SEBI should promote transparency in bourses by implementing RTI Mechanism
In order to promote transparency and accountability in administration, the Legislature enacted the Right to Information Act, 2005 which came into force on 12 October 2005. The Act empowers Indian citizens to seek information from a Public Authority, thus making the Government and its functionaries more accountable and responsible. The Right to Information Act, 2005 has converted the prevailing culture of secrecy into a culture of openness and transparency in the working of the Government.
The objective of the RTI
The Right to Information Act, 2005 was introduced in the Parliament with an objective to provide information to citizen of India for the purpose to secure access to information under the control of public authorities, in order to promote transparency and accountability in the working of every public authority. The main aim of enacting the Right to Information Act was to access to the information which is held under the control of any public authority which includes Inspection, getting copies / certified copies, records etc. It ensures openness and transparency consistent with the concept of participatory democracy and constitutional right to seek information and be informed. It also ensures that the Government and their instrumentalities are accountable to the governed and checks corruption, harassment and red-tapism.
The act was constituted within the framework and notion of freedom of expression under Article 19 of the Constitution of India, which implicitly, recognizes the freedom of right to information, thus guaranteed the citizens to Right to know about the activities of the state, the instrumentalities, the departments and the agencies of the State.
Right to Information is a Fundamental Right
The Hon’ble Apex Court had, in several Judgments prior to enactment of the RTI Act, interpreted Indian Constitution to read Right to Information as the Fundamental Right as embodied in Right to Freedom of Speech and Expression and also in Right to Life.
Securities Exchange Board of India and Right to Information
The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 with an objective to protect the interests of investors in securities which is well reflected in the Preamble of the SEBI Act which inter alia reads, “An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”.
Thus, the main purpose of the SEBI Act is protection of interest of investors. Chapter IV of the Act enumerates powers and functions of the Board for achieving the purposes of the Act. Sub section (1) of section 11 provides that “subject to the provisions of the Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit”.
Sub section (2) of Section 11, provides without prejudice to the generality of sub section (1) certain specific measures for the purpose. One of the specific measures provided therein is the regulating the business of stock exchanges or other Security Markets, for registering and regulating the working of several types of capital market intermediaries like for instance, stock brokers, sub brokers, Merchant Bankers etc.. SEBI had made several regulations to regulate the conduct of the business of the intermediaries, in the specified areas. Further, SEBI had also issued under section 11 of the Act, the SEBI (Disclosure and Investors Protection) Guidelines, providing extensive guidelines which are quite exhaustive from the disclosure point of view. It also deals with the obligations cast on the stock exchanges, brokers.
SEBI is a “Public Authority” within the meaning of RTI Act
Under the Right to Information Act, 2005, “public authority” as defined u/s 2 (h) of the RTI Act, 2005 means any authority or body established or constituted by any Central or State law and includes any other body owned and controlled by the State or which receive any aid directly or indirectly by the Government and shall include the body whose composition and administration are predominantly controlled by the Government or the functions of such body are of public nature or interest or on which office bearers are appointed by the Government. The SEBI falls within the RTI regime as it is constituted under the Act of Parliament, therefore, clearly a “Public Authority” within the meaning of the Section 2 (h) of the RTI Act, 2005.
Even the US Securities and Exchange Commission, an US counterpart of Indian SEBI is also under the purview of their right to information legislation i.e. Freedom of Information Act (FOIA).
The RTI Applications before the SEBI
The RTI applications before the SEBI largely constitute that of investors who are the victims of the fraudulent trade practice in the stock market which is prevalent in the stock market due to corrupt practices adopted by the market intermediaries (brokers). The fraudulent trade practices adopted by the brokers are wide and varied ranging from change in client code, dabba trading etc, execution of unauthorized trades, and shift of loss making trades to the client account etc. to name a few violating the various provisions of the SEBI Act, its rules & regulations.
