Is SEBI Toothless, despite Its Powers? Two Cases Expose How Companies and Intermediaries Defy Its Directives
Even as millions of new investors enter the capital market, our investor grievance redress system remains broken. Two recent orders that have gone against the Securities and Exchange Board of India (SEBI) expose the frightening state of affairs.
 
Blame Game with Intermediaries: On 4th December, the securities appellate tribunal (SAT) slapped a penalty of Rs5 lakh on SEBI and rapped it for its ‘lackadaisical approach’ in failing to unfreeze the demat accounts of the Kirloskar family members when its orders against the family had been set aside over a year ago. (Read: SAT Slaps Rs5 Lakh Penalty on SEBI for Noncompliance in Kirloskar Family Case
 
The details are shocking and date back to October 2020. That is when SEBI had passed an order barring Atul, Rahul, Alpana and Arti Kirloskar as well as Jyotsna Kulkarni from accessing the securities market for six months. The Kirloskars approached SAT which passed an interim order staying SEBI’s action – but for an undertaking from the family that they would not sell their holdings in Kirloskar Industries Ltd (KIL). Consequently, their demat accounts were unfrozen barring the KIL shares. Two years later, in October 2022, SAT passed final orders quashing the SEBI action and ordered that the freeze on KIL shares should also be lifted. 
 
Logically, a standard operating procedure (SOP) ought to have been in place over a decade ago to transmit regulatory/judicial/tribunal orders to regulated intermediaries and ensure they are acted upon. After all, SEBI routinely issues and revokes such orders. This case paints a grim picture of how things really work. 
 
The freeze on KIL shares wasn’t lifted after the  SAT order in October 2022. So the Kirloskars wrote to SEBI and the National Securities Depository Limited (NSDL) on 22nd and 23rd February 2023, respectively, asking for action. NSDL immediately responded, on 24th February, asking for details of the order which were duly provided. 
 
What went on between SEBI and NSDL after this is absolutely bewildering. SEBI claimed that it had written to NSDL on 13 December 2022, asking it to lift the freeze. Why, then, did NSDL fail to act? Believe it or not, it was apparently because the Kirloskars had failed to provide their permanent account numbers (PANs). When know-your-customer (KYC) requirements to open a bank or demat account cannot be completed without a PAN number, does this claim even make sense? Every SEBI order also states the name and PAN of the respondents.
 
It gets worse. After a reminder from the Kirloskars in March, NSDL wrote to SEBI on 13th March, seeking a directive/guidance on lifting the freeze. SEBI did not respond to this email. The question is: Why not? According to SEBI’s deposition before SAT, the email was ‘issued to a wrong person’ and, hence, ‘remained unattended’. So, NSDL ignores SEBI’s email of 13 December 2022, and SEBI ignores NDSL’s email of 13 March 2023. Is it any surprise that so many emails from ordinary investors meet the same fate?  
 
In August 2023, after waiting for five months, the Kirloskars again reminded NSDL and simultaneously decided to approach SAT for directions to SEBI to unfreeze the shares. SAT, in turn, asked NSDL, which was not a party to the suit, to appear and respond.
 
SAT says when the Kirloskars approached it on 1 November 2023, “all hell broke loose. The demat accounts and the shares of the appellants were defreezed on November 03, 2023. This by itself speaks volumes of the functioning of SEBI in reacting to matters at the last moment.”
 
Although SAT took a ‘dim view’ of this blame game and slapped a Rs5-lakh penalty on SEBI, this is not a one-off case. In fact, readers would say: if this happens to the Kirloskar family, what happens to ordinary investors who do not have the financial resources for such action? 
 
Well-known securities lawyers tell me that their clients are routinely harassed in a similar manner. What will it take for SEBI to put in place SOPs and when will it begin to hold its officials accountable for such lapses? SEBI is more likely to challenge this order in the Supreme Court (SC) because it routinely challenges orders where there are adverse comments or costs imposed against it, says a lawyer.
 
The actions of SEBI and NSDL reek of arrogance, incompetence and callous disregard for investor rights; the ‘blame game’ also shows that the depository, a key market infrastructure institution (MII), cares little about SEBI directives. How else would they dare to argue that a PAN was not provided or emails were sent to an incorrect ID? Remember, this is about official communications between the regulator and one of the largest market infrastructure institutions (MIIs)—this is not a retail investor struggling to find the right email ID in SEBI.
 
If the SAT order does not lead to a root-cause analysis and identify specific responsibility, it raises obvious questions about SEBI’s grand plans for the online dispute resolution mechanism announced in September 2023. More about that later. 
 
Recalcitrant Companies: The Khoday Case
Here is another example of how little companies care about regulators. 
 
