The Supreme Court expressed frustration with Sebi for taking a decade to issue a show-cause notice to a finance company accused of misappropriating funds raised through a preferential allotment.
In a significant admonition to the Securities and Exchange Board of India (SEBI), the Supreme Court of India expressed its dissatisfaction with the regulator’s protracted investigation timeline, spanning a decade, into allegations of listing norm violations and unfair trade practices. The apex court’s critique underscores a pressing need for regulatory efficiency and accountability within India’s financial market oversight mechanisms.
The bench, comprising Justices Sanjiv Khanna and Dipankar Datta, posed critical questions to SEBI’s counsel, highlighting concerns over the regulator’s efficacy and the global perception of its regulatory standards.
“Does it take ten years for India’s premier regulator to conclude an investigation? Is it an effective and good regulation practice? Is that the standard you want the world to know of the regulator that you are?”
the justices inquired, signaling a deep concern over the pace at which SEBI operates.
This rebuke came to light during proceedings related to SEBI’s investigation into Alps Motor Finance Ltd (AMFL), which was accused of misusing funds raised through preferential allotment back in August 2013. Despite the Bombay Stock Exchange (BSE) identifying potential violations in 2016, SEBI’s formal engagement, marked by the issuance of a show-cause notice, did not occur until 2023—a delay that the court found unacceptable.
The Supreme Court’s frustration was palpable as it addressed SEBI’s counsel, questioning the rationale behind the delay in initiating the investigation post-BSE’s flagging of the issue and the subsequent inaction until 2023.
“Explain the delay…Why did you take around two years to start the investigation after BSE flagged it? And what did you do between 2018 and 2022? You issued a show-cause notice in 2023. Is this what’s expected from a good regulator? We can’t keep on accepting your lethargy,”
the bench stated, emphasizing the unacceptable nature of SEBI’s sluggish response.
Further, the court suggested potential complicity within SEBI, pointing to the extended timelines as indicative of internal issues.
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“It takes 18 months for you to start an investigation, which takes another 50 months to complete. This is wrong. Your officers must be taken to task. This was done to help them (the company),”
the justices remarked, indicating a need for accountability within the regulatory body.
In defense, SEBI’s representative, Additional Solicitor General N Venkatraman, cited the regulator’s workload and policy focus as factors contributing to the delays. He referenced a report from SEBI’s executive director (investigation), which was compiled following a court directive from the previous year. However, the bench was unconvinced, labeling the report as a “cover-up” and insisting on disciplinary action against the involved officers.
The Supreme Court’s directive extended beyond SEBI, suggesting that the Union finance ministry should also investigate the lack of action against the company’s directors post-2014, highlighting inconsistencies in regulatory enforcement. This came as the court dismissed SEBI’s appeal against a securities appellate tribunal (SAT) order from July 2023, which had annulled a penalty imposed on AMFL and one of its directors, Brij Kishore Sabharwal, for the misuse of funds raised through preferential allotment.
This case, involving the misallocation of ₹7.01 crore and subsequent loans to six entities, underscores the challenges in regulatory oversight and the imperative for SEBI to enhance its investigative and enforcement mechanisms. The Supreme Court’s critique serves as a clarion call for SEBI to refine its operations, ensuring timely and effective regulation that upholds the integrity of India’s securities market.
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