Supreme Court Strictures Show How SEBI’s Failures Span Both Commissions And Omissions

By K Raveendran

Recent interventions by the Supreme Court into actions taken by the Securities and Exchange Board of India (SEBI) have underscored mounting concerns about systemic issues within the country’s chief market regulator. SEBI’s actions in several high-profile cases—particularly its record of imposing significant penalties and its alleged tendency to either delay or condone infractions by key market players—are sparking renewed questions about the agency’s decision-making processes and effectiveness. With SEBI Chief Madhabi Puri Buch herself now under scrutiny, facing allegations of misconduct and questionable financial dealings, public and judicial attention to the organization’s governance has intensified.

Several recent cases illustrate these issues, highlighting potential lapses in SEBI’s enforcement of financial regulations. In one of the most notable instances, the Supreme Court overturned SEBI’s imposition of a ₹25 crore penalty on Mukesh Ambani and dismissed its case against Reliance Investment Holdings over alleged breaches of takeover rules dating back to a transaction in 1994. Another court decision last year ordered SEBI to refund ₹300 crore to the National Stock Exchange (NSE) over a controversial co-location policy that allowed brokers to install servers within SEBI premises, thereby gaining faster access to market data. Such rulings cast a critical light on SEBI’s oversight, revealing a troubling pattern of decisions that not only appear inconsistent but sometimes exhibit leniency toward powerful interests.

SEBI’s recent decisions reveal a disconnect between the regulator’s stated mission of protecting investors and its apparent leniency in enforcing policies against major market players. For critics, SEBI’s response to these rulings from the Supreme Court has done little to restore confidence; rather, the regulator’s stance in recent cases has only reinforced scepticism regarding its independence and integrity. SEBI’s leadership, meanwhile, has sought to portray these judicial setbacks as rare anomalies, asserting that its policy framework is both transparent and rooted in law. However, analysts and some former SEBI officials argue that these cases point to a broader, more systemic problem with SEBI’s internal processes and decision-making, especially under the current administration.

Criticism has particularly centred on SEBI’s perceived lapses in enforcing regulations, especially in cases involving influential corporate figures or entities. The Supreme Court’s criticism of SEBI’s handling of the Mukesh Ambani case has not only called into question the regulatory rigor of the organization but has also led to discussions about whether SEBI’s approach disproportionately impacts smaller firms and individual investors. By failing to demonstrate consistent, fair enforcement across cases, critics argue that SEBI risks undermining trust in India’s capital markets, where transparency and accountability are crucial for attracting foreign investment. For some market participants, SEBI’s selective enforcement of rules has created a perception that the organization is overly deferential to the interests of the powerful.

Beyond the specific rulings, SEBI’s approach to oversight has also faced challenges on procedural and operational grounds. Among the issues brought to light by recent Supreme Court decisions is SEBI’s long-standing reliance on reactive, rather than proactive, measures. The organization has often acted only when crises emerge, rather than working preemptively to detect and address potential market distortions. This passive approach, they contend, is ill-suited to an era where complex, high-frequency trading and technological advancements pose ever-evolving risks to market stability. As India’s capital markets grow more interconnected with global finance, the absence of robust, forward-looking oversight mechanisms is seen as increasingly untenable.

SEBI’s decisions have not only faced judicial scrutiny but have also attracted criticism from within the financial sector. Market participants have voiced similar concerns about SEBI’s perceived unwillingness to address conflicts of interest and potential biases. SEBI’s structure as an independent board, while designed to insulate it from political pressures, has been criticized for lacking adequate accountability mechanisms. Calls for greater transparency in SEBI’s decision-making process have gained traction amid recent controversies, with experts arguing that the organization’s opaque procedures contribute to suspicions of favouritism and selective enforcement. By shielding key regulatory decisions from public scrutiny, SEBI risks further eroding the credibility of its oversight and alienating investors.

The Supreme Court’s rulings against SEBI have also revived discussions about the role of the regulator’s leadership in shaping policy direction and enforcement standards. Madhabi Puri Buch, who was appointed as SEBI’s first woman chairperson, initially garnered support for her promises of reform and modernization. Yet her tenure has increasingly been marred by accusations of impropriety and lack of oversight. Reports alleging irregular financial dealings and accusations of failing to uphold fiduciary duties have complicated her position, raising questions about the adequacy of SEBI’s internal controls and governance structures. While Buch has dismissed these allegations as baseless, critics argue that the charges underscore deeper governance issues within SEBI, where decision-making appears concentrated and potentially susceptible to conflicts of interest.

Further compounding SEBI’s woes is the perception that the regulator has often overlooked serious infractions by influential corporations while rigorously pursuing less powerful market participants. Analysts point to SEBI’s treatment of certain high-profile cases as evidence that enforcement actions are influenced more by political considerations and corporate lobbying than by objective legal standards. Such practices, they argue, risk creating a two-tier regulatory system where rules apply selectively, thereby undermining the regulator’s mandate to ensure a fair, level playing field.

Unless SEBI can demonstrate a more consistent, transparent approach to rule enforcement, investor confidence in India’s capital markets may suffer. In a landscape where market integrity is paramount for sustaining economic growth, SEBI’s perceived failures have broader implications for the country’s economic aspirations. A regulatory environment marred by selective enforcement and favouritism risks deterring both domestic and foreign investment, ultimately slowing the pace of financial development. (IPA Service)