Sebi gets interim relief as HC halts special court order to probe a 1995 IPO

Mint

a day ago

Can a special court order the Securities and Exchange Board of India (Sebi) to initiate investigation of alleged malfeasance brought to its notice by an investor? The Bombay high court is currently seized of such a case, and the final outcome could reinforce the line between judicial overreach and regulatory autonomy.
The Bombay high court has in the interim stayed a special court's order that directed Sebi to investigate alleged irregularities in Radhe Developers' December 1995 listing on the BSE, after an investor sought a court-ordered probe through the criminal procedure route.
The interim stay halts the special court's 23 January order, which required Sebi to investigate and file an action taken report, till the High Court hears the case again. The matter, listed in mid-June, is expected to be taken up again later this month.
A single-judge bench of Justice R.N. Laddha issued notice to the complainant on Sebi's revision plea and recorded the regulator's core position: special courts under the Sebi Act are meant to try offences on complaints instituted by Sebi, and do not have the jurisdiction to compel the regulator to open investigations or supervise how it exercises its administrative powers.
In its April order, the high court highlighted Sebi's challenge to the special court's authority and stayed the 'execution, operation and implementation" of the impugned order.
The underlying proceedings stem from a complaint by investor and legal reporter Sapan Shrivastava, who alleged that the Gujarat-based realty developer Radhe Developers was listed on the BSE in December 1995 without complying with Sebi's listing norms and sought directions under Section 156(3) of the Criminal Procedure Code (CrPC), which empowers a magistrate to direct initiation of an investigation.
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While acknowledging that Section 26 of the Sebi Act allows cognisance of offences only on a complaint by the regulator, the special court nevertheless held it could direct Sebi to investigate in investors' interest, and ordered the regulator to inquire and report back.
Arguing before the High Court, Sebi said that Section 156(3) CrPC is confined to directing police to investigate cognisable offences and cannot be applied to statutory regulators operating under their own enabling law.
The regulator also stressed that special courts are designed for expeditious trial of offences arising under the Sebi Act upon a Sebi-filed complaint, not to mandate investigations or control Sebi's discretion at the pre-complaint stage.
Shares of Radhe Developers closed 3.5% lower at ₹2.74 apiece on the BSE on Tuesday.
Why this matters
The case could reset the line between judicial oversight and regulatory autonomy in securities law enforcement, especially for investors attempting to revive scrutiny of legacy listings through criminal court applications.
'The role of a special court is to adjudicate offences brought before it, not to identify or investigate them in the first instance," Sachit Mathur, managing partner at Emerald Law Offices, said.
Allowing special courts to direct Sebi to investigate would be an overreach and ultra vires, he said, warning it could disrupt Sebi's autonomy and the statutory design that vests investigation squarely with the regulator.
Mathur added that magistrates' directions under the criminal procedure code extend only to police and do not bind Sebi. Investors can escalate grievances on SCORES, which is Sebi's online complaint redressal platform, approach Sebi's grievance cell, and, if needed, file a writ under Article 226 for a time-bound mandamus to consider the representation without dictating the outcome.
Under Article 226 of the Indian Constitution, high courts can issue writs or directives for the enforcement of fundamental and other legal rights. Mandamus is one of the five writs, which is issued to force a public authority to perform a public duty.
Aditya Bhansali, founding partner at Mindspright Legal, said the Sebi Act does not empower special courts to order Sebi to initiate an investigation on an investor's application, and Section 156(3) cannot compel statutory regulators to exercise investigative powers.
'The most effective lawful route for investors seeking action is to file a writ petition before the high court," he said, noting that while the Securities Appellate Tribunal (SAT) is an appellate forum, it is available only when there is an order by Sebi or an exchange, often absent where investors allege inaction.
The Bombay high court's interim stay aligns with its recent caution against trial courts mechanically directing criminal or investigative measures in securities market cases without clear legal footing.
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Earlier this year, it stayed an Anti-Corruption Bureau court's order directing registration of an FIR against former Sebi chair Madhabi Puri Buch and others, finding the order mechanical and non-specific.
Rohit Jain, managing partner at Singhania & Co, said that directing an investigation would usurp a function reserved for the regulator and act before the court's jurisdiction properly begins.
Implications for investors
For investors, the case could reshape how Sebi's online grievance redressal platform SCORES and other remedies are used.
As Bombay High Court counsel Yash Joglekar noted, Section 156(3) authorises directions to the officer in charge of a police station, not to Sebi.
Legacy matters face added hurdles: laches from decades-long delays, incomplete listing records, and missing witnesses—while Section 26 of the Sebi Act bars criminal proceedings unless initiated by Sebi itself.
The doctrine of laches is a legal principle under which legal claims can be barred due passage of an unreasonably long time.
If the high court affirms that special courts cannot compel Sebi to investigate, the practical path shifts to administrative and constitutional routes, he said.
'Investors will have to rely on escalation through SCORES and the grievance cell, use RTI to seek reasons for inaction, approach SAT where there is an appealable order, and file writ petitions for time-bound consideration—without asking courts to micromanage outcomes."
Tushar Kumar, advocate at the Supreme Court, cautioned that vintage listings pose severe practical barriers. 'Listings from the mid-1990s raise formidable obstacles—from limitation and laches to the retrieval of contemporaneous evidence, records and witnesses," he said.
A ruling upholding Sebi's stance would entrench regulatory autonomy and curb ad hoc, court-driven probes, while pushing investors towards regulatory and constitutional remedies, he added.
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'Such a pronouncement would reinforce the line between judicial oversight and regulatory independence and may trigger debate on narrowly tailored statutory channels for independent scrutiny in exceptional cases—preserving market integrity without undermining Sebi's functional autonomy."