Some of these violations are so gross, that they attract the penal provisions also like Indian Penal Code and also Information Technology Act, 2005 as now the share transactions are being executed electronically. The brokers for the obvious reasons would not supply the requisite information to the investors; in fact, in some cases they do not supply the documents which they statutorily are required to supply to the client-investors like contract notes, bills & statement of accounts. The brokers act as interface between the Stock Exchange and the client for execution of share transactions and the parallel records of such executed share transactions along with other records which are statutorily required to be submitted by the brokers are maintained at the stock exchange which in turn report to the SEBI under the various provisions of the SEBI Act and its rules. Therefore, the aggrieved clients approach the SEBI as a stock market regulator, to provide the information under the RTI Act. The investor has a right to seek information from a public authority which is held by the public authority or which is held under its control. Likewise, they can approach the SEBI for the information which is under its control or which is held by Stock Exchange which in turn is under the control of the SEBI. This right includes inspection of work, documents and records; taking notes, extracts or certified copies of documents or records; taking certified samples of material held by the public authority or held under the control of the public authority.
The SEBI has deep pervasive control over Stock Exchanges
The investors approach SEBI as a capital market regulator to use its power actively to seek information from market intermediaries to address investor grievance. The SEBI has a deep pervasive control over the affairs of Stock Exchanges which can be inferred from the provisions of Securities Contracts (Regulation) Act, 1956 (SCRA) as well as provisions of the SEBI Act.
Securities Contracts (Regulation) Act, 1956
The bye-laws framed by stock exchanges under Section 9 of SCRA for the regulation and control of contracts, are required to be approved by the SEBI and after approval, these are required to be published in the Gazette under Section 9(4) of the SCRA. The Central Government and SEBI have the power to supersede the governing body of a recognized Stock Exchange. Section 11 of the SCRA confers powers on the the SEBI to supersede the governing body of a Stock Exchange. The SEBI’s control can be further inferred from the provisions of Section 11 of the SCRA which enables the SEBI to supersede the governing body of a stock exchange. Thus, a stock exchange starts its function only after recognition and even while so functioning remains under the implicit control of the Government through SEBI, which has to be categorized as “pervasive”.
SEBI Act, 1992:
- Preamble of the SEBI Act which inter alia reads, “An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”.
- Section 11(1), which casts a duty upon SEBI to protect the interest of the investors and promote the development of and regulate the securities market.
- Section 11(2)(a), specifically casts a duty upon SEBI to regulate, even the business (means regulation of even day-to-day business) and that is why it is under this section that SEBI from time to time issues directions to Stock Exchanges about the nature, type, extent and percentage of margin money to be taken from the members of Stock Exchanges; Capital Adequacy Norms to be observed by the said members; nature, organization structure and duties of Market Surveillance department etc.
- Section 11(2)(j) requires SEBI to perform such functions and exercise such powers under SCRA 1956, which may be delegated to it by the Central Government.
Moreover, the Stock Exchanges discharge an important public function as they regulate and control the business of sale and purchase of securities. Mere incorporation does not give Stock Exchanges any right to function. It is the grant of recognition by the SEBI which exercises the powers of the Government under SCRA that enables them to function as a stock exchange.
The Stock Exchange is “State” or instrumentality of “State” therefore also “Public Authority”
Section 29 of the SCRA protects actions taken by the Governing Board and officers of the exchange taken in good faith: in the following terms:
“No suit, prosecution or other legal proceeding whatsoever shall lie in any Court against the governing body or any member, office-bearer or servant of any recognized stock exchange … for anything which is done in good faith or intended to be done in pursuance of this Act or of any rules or bye-laws made thereunder.”
Thus, Section 29 of the SCRA is a pointer to show that it is an instrumentality of the State inasmuch as the protection of action taken in good faith has been extended to Stock Exchanges which are granted only to public servants.
The Delhi High Court in Delhi Stock Exchange vs. K.C. Sharma held that stock exchanges are under deep and pervasive control of the Government and that they perform functions of public character. Therefore, they fall within the definition of “State” as given under Article 12 of the Constitution of India. The decision of the Delhi High Court was later on affirmed by Hon’ble Supreme Court of India (K.C. Sharma Vs. Delhi Stock Exchange AIR 2005 SC 2884.
