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Deep Dive 1 – Section 11B of SEBI Act, 1992

Writer's picture: Manal ShahManal Shah

Any/all views expressed herein belong solely to the author and do not reflect the view/opinions of any organisation.


This blogpost attempts to dissect and understand provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) which are used by SEBI to enforce securities law with a deep dive on Section 11B.


First, it traces the evolution of Section 11B and a general overview of its comparison with other enforcement powers u/Ss. 12(3) and 15-I. Second a caselaw analysis giving and insight on the nature and scope of Section 11B. Third, it provides insights upon an analysis on the nature of instances wherein SEBI has used its powers u/S11B in a 1 year period from January 24, 2024 to January 24, 2025.


Fine print of the provisions

Section 11B – Genesis, Object and Role

Before 1995, Section 11(1) and 11(2) of the SEBI Act contained the scope of SEBI’s powers. Though Section 11 enabled SEBI to regulate the securities market by taking such measures as it deemed fit, SEBI felt handicapped when it came to issuing directions to market intermediaries or persons associated with the securities market. Section 11B filled the vacuum.[1]


Section 11B as introduced thus empowered SEBI issue such directions to any person/class of persons referred in Section 12 or associated with the securities market; or to any company in respect of matters u/S.11A as may be appropriate in the interest of investors in securities and the securities market.


SEBI could use this power if, after making or causing to make an enquiry, it is satisfied that it is necessary (a) in the interest of investors, or orderly development of securities market; or (b) to prevent the affairs of any intermediary or others referred to u/S. 12 being conducted in a manner detrimental to interest of investors or securities market; or (c) to secure the proper management of any such intermediary or person.


The statement of objects and reasons of the Securities Laws (Amendment) Act, 1995 which introduced Section 11B demonstrated inter alia, the object to empower SEBI to issue regulations without central government approval. Section 11B thus empowers it to give directions in the interests of the investors and for orderly development of securities market, the twin purposes of the Act (“Twin Purposes”).[2]


Section 15-I – Genesis Object and Role

The same Act of 1995 that introduced Section 11B, also introduced Chapter VIA providing for penalties and adjudication, including Section 15-I. Section 15-I essentially provides that for the purpose of adjudging under penal sections of the Chapter, SEBI may appoint any officer not below the rank of a Division Chief to be an adjudicating officer (“AO”) for holding inquiry in prescribed manner after giving any person concerned pre-decisional hearing. It also arms the AO with power to summon persons and enforce their attendance for receiving evidence.


Chapter VIA prescribed penalties for identified contraventions. From Section 15A-15H, it provided penalties for (a) failure to furnish information, return, etc; (b) failure to enter into agreement with clients; (c) failure to redress investors’ grievances; (d) certain defaults in case of mutual funds; (e) failure to observe rules and regulations by an AMC; (f) default in case of stock brokers; (g) insider trading; and (h) non-disclosure of acquisition of shares and takeovers.


Eventually, Section 15HA was introduced by the SEBI (Amendment) Act, 2002 providing penalty for fraudulent and unfair trade practices corresponding to the introduction of Section 12A in the SEBI Act. Later, Section 15EA and 15EB were introduced vide Finance Act, 2018 providing penalties for defaults in cases of AIFs, InvITs and ReITs and in case of investment adviser and research analyst. Lastly, Section 15HAA was introduced by Finance Act, 2019 providing a penalty for alteration, destruction, etc., of records and failure to protect the electronic database of Board.


Lastly there is the residuary-catchall penalty provision u/S. 15HB for contravention of any provision of the Act or the rules/ regulations/ directions issued thereunder for which a separate penalty has not been provided.


Analysis of Section 11B vis-à-vis Section 15-I

A plain reading of the provisions of Section 11B compared to Section 15-I gives away the vastness of the former. Section 15-I can be used to impose penalties only after pre-decisional hearing and on establishment of the contravention. Further, the AO can only impose penalties of the quantum or range specified therein. Furthermore, in almost all cases, penalties have been prescribed corresponding to the provisions of the Act, i.e., where persons are restricted from doing something under the Act or under secondary legislation (except maybe Section 15HAA).


