In August 1997, a year after one of India’s blue chip firms, Hindustan Lever Limited (now HUL), announced a merger with Brooke Bond, securities market regulator SEBI issued an interim order saying that the Indian unit of the Anglo-Dutch multinational had indulged in insider trading prior to the announcement of the merger.
SEBI said that it had probed the purchase of eight shares of Brooke Bond India by HLL from public investment institution UTI a fortnight prior to the merger announcement on April 19, 1996, and was convinced that it was a case of insider trading. The regulator’s notice was issued to the then chairman of the company, Keki Dadiseth, senior executive directors, and the company secretary — with the threat that criminal proceedings would be launched against them. Armed with powers to impose monetary penalties — which it had first acquired in 1995, three years after becoming a statutory regulator — SEBI said that the company ought to compensate UTI.
Following the uproar, the company management met with top officials of the Finance Ministry to present their version — a move that was criticised, and for good reason. At that time — in the early years of the capital markets regulator — any appeal against SEBI’s orders went to a two-member Appellate Authority in the Finance Ministry. The finance secretary headed the authority — and a meeting with the Lever management came in for flak because of a perceived conflict of interest. Officials, however, sought to deflect the criticism, saying it wasn’t a planned meeting.
A little later, when the final hearing of the case took place, it was suggested to the company that if they compensated UTI for what was reckoned to be a notional loss of Rs 6 crore, the stigma of insider trading would go — and the final order would not reflect the charge. Rather, it would be a case of a “technical mistake”, it was indicated.
But the company replied that it was not willing to do so — because accepting the proposal would amount to an acknowledgment of guilt. In those days, the concept of plea bargaining, or settling a case out of court, was yet to become popular. Also, unlike now, SEBI then wasn’t adequately empowered to impose a huge monetary penalty.
That’s when HLL appealed against the order to the Appellate Authority in the Finance Ministry, which then had Montek Singh Ahluwalia (who was finance secretary) and the special secretary, Banking, C M Vasudev, as members. The Authority struck down the SEBI order, prompting the regulator to approach the Bombay High Court.
It was against this backdrop that discussions took place in the Finance Ministry on handling the fallout. The issue before the government was whether to defend the order passed by the authority. A decision was taken that there was no need to defend it — as it wasn’t an order of the Finance Ministry, but of officials in the Ministry, acting in a quasi judicial role.
The Ministry also decided that it was time to effectively transfer the functions of the Appellate authority. The 1995 law that provided for monetary penalties was a breakthrough: it was the first time that an agency that was not a court, and was outside the government, was being empowered to punish offenders.
The law — the concept note and drafting of which involved P J Nayak, then a Joint Secretary in the Finance Ministry, (the late) C Achuthan, a Joint Secretary in the Law Ministry, and M S Sahoo, who later went on to become a SEBI member — also provided for a Tribunal where monetary penalties imposed by SEBI could be challenged.
By then, monetary penalties were seen as being far more effective as a deterrent globally than other forms of punishment such as cancellation of licences of stock brokers, depositories, or other intermediaries. In the government, it was also felt that a forum to challenge the orders of a regulator could help promote accountability, and also enhance, over time, the quality of the orders issued by SEBI.
The HLL case prompted the Finance Ministry to act quickly on operationalising the Securities Appellate Tribunal in 1997 — when Montek, who had issued the orders in the HUL case, was still finance secretary, and P Chidambaram was the finance minister. In November 1997, the one-man Tribunal got working — with Achuthan, an officer from the Indian Legal Service, who had had a long stint in the Law Ministry and served on the board of SEBI — at the helm.
By 1999, the government amended the SEBI Act further to allow the Tribunal to handle non-monetary cases as well. This was followed by other changes over the next few years, raising the quantum of monetary penalties — especially after the 2001 securities scam — and making the Tribunal a three-member bench with a presiding officer.
Interestingly, in the 1999 amendments to the securities law, the government mentioned that it was transferring the Appellate function because even those orders that were issued on merit by the Appellate Authority, were being perceived as compromising the regulator’s independence, or as being partial.Years later, the ambit of the Tribunal has been extended to hearing appeals challenging orders issued by two other regulators — IRDA, which supervises insurance companies, and PFRDA, which oversees pension funds. The Reserve Bank of India has been an outlier so far. But the Financial Sector Legislative Reforms Commission, or FSLRC, headed by Justice B N Srikrishna, has made a case for an umbrella appellate authority for the financial sector, called FSAT. That is in the making — and if it that happens, it could signal another change in governance.