In view of the decision of the Delhi High Court cited above which has been affirmed by the Hon’ble Apex Court, a stock exchange is a “state” within the meaning of Article 12 of the Constitution of India and as such it is amenable to the writ jurisdiction of the superior courts. The SEBI in an RTI case before the Central Information Commission contended that the term ‘public authority’ is broader and more generic than the word ‘state’ under Article 12 of the Constitution of India. Every authority or institution which is a ‘state’ has to be a public authority under Section 2(h) of the Right to Information Act, 2005. Even a non-governmental organization if substantially financed directly or indirectly by funds provided by the Government may be a public authority. Even a private institution substantially financed by an appropriate Government can also be a ‘public authority’ but such non-governmental bodies or such private institutions or bodies may not be categorized as ‘state’ but they would be public authorities within the meaning of Section 2(h) of the RTI Act.
The SEBI should be proactive in providing RTI information
Accepting the contention of the SEBI and considering the deep pervasive control of SEBI over the Stock Exchanges, the CIC in its judgment delivered on 07.06.2007 held that a stock exchange being a quasi governmental body working under the statute and exercising statutory powers has to be held to be a “public authority” within the meaning of section 2(h) of the RTI Act, 2005. The CIC accordingly directed the stock exchanges to put in place RTI regime in their organizations.
The Delhi High Court vide its judgment dt. 15th April, 2010 upheld the decision of the Central Information Commission which had declared stock exchange as a public authority. Dismissing the plea of NSE and Jaipur Stock Exchange which submitted that they cannot be forced to reveal information to the public under the RTI Act as they are autonomous bodies incorporated under the Companies Act and not controlled by the government, the Single Bench of Delhi High Court held that the NSE is a “Public Authoriy” as it is an ‘authority or institution of self-government‘constituted or established by notification or order issued by the appropriate Government. It also held that the NSE is controlled by the appropriate Government.
The Central Information Commission (CIC) has asked capital market regulator Securities and Exchange Board of India (Sebi) to use its power pro-actively to seek information from market intermediaries to address investor grievances. The CIC has directed the regulator to ensure that stock exchanges function in a transparent manner, especially in respect of investor protection.
In two recent orders, the Hon’ble CIC has severely criticized SEBI’s handling of investor grievances as well as the way SEBI playing its role as a regulator.
In the matter of Dhirendra Kumar and Satish Kumar Jain, the SEBI refused to provide the information to the investors, whose shares were misappropriated by the brokers, without sending contract notes and other information, which are mandatory as per the provisions / guidelines of SEBI. The above parties approached the Hon’ble CIC by way of Second Appeal under the provisions of Section 19 of Right to Information Act, 2005 when their appeal was rejected. The Hon’ble CIC vide order dated 06.01.10 made following observations and remitted back the matter of the First Appellate Authority with a direction to provide the information/documents etc. to the appellant.
“It is noted that CPIO had not made any attempt to access the information, requested through appellants RTI-applications dated 31.01.2009 and 20.03.2009, from the private entities, who held it. In terms of the order of the Delhi High Court in WPC No.7265/2007 dated 25.09.09, a public authority is obliged to provide to an applicant information held by a private entity and which such public authority is authorized to excess under the law under which the public authority functions”.
The SEBI has challenged the above observations before the Hon’ble High Court of Bombay, which is pending adjudication. The matter under High Court Stay is whether or not BSE is a public authority within the meaning of Section 2(h) of the RTI Act
However, the CIC, in the matter of Bhoj Raj Sahu has observed that the stay by the Bombay High Court on the issue whether the BSE is a “Public Authority” within the meaning of the RTI Act would not preclude the SEBI from accessing information from the Stock Exchange u/s 2(f) of the RTI Act.