SEBI’s powers u/S. 15-I in comparison are exact and precise, and while the use of this power may require extensive fact finding and interpretation of relevant provisions, the nature of this power is narrower.  Section 11B on the other hand provides vast powers to SEBI to take such measures as it deems fit and as caselaws will discuss, the use of this power may be interim, i.e., pending completion of investigation, so long as upon enquiry, SEBI is satisfied of the necessity to take such measures in order to secure the Twin Purposes.


Note on 2018 Amendment to Section 11B

It must be noted that until 2018, SEBI was entitled to initiate parallelly proceedings u/S.11B (preventive, remedial but not punitive) and proceedings for adjudication u/S.15I (leading to orders levying penalties in accordance with Chapter VIA of SEBI Act). While the WTM of SEBI was delegated the power to take measures u/S.11B, the adjudicating proceedings were under the adjudicating officer who is required to hold an inquiry in the prescribed manner and pre-decisional hearing.


Finance Act, 2018 however, modified Section 11B to include the terms ‘and levy penalty’ and a new sub-section (2) was introduced, empowering SEBI to levy penalty u/Ss. 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner. This in a way, erased the line demarcating the powers and to an extent consolidation of the different powers.


Implications of the 2018 Amendment

It is critical to understand the difference in the language of provisions of Section 11B(2) and 15I(1). While 15-I also uses the same language until the words ‘prescribed manner’, it also contains the words ‘after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing penalty’ subsequent thereto. Further Section 15-I requires the appointment of an adjudicating officer for the purposes of levying monetary penalty.


Though on the face of it the provision hints at a possibility for SEBI to impose penalty without providing pre-decisional hearing, it must be noted that it is required to impose the same only after holding an inquiry in the manner prescribed under SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995. Rule 4 therein requires SEBI to provide pre-decisional hearing before imposing penalties.


Section 12(3) – Object and remit compared to Section 11B

Unlike Section 11B and 15-I, SEBI Act as originally enacted included Section 12(3). It empowers SEBI to suspend or cancel a certificate of registration of intermediaries in such manner as determined by regulations. Such orders are usually issued u/S 12(3) r/w Regulation 27 of the SEBI (Intermediaries) Regulations, 2008 and issued for failure of an intermediary to comply with conditions of registration and provisions of securities laws, directions instructions or circulars issued thereunder.


This power is also precise when compared with section 11B, as it’s scope is limited to intermediaries registered with SEBI and for contravention of existing provisions applicable to it or directions or instructions made by SEBI. Notably, these decisions also require pre-decisional hearing.


Judicial Interpretation of Section 11B

To understand better the provisions of Section 11B(1), we can take a look at some judicial decisions. All of these relate to Section 11B as originally enacted and before the 2018 amendment thereto.


The distinction between powers u/S. 12(3) and 11B was emphasized by the Bombay High Court in Ramrakh R. Bohra v. SEBI, [3] wherein SEBI had directed a broker not to undertake any fresh business as a broker till inquiry proceedings were completed. When this was challenged for being an action under the guise of Section 12, the Bombay High Court observed that in this case the exercise of power u/S.11B was an interim measure, distinct from the power and proceedings u/S.12 which provides for penalty of suspension of business/cancellation of registration (which can only be levied after affording a reasonable opportunity of being heard). Further, the court observed that Section 11B is an enabling provision enacted to empower SEBI to fulfil the Twin Purposes. It noted that:

The said power to issue directions under Section 11B must carry with it, by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective including the power to pass interim orders in aid of the final orders. The provision of Section 11B…seeks to confer additional power on the Board, by way of interim measures, pending inquiry. The same is intended for the protection of the interests of investors and the securities markets


