SAT order: Pyrrhic victory for Sebi, as tribunal accepts most of Reliance arguments

The Securities Appellate Tribunal's final order on the Reliance 'illegal trading gains' case does not quite vindicate Sebi. Sebi won largely because of the retrospective nature of the rules it brought in Did Reliance Industries, whose appeal against a Sebi order on "illegal trading gains" was rejected by the Securities Appellate Tribunal (SAT) yesterday really lose the argument, as widely reported in the media today (1 July)? and did Sebi really carry the day? The answer is both yes and no. The SAT order dated 30 June and signed by Justice JP Devadhar, and two tribunal members Jog Singh and AS Lamba, clearly says that Reliance's appeal is "dismissed" but the most crucial words are those that precede the word "dismissed." SAT actually says it is dismissing the Reliance appeal not because it has no case, but because of a new retrospective law, Section 15JB of the Sebi Act, which bars it from hearing any appeal against "any order" passed by Sebi in consent proceedings. Thus, "we have no option but to dismiss the appeal." In short, it was the retrospective nature of Sebi's new regulations that did Reliance in. and the retrospective law was brought in just before SAT was about to pronounce its final order on the Reliance appeal. Before we discuss some of the details, here is the history. Some time in November 2007, Reliance (or entities linked to it) took short positions on Reliance Petroleum Limited (RPL, a subsidiary that was to be soon merged with it) in the futures and options (Fand O) segment of the National Stock Exchange. In order to profit from this short position in the futures market, it was alleged that Reliance and entities related to it sold approximately 200000000 shares of RPL in the cash market so as to depress prices in the futures market. This helped it make an "illegal" gain of Rs 5130000000 on its Fand O short positions. Around April 2009, when Sebi investigated the matter, it issued a show-cause notice to Reliance, but the latter filed a consent application on 5 November 2009 seeking to settle the dispute. (A consent application is made by a company accused of wrongdoing with the hope that Sebi will settle the issue with a penalty or stricture without serious admission of guilt. Consent applications are the norm in US SEC insider and illegal trading cases). Sebi rejected the consent application four months later in March 2010 and by the end of that year issued a new show cause based on a re-investigation. The important change in the new show cause was that the insider trading charge was dropped, and the charge now was "illegal trading gains". In April 2011, Reliance filed a fresh consent application with Sebi in line with extant Sebi laws. It also sought to examine certain documents with Sebi - which Sebi apparently stonewalled till November 2012. In November 2012, Sebi gave Reliance the requested documents and called it for a final meeting on 7 December with its Internal Committee (IC, which was examining the consent request). Reliance sought time since it was given 1,300 pages of documents just a few days earlier, but this time was not given. IC then went ahead and made its recommendations to the High Powered Advisory Committee and Sebi finally decided to reject the consent request on 2 January 2013 without hearing the Reliance side of the argument by giving it some time. This is how the case landed up with SAT when Reliance moved it in January 2013 against the Sebi order. Hearings at the SAT continued till January this year and it was about to deliver its order when Sebi made some retrospective law changes. Observes the SAT order "This appeal was fully heard on January 6, 2014, and, on conclusion of arguments, order was reserved. Before reserved order could be pronounced, Sebi, in exercise of powers conferred by Section 15JB of Sebi Act, 1992, and Section 23JA of Securities Contracts (Regulation) Act, 1956, and Section 19IA of the Depositories Act, 1996, framed Sebi (Settlement of Administrative and Civil Proceedings) Regulations, 2014, with retrospective effect from April 20, 2007...In view of 2014 Regulations issued on January 9, 2014, with retrospective effect from April 20, 2007, present appeal was placed on board for directions/hearing from time to time to consider effect of newly introduced provisions to facts of present case." The retrospective effect adequately covered the Reliance case which pertained to a transaction in November 2007. This is what SAT found. One, even though Section 15JB barred SAT from considering an appeal against its consent order, SAT chose to do so because the consent order was given ex-parte - without hearing Reliance. It said Sebi was "not justified" in passing the ex-parte order on 2 January 2013. Two, SAT rejected Sebi's argument that Reliance was seeking wholly irrelevant documents and merely delaying the case. It noted "Argument of Sebi that the appellant was seeking inspection of wholly irrelevant documents with a view to stall proceedings under Section 11B is without any merit. If Sebi was of the opinion that the appellant was seeking inspection of irrelevant documents, then after rejecting the request for inspection, there was no reason for Sebi to give inspection of documents voluntarily after lapse of more than two years." (Italics mine) Three, SAT also rejected Sebi's claim that the rejection of Reliance's consent application had not negatively impacted its claims. SAT said this argument too was "without merit" since the "gravity of the dispute" in the present case involved an amount in excess of Rs 5000000000 and was "such that even Sebi had to disregard its investigation and consequential show cause notice dated April 29, 2009, and had to reinvestigate the matter and thereafter issue fresh show cause notice dated December 16, 2010." These delays indicated that nothing would have been lost by giving Reliance more time to examine the documents. SAT, therefore, held that the "impugned decision of Sebi which abruptly seeks to reject consent application of appellant by ex-parte order dated January 2, 2013, has caused prejudice not only to appellant but also to investors at large." In conclusion, while rejecting Reliance's appeal in view of the retrospective nature of Section 15(JB), which barred SAT from reviewing any consent order, SAT had this to say with finality "We hold that Sebi was not justified in rejecting the consent application without giving an opportunity to the appellant to present its case for settlement." Seems more like a moral victory for Reliance, and a pyrrhic one for Sebi. (Read the full SAT order here) (Disclosure Firstpost anf Firstbiz are published by Network 18 Media and Investments, which is currently being acquired by the Reliance Group through an open offer).