INTRODUCTION

The Securities and Exchange Board of India (SEBI) is the pivotal regulatory body overseeing the securities market in India. It was established in 1988 as an executive body, to address the need for a unified, autonomous authority to regulate and nurture the Indian securities market and protect the interests of the retail investors. It was given statutory authority in 1992, which highlighted the imperative of a robust regulatory framework to safeguard investor interests, promote transparency, and ensure fair practices within the financial markets. Alongside SEBI, the Securities Appellate Tribunal (SAT) was established as an statutory body under the Section 15K of the Securities and Exchange Board of India Act, 1992 to hear and dispose of appeals against orders passed by the SEBI or by an adjudicating officer under the Act; and to exercise jurisdiction, powers and authority conferred on the Tribunal by or under this Act or any other law for the time being in force.

SEBI’S REGULATORY POWERS OVER EXCHANGES FOR MARKET INTEGRITY

The Securities Contract (Regulation) Act of 1956 confers upon the Securities and Exchange Board of India (SEBI) the authority to acknowledge, recognize and oversee both stock exchanges and commodity exchanges within the country.^[1] Additionally, the Central Government holds the prerogative to instruct these exchanges to formulate specific rules conducive to public interest and the sustained advancement of the market.^[2] It is upon all exchanges to adhere meticulously to the directives set forth by both the SEBI and the Central Government, incorporating and executing the regulatory frameworks established by the SEBI within the stipulated timeframes. Failure to comply with these guidelines may lead to legal consequences as prescribed.^[3]

The exchanges are thus mandated to comply with the rules and directives set forth by both the SEBI and the Central Government. This compliance is substantiated by various provisions within the regulatory framework governing securities markets in the country. SEBI is bestowed with powers to regulate the functioning of stock exchanges, including the power to issue directions, guidelines, and regulations to ensure fair and orderly trading in securities markets.^[4] It is also empowered to issue regulations for the development and regulation of securities markets. These regulations are binding on all stock exchanges and market participants.^[5] It is also binding for every recognized stock exchange to comply with the conditions of recognition and follow the guidelines, rules, and regulations issued by SEBI.^[6]

SEBI’s regulations aim to maintain the integrity of the markets by curbing malpractices like insider trading, market manipulation, and fraudulent activities. It also aims to enhance investor awareness, facilitate easy access to information, and safeguard their investments through stringent disclosure norms and fair market practices and thereby fostering market development by introducing measures that encourage innovation, liquidity, and efficiency within the securities market.

SEBI’S LEGAL AUTHORITY AND REGULATORY POWERS

SEBI has been conferred with a broad spectrum of regulatory authority which empowers it to oversee, regulate, and shape various fundamental aspects of the securities market landscape. Section 11 of SEBI Act is a pivotal provision conferring extensive powers upon SEBI, the apex regulatory body governing India’s securities markets. It grants SEBI substantial authority to create directives, guidelines, and regulations governing various facets of the securities market, including the issuance and trading of securities, investor protection, insider trading, and market conduct. It serves as the backbone of SEBI’s regulatory framework, providing legal backing for formulating and implementing rules crucial for ensuring the integrity, transparency, and efficiency of securities markets. Its broad scope enables SEBI to swiftly adapt to evolving market conditions, enhancing investor confidence and ensuring a fair, transparent, and well-regulated securities market ecosystem. It further vests with SEBI to formulate regulations, guidelines, and rules governing the conduct and operations of market intermediaries, listed companies, and other market participants. It also mandates the creation of rules and regulations concerning several critical aspects, including the issuance and trading of securities, prevention of fraudulent and unfair trade practices, insider trading regulations, and measures to protect investor interests. It also allows it to introduce measures to enhance market liquidity, facilitate capital raising for companies, and encourage innovative financial products and trading mechanisms. It can also formulate rules to promote investor education, mandate disclosure requirements by listed entities, and regulate the conduct of market participants to safeguard investor interests. It can further enforce its regulations and directives, imposing penalties and sanctions for non-compliance by entities operating within the securities market.