The Gujarat High Court in SEBI v. Alka Synthetics[4] noted further that Section 11B operates in the field of laying down general regulatory measures as a matter of policy. Regarding its dynamic nature, it also observed that:

It is a matter of common knowledge that SEBI has to regulate a speculative market and in case of speculative market varied situations may arise…and it has been entrusted with the duty and function to take such measures as it thinks fit. Thus, the measures cannot be laid down as a one time exercise to be followed in defined cases. SEBI has to rise to the occasion for taking appropriate measures to combat even such situations in the speculative market, which may or may not be conceived in advance.”


The Bombay High Court in Anand Rathi v. SEBI[5] observed that Ss. 11 and 11B include the power to order suspension as an interim measure pending investigation. It again affirmed the need to bear in mind that SEBI has to regulate a speculative market, in which case, varied situations may arise and that looking into the exigencies and requirements, it has been entrusted with the duty and functions to take such measures as it thinks fit. The court also observed that pre-decisional natural justice is not always necessary when ad-interim orders are made pending investigation or enquiry unless so provided by the statute and that the rules of natural justice would be satisfied by giving post-decisional hearing.


The SAT in Sterlite Industries (India) Ltd. v. SEBI, observed that Section 11B (now sub-section (1) thereof) is not a penal provision, but preventive and remedial. This is noted on basis of other provisions clearly spelling out their respective punitive effect. SAT observed that since the legislature has deliberately chosen to create specific offences and penalties thereto, SEBI cannot be construed competent u/S.11B(1) to issue directions amounting to imposition of penalties.


Over the years, it was established by various judicial decisions that the power u/S. 11B(1) was meant to be preventive and remedial and not punitive and that it was to be used as a response to an emergency. Further, though it includes the power to issue interim orders, it’s use ought to be reasonably warranted. [6]


Note on introduction of Section 11(4) in 2002

It may have been this judicially established nature of Section 11B that resulted in introduction of Section 11(4) which provides the power to issue directions in the nature of (a) suspension of trading of a security; (b) debarment and restrictions on accessing and being associated with securities market; (c) impounding and retaining proceeds or securities regarding a transaction under investigation; and (d) attachment of bank accounts or other property.


This power could be used either pending investigations or upon completion of investigation, thereby removing the emergency nature of powers u/S.11B.[7] Section 11B expressly provides for either pre-decisional hearing or post.


Analysis of Orders issued by SEBI u/Ss. 11B from January 25, 2024 – January 24, 2025

We have understood the fine-print of the provision being Section 11B. We have also now understood the nature of this power as illuminated by the honourable courts and securities appellate tribunal. However, as the power is seemingly indefinable and a living provision one might say, it is useful to look at some recent orders of SEBI thereunder.


For this purpose, orders issued u/S. 11B from the January 25, 2024 to January 24, 2025 were analysed to the limited extent of understanding occasions where this power was used and type of directions issued.


Of the instances on account of which SEBI used powers u/S. 11B, most pertained to fraudulent, manipulative and unfair trade practices (of which also 1 in 3 matters pertained to front running). Others included LODR, followed by unregistered investment advisory activities and insider trading. It may be noted that most orders relating to Section 11B were issued by a combined use of powers u/Ss. 11(1), 11(1), 11(4) and/or 11(4A).


More than 25 distinct types of directions were issued by SEBI vide these orders. The most common being restraint from accessing the market, followed by restraint on being associated with securities market, followed by monetary penalty, impounding and disgorgement. Cease and desist and refund were other directions issued in more than 5 orders.


Additionally in some cases where the audit committee (“AC”) was found to have lapsed in its oversight, SEBI directed companies to constitute new ACs with enhanced oversight. In some instances, SEBI directed bringing back diverted money.


