Statutory Boundaries Of Securities-Market Adjudication: SEBI, SAT And Limits Of Procedural Power

The Supreme Court allowed four appeals by PCMs and set aside the Committee and SAT orders. It rejected a client investor's appeal as not maintainable. The judgment matters for two related reasons:

1. It examines the collateral-visibility framework in force at the liquidation dates, and it defines the limits of a delegated body's power to order restitution; and

2. Paragraphs 22 and 23 also record the Court's reasoning on the limits of SAT's own powers, which is considered herein below. 

The Regulatory Setting: Client-Level Visibility and Its Chronology

The Supreme Court considered whether the framework in force at the liquidation dates required a PCM to verify each underlying client's credit or debit position before liquidating collateral furnished by a TM. The PCMs contended that no such obligation existed and that no mechanism gave them visibility of individual client positions. The Clearing Corporation argued that the circulars and the CM-TM agreement imposed the duty. 

The Court answered that question in the negative. It held that the PCM had no statutory obligation to verify constituent-wise debit and credit positions, and that the regulatory mechanism did not give the PCM visibility of individual client positions. The reporting regime had developed in stages. The Court described the progression from monthly uploads in 2016, to weekly reports in 2019, to daily reporting in 2021 as "a progression informed by experience and conditioned through pitfalls". 

The SEBI circular of 20 July 2021, "Segregation and Monitoring of Collateral at Client Level", required disaggregated, client-wise collateral reporting "daily”. Its reporting provisions took effect on 1 October 2021. The Court first deferred its other provisions to 28 February 2022 and then to 2 May 2022. The Court treated the absence of those measures before their implementation as supporting the PCMs' lack of visibility. 

The pledge framework followed a separate sequence. The SEBI circular of 25 February 2020 provided that, from 1 June 2020, TMs and clearing members would accept client collateral in the form of securities only by way of a margin pledge in the depository system. A later implementation circular of 29 July 2020 moved that mechanism to 1 August 2020 and allowed acceptance by title transfer until 31 August 2020. The judgment records the demat-account procedure as effective only from 30 June 2020, which is the date by which client-tagged accounts were to be closed. These dates matter because the liquidations under review spanned this period. In the lead appeal, they occurred between 13 January and 2 June 2020. In another appeal, they ran from 22 October 2019 to 3 July 2020. 

On this reading, the Court's answer concerns the framework in force at each liquidation, not the framework introduced later. A later regulatory intervention may respond to a deficiency in an earlier regime, but it does not, without more, establish that the later obligation already existed. The Court took a similar approach to the losses recouped by the PCM, which it held to be "permissible in the manner it was done as per the regulatory measures in place at that time".

Restitution and the Limits of Delegated Power

The Committee's direction raised a separate question: whether the Clearing Corporation, acting through the Committee and its bye-laws, could compel restoration of the securities or impose a monetary consequence equal to their value. The Committee had directed that, if restoration did not follow within fifteen days, an amount equal to the value of the securities as on the sixteenth day, plus five per cent, be blocked from the PCM's collateral. 

The Court began with the statute. Section 9(3)(b) of the Securities Contracts (Regulation) Act, 1956 (the “SCRA”) permits stock exchange bye-laws to provide that a contravention renders the member liable to:

(i) fine;

(ii) expulsion from membership;

(iii) suspension from membership for a specified period;

(iv) any other penalty of a like nature not involving the payment of money.

The Securities and Exchange Board of India Act, 1992 (the “SEBI Act”) takes a different route. Section 11B(1) permits SEBI, after an enquiry, to issue directions in the interests of investors or the orderly development of the securities market. Its Explanation provides that the power to issue directions includes the power to direct a person who made profit or averted loss by a contravention to disgorge an amount equivalent to the wrongful gain or loss averted. The Court noted that the SCRA contains a similar disgorgement provision in Section 12A, and that the Legislature conferred disgorgement on SEBI in two related statutes but did not extend it to bye-laws. 

The Court held that the Committee's order was, in substance, a prescription for payment of money. It described the order as "in stark violation of the power conferred by the statute". It also held that the bye-laws conferred no disgorgement or restitution power, and that such a power could not be brought in "on grounds of equity, justice and good conscience" against the statutory bar. 

The Clearing Corporation had argued that restitution was a lesser power included within the greater power of expulsion. The Court did not decide that principle in the abstract. It said that whether restitution falls within the greater penalty of removal was "no more relevant and is inconsequential on our reasoning, but still we answer the same". It then distinguished the environmental authority relied on, viz. Indian Council for Enviro-Legal Action v. Union of India and Others (1996) 2 SCR 503, which rested on the polluter-pays principle and on unjust enrichment, and the authority on retrospective penalties. It held that the restitution claim could not be sustained on the statutory bar. 

The restitution doctrine did not assist the Committee either. The Court accepted that restitution may restore a specific thing to its owner, compensate for benefits derived from wrongdoing, or compensate for loss caused to another. It held, however, that the retention of the money or property by the person from whom restitution is sought must be unjust or illegal, and that this had not been shown. 

Procedural Rules and Appellate Powers

SAT took a different route. It relied on Rule 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000, to hold that, even if the Committee lacked power to order restitution, the Tribunal could itself direct restitution suo motu. The Supreme Court rejected that reasoning. It stated that a procedural provision "may not be mistaken as a carte blanche to do anything and everything", and that the rule "only enables the Tribunal to regulate its procedure". 

The Court accepted the familiar principle that an appeal continues the original proceeding, so that an appellate tribunal “has all the powers of the original authority”. It immediately qualified that principle: the tribunal “cannot assume for itself a greater power than the statute permits”. The distinction is critical: Rule 21 at best permits SAT to devise it's own procedure to arrive at a conclusion and grant relief as permitted by the statute or the statutory byelaws but it cannot travel beyond the jurisdiction conferred by statute and grant relief based on equity and good conscience.

