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The Securities and Exchange Board of India (SEBI) said in an affidavit to the Supreme Court (SC), in connection with the Adani-Hindenburg case.
This is one such exception to the number of enforcement actions initiated by SEBI due to a strange situation and the same cannot be the standard for measuring the number of actions taken by SEBI in general, the regulator said in the affidavit.
According to the affidavit, 6,566 executive actions were taken in fiscal year 2021-22 (FY22), followed by 6,653 actions in 2022-23 (FY23). Of those, more than 11,000 claims were cleared through settlement procedures in fiscal year ’23.
Admittedly, at first, SEBI initiated proceedings against a very small number of entities for violations of securities law in connection with ISO matters. Certain orders issued by SEBI were set aside by the Securities Court of Appeals, the affidavit stated.
Upon SEBI’s appeal, the Supreme Court delivered its judgment dated 8 February 2018 – in Civil Appeal No. 1969 of 2011 SEBI v Rakhi Trading Pvt. Ltd. – adjudicated violations in relation to cases of non-original ISO trades and held that when some unscrupulous elements attempt to manipulate the market to serve their advantage, it becomes necessary on the part of SEBI to intervene and take necessary measures to maintain public confidence in the integrity of the stock market, the regulator said.
The panel of experts appointed by the Supreme Committee noted that procedures initiated by SEBI in FY22 rose to 7,195 cases, compared to 562 cases in FY21 and 249 cases in FY2020.
“In this regard, it is recognized that the increase in arbitral proceedings commencing in 2021-22 i.e. 7195 was out due to the large number of arbitration proceedings in ISO matters commencing that year,” the affidavit states. She added that if the significance of the ISO, due to it being an anomaly, is excluded in FY22, the total number of procedures initiated in the year would be only 416.
Regarding the expert panel’s observation that settlement proposals stalled, since the total number of settlement requests received in FY22 (excluding ISO) was 345, the percentage for FY22 (if we consider non-ISO cases initiated) It would actually be 54.84 per cent, which is more than the previous fiscal ’21 rate of 42.52 per cent, SEBI said in the affidavit.
The overall dramatic increase in enforcement proceedings in one or two fiscal years was due to the large number of arbitral proceedings (i.e. over 13,000 cases) initiated in the ISO matter that commenced that year.
According to SEBI, stock market manipulation or misconduct is not always immediately apparent, and investigations often begin only when a complaint is received. The regulator added that sometimes, many years change the event and dependencies, such as information received from other jurisdictions, other law enforcement agencies, non-intermediate entities, etc., which has an impact on the time to complete the investigation / enforcement.
The affidavit said that setting timelines for launching an investigation and procedures may not be appropriate because the SEBI Board is empowered to form a preliminary opinion (reasonable causes) to designate investigative authority. “The Board’s aforementioned decision to appoint an investigative authority depends on many factors, including when the alleged infringement was noticed/came to SEBI’s knowledge, analysis of information and materials available in the Registry and so on.”
Furthermore, the nature, scope, and complexity of cases in the stock market vary widely, and a “reasonable time” to complete an investigation will depend on the facts of each specific case and the availability of information. Therefore, setting specific timelines for completion of the investigation may be detrimental to the quality of the investigation.
In addition, the completion of the investigation also depends on various factors, including the information provided by the people being investigated, whether these people are cooperative, the availability of information from cross-border financial institutions, and so on. “This may create constraints for the board to operate efficiently as well as increase litigation. In the same way, it may not be appropriate to set timetables for disposing of settlement proceedings.”
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