The powers under Section 11 can be divided into two heads: legislative & executive powers and quasi judicial powers. The Board exercises its legislative power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. The only check upon exercise of such wide-ranging powers is that it must comply with the Constitution and the Act. In that view the expert Tribunal which has constituted its scrutiny must be held to be of wide review powers. The Tribunal must, thus, be allowed to exercise its own jurisdiction conferred on it by the statute without any limitation.^[7]

IMPACT OF LEGAL PRECEDENTS ON SAT’S AUTHORITY – DISTINCTIONS BETWEEN QUASI-JUDICIAL AND ADMINISTRATIVE ORDERS OF SEBI

The Section 15T^[8] of the Act empowers the SAT to hear the appeals from the decisions taken by the Board. This Section in Chapter VIB was inserted by an amendment Act of 1995. In the process of determining the jurisdiction of the SAT, contentious deliberations have arisen regarding the extent to which the SAT is empowered to adjudicate upon appeals brought forth by persons aggrieved by the decisions of SEBI pertaining to its administrative, legislative, and executive powers, in addition to its quasi-judicial functions. This ambiguity was finally addressed in the landmark case of NSDL v. SEBI^[9].

It had overturned the decision of Clariant International Ltd. &Anr. vs. SEBI^[10] which held that the expression “order” is extremely wide, and there being nothing in the Act to restrict an appeal only against quasi-judicial orders, appeals would lie against all three types of orders under the Act i.e. administrative orders, legislative orders as well as quasi-judicial orders.

The court while determining the difference between various powers of SAT had relied upon various landmark judgements such as Province of Bombay vs. Kushaldas S. Advani^[11], Jayantilal Amrit Lal Shodhan vs. F.N. Rana &Ors.^[12] In the process of adjudication, the court heard the applicant, leading to the interpretation of the appellate jurisdiction of the SAT. The petitioners emphasised their contention that the SAT exclusively possesses quasi-judicial authority and is not empowered to entertain appeals related to legislative and executive powers for which they had relied on the following arguments:

• Section 15M^[13] of the Act specifies the qualifications required for the appointment of the Presiding Officer of the three-member Appellate Tribunal. This provision mandates that the Presiding Officer must be a sitting or retired Judge of the Supreme Court, a sitting or retired Chief Justice of a High Court, or a sitting or retired Judge of a High Court with a minimum of 7 years of service. This requirement indicates that the Appellate Tribunal, comprising a member of the higher judiciary, is primarily intended to adjudicate appeals against quasi-judicial orders.
• Section 15-I^[14] of the Act empowers the Board to appoint an officer not below the rank of a Division Chief as an adjudicating officer, responsible for conducting inquiries, providing a hearing to the concerned individual, and imposing penalties. This provision indicates that such officers primarily exercise quasi-judicial functions.
• Sub-section (3) of Section 15T stipulates that every appeal must be filed within 45 days from the date the individual receives a copy of the order made by the Board or the adjudicating officer. This suggests that the order referred to in sub-section (1) of Section 15T pertains solely to quasi-judicial orders, as administrative orders and legislative regulations made by the Board are typically not personally received by the aggrieved party.
• Sub-section (5) of Section 15T requires that a copy of every order made by the Appellate Tribunal be sent to the Board, the parties involved in the appeal, and the relevant adjudicating officer. This provision indicates that the concerned adjudicating officer and the parties involved in the appeal are specifically related to quasi-judicial proceedings.
• Section 15Z^[15] of the Act provides for an appeal to the Supreme Court from any “decision or order” of the Securities Appellate Tribunal on questions of law arising from such orders. This further underscores that the orders subject to appeal are of a quasi-judicial nature.

The Apex Court also looked upon the two judgments under Acts which deal with expert bodies like SEBI.

