Securities law was introduced with the broad objectives: to protect the investors participating in the securities market; and regulate the securities market. In furtherance to the abovementioned objectives, the Securities and Exchange Board of India Act, 19921 (SEBI Act) was framed. SEBI was established as a watchdog of the securities market; SEBI frames various regulations under Section 30 of the SEBI Act2.
Various provisions under the SEBI Act and the Regulations framed thereunder empower SEBI to initiate action in respect of alleged violation of the SEBI Act or the Regulations framed thereunder.
Issuance of show-cause notices
SEBI keeps an oversight on market movements and trends and in exceptional circumstances analyses it to understand if any action needs to be taken. When appropriate either suo motu or on the basis of reports received from the stock exchanges or specific complaints, it conducts an analysis inter alia to determine whether the trading raises suspicion of market manipulation and/or insider dealing. In case such an analysis of the trading information leads to a suspicion of market abuse, then, client details and records are also looked into. If further analysis of these records suggests the possibility of occurrence of market manipulation or insider dealing or other misconduct, then investigations are initiated. On completion of investigations, SEBI Regulations provide detailed procedure for enquiry proceedings to be conducted in respect of intermediaries for their prima facie, violations of SEBI Act and its Regulations.
Pursuant to the completion of the investigation, show-cause notices are issued to find out as to why suitable directions including directions prohibiting the market participant concerned from dealing in securities and accessing the capital market, for an appropriate period, should not be issued, for creation of artificial market, price manipulations, insider trading, non-compliance of takeover codes, etc.
In addition to the above, show-cause notices are also issued for initiating prosecution proceedings against the intermediaries and the non-intermediaries for misstatement in prospectus, market manipulations, delay in transfer of shares, substantial acquisition without following procedure of open offer in violation of takeover code, etc.3
However, neither the Act nor the Regulations lay down a time period within which such an action is to be initiated or even completed. This has posed a serious problem as show-cause notices are being issued even after seven or eight years of the alleged violation. For instance, in a case where there has been manipulation of market by artificial trading in securities or synchronised trading which has deceived the investors in 2009, show-cause notices to the violators are being issued as late as in 2015. The defence taken by SEBI in such cases is that the investigation was completed in 2015 and hence, the notice could be issued only in 2015. The violators take the plea that even in the absence of a provision laying down the time period within which such a notice could be issued, such action must be taken by SEBI within reasonable period of time. While in several matters the Securities Appellate Tribunal (SAT)/courts accept the indirect penetration of the reasonable time principle within the realm of securities law; in some other cases, SAT/court apply the statue strictly to allow such notices/proceedings.
Law of limitation—a lex fori occupies an important position in the enforcement of legal rights and remedies. The statues of limitation or the statues providing substantive rights by virtue of certain provisions determine the period within which a claim must be asserted before a court of law. Absence of such provisions would imply that one can virtually sit over her rights and make stale claims whenever convenient to do so.
Statutes of limitation, like the equitable doctrine of laches, in their conclusive effects are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them.4
For instance, Regulation 22 of the SEBI (Buy Back of Securities) Regulations, 1998 empowers the SEBI to carry out investigation in respect of the conduct and affairs of any person associated with the process of buy-back. No provision providing for a period within which such investigation must begin or be completed.
The law of limitation occupies a very dominant position in adjective laws. No one can be permitted to sleep over his or her rights and later raise stale claims and disturb equities. Delay could lead to a waiver, acquiescence or even estoppel in respect of the right.
Though there are no provisions under the SEBI Act or the SEBI Regulations laying down the time period within which investigations must be completed and show-cause notice must be issued, Section 15-W of the SEBI Act, 19925, provides that the provisions of the Limitation Act, 19636 are applicable to appeal before SAT.
