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The Curious Case of ‘Standard of Proof’ under the SEBI Regime

Shouryendu Ray[1]

The Board, under the SEBI Act, 1992, enjoys considerable power with respect to the regulation of the securities market and its intermediaries – this includes suspending trading of any security on a stock exchange, restraining entities from accessing the securities market or otherwise dealing in securities, provisional attachment of assets, and significant monetary penalties. The Board functions as a quasi-judicial authority in such proceedings either directly, through its Whole Time Members under Section 11 of the Act, or through delegated authority to the Adjudicating Officer under Section 15-I. Considering the extent of SEBI’s power, it becomes critical for it to follow standards prescribed for establishing culpability of a person accused. However, recent jurisprudence shows SEBI taking a wavering stance on this important issue.

In PwC v. SEBI (Writ Petition No. 5256 of 2010), the issue before the Hon’ble Bombay High Court concerned SEBI’s jurisdiction over audit firms under its mandate to protect investor interest. This was in the context of allegations against PwC under the SEBI (Prevention of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations (“PFUTP Regulations”) in the Satyam case. There, the Court taking note of the special nature – as CAs otherwise are under the regulatory purview of the Institute of Chartered Accountants of India – held that SEBI can proceed against a CA only if there was mens rea (the legal maxim meaning a ‘guilty mind’) or connivance on its part, and not if it stood accused simply of omission.

In a different leg of the same matter before the Securities Appellate Tribunal (S. Gopalakrishnan v. SEBI), SEBI took the position that mens rea, as was prescribed by the Bombay High Court, is not the appropriate standard for ascertaining culpability. For this, SEBI placed reliance on the Supreme Court decision in SEBI v. Kanaiyalal Patel, (2017) 15 SCC 1. In Kanaiyalal, a matter concerning front running and violation of PFUTP Regulations, the Supreme Court, citing its decision in SEBI v. Kishore Ajmera, (2016) 6 SCC 368, took the view that mens rea can be dispensed with and the correct standard is one of ‘preponderance of possibilities’ – a considerably lower threshold of ‘more probable than not’ based on balancing of probabilities. The Supreme Court further held in the matter that merely because the PFUTP Regulations levy penal sanction, proof beyond reasonable doubt (the ordinary standard for criminal prosecution) is not an indispensable requirement.

In the author’s view, importing the civil law standard of preponderance to provisions contemplating criminal sanction is a misstep. Viewed differently, Kanaiyalal has also read Kishore Ajmera erroneously, where the observation was only with regard to civil liability. The Court observed in Kishore Ajmera – “The test, in our considered view, is one of preponderance of possibility so far as adjudication of civil liability … is concerned.” Notably, in the very next sentence, the Supreme Court holds that for Section 24 of the SEBI Act (the “offence” provision covering all regulations made under the SEBI Act), the standard “of course is proof beyond reasonable doubt”.

This leads to an anomaly as, under Section 24, it is the contravention of the SEBI Act that is made punishable with imprisonment of up to ten years. Now, following Kanaiyalal, a contravention of the SEBI Act, say the PFUTP Regulations, may be established basis the lower standard of preponderance of possibilities; and with such contravention being established, one may even be punished with imprisonment. As may be seen from this illustration – importing the civil liability standard of evidence to criminal sanction would lead to an absurdity and worse, miscarriage of justice.

Recently, in Balram Garg v. SEBI, in a case involving insider trading and a violation of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), SEBI submitted before the Supreme Court that the preponderance of possibilities standard, as prescribed by Kishore Ajmera, should also apply for establishing a violation of PIT Regulations. However, distinguishing Kishore Ajmera, the Supreme Court held that in cases of insider trading, mere circumstantial evidence such as trading patterns, timing, etc. cannot be determinative of the existence of a tipper-tippee relationship – an essential ingredient for establishing breach of the PIT Regulations.

With this, the Supreme Court has created two discrete standards of proof under the PFUTP Regulations and the PIT Regulations. This, in the author’s view, is unsustainable, not only due to the absurdity alluded to above, but also the fact that both sets of Regulations emerge from the same provisions in the SEBI Act – viz., Sections 11 and 12A, which covers regulation for the prohibition of fraud and unfair trade practices and insider trading in securities. In the author’s view, since a contravention of the SEBI Act, established through a breach of either PFUTP Regulations or PIT Regulations, could lead to penal sanction, a uniform standard of evidence should be adopted, which should be the one of ‘proof beyond reasonable doubt’; it should not be left to the discretion of SEBI to cherry pick the standard of proof to suit its convenience as doing so could lead to grave miscarriage of justice.

[1]Shouryendu Ray is a Partner at Nora Chambers, New Delhi. He may be reached at

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