• In the case of PTC India Ltd. vs. Central Electricity Regulatory Commission^[16], the Supreme Court had to interpret various sections of the Electricity Act, 2003. The court ultimately concluded that the Appellate Tribunal for Electricity lacks the authority to determine the validity of Regulations framed under the Central Electricity Regulatory Commission pursuant to Section 178^[17] of Electricity Act, 2003. However, the validity of these Regulations may be contested through judicial review under Article 226^[18].
• This ruling was subsequently applied in the case of BSNL vs. TRAI &Ors^[19]. Following an amendment to the Telecom Authority of India Act, 1997 in 2000, which stripped TRAI of all quasi-judicial functions, the question before the Court was whether the Appellate Tribunal, TDSAT, had the jurisdiction under Section 14(b)^[20] of the TRAI Act to entertain challenges to regulations framed by TRAI under Section 36^[21] of the TRAI Act. The Supreme Court ruled that TDSAT does not possess such jurisdiction, as the regulations framed by TRAI under Section 36 of the TRAI Act are of a legislative nature.

The Apex Court after listening to the contention of both parties and after reviewing various legal precedents, the court held that Section 15T pertains solely to quasi-judicial orders, regardless of the interpretation given to the Section earlier in this judgement. SEBI, established by the Act, possesses administrative, legislative, and quasi-judicial functions. Rules formulated under Section 29^[22] and Regulations established under Section 30^[23] are required to be presented before Parliament under Section 31^[24] of the Act. Appeals under Section 15T encompass orders which are quasi-judicial in nature, as well as orders issued under the Rules and Regulations. Conversely, administrative orders such as circulars issued under Section 11(1) of the Act fall outside the appellate jurisdiction of the Tribunal, as previously explained.

It is hereby clarified that the opportunity to initiate suitable legal recourse via judicial review proceedings to challenge any circular or other administrative and legislative orders of SEBI is available through judicial review under Article 226 before the High Court.

Authored by:

Rohan Kumar Tolani,B.Sc.LL.B.(Hons.) [Data Science] (2021-26), School of Law, Forensic Justice & Policy Studies, National Forensic Sciences University, Gandhinagar

^[1] Securities Contract (Regulation) Act, 1956, § 4, No. 42, Acts of Parliament, 1956 (India).

^[2] Securities Contract (Regulation) Act, 1956, § 8, No. 42, Acts of Parliament, 1956 (India).

^[3] Securities Contract (Regulation) Act, 1956, § 23, No. 42, Acts of Parliament, 1956 (India).

^[4] Securities and Exchange Board of India Act, 1992, § 11, No. 15, Acts of Parliament, 1992 (India).

^[5] Securities and Exchange Board of India Act, 1992, § 11B, No. 15, Acts of Parliament, 1992 (India).

^[6] Securities Contract (Regulation) Act, 1956, Rule 19

^[7] Clariant International Ltd. &Anr. vs. Securities & Exchange Board of India [(2004) 8 SCC 524].

^[8] Securities and Exchange Board of India Act, 1992, § 15T, No. 15, Acts of Parliament, 1992 (India).

^[9] 2017 SCC OnLine SC 256

^[10] Supra

^[11] [(1950) SCR 621]

^[12] [(1964) 5 SCR 294]

^[13] Securities and Exchange Board of India Act, 1992, § 15M, No. 15, Acts of Parliament, 1992 (India).

^[14] Securities and Exchange Board of India Act, 1992, § 15I, No. 15, Acts of Parliament, 1992 (India).

^[15] Securities and Exchange Board of India Act, 1992, § 15Z, No. 15, Acts of Parliament, 1992 (India).

^[16] (2010) 4 SCC 603

^[17] Electricity Act, 2003, § 178, No. 36, Acts of Parliament, 2003 (India).

^[18] INDIA CONST. art. 226.

^[19] (2014) 3 SCC 222

^[20] The Telecom Regulatory Authority of India Act, 1997, § 14 cl. b, No. 24, Acts of Parliament, 1997 (India).

^[21] The Telecom Regulatory Authority of India Act, 1997, § 36, No. 24, Acts of Parliament, 1997 (India).

^[22] Securities and Exchange Board of India Act, 1992, § 29, No. 15, Acts of Parliament, 1992 (India).

^[23] Securities and Exchange Board of India Act, 1992, § 30, No. 15, Acts of Parliament, 1992 (India).

^[24] Securities and Exchange Board of India Act, 1992, § 31, No. 15, Acts of Parliament, 1992 (India).

