S.11C of SEBI ACT is unconstitutional?

OPINION

SECTION 11 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 VIS-À-VIS PROTECTION AGAINST SELF-INCRIMINATION.

1. The protection against self incrimination which a person whom the Securities and Exchange Board of India (SEBI) considers has indulged in fraudulent and unfair trade practices, including insider trading, is a subject which remains res integra – an undecided question.

The common impression among lawyers, Judges and informed citizens is that our Constitution affords a protection against self-incrimination if one is an accused. Since Article 20(3) reads “No person accused of any offence shall be compelled to be a witness against himself”, the general impression is that the protection is available only to those who have been formally accused and even the most liberal is willing to consider the protection to those though not formally placed in the position of an accused and not beyond.

Though Article 20(3) is couched in simple words, what exactly is the import of the protection conferred by it continues to be an enigma. I think there could be only few other Articles in the Constitution which were subjected to judicial interpretation by many a Constitutional Benches of the Supreme Court. To refer to all the judgments could be needlessly taxing. I am confining myself to a few of the most important judgments.

2. The first judgment on the subject since independence was rendered by a Full Court of 8 Judges in M.B. Sharma v. Satishchandra, AIR 1954 SC 300. The whole Court sat to hear the said case as the strength of the Supreme Court then was of 8 Judges. This judgment, in my opinion, constitutes the foundation of what the law is on Article 20(3). The Court here did not answer all questions relating to Article 20(3). It answered only one legal issue, namely, whether the protection under Article 20(3) is confined to Court Rooms or is available to outside also.

The Court said that the constitutional provision has to be given the widest import and the protection is available not merely to Court Rooms but outside as well. It also definitely said that once a person is formally accused, then the protection is certainly available. The broad question whether such protection is available to persons who are yet to be formally accused was not answered, but was kept open (see paragraph 10 of the judgment).

3. With utmost respect to the Full Court of the Supreme Court, the judgment in M.B. Sharma (cited supra) could not bring absolute clarity. Many doubts remain. Therefore, in State of Bombay v. Karthi Kalu Oghard, AIR 1961 SC 1808, the Full Court of 11 Judges (the then strength of the Supreme Court) thought it appropriate to re-visit Article 20(3). In this case, Chief Justice B.P. Sinha wrote the judgment for himself and 7 Brother Judges and Justice Dasgupta wrote a concurring judgment for himself and Brother Judges S.K. Das and A.K. Sarkar. It re-affirmed what was held by the Full Court in M.B. Sharma’s case. It, however, said that being made to give thumb impression, handwriting, signature, etc., did not amount to compulsion of a witness against himself. This judgment also did not make any authoritative pronouncement on the question left open by the Full Court in M.B. Sharma, namely, whether the protection could be claimed by a person who is yet to be formally accused. The judgments of the Full Courts of the Supreme Court in M.B. Sharma and Karthi Kalu Oghard are incapable of being overruled as all other judgments on the subject are by Constitutional Benches of 5 Judges or of lesser strength. I will come to those judgments a little later.

4. The expressions “accused” and “accused of any offence” find their definitions in Sections 24 and 25 of the Evidence Act and in a number of decisions of the Supreme Court. The Supreme Court in State of U.P. v. Deoman Upadhyay, 1960 SC 1125 (paragraph 7) states that it does not predicate a formal accusation against him at the time of making the statement sought to be proved. Webster Law Dictionary and Black’s Law Dictionary describe an accused as a person against whom a charge of crime or misdemeanour is brought or a person who has been blamed for wrong doing, especially a person who has been subjected to actual restraint on liberty through an arrest. The constitutional provisions deserve liberal interpretation. Therefore, an accused would mean a person against whom a charge of crime or misdemeanour is brought and not necessarily a person against whom First Information Report is filed. The expressions “prosecution”, “punishment”, “offence”, etc., appear in Article 20(3), which reads thus:-

“20. Protection in respect of conviction for offences.—
(3) No person accused of any offence shall be compelled to be a witness against himself.”

