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SEBI (Ombudsman) Regulations 2003 — Much needs to be clarified

Amit K. Vyas

THE Security and Exchange Board of India notified the Ombudsman Regulations 2003 with effect from August 21, 2003. The ombudsman is empowered to:

  • Facilitate amicable resolution of the complaint(s) against any listed company or a market intermediary; or

  • Adjudicate such complaints in the event of failure of a settlement.

    While the benevolent investor-protection spirit behind the regulations need appreciation, it cannot be denied that there are some grey areas which are of concern.

    First, the legal status of the office of an Ombudsman — whether it is an administrative body or a quasi-judicial body? If the latter, then whether mere SEBI Regulations which are in fact delegated legislation can constitute it or whether a substantive law is required to set-up such an office? More important, is the regulator empowered to constitute quasi-judicial bodies under Section 11 of the SEBI Act? It has been held in the cases of Province of Bombay vs Khushaldas S Advani AIR 1950 SC and Registrar, University of Allahabad vs Dr Ishawari Prasad AIR1956 that the real test that distinguishes a quasi-judicial act from an administrative one is the duty to act judicially.

    This, in essence, is nothing but a requirement to act justly and fairly, and not arbitrarily. The main factor to be considered is whether the authority has to decide a dispute between two parties or has to merely take note of the dispute to inform its mind before it exercises its power? In the former case the act is judicial or quasi-judicial and in the latter, administrative. Applying the said tests to the office of an ombudsman, it can be inferred that it is certainly a quasi-judicial body as it decides disputes between parties and has the power to pass an award that is binding. This award also includes compensation with interest and the costs of the proceedings — all what a quasi-judicial body would do. The next aspect is whether SEBI is empowered to create such quasi-judicial bodies through Regulations when all other quasi-judicial bodies are constituted under substantive legislation such as the Companies Act, 1956 and the SEBI Act, 1992.

    The Ombudsman Regulations stipulate that "legal practitioners" should not be allowed to represent the listed company or the market intermediary in the proceedings before the ombudsman. This term has not been defined and it is not clear whether it will exclude or include within its scope secretaries in whole time practice and chartered accountants. It is possible that such professionals also practice law, namely the Companies Act or the Income-Tax Act. In such a case can they represent the party? Another grey area.

    Section 55A of the Companies Act, 1956 clearly segregates the Sections which shall be administered by SEBI from those to be administered by the Centre. Thus, in sections falling within the Centre's domain SEBI has no powers to enact rules, regulations and so on. The ombudsman has been empowered to entertain complaints (inter alia) relating to:

  • Non-payment of interest on debentures.

  • Failure to redeem debentures.

    It is pertinent to point out that those issues are covered by Sections 117A, 117B and 117C of the Companies Act which are, in fact, out of the SEBI's purview. Thus, can SEBI can entertain such complaints?

    A plain reading of Entry 14(3)(a) and (b) of the Ombudsman Regulations reveals that unless a complaint is duly received by the company the same cannot be entertained by the ombudsman. What happens where a company refuses to receive the complaint? The Regulations have not clarified that refusal tantamounts to deemed receipt by the company.

    Also, Regulation 22(2) provides an escape route to defaulters by stating that a person shall be not be punishable for non-implementation of the award if there is reasonable cause. It is not clear whether an appeal will lie with the Securities Appellate Tribunal against the order passed by SEBI while reviewing an award of the ombudsman.

    (The author is a senior company secretary.)

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