In this blog post, Rakshit Joshi, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, analyses whether a no-action letter or an interpretive letter issued by SEBI under the Informal Guidance Scheme is binding on the Board or not.
Section 11 of the Securities and Exchange Board of India Act, 1992 obliges 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. In pursuance of this vide discretionary power it issued Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 with the stated aim of “better regulation of and orderly development of the securities market”.
The scheme allows any market intermediary registered with the board or a listed company also a mutual fund company to obtain ‘informal guidance’ from the board in the form of two documents. One, a No-action letter in which a department of SEBI answers whether it would recommend any transaction under any rule of law in force. Second, is in the form of an interpretive letter in which the Department provides an interpretation of any law or rule in the context of a proposed transaction. Any person may apply to the concerned department of SEBI with fees of Rs 25, 000 describing the request disclosing all material facts and applicable legal provisions.
The “informal” nature of the scheme has been a cause of considerable ire of the parties as at times SEBI has taken opposite view to the rationale provided by the department under the scheme. Any document furnished by a department of SEBI tends to bind all the market participants. But the Board discharges any liability citing Section 13 of the said guidelines which clearly states that any letter issued by a department shall not be construed as a conclusive decision or determination on any question of law or fact. Neither is the order appealable under Section 15T of the Act.
This apparent conflict has led to demands of revamping the whole process. It is also in contrast to section 245 (S) (2) of the Income Tax Act, by which any advance ruling given by the authority shall be binding unless there is a change of law or facts. SEBI, on the other hand, is quasi-legislative. Quasi- executive and quasi-judicial combined into one body. This is against the principle of separation of power which is leading to this conflict.
The scheme of informal guidance is helpful provided it is made more reliant and authentic. SEBI can do it in any of the two ways:
Either constitutes a permanent body of external and internal experts chaired by a retired judge of Supreme Court or High Court who may give clearance to any informal guidance by SEBI. The second option is to abridge SEBI of its quasi-judicial power altogether. It can be a sole regulator and facilitator of Securities Market like RBI is for Banking. Special commercial courts can perform the judicial authority at the district level and High court benches under the Commercial courts bill 2015 which is already pending in the Rajya Sabha.