Article 20(3) says that no person accused of any offence shall be compelled to be a witness against himself. A Constitution Bench of the Supreme Court had occasion to consider the meaning of the expression “prosecute” in Thomas Dana v. State of Punjab, AIR 1959 SC 375; so also in Maqbool Hussain v. State of Bombay, AIR 1953 SC 235 and S.V. Venkatram v. Union of India, AIR 1954 SC 375. In these judgments, the Supreme Court took the view that imposition of a penalty at the hands of Sea Customs authorities or adjudicating authorities under the Foreign Exchange Regulation Act, 1973, since repealed, constitutes punishment for an offence. However, the majority held that an adjudication proceeding does not amount to a prosecution as such proceeding is not judicial in nature. The distinction between judicial and administrative proceedings becomes extinct with the judgment of the House of Lords in Ridge v. Baldwin, 64 Appeal Cases 40 and of the Supreme Court in A.K. Kraipak & Ors. v. Union of India & Ors., AIR 1970 SC 150, Maneka Gandhi v. Union of India, AIR 1978 SC 597, Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664, Mohinder Singh Gill v. Chief Election Commissioner, (1978) 1 SCC 405, and Kihoto Hollohan v. Zachillhu, (1992) Supp. 2 SCC 651 = AIR 1993 SC 412. Prior to Ridge v. Baldwin, there existed a clear-cut distinction between judicial and administrative functions. It was thought that only if a proceeding is judicial in nature, principles of natural justice were to be complied with. ____________________ is the last judgment where this distinction was re-affirmed before the concept underwent a sea change with the judgment in Ridge v. Baldwin followed by A.K. Kraipak and others, cited above.

5. Certain legislative changes also took place in the meanwhile. Many legislations, like Foreign Exchange Regulation Act, 1973, clearly stated that an adjudication proceeding is a judicial proceeding and clothe the adjudicating authority with the power of a Civil Court. In short, in my opinion, unlike what was the legal position at the time of Thomas Dana, S.V. Venkatram, Maqbool Hussain, etc., in the 1950s, an adjudication proceeding at the hands of a quasi-judicial authority created by statutes like FERA, FEMA, SEBI Act, etc., amounts to a prosecution. It may, however, be added here that the proposition which I canvass here remains res integra. I have raised this issue in a Writ Petition (Seema Silk & Sarees Ltd. v. Union of India & Ors.); the same is admitted and is pending before the High Court of Bombay.

6. I have discussed so far as a preface so that it will be easier to appreciate my propositions on protection against self-incrimination vis-à-vis Section 11 of the SEBI Act. Section 11 of the SEBI Act is an interesting provision. Section 11(4) confers power on the Securities & Exchange Board of India (Board, for short) to suspend the trading of any security in a recognised stock exchange; restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; impound and retain the proceeds or securities in respect of any transaction which is under investigation; attach bank account or accounts, etc., where it has reasonable grounds to believe that a Company which is under its purview has been indulging in insider trading or other fraudulent and unfair trade practices. The proviso to sub-Section (4) of Section 11 states that the Board shall afford an opportunity of being heard to the person against whom orders as aforesaid are passed, either before a decision is taken or after. Sub-Section (3) of Section 11 also vests the Board with the powers which a Civil Court enjoys under Section 30 of the Code of Civil Procedure while adjudicating a lis before it. Such power includes the power to summon, enforce attendance and examine a person on oath. The power which is vested in the Board under Section 11 is primarily administrative or regulatory in nature. In exercising such regulatory powers, it is clothed with powers to pass orders which could entail in serious adverse civil consequences. Therefore the SEBI Act has provided the Board with power to take evidence and act like a Civil Court adjudicating a dispute between two parties. Provisions like Section 11 of the SEBI Act are not very common, but it cannot also be said that such provisions are not seen at all. Section 132 of the Income Tax Act, 1961, for instance, clothes similar powers on the assessing authorities. An assessing authority under the Income Tax Act, the Board under Section 11 of the SEBI Act and Banks and Financial Institutions under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (Securitisation Act, for short), are clothed with both judicial and administrative powers. To do so is against the fundamental principle of natural justice, namely, nemo debet esse judex in propria causa or nemo iudex in sua causa – no man shall be a judge in his own cause – and iniquum est aliquem rei sui esse judicem – “it’s wrong for anyone to judge his own complaint or cause”. However, vesting of such jurisdiction could be justified on the doctrine of necessity. In my personal view, the doctrine of necessity could be a justification.

7. Section 11C speaks about investigation and it empowers the Board to appoint an investigating authority where it has reasonable ground to believe that transactions in security are being dealt with in a manner detrimental to the interest of the investors or the securities market. There cannot be any quarrel in the Board being conferred with such powers. However, sub-sections (5), (6) and (7) of Section 11C are unthinkable, draconian and certainly unconstitutional. For convenience, I am extracting below the said sub-sections:-

“11C. (1) Where the Board has reasonable ground to believe that –

(a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or …

(1) to (4) … … …

(5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally.

