SEBI slams companies for prioritising litigation over resolution and warns of dire consequences for those who refuse to cooperate in 2023

SEBI slams companies for prioritising litigation over resolution and warns of dire consequences for those who refuse to cooperate in 2023.

The Securities and Exchange Board of India (SEBI) has issued a strong warning to companies, urging them to abandon their reliance on litigation to resolve disputes. 

In a recent statement, SEBI called on firms to shift their mindset from adversarial approaches to a more collaborative and problem-solving mentality.

It emphasised the importance of avoiding prolonged legal battles that could harm both reputation and financial stability. 

The regulatory body cited several examples of companies that had suffered significant setbacks as a result of protracted litigation. Such cases can drag on for years, causing financial strain and consuming valuable time and resources.

The board has called on companies to adopt a more proactive approach to conflict resolution, including engaging in direct communication and negotiation with other parties. 

The regulator also stressed the importance of considering mediation and arbitration as alternatives to litigation.

It’s latest announcement comes amid a growing trend of businesses turning to the courts to settle disputes. The regulator’s call to action is a reminder that such an approach can be costly, time-consuming, and ultimately counterproductive. 

Instead, SEBI is urging companies to prioritise collaboration and problem-solving as the most effective means of resolving disputes in a timely and efficient manner.

Brief about SEBI: How and why it came into existence. 

SEBI, or the Securities and Exchange Board of India, was established in 1988 as an independent regulatory body under the Securities and Exchange Board of India Act. The main purpose behind its establishment was to regulate the securities market in India and protect the interests of investors. 

Prior to the formation of thie board, the regulation of the securities market was done by the Ministry of Finance and other government agencies.

The establishment of SEBI was a significant step towards developing a transparent and efficient securities market in India. Its creation was spurred by a number of financial scandals in the 1980s, for example, the Harshad Mehta scam, which highlighted the need for a specialised regulator for the securities market.

It’s role is to regulate and oversee various entities for example, stock exchanges, brokers, and other intermediaries in the securities market to ensure fair and transparent trading practices. 

Its key functions include regulating stock exchanges, registering and regulating brokers and other market intermediaries, overseeing public issues of securities, regulating insider trading, and conducting investigations and enforcement actions against violations of securities laws.

It has introduced various reforms and initiatives to promote the growth and development of the Indian securities market, for example, introducing electronic trading platforms and simplifying regulations. 

Its efforts have contributed significantly to the growth and development of the Indian securities market and have helped to enhance investor confidence in the market.

What are SEBI’s reasons for avoiding litigation?

Here are some key points to further explain the reasons behind the board’s call to shift away from litigation – 

1. Financial costs: Litigation can be a financially draining process for companies. Legal fees, court expenses, and other costs can add up quickly, making it a costly endeavour.

2. Time-consuming: Litigation can be a lengthy process that can take several years to resolve. This can cause companies to divert valuable resources away from their core business activities.

3. Negative impact on reputation: Legal battles can attract negative attention from the media and the public, which can harm a company’s reputation and brand image.

4. Alternative conflict resolution options: There are several alternative conflict resolution options available, for example, mediation and arbitration, which can be less costly and time-consuming than litigation.

5. Collaborative approach: Adopting a collaborative approach to problem-solving can help companies avoid disputes in the first place and resolve them more efficiently when they do arise. This can lead to better outcomes for all parties involved.

Some cases SEBI has been through.  

Here are some recent cases involving SEBI:

ICICI Bank-Videocon loan case –

In this case there were irregularities in the sanctioning of loans by ICICI Bank to the Videocon group. The regulator found that ICICI Bank’s former CEO Chanda Kochhar violated SEBI’s disclosure norms and imposed a penalty of Rs 15 lakh.

Yes Bank case –

This was the case of alleged insider trading by Yes Bank’s former CEO and founder Rana Kapoor. The regulator found that Kapoor violated SEBI’s insider trading norms and imposed a penalty of Rs 1 crore.

Future Retail-Amazon case –

It conducted an investigation into alleged insider trading by Future Retail’s promoters in the run-up to the company’s sale to Reliance Industries. The regulator found that Future Retail’s promoters violated SEBI’s insider trading norms and imposed a penalty of Rs 1 crore.

Franklin Templeton case –

The investigation was conducted into the sudden closure of six debt schemes by Franklin Templeton. The regulator found that the fund house violated SEBI’s regulations and imposed a penalty of Rs 5 crore.

NSE co-location case –

It has happened because of unfair access provided to certain brokers in the National Stock Exchange’s co-location facility. The regulator found that the exchange violated SEBI’s norms and imposed a penalty of Rs 1,000 crore.