Facebook Pixel Code

Column: At 25, Sebi gets a vitality pill

While more powers to Sebi would help curb fraud, checks and balances are a must to avoid excesses

Soon after Sebi celebrated the completion of 25 years, Parliament proposed to give it a vitality-enhancing (p)bill. The government has passed an ordinance giving enhanced powers to Sebi among other things. The same powers are sought to be handed over to the regulator on a more permanent basis by Parliament. While the proposed Securities Laws Amendment Bill tabled in Parliament is an important step forward in securities laws in India, it also poses certain challenges.

The Bill proposes five fundamental changes to the current statutory framework of securities regulations. First, it enhances the powers of the regulator to seek information in its investigative role. Second, it hands search and seizure powers to Sebi. Third, it broadens the regulatory net for Ponzi schemes and collective investment schemes. Fourth, it gives statutory imprimatur to taking away ill-gotten gains from violators, aka disgorgement. Fifth, the process of consent orders is being given explicit statutory recognition.

Sebi can currently call for information in respect of any transaction in securities which is ?under investigation or inquiry?. However, the Bill proposes that Sebi be authorised to call for information and records ?from any person? which in the ?opinion of the board? shall be relevant ?to any investigation or inquiry by the board in respect of any transaction in securities?. The power to call for information has been expanded from the realm of mere suspects and certain authorities to the realm of any person who can throw up relevant information about a matter being investigated. In other words, even those people who are not under suspicion but whose witness statement would strengthen the regulator?s case, could be called for. Thus, an office clerk who overheard inside information tips being passed on could be summoned. While previously Sebi could call for information from banks or any other authority or board or corporation established or constituted by or under any central, state or provincial Act, now the broader test of relevance will be applied. Such an expansion would enable Sebi to investigate fraudulent schemes in a more efficient and effective manner. However, the power is wide and there is no buy-in required from an independent agency or court for exercising the power.

Till now, when an investigating authority had reasonable ground to believe that the books, registers, other documents and records of any intermediary or any person associated with the securities market could be destroyed, altered, falsified or kept secret, Sebi could make an application to the court for an order of seizure of such books. However, the Bill has removed this requirement and Sebi can authorise the investigating authority to (a) enter and search, (b) break open any lock, (c) search any person, (d) require any person to provide the necessary facility to inspect documents, (e) seize any such books of account or other documents, or (f) record a statement on oath. The Bill removes the external check of a court of law that existed for the aforementioned actions and therefore this power must be exercised with great caution.

The Bill proposes to add a deeming provision in the Act which states that any pooling of funds under any scheme or arrangement, which is not registered with Sebi or is not covered under sub-section (3) of the Sebi Act, involving a corpus amount of R100 crore or more shall be deemed to be a collective investment scheme or CIS. However, the text of this is very ambiguous and seems to suggest that if there is pooling of money of over R100 crore, other elements of CIS like profit motive need not be met. This ambiguity should be removed as it may bring ordinary commercial transactions like a builder collecting advances from investors in flats within the scope of the Act. Until now, only companies were covered by the definition of collective investment schemes. This has been altered by the Bill to include all ?persons? thereby filling the gap where individuals or trusts could pool money for a fraudulent purpose and try to argue that the regulatory mechanism for collective investment schemes does not apply to them.

The Bill proposes to insert a new provision which provides that any amount disgorged, by a regulatory direction shall be credited to the Investor Protection and Education Fund established by Sebi and such amount shall be utilised by Sebi in accordance with the regulations made under the Sebi Act. Since the regulator has been allowed to form norms for the utilisation of the amount, it should have detailed regulations which provide that the disgorged amount should specifically be made available to victims of the fraud/insider trading/other violations. Merely taking away ill-gotten gains is not sufficient to redress the grievance of investors who must be made whole where it is possible. This process is called restitution in legal parlance and must be used wherever amounts are disgorged from the wrong-doer, except where the victims cannot be traced or where the cost of finding and refunding to the victims is prohibitively high. For instance, refunding three rupees each to the entire sell-side of the market on a day insider trading happened is not practical from a cost-benefit perspective.

The Bill also gives statutory imprimatur for consent orders of Sebi, to protect actions taken by the regulator over the past several years from any challenge. Consent orders were introduced in April 2007 with the rationale of ?achieving the twin goals of an appropriate sanction and deterrence without resorting to a long drawn litigation before Sebi/Tribunal/Courts.? The process has substantially reduced delays in securities litigation both before the board and before courts.

The Bill also proposes certain other amendments like the establishment of special courts for the purpose of providing speedy trial of offences and attachment of assets where a person does not pay due to Sebi. All in all, these are important additions to the armoury of Sebi, and will help Sebi reduce the menace of frauds including Ponzi schemes. However, some additional checks and balances should be added by Sebi itself through regulations so that the processes are institutionalised.

The author is the founder of Finsec Law Advisors

Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.

First published on: 03-09-2013 at 02:23 IST
Market Data
Market Data
Today’s Most Popular Stories ×