(6) If any person fails without reasonable cause or refuses –

(a) to produce to the Investigating Authority or any person authorised by it in this behalf any book, register, other document and record which is his duty under sub-Section (2) or sub-section (3) to produce; or

(b) to furnish any information which is his duty under sub-Section (3) to furnish; or

(c) to appear before the Investigating Authority personally when required to do so under sub-section (5) or to answer any question which is put to him by the Investigating Authority in pursuance of that sub-section; or

(d) to sign the notes of any examination referred to in sub-section

(7) he shall be punishable with imprisonment for a term which may extend to one year, or with fine, which may extend to one crore rupees, or with both, and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues.

(7) Notes of any examination under sub-section (5) shall be taken down in writing and shall be read over to, or by, and signed by, the person examined, and may thereafter be used in evidence against him.”

The above-quoted sub-sections authorise the investigating authority to examine any manager, managing director, officer, other employee, etc., on oath and if the person who is subjected to such examination refuses to answer any question which is put to him, he is liable for imprisonment for a term which may extend to one year or a fine which may extend to one crore rupees or both and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues. Sub-Section (7) of Section 11C is more horrible. It says that the answers so given could be used against the person who is compelled to give evidence under oath to the investigating agency.

8. In none of the judgments which I have referred to above, except the one which I am referring now, the Supreme Court had occasion to contemplate a situation similar to the one in Section 11C of the SEBI Act. Before I examine the said judgment, I need to very briefly state what exactly was the legal position available under the common law. The maxims accusare nemo se debet nisi coram deo, namely, nobody is bound to incriminate himself, and nemo tenetur seipsum accusare – no one shall be compelled to bear witness against himself – remain from time immemorial, were the indisputable legal position. While India was under the British rule, it was the common law which was administered by Courts. When the Constitution was promulgated, the common law became part of the law of the land by Article 372 thereof, which states that the laws which were prevailing at the time of the promulgation of the Constitution will continue to be in force. In common law, validity of the aforesaid maxims was beyond challenge. The protection against self incrimination was not confined to a person who is an accused. The same was available even to a witness. The proviso to Section 132 of the Indian Evidence Act, 1872 gives enough indication that in the British India too, the fundamental principle, namely, accusare nemo se debet nisi coram deo, was irrefutable. A person while in the witness box though could not refuse to answer a question on the ground of self incrimination, the proviso to Section 132 of the Evidence Act guarantees that no criminal proceeding will lie against him based on the evidence so given. Article 20(3) of the Constitution only reaffirms the protection which was available to an accused or somebody who is yet to be accused by giving it the status of a fundamental right. It cannot be said that the Founding Fathers of our Constitution intended to in any manner undermine the protection which even a witness enjoyed under the common law. The judgments of the Constitution Benches of the Supreme Court referred to above and in Mohd. Dastagir v. Union of India, AIR 1960 SC 756, Rajanarayanlal Bansilal v. Manek Firoze Mistry, AIR 1961 SC 29 and State of Gujarat v. Shyamlal Mohanlal Chokshi, AIR 1965 SC 1251, which I am not elaborating for reason of brevity, have not at all discussed the question of protection which a witness enjoys under the common law. In so far as none of the judgments of the Supreme Court, referred to above, has directly considered the scope and ambit of the protection which a witness enjoys under the common law, the references made in the judgments referred above on the scope of Article 20(3) cannot be said to be a ratio decidendi at the hands of the Supreme Court, but only an obiter dictum.

9. Sub-Section (5) of Section 11C of the SEBI Act has to be considered in the backdrop of common law which, by virtue of Section 372 of the Constitution, is the law of the land. Under common law, whether it be civil or criminal proceeding, the burden of proof is on the person who makes the charge or accusation. Affirmanti non neganti incumbit probatio or ei incumbit probation qui decit non qui negat – the burden of proof is upon him who affirms, not upon him who denies and actori incumbit onus probandi - the burden of proof lies on the Plaintiff – are the maxims applicable. The reus or the accused is called upon to defend the case made out against him. There existed no legislation in England which was in conflict with the aforesaid common law principles. However, in India one comes across Section 108 of the Customs Act and even more draconian law such as sub-sections (5), (6) and (7) of Section 11C of the SEBI Act. Sub-sections (5), (6) and (7) of Section 11C take it back to the days of Star Chambers. These sub-sections which empower an investigation officer to examine a person who could be in the place of an accused; compel him to produce documents; on failure to do so he can be prosecuted; permitting the evidence so obtained under compulsion and that too under oath against him, etc., are all against the common law, Magna Carta, the Bill of Rights and the fundamental rights guaranteed under Part III of the Constitution. Section 108 of the Customs Act has been in existence for a couple of decades. However, the validity of the said provision on the touchstone of Part III of the Constitution is yet to be decided. The question remains res integra. Section 11C of the SEBI Act was introduced by virtue of SEBI (Amendment) Act of 2002 with effect from 29th October, 2002. The afore-quoted sub-sections (5), (6) and (7) of Section 11C, which are manifestly in conflict with the fundamental rights guaranteed under Part III of the Constitution are as draconian as the law which prevailed in the Dark Ages, have till date not been challenged on the touchstone of Part III of the Constitution.