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Introduction:

Addressing stock exchanges necessitates the crucial implementation of Enhanced Surveillance Measures to oversee and regulate trading activities. These protective measures ensure the fairness and transparency of trades, simultaneously identifying and thwarting market manipulation, insider trading, and other fraudulent practices. Surveillance measures play a pivotal role in safeguarding market integrity, investor interests, and overall market stability. Detecting and preventing fraudulent activities not only safeguard these aspects but also promote transparent and ethical trading practices.

To enhance market integrity and safeguard investor interests, SEBI (Securities and Exchange Board of India) and stock exchanges continuously introduce diverse surveillance measures. Firstly, they aim to inform and caution investors dealing with such securities. By raising awareness, investors are encouraged to approach these securities with heightened caution, conducting thorough research for informed investment decisions. Secondly, the measures prompt market participants to exercise necessary caution when engaging with these securities. The implementation of surveillance measures contributes to fostering a responsible and knowledgeable trading environment, motivating market players to remain vigilant and proactive in their trading activities.

In addition to existing measures like Additional Surveillance Measures (ASM) and Graded Surveillance Measures (GSM), SEBI and stock exchanges have decided to roll out the Enhanced Surveillance Measure (ESM) framework. This framework is exclusively designed for Micro-Small Companies listed on the main board with a market capitalization of less than ₹500 crores. It came into effect on June 5, 2023, as per NSE Circular no. NSE/SURV/56948 dated June 02, 2023, and BSE Notice No. 20230602-44 dated June 02, 2023.

Shortlisting Criteria for Enhanced Surveillance Measures Framework:

In the Enhanced Surveillance Measure (ESM) framework, specific criteria are employed to select stocks. The shortlisting process comprises two stages:

ESM Stage I:

The shortlisting criteria are met if either of the following conditions is satisfied:

High-Low Price Variation (computed based on corporate action adjusted prices) over a period of 3 months, 6 months, or 12 months equals or exceeds 1 standard deviation of the High-Low variation of all Micro-Small Cap Companies. The minimum thresholds are as follows:

3 months: > 75%
6 months: > 100%
12 months: > 150%
Close-to-Close Price Variation (computed based on corporate action adjusted prices) over a period of 3 months, 6 months, or 12 months equals or exceeds 1 standard deviation of the Close-to-Close Price variation of all Micro-Small Cap Companies as defined above. The minimum thresholds are as follows:

3 months: > 50%
6 months: > 75%
12 months: > 100%

ESM Stage II:

Securities already in Stage I must satisfy the following conditions:
In 5 consecutive trading days: The Close-to-Close Variation is equal to or exceeds 15%.
On a monthly basis: The Close-to-Close Variation is equal to or exceeds 30%.

Nevertheless, there is no cause for concern among Public Sector Enterprises, Public Sector Banks, or Securities offering derivative products, as they are specifically exempted from the ESM framework.

Micro-Small Companies listed on the main board of the stock exchange with a market capitalization of less than ₹ 500 crores.

Impact of Scrips Entering the Enhanced Surveillance Measures Framework:

Securities meeting the Enhanced Surveillance Measure (ESM) criteria may experience changes, including a transfer from the Rolling Settlement segment to the Trade-for-Trade (TFT) segment. The effects differ based on the stage within the Enhanced Surveillance Measures framework:

ESM STAGE I:

For securities in this stage, the applicable margin becomes 100% from T+2 day. Additionally, trade settlement is conducted under a price band of either 5% or 2% if the scrip is already in the 2% band.

ESM STAGE II:

Securities in this stage undergo trade settlement under a 2% price band. Furthermore, trading is permitted once a week with a Periodic Call Auction. Starting July 24, 2023, the applicable margin for these securities becomes 100%, and trade settlement is conducted under a 2% price band on all trading days during Periodic Call Auction, as per NSE Circular no. NSE/SURV/57609 and BSE Notice no. 20230718-46 dated July 18, 2023.

Once a security enters the Enhanced Surveillance Measures framework, it remains there for a minimum of 90 calendar days. However, if a security is in Stage II, it stays in Stage II for a minimum of 1 month. After this month, during the weekly stage review, if the close-to-close price variation is less than 8% within that period, it can move to Stage I of the framework. Securities completing 90 calendar days in the framework (meeting the condition) become eligible for a stage-wise exit, provided they do not meet the entry criteria specified in the Shortlisting criteria for Stage I.

Various Concerns Regarding Entry into ESM Framework:

Entering the Enhanced Surveillance Measure (ESM) framework can pose several challenges for companies, raising substantial concerns:

Trading Restrictions:

Companies in the ESM face restrictions on trading, including trade settlement under stricter conditions and narrower price bands. These limitations can impede trading liquidity, potentially impacting price volatility, and creating challenges for investors.

Negative Market Perception:

Despite exchanges emphasizing that ESM inclusion is solely due to market surveillance, it may still lead to negative perceptions among investors. Being in the ESM could raise concerns about a company’s financial health, governance practices, or compliance issues, affecting investor confidence and the company’s market reputation.

Limited Access to Capital:

Companies in the ESM may find it more difficult to raise funds through capital markets. Negative perceptions, coupled with trading restrictions and heightened regulatory scrutiny, can discourage investors, hindering the company’s ability to attract necessary investments and limiting access to capital for growth and financial stability.

Extended Duration in ESM:

Once a security enters the ESM framework, it remains there for a minimum of 90 calendar days, approximately 60 to 62 trading days. If it moves to Stage II, an additional month, roughly 20 trading days, is added. This extended period lacks mechanisms for expediting the process.

Fairness and Liquidity Concerns:

Questions arise about the fairness of restricting trading and reducing liquidity for companies that have paid listing fees for an entire year. While exchanges argue that these measures are essential for investor protection, the narrowed price band and movement to the TFT segment significantly reduce liquidity for these companies.

Stringency of Measures:

The introduction of stringent measures under ESM raises questions, considering the existence of Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM). The impact on liquidity and the necessity of such measures are subjects of scrutiny.

Legal Challenges:

Companies affected by the ESM framework might challenge its validity. For instance, M/s. Mercury EV-Tech Ltd, currently in ESM Stage II, has challenged the framework at the Hon’ble Securities Appellate Tribunal (SAT). This legal challenge reflects the concerns and impacts on trading volumes experienced by companies within the ESM framework.

In summary, the ESM framework brings about potential drawbacks for companies, ranging from trading restrictions and negative market perceptions to challenges in accessing capital and liquidity concerns. These issues warrant a careful evaluation of the framework’s impact on the overall market ecosystem and the companies involved.

Conclusion: Striking a Balance with Enhanced Surveillance Measure (ESM):

In summary, the implementation of the Enhanced Surveillance Measure (ESM) introduces a complex dynamic for companies listed on stock exchanges, encompassing both advantages and disadvantages.

Positive Aspects:

On the positive side, the ESM plays a crucial role in promoting fair and transparent trading practices. Its active detection of market manipulation and protection of investor interests underscores its significance. The heightened regulatory scrutiny accompanying the ESM contributes to market integrity, ensuring a level playing field for all participants.

Potential Drawbacks:

However, the ESM brings forth notable challenges for companies under its purview. Trading restrictions, a key challenge, can impact liquidity due to narrower price bands and stricter trade settlement conditions. These constraints may disrupt trading ease and potentially influence price volatility. Such restrictions can contribute to negative perceptions among investors, raising concerns about the financial health, governance practices, or compliance of the affected companies.

Balancing Act for Regulators and Exchanges:

For regulatory bodies and exchanges, achieving a delicate balance between effective market surveillance and providing growth opportunities for companies is paramount. Striking this balance ensures the maintenance of investor protection without unnecessarily hindering a company’s ability to raise funds, expand operations, and foster sustainable growth.

Proactive Management for Companies:

Companies operating under the Enhanced Surveillance Measures should proactively manage their reputation and engage with investors to address concerns, thereby maintaining trust in the market. The ripple effect of negative perceptions stemming from ESM inclusion emphasizes the need for transparent communication and strategic efforts to regain investor confidence.

In conclusion, the ESM is a tool with a dual nature, serving as a guardian of market integrity while presenting challenges for the companies it encompasses. The ongoing evaluation and fine-tuning of this framework are essential to strike an optimal balance, ensuring the coexistence of robust market surveillance and a conducive environment for corporate growth.

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