The Hon’ble CIC in the matter of Atam Dev Arora Vs. SEBI while holding following observations remitted back the matter to SEBI to reconsideration :-
It is clear from the above that SEBI has a certain way of looking at its role as regulator ⎯ especially its role as the protector of the investors’ interest ⎯ and ensuring implementation of arbitration Awards won by such investors is not part of that role. I find this approach somewhat surprising. This virtually amounts to saying that even after an investor has won an arbitration award against a sub-broker, he has no way to get this Award enforced except by going through long judicial proceedings before Courts of law. Many will differ with SEBI in so completely washing its hands off the grievance and the plight of an investor vis-à-vis a sub-broker.
Given the fact that appellant has been making several petitions to SEBI about his grievance and SEBI has been in touch with the Bombay Stock Exchange in the matter, it sounds unlikely that they did not have any document or record in this subject. It is important and necessary that they revisit their position.
In view of the aforesaid rulings, the SEBI as a market regulator endeavor to provide the information sought from it by the investors under the RTI Act, 2005 to ensure market transparency and fair play in the stock market. The rationale for bringing the bourses under the purview of the RTI Act is in fact very sound and cannot be questioned. In fact the observation of the CIC in the Bhojraj Sahu case stated supra is clear and loud regarding the role of the SEBI in furthering the cause of the RTI Act as a market regulator. The CIC observed:
“The investor and client protection is an important function of SEBI as capital market regulator. It has been the experience of the Commission in the past that investors and other persons dealing with the Stock Exchanges approached the Commission invoking the provisions of the RTI Act because somehow it is their feeling that SEBI, as market regulator, was not providing to them the type of support and relief they were looking for. This second-appeal is itself a case in point. SEBI believes that it has the authority under SEBI’s own laws to access the information requested by this appellant on his behalf from the Bombay Stock Exchange. If this is what the understanding of SEBI officials of their powers under SEBI law, then the ideal thing to do would have been for them to invoke the SEBI Act to obtain information requested by the appellant from BSE and to provide it to him. For some unknown reason, this was never done forcing the appellant to approach the Commission under the RTI Act. Now SEBI claims that it has the power under its own Act to access the information and to provide it to the appellant under the RTI Act Section 2(f). To my mind, this is a very circuitous and complicated way of providing to the lay investors or ordinary public the protection they need from the several entities operating in the capital market. SEBI’s responsibility should not be seen as limited to acting when it is forced to do so under the provisions of the RTI Act. In all fairness to ordinary investors and ordinary public, SEBI ought to be discharging this function under its own laws ⎯ RTI Act or no RTI Act. I am quite confident that if SEBI lays down clear guidelines about how it intends to promote to promote investor protection through promotion of transparency in the functioning of entities such as stock exchanges and it forces compliance through the power which vests in it under the SEBI Act, this will go a long way in obviating, on the one hand, the tendency among ordinary public and investors to choose information-disclosure under the RTI Act as a tool of their grievance-settlement and, on the other hand, expand and deepen SEBI’s own involvement as market regulator in providing protection to the most vulnerable among the entities in the market, i.e. the investors and the ordinary public. In that sense, I believe that RTI Act has presented to SEBI a unique opportunity to introspect about its own powers and functions and to take meaningful actions in a vital area of its regulatory function.”
Last but not the least, any denial of the information on the part of the SEBI would be against the Preamble of SEBI Act, which inter-alia reads, “ an act to provide for an establishment of a board to protect the interest of the investors in securities”. Moreover, it would be against the preamble and the very purpose for which the RTI Act, 2005 was brought into statute book. The information sought by the investing public with respect to their shares trades executed via brokers/stock exchanges relates to an public activity, are within the access of SEBI. The information sought by the investors should be provided by the SEBI by exercising its power under RTI Act over Stock Exchanges, which would go a long way to ensure transparency, integrity and accountability in the share market and the transparency of such information is vital in the larger interest of the investing public. The denial of such information in actual possession & within the reach of the SEBI would increase the incidents of share frauds as the fraudsters illegal activities in the stock market would not come to light being immune from the RTI Act which would harm the economic growth as public would lose faith in the stock market the working of which is of public nature and therefore, not good in the larger interest of investing public.