Procedural rules govern how a jurisdiction is exercised; paragraph 22 treats them as incapable of supplying substantive power. The Supreme Court applied the same limit to Rule 21 in SEBI v. Saikala Associates Ltd., 2009 INSC 576, holding that the Tribunal could not exceed the powers conferred by its governing statute. The point protects the statutory design. If a procedural rule could create substantive remedial power, subordinate legislation could bypass the limits Parliament placed on a regulator or delegated body.

SEBI's Original Jurisdiction

Paragraph 23 applies the principle to SEBI. It refers to the decision of a three-Judge Bench in SEBI v. S. Kumars Nationwide Ltd., Civil Appeal No. 2049 of 2010, disposed of on 26 November 2010. The dispute before SAT arose from the Bombay Stock Exchange's refusal to grant in-principle approval for listing and allotment of shares. It is not disputed that SEBI was made a proforma party to the Appeal as no relief was sought against SEBI. Although SAT observed that it could have remitted the matter to the Board for consideration, it instead issued directions by exercising powers which the statute had conferred on SEBI.

SEBI challenged that exercise of power before the Supreme Court. The Court accepted SEBI's contention viz. that SAT had exercised powers available to SEBI in an order on an issue which had not been agitated before the Board.

The Court noted that “it has been contended by the SEBI that these powers cannot be directly exercised by the SAT since these powers are conferred only upon the Board, more so when there was no order passed by SEBI itself. SEBI submits that the impugned order of SAT insofar as it pertains to the exercise of powers under Clause 17.2.A.1 amounts to passing an order on an issue not agitated before it and further is an exercise of jurisdiction not vested in the SAT and needs to be set aside to this extent. This contention of the SEBI appears to be correct”, however, did not interfere with the directions because BSE had already complied with them. Edelweiss in the light of this decision, reiterates that SAT “cannot have omnibus powers to pass directions as it may deem fit and proper” and remains regulated by the statute constituting it.

The statutory footing lies in the SEBI Act. Section 11(1) imposes on SEBI the duty to protect investors and to regulate the securities market “by such measures as it thinks fit”. Section 11B(1) conditions the issuance of directions on SEBI being satisfied, “after making or causing to be made an enquiry”, that they are necessary. This enquiry requirement supports the author's view that, when SEBI exercises its original direction-making power under Section 11B, it must first form its own satisfaction on an enquiry. That is an inference from the statutory text; it should not be understood as a proposition that every statutory power of SEBI can be exercised only through Section 11B.

The appellate character of SAT's jurisdiction does not make it a parallel regulator. SAT may grant relief which its governing statute authorises and decide questions properly arising in an appeal, consistently with paragraph 22's recognition that it has the powers of the original authority. What it may not do is exercise an original power which the statute has entrusted to SEBI, on an issue that SEBI has not considered. The practical consequence, which the Court did not spell out, is that SEBI ordinarily forms an original regulatory measure after the enquiry required by Section 11B(1), thereby creating a reasoned record capable of appellate review.

Investor Protection Within the Rule of Law

The facts presented a serious investor-protection concern. Client securities were caught in the consequences of a TM's default. The Court also examined the TM's business. It recorded that the forensic audit found that Anugrah had offered clients assured returns of 12 per cent per annum under schemes described as "Gold" and "Platinum", and that SEBI had found a large shortfall in the securities available to clients. The Court relied on those findings in assessing the claims against the PCMs, and it held that the TM's conduct was "outright illegal". 

The Court held that the claims against the PCMs failed. It did not hold that investors in speculative markets lose statutory protection. It said that investor "innocence" cannot be attributed to the investor or to the activity, but it also preserved remedies against the TMs, subject only to just exceptions. It stressed that the case was not "open and shut" where failure to carry out due diligence alone is shown, even if restitution were statutorily permissible. 

The broader lesson is that investor protection must be pursued through powers lawfully conferred and procedures lawfully followed. The 2021 reporting framework illustrates how regulatory reform can respond to the practical problem of client-level visibility. Hence, the jurisdictional limits discussed above, do not relieve the regulator or market institutions of the responsibility to identify gaps in the architecture and address them prospectively.

The judgment in Edelweiss resolves the liquidation dispute by reference to the regulatory framework in force at the time of each liquidation and the statutory limits in Section 9(3)(b) of the SCRA on restitutionary directions by a stock-exchange clearing body. Paragraphs 22 and 23 add an important jurisdictional dimension: procedural rules cannot supply substantive power, and SAT cannot exercise an original regulatory power entrusted by statute to SEBI in a matter which has not been considered by the Board.

The significance of paragraphs 22 and 23 extends beyond the immediate controversy. They reaffirm two fundamental limitations on statutory adjudication. First, procedural rules cannot be employed to create substantive jurisdiction which the parent statute has not conferred. Secondly, an appellate tribunal cannot assume the original regulatory powers of the authority whose decisions it is constituted to review. The distinction between original and appellate jurisdiction is not merely procedural; it is an essential feature of the legislative allocation of institutional responsibility.

In the securities market, where SEBI is entrusted with wide-ranging powers to protect investors and maintain market integrity, this distinction assumes particular importance. The effectiveness of regulation depends not merely on the breadth of the powers available, but equally on their exercise by the authority to which Parliament has entrusted them.

Appellate authority is statutory authority, and regulatory action is most durable when the body to which the statute assigns a function exercises it through the procedure the statute prescribes. The Edelweiss judgment does not deny the need for effective remedies. It requires that each remedy be traced to a source of power, and it leaves investors' remedies against the TMs in place.

Author is a Senior Advocate practicing at Supreme Court of India. Views are personal.