. SEBI, in its order, stated that additional facts were found and went on to justify the issuance of the Supplementary Show Cause Notice under the garb of natural justice in a quasi-judicial proceeding.

SEBI has, on multiple occasions, taken the defense of natural justice whenever noticees have raised an issue on SEBI’s power to issue Supplementary Show Cause Notices. For example, in both, Adjudication Order in the matter of Fixed Maturity Plans Series 127, 183, 187, 189, 193, and 194 of Kotak Mahindra Mutual Fund and Order in the matter of GDR issue of Morepen Laboratories Ltd, SEBI passed an order stating: “supplementary show cause notice is an inbuilt requirement in any quasi-judicial proceedings as a part and parcel of principles of provided for in the legislation.

Further, the order against Morepen Laboratories Ltd. was later appealed to the Hon’ble Securities Appellate Tribunal (SAT). SAT’s order—in the appeal—throws out of the window SEBI’s power of issuing notices at any time as “the SEBI Act, 1992 (SEBI Act) is not time-barred”. SAT, in its order, stated that although there is no period of limitation prescribed in the SEBI Act and other regulations, the issuance of notices for the completion of adjudication proceedings must be done within a reasonable period of time to avoid inordinate delay. Reliance was placed on the Hon’ble Supreme Court’s judgment in Adjudicating Officer, Securities, and Exchange Board of India vs. Bhavesh Pabari[1].

Not only did this SAT order impose restrictions on SEBI’s boundless power of issuing notices, but it also acted as an antithesis to SEBI’s notion: that if something is not covered under its laws, then it is not bound by those laws—in the present case, the concept of time-barred limitation. Further, this SAT order also becomes relevant in the context of Supplementary Show Cause Notices. It poses two big questions: does SEBI have the power to issue Supplementary Show Cause Notices in a proceeding just because anything contrary to this has not been mentioned in any of its laws? If yes, then is this power absolute without any restrictions?

In arguendo: Parliament has conferred other agencies with the power of issuing Supplementary Show Cause Notices

In the context of the argument raised against the nature of SEBI’s power to issue Supplementary Show Cause Notices, it becomes relevant to mention that whenever the Parliament has thought of conferring any agency with the power of issuing Supplementary Show Cause Notices, the legislature has explicitly so provided. For example, the Finance Act 2018 amended the Customs Act 1962 to include Supplementary Show Cause Notices under the legislation; however, nothing was done for the SEBI Act.

Further, Sections 28(7A) and 124 of the Customs Act, 1962 outline the circumstances under which “a proper officer” can issue a supplementary notice. Additionally, the erstwhile Income Tax Act 1869 also contained Section 23, which gave power to the Collector to issue a fresh notice when he “has reason to believe that, in assessing any person under the Act, any source of income or profits not specified in the receipt granted to him under section seventeen has been overlooked, which source, if it had then been known to exist, would have increased the assessment.” Furthermore, the power to issue supplementary notices has also been conferred on the Collector under Section 17 of the Works of Defence Act, 1903. Section 17 states: “…. the collector shall cause supplementary notice to be given, as nearly as may be, in the manner prescribed by section 9 and subject to the limit of time imposed by sub-section (1) of that section, and the provisions of sections 10 to 16 shall, so far as they are applicable be deemed to apply to any further inquiry and award which may be held or made in consequence of such supplementary notice”.

All these instances point towards one argument: the legislature has specifically provided the power of issuing supplementary notices to agencies if required. Furthermore, the Finance Act 2018, which amended the Customs Act 1962 to include supplementary notices, also amended the Securities Contracts (Regulations) Act, 1956 (SCRA); however, the Parliament did not deem it necessary to include the facet of Supplementary Show Cause Notices under the SCRA or SEBI Act, although the same was being touched upon concerning the Customs Act, 1962. Nevertheless, a Casus Omissus cannot be inferred because the Parliament has not amended the SEBI Act to include the issuance of supplementary notices. Therefore, it is not SEBI’s function or within its power to enlarge, improve or change the law; if the Parliament had intended to provide the facet of Supplementary Show Cause Notices under the SEBI Act, then it would have done so in clear language.

Conclusion

The growth of the legislative power of the executive is a significant development of the twentieth century. The doctrine of laissez-faire is followed on a large scale to minimize the intervention of governments in private activities. It is not possible for the legislature to deal with everything; therefore, there comes delegated legislature, which helps them delegate some powers to the executive. As mentioned earlier, there is a fine undefinable line between the delegated legislature and excessive delegation. Crossing that line and moving towards the latter often results in arbitrariness and despotism. In this context, it is pertinent to mention Justice B V Nagarathna’s dissenting opinion in the recent Supreme Court verdict on Vivek Narayan Sharma v. Union of India (commonly known as the “Demonetisation verdict”), Justice Nagarathna noted that any vast power conferred by the process of delegated legislation becomes excessive delegation, and thus, is arbitrary and unconstitutional.

Based on all these observations, it can be said that SEBI’s power of issuing Supplementary Show Cause Notices, without a properly laid framework, suffers from the vice of despotism. It is a modern-day example of excessive delegation of power. The Central Government must immediately formulate a structure or a framework—as they have done for other agencies—to curtail this arbitrary power of SEBI.

[1] Adjudicating Officer, Securities, and Exchange Board of India vs. Bhavesh Pabari (2019) SCC OnLine SC 294.

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