While the above provision is a window towards lex fori in securities law, there may be a requirement of distinguishing between limitation and period within which any authority must take action. Generally, the term “period of limitation” or “limitation” refers to period prescribed within law to initiate action in respect enforcement of a right when there has been violation of a right/prevent such violation. For instance, limitation to institute a suit by a party would be three years from the date when the cause of action arose. However, the period or the timeline which is the point of discussion in this article is the period within which an authority, in this case the SEBI must initiate proceedings/issue show-cause notice.
Such a scenario wherein an authority must act in a time-bound manner for initiating any action is found in various statutes:
Under the Income Tax Act, 19617, an assessing officer can serve a notice for reopening of assessment under Section 1488 to an assessee within three years from the end of the relevant assessment year. However, in certain other cases wherein there is evidence which reveals that the income chargeable to tax, represented in the form of (i) an asset;(ii) expenditure in respect of a transaction or in relation to an event or occasion; or (iii) an entry or entries in the books of account, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year, a notice can be served to an assessee within 10 years from the relevant assessment year. This framework assures the assesses of the fixed tenure within which their assessment may be reopened, and it places an obligation on the agency to initiate appropriate enforcement proceedings within the fixed timeframe.
Under the Customs Act, 19629, the authorities are required to act in a time-bound manner. As per Section 28 of the Customs Act, 196210 the proper officer shall serve a notice on the assessee within two years of the alleged violation. The Customs Act, 1962 also provides that in case of collusion or any wilful misstatement or suppression of facts, the period of limitation to serve a notice is extended to five years.
Similarly, as per Section 11-A of the Central Excise Act, 194411, the Central Excise Officer must serve a notice on the person chargeable with duty which has not been levied or paid or which has been short-levied or short-paid or to whom the refund has erroneously been made within one year from the relevant date. In cases where there is fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act or of the rules made thereunder with intent to evade payment of duty, the period of limitation to serve a notice is extended to five years.
Absence of provisions of limitation and view taken by courts/tribunals
The SAT has time and again observed that even though there is no period of limitation prescribed in the Act and Regulations for the issuance of a show-cause notice or for completion of the adjudication proceedings the authority is required to exercise its power within a reasonable period. SAT has in several cases held that long delays in issuing a show-cause notice is fatal to the proceedings. Several orders passed by SEBI have even been set aside on this ground alone.
For instance, in Libord Finance Ltd. v. SEBI12 where the registration certificate of a merchant banker had already expired on the date of issuance of the show-cause notice i.e. 2004 — for alleged violation of law in the year 1996, the SAT allowed the appeal and quashed the proceedings inter alia due to the delay in issuance of the show-cause notice.
In Shriram Insight Share Brokers Ltd. v. SEBI13, the SAT quashed a show-cause notice which was issued after a period of more than 7 years and further opined that old and stale dispute should not be raised.14
Further in cases arising out of violation of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 200315, (i) Ashlesh Gunvantbhai Shah v. SEBI16; (ii) Rakesh Kathotia v. SEBI17; (iii) Ashok Shivlal Rupani v. SEBI18; (iv) Sanjay Jethalal Soni v. SEBI19, SAT has quashed the show-cause notices as the same were issued after a period of long delay.
Whereas, in Metex Mktg. (P) Ltd. v. SEBI20 which involved violation of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 201121, the SAT rejected the contention that the show-cause notice and the proceedings were liable to be quashed due to inordinate delay because there is no period of limitation prescribed in the said Regulations and SEBI Act.
In Subhkam Securities (P) Ltd. v. SEBI22, the SAT made certain interesting observations in a case wherein the SEBI took twelve years to complete proceedings in a matter relating to market manipulation,
5. … This is not the way to conduct proceedings against entities who are charged with serious allegations like market manipulation or insider trading. Expeditious disposal of such proceedings by the Board alone will ensure that the Board is carrying out its duty effectively to protect the interest of investors in securities and to promote the development of and regulating the securities market as mandated by Section 11(1) of the Act23. Inordinate delay in conducting inquiries and in punishing the delinquent not only permits market manipulator to operate in the market, it also has demoralising effect on the market players who are ultimately “not found guilty” but Damocles' sword of inquiry keeps hanging on them for years together from the date of starting investigation by the Board to the date of completion of inquiry proceedings…. We hope that the Board will take necessary steps to ensure that inquiry proceedings against market manipulators are completed expeditiously and guilty persons are punished in a time-bound manner so that the objective of having a clean and investor friendly market can be achieved.