For unregistered investment advisory, besides cease and desist and disgorgement/impounding, the directions to immediately withdraw any soliciting materials like advertisements, etc pertaining to investment advisory were issued. In few matters, directions were revoked after insufficient material was found by SEBI


Most other directions were pertaining to factual matrix of the cases. A pie-chart of top 6 most recurring directions is given below:[8]


Some interesting directions tailored to the factual matrix of the cases are discussed below:

  1. Order in the matter of Linde India Ltd (“LIL”) dated July 24, 2024, where SEBI had found that the entity had failed to take shareholder approval for material related party transactions (“RPT”) and there were some irregularities relating to business allocation arising from a business agreement. SEBI directed:

    a. LIL to test materiality per threshold u/R.23(1) of LODR on basis of aggregate value of transactions entered into with any related party in FY irrespective of number of transactions/contracts involved.

    b. If aggregate value of RPT calculated as above exceeds the materiality threshold u/R. 23(1), LIL shall obtain mandated approvals per Reg. 23(4) of LODR.

    c. NSE to appoint a registered valuer for carrying out valuation of business foregone and received in terms of the JV & SHA.

    d. NSE to share valuation report with SEBI and the company.

    e. LIL to, within 2 weeks of receiving valuation report, place it before AC and the board. It must make a disclosure on stock exchange providing summary and key observations in the valuation report, along with management comments on the same.


  2. Interim Order in the matter of Religare Enterprise Limited dated June 19, 2024 where SEBI found that Religare (Target Co) was attempting to thwart acquisition by not obtaining requisite statutory approvals that could be initiated only by Target Co. SEBI observed that any action / decision affecting the shareholders has to be taken with the consent of the shareholders. It directed thus for Religare to apply for requisite approvals and take necessary steps to facilitate acquirers to fulfil their obligation under SAST Regulations.


  3. Interim Order in the matter of Embassy Office Parks Management Services Limited dated November 04, 2024, where SEBI directed a company to suspend its CEO for failure to meet the ‘fit and proper’ criteria under the SEBI (Intermediaries) Regulations, 2008 on account of an order against him issued by National Financial Reporting Authority (“NFRA”) was stayed. The NFRA Order had imposed penalty and maximum statutorily permissible debarment.


Conclusion

Section 11B is wide, it suitably and rightly empowers SEBI to take curated measures to deal with emergent situations. However, as discussed above, saving few procedural differences between adjudication proceedings and proceedings u/S.11B, there appears to be an overlap in the powers vested with SEBI.


As of now, in certain cases of contraventions, the way for SEBI may be clear, e.g., failure to maintain records, etc., wherein it may use powers u/S.15I. However, for contraventions of say Section 12A, failure to segregate client funds, failure to redress investor grievances, etc,[9] it may be more suitable to provide remedial orders rather than merely punitive.


The two powers need to be reconsidered and a clearer law needs to be laid down giving clarity on when and in what cases SEBI will use which powers without clipping any of SEBI’s powers. In fact, a larger number of cases, especially those involving investors may be better suited to remedial orders.


Thus, there is a need to evaluate the enforcement powers under SEBI Act and to systematize them and to lay them out more clearly, a consolidation may be considered upon ensuring checks and balances.


[1] Urban Infrastructure Trustees Limited v. SEBI, SAT Appeal No. 93 of 2023 decided on November 22, 2023.

[2] SEBI v Ajay Agarwal 2010 3 SCC 765.

[3] 1999 96 Comp Cas 623.

[4] 1999 95 Comp Cas 772.

[5] 2002 1 MahLJ 522.

[6] North End Foods Marketing Pvt. Ltd. v. SEBI, SAT Appeal No. 80 of 2019 decided on March 12, 2019.

[8] Does not take into account directions pertaining to freezing of bank account and/or demat account.

[9] I do not get the touchiness with taking up investor grievance issues, it is literally one of the two purposes for which SEBI has been established. Read https://www.thesecuritiesblawg.in/post/changing-winds-in-investor-protection-in-the-securities-market .

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