10. Section 11C of the SEBI Act is in conflict with many a judgment of the Supreme Court on the scope and ambit of Articles 14 and 21 of the Constitution, particularly Anwar Ali Sarkar,Royappa______________, ______________ and Menaka Gandhi_______________. Section 11C, to my mind, comes in clear conflict with the judgments which are referred to above and in particular with Ramanlal Bhogilal Shah v. D.K. Guha, AIR 1973 SC 1196. In the said judgment it is said that once someone is an accused, there under the Indian Penal Code (IPC), such person cannot be compelled to give evidence before the Enforcement Directorate under FERA, though the offence of which he is formally accused of under the IPC and one under FERA are different. The judgment of the Five-Judge Constitution Bench of the Supreme Court in Tukaram Gaonker v. _______________, AIR 1968 SC 1050 (Please check this, the page number does not tally) on the question whether a person who has been an accused could at all be summoned by an administrative investigating agency is also equally relevant.

11. To my mind, the following are the crucial questions:-

(a) Whether the Rajus are “accused” within the meaning of Article 20(3) of the Constitution in view of the fact that no FIR has been filed against them for commission of an offence under the SEBI Act?

At first blush one might conclude that since no FIR is filed for commission of any offence under the SEBI Act but the FIR which is filed is under the IPC or some other enactment, they cannot claim protection under Article 20(3) of the Constitution in respect of the investigation which the investigating authority under Section 11C of the SEBI Act has undertaken. In my view, this view, which is not beneficial to the Rajus, is not an impenetrable one. It could be strongly contended that contrary to the view that was in force prior to State of Orissa v. Dr. (Miss) Binapani Dei, AIR 1967 SC 1269, A.K. Kraipak, etc., a quasi-judicial inquiry at the hands of the Board could be construed to be a prosecution. The judgments in Thomas Dana, S.V. Venkatram, etc., which took the view that a departmental adjudication proceeding is not a prosecution because such administrative authority is not a judicial authority, are no longer good law. Therefore it could be contended that since the SEBI Act expressly states that the inquiry contemplated under Section 15 is an adjudication proceeding at the hands of a quasi-judicial authority, the same amounts to a prosecution like the one before a Criminal Court. This proposition may face aggressive opposition. However, the point remains res integra. There is no harm in agitating the point with conviction, for the maxim is nil desperandum, never despair, never give up.

(b) In my view, none of the judgments of the Supreme Court touching upon Article 20(3) of the Constitution had gone deeply into the question whether a person who is a witness could claim protection under the said Article. In none of the judgments the common law protection to a witness against self incrimination vis-à-vis Article 20(3) has been discussed or decided. Whatever observations, some of which to the effect that to claim the protection under Article 20(3) one ought to be formally accused, were in the nature of an obiter and not a ratio decidendi. To constitute an opinion of a Court, even of the Constitution Bench, as a ratio decidendi, there must be a deliberation on the issue and a conclusion based on reasoning.

(c) Whether an investigating agency could ever be clothed with the powers of compelling a person, who is an accused or likely to be an accused, under oath to produce documents and make him liable for imprisonment and penalty for failure to answer under oath; providing for the evidence so taken under compulsion to be used against him, etc., are against the common law principles in force from time immemorial and which is now sacrosanct as fundamental rights, which not only prohibit self incrimination but casts the burden of proof on the accuser which finds a place of near divinity in the Bill of Rights and as fundamental rights under Part III of the Constitution. No judicial powers can be vested in the investigating agencies, for to do so is in conflict with the doctrines of iniquum est aliquem rei sui esse judicem “It is wrong for anyone to judge his own complaint or cause” and nemo debet esse judex in propria causa or nemo iudex in sua causa – no man shall be a judge in his own cause.

12. I think, the proceedings under the SEBI Act could effectively be countered. All that is required is to harp on the fundamental legal principles which I have discussed above. By not raising these issues and seeking the protection of fundamental rights/common law rights, nothing is gained. On the contrary, by insisting upon compliance with the basic principles of natural justice, you will be able to effectively defend yourselves. In your case, the facts may be bad, but I believe the law could be turned to your advantage, provided you are smart enough to take advantage of the fundamental legal principles. Remember the oft quoted advice: “You don’t need merits to win a case; the law after all is an ass”. It is all about making black into white and white into black, to borrow from Charles Dickens.

Author : Mathews J. Nedumpara

http://nedumpara.com/