In SEBI v. Bhavesh Pabari24, the Supreme Court of India rejected the contention that as the show-cause notice was issued after a period of 8 years, the proceedings should be quashed stating that what is reasonable time would depend upon the facts and circumstances of the case; nature of default/statue; prejudice caused; whether third-party rights had been created.
In H.B Stockholdings Ltd. v. SEBI25, the SAT was considering delay of more than 11 to 12 years in completion of the proceedings and a delay of more than 5 years for issuance of the show-cause notice. The the SAT set aside the impugned order in view of the unconscionable delay. The SAT inter alia held that:
20.…At this point we find it pertinent to note that human memory has a short shelf life. Allowing matters to go on and on for years together by the respondent serves no purpose, rather it risks loss of evidence such as important documents which may get destroyed while the issue gathers dust. Such systemic failures occur to the disadvantage of all parties concerned and lead to consequences such as genuine violators being allowed to function normally in the capital market for years together, whereas in some situations the reputation of innocent entities gets tarnished as they wait for the wheels of justice to turn a bit faster than the pace at which they seem to be going.
Similarly, in Khandwala Securities Ltd. v. SEBI26, the SAT was considering a delay of 9 years in completion of the proceedings wherein the show-cause notice was issued more than 6 years after the transactions took place. Though the SAT held that the appellant therein had violated the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 200327 and code of conduct for stockbrokers, the order insofar as suspension of certificate of registration was set aside in view of the delay incompletion of the proceedings. The SAT held that:
19.…Delay defeats justice and the very purpose for which proceedings are initiated. In the present case, the suspension of certificate of registration after a period of 12 years from the commission of the violation cannot be regarded as reasonable or justified.28
Before the Union Budget 2022-2023 was introduced, the Association of National Exchanges Members of India made several pre-budget representations to the Ministry of Finance to introduce a provision to specify time-limits for issuance of show-cause notices.29 The Ministry of Finance sought response from SEBI and there were speculations that the proposal would find it a place in the Bill.30 However, no such amendment was introduced in the Finance Bill, 2022.
Given the nuanced nature of violations under the securities law, there may not be a straitjacket formula to determine the adequate period within which a show-cause notice must be issued. The period must create a balance between the difficulties faced by market participants in producing evidence to prove their innocence after a lapse of time as well as provide sufficient time to SEBI to investigate the alleged violation and gauge sufficient evidence to initiate proceedings.
In Govt. of India v. Citedal Fine Pharmaceuticals31, the Rules32 framed under the Medicinal and Toilet Preparations (Excise Duties) Act, 195533 were impugned as unreasonable due to the absence of a provision providing for a period of limitation for recovery of duty under the said Act. The Supreme Court rejected the contention and upheld the validity of the impugned rule with a word of caution that in the absence of any period of limitation, the authority is required to exercise its powers within a reasonable period. This case has been relied upon in several decisions of SAT for determining whether the notice or proceeding was within a reasonable period. However, being an open-ended question, there are no objective tests to determine what reasonable period is. It is always left open to say it is determinable based on facts and circumstances of each case. While the discretion may be necessary, but some tests are required, or an outer limit is required to avoid abuse of process.
A participant of the market has a right, has a reasonable expectation that if the market regulator will initiate proceedings against him /her for a purported act of violation of any rules and regulations framed by the regulator, the same would be done within a reasonable period of time. The delay in initiating the proceedings could lead to a stale claim being resurrected and delay in completing the proceedings could lead to mental agony without any fault of the market participant.