In August 2023, I wrote about SAT having rapped SEBI for behaving like a ‘post-office’ after Khoday India Ltd (Khoday) refused to demat the shares of KLA Padmanabhasa, 82, a promoter and director of the company (Read: SAT Confirms That SEBI’s SCORES Acts Like a Post-office. What Next for Investor Grievance Redress?). After SEBI acted like a post-office when he filed a complaint with SCORES, the matter went to SAT, which ordered SEBI to issue a fresh order directing Khoday to rectify the violation of securities law that had occurred.
 
On 24th August, SEBI wrote to Venkat Subramanyan, the company secretary and compliance officer of Khoday, to dematerialise the shares within 21 days. The company ignored SEBI’s order until 6th November, when the chairman and managing director (CMD), KL Swamy, wrote to the regulator that ‘after careful consideration of your letter’ the board had ‘rejected your request for dematerialisation of shares’, in line with a unanimous decision of the board. It also informed SEBI that the company will pursue appropriate legal remedies in connection with the SAT order of 3 August 2023. 
 
This suggests that SEBI’s directives and SAT’s orders are mere words with no enforceability. First, SEBI gave Khoday a long rope. It issued a ‘directive’ only when ordered by SAT to do so. The company considers this a ‘request’, not an order. Unless SEBI goes back to SAT and seeks action for contempt, it is signalling that the regulator is toothless, doesn’t matter how empowered it appears on paper.
 
Advocate Joby Mathew, who appeared for Khoday, had previously worked with SEBI’s legal department. When asked, he admitted to being disappointed with SEBI’s failure to enforce its directions and says that his client may have to approach SAT or the registrar of companies (RoC) for compliance.

Khoday’s registrar and transfer agent (RTA) is equally unconcerned about SEBI’s directive. Advocate Mathew says the RTA wants Mr Padmanabhasa to file and produce a first information report (FIR) to seek duplicate shares, although the company secretary had previously confirmed that physical shares are in Khoday’s possession. 
 
As in the Kirloskar case, this is a wealthy investor who has the luxury of being able to fight legal battles. Imagine what happens to ordinary investors caught in such crossfire. They simply lose rights to their hard-earned investment. 
 
As advocate Mathew says, “The recourse available to investors for safeguarding their investments, for a credible dispute resolution and for recovery of money lost to fraud is shrinking.”
 
He also asks, “What is the point of collecting money in the Investor Protection Fund if it does not benefit investors?”
 
This is a question that I have been asking ever since such investor funds have been set up by the ministry of corporate affairs (MCA) and every financial regulator. 
 
PR Ramesh, who also practices securities law after a long stint with SEBI, tells me that his clients regularly face issues because SEBI has failed to convey instructions to banks, depositories and other intermediaries in line with SAT or court orders. While emphasising the need for SOPs, he suggests that the delay in transmitting instructions is often deliberate—because SEBI may be contemplating an appeal before the apex court.
 
He says, “In some cases even where SEBI has instructed Depositories, the Depository Participants (DPs) don't comply. We have cases where we had to issue legal notices claiming damages from the DPs.”
 
Meanwhile, SEBI has announced an online dispute resolution (ODR) platform that requires intermediaries, such as merchant bankers, debenture trustees, registrar to an issue, share transfer agents and a KYC registration agency to redress investor grievances within 21 days.
 
If SEBI cannot enforce its own directives, isn’t this now-postponed online redress rather cosmetic? Indeed, the less consequential complaints will always be resolved and allow SEBI to claim great success by citing overall numbers. For instance, on 13th November, it put out data to say that its SCORES platform had successfully resolved 3,533 complaints out of 5,083 actionable complaints, with an average resolution time of 36 days. 
 
But throwing data cannot hide the fact that it appears toothless in the face of defiance by powerful intermediaries, so what can one expect when it receives directives from those in power?
 
 
Comments
adityag
3 months ago
SEBI toothless? It single-handedly destroyed the fiduciary profession.
santhosh69312
3 months ago
SC is reserved the order in adani case and people have started investing,i look the matter this way, may be adani is offloading his shares to retailers before one more hitback from hindunberg.

Kamal Garg
3 months ago
SEBI, of course, is not toothless; it only conveniently forgets to implement such acts which it does not like to do.
sathya2011
3 months ago
It is evident that SEBI is not exercising their rights nor doing their roles effectively starting from the NSE scam in recent past. However, in spite of repeated assertions about robustness of the institution by the ministry nothing is done to put them on track in the past 10 years and it is disturbing and causing concern for investor community.
rmganatra
3 months ago
SEBI's indifference on such a small compliance with SAT order is bewildering. Ditto with NSDL. Even SAT seems to have deficient systems. Shouldn't it seek declarations from SEBI for compliances?

Things are reported to be unclean in SEBI. But such small matters languishing is amazing!
zoom2mercury
3 months ago
One should not say "toothless" to anyone.
One should introspect especially after the CONTRAVENTION OF farm fires despite DIRECTIVES!
It's simple case of every individual "losing faith" that wrong doings can be set right!
When "Fair is foul and foul is fair, Hover through the fog and filthy air" is prevalent in the society, how can one say "toothless"?
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