As some of us have observed time and again on this Blog, the
substantive aspects of securities regulation have become progressively
extensive and sophisticated in India. Over the last two decades of SEBI’s
functioning, it has constantly updated securities laws to meet with market
developments, whether it is in the primary markets (IPOs, QIPs, etc.) or in the
secondary markets (insider trading, market manipulation, etc.). However, one principal
quibble has often been the lack of effective enforcement of these laws by SEBI.
Robust substantive laws are no good until they are effectively enforced by the
regulator.
substantive aspects of securities regulation have become progressively
extensive and sophisticated in India. Over the last two decades of SEBI’s
functioning, it has constantly updated securities laws to meet with market
developments, whether it is in the primary markets (IPOs, QIPs, etc.) or in the
secondary markets (insider trading, market manipulation, etc.). However, one principal
quibble has often been the lack of effective enforcement of these laws by SEBI.
Robust substantive laws are no good until they are effectively enforced by the
regulator.
This perceptible regulatory gap is now sought to be
addressed through the ordinance route. Last week, the Union Cabinet approved
and the President promulgated the Securities
Laws (Amendment) Ordinance, 2013 which brings about significant changes,
especially on the enforcement powers and authorities of SEBI. A quick review of
the Ordinance indicates that it has been primarily been driven by lessons garnered
from recent episodes involving securities law matters. The key ones are the
Sahara case, the Saradha group scandal and the spate of insider trading cases
decided by SEBI and heard and dealt with on appeal by the Securities Appellate
Tribunal (SAT). Apart from a substantive change in the Ordinance relating to
the expansion of the scope of collective investment schemes (CIS), all other
changes are aimed at bolstering SEBI’s investigative and enforcement powers.
addressed through the ordinance route. Last week, the Union Cabinet approved
and the President promulgated the Securities
Laws (Amendment) Ordinance, 2013 which brings about significant changes,
especially on the enforcement powers and authorities of SEBI. A quick review of
the Ordinance indicates that it has been primarily been driven by lessons garnered
from recent episodes involving securities law matters. The key ones are the
Sahara case, the Saradha group scandal and the spate of insider trading cases
decided by SEBI and heard and dealt with on appeal by the Securities Appellate
Tribunal (SAT). Apart from a substantive change in the Ordinance relating to
the expansion of the scope of collective investment schemes (CIS), all other
changes are aimed at bolstering SEBI’s investigative and enforcement powers.
The Ordinance brings about amendments to the triumvirate of
securities laws in India, being (i) the SEBI Act, 1992, (ii) the Securities Contracts
(Regulation) Act, 1956 and (iii) the Depositories Act, 1996. The key changes
are as follows:
securities laws in India, being (i) the SEBI Act, 1992, (ii) the Securities Contracts
(Regulation) Act, 1956 and (iii) the Depositories Act, 1996. The key changes
are as follows:
1. Collective
Investment Schemes
Investment Schemes
In order to obviate any doubt regarding SEBI’s domain over
innovative methods of raising funds from investors, the scope of the CIS has
been clarified. Under section 11AA of the SEBI Act, which details the parameters
of a CIS, it is now stated that “pooling of funds under any scheme or
arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be
a CIS whether or not it is registered with SEBI. Hence, registration with SEBI
is not a prerequisite for such scheme to fall within the regulatory purview of
SEBI.
innovative methods of raising funds from investors, the scope of the CIS has
been clarified. Under section 11AA of the SEBI Act, which details the parameters
of a CIS, it is now stated that “pooling of funds under any scheme or
arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be
a CIS whether or not it is registered with SEBI. Hence, registration with SEBI
is not a prerequisite for such scheme to fall within the regulatory purview of
SEBI.
2. Investigative
Powers
Powers
Section 11C of the SEBI Act that deals with investigation by
SEBI has been bolstered by conferring additional powers to SEBI, to be
exercised under the authority of its Chairman. These include search and seizure,
recording of statements under oath, etc. that will add to the currently available
powers.
SEBI has been bolstered by conferring additional powers to SEBI, to be
exercised under the authority of its Chairman. These include search and seizure,
recording of statements under oath, etc. that will add to the currently available
powers.
Moreover, SEBI can call for information and records relevant
for information, including telephone call data records. This had become a bone
of contention in several insider trading cases where direct evidence is hardly
available and SEBI has had to rely on circumstantial evidence. Considerable
pressure was also imposed on SEBI through international developments where call
records were the basis on which convictions were obtained in the US in the Rajaratnam
and Rajat Gupta insider trading cases.
for information, including telephone call data records. This had become a bone
of contention in several insider trading cases where direct evidence is hardly
available and SEBI has had to rely on circumstantial evidence. Considerable
pressure was also imposed on SEBI through international developments where call
records were the basis on which convictions were obtained in the US in the Rajaratnam
and Rajat Gupta insider trading cases.
The power of SEBI is also extended to obtaining information
from international sources through regulators in other countries with whom it
has entered into an arrangement for sharing of information. This becomes
relevant in indirect foreign investments through entities such as foreign
institutional investors (FIIs) where the know-your-customer (KYC) norms may not
have been implemented adequately by the entities involved.
from international sources through regulators in other countries with whom it
has entered into an arrangement for sharing of information. This becomes
relevant in indirect foreign investments through entities such as foreign
institutional investors (FIIs) where the know-your-customer (KYC) norms may not
have been implemented adequately by the entities involved.
3. Enforcement Methods
/ Remedies
/ Remedies
Even where SEBI has been successful in obtaining favourable
outcomes in enforcing its regulation, often the consequences on violators have
been less than desirable. A standing example of this (although somewhat
exceptional) is the Sahara case where despite a favourable ruling from the Supreme
Court, there have been delays and difficulties in successfully enforcing those
orders against the persons guilty of non-compliance. These are sought to be
rectified by the Ordinance by granting specific powers to SEBI to attach the
violators’ property, bank accounts, and also the arrest and detention of the
violator in prison.
outcomes in enforcing its regulation, often the consequences on violators have
been less than desirable. A standing example of this (although somewhat
exceptional) is the Sahara case where despite a favourable ruling from the Supreme
Court, there have been delays and difficulties in successfully enforcing those
orders against the persons guilty of non-compliance. These are sought to be
rectified by the Ordinance by granting specific powers to SEBI to attach the
violators’ property, bank accounts, and also the arrest and detention of the
violator in prison.
4. Special
Courts
Courts
In order to ensure that cases involving securities
regulation that go to court are dealt with in a timely manner, the Ordinance envisages
the establishment of special courts to handle such cases. This is especially because
there has been no track record of criminal prosecution of securities offenders
that may act as a deterrent in the markets. While this is understandable, the use
of special courts and tribunals have often been susceptible to legal challenge,
and it remains to be seen whether such impediments will be placed in the way of
establishment and functioning of special courts for securities laws.
regulation that go to court are dealt with in a timely manner, the Ordinance envisages
the establishment of special courts to handle such cases. This is especially because
there has been no track record of criminal prosecution of securities offenders
that may act as a deterrent in the markets. While this is understandable, the use
of special courts and tribunals have often been susceptible to legal challenge,
and it remains to be seen whether such impediments will be placed in the way of
establishment and functioning of special courts for securities laws.
Of course, the Ordinance contains a lot more
detail than can possibly be discussed within the contours of a brief blog post,
but it does represent a significant step forward in inducing greater stringency
in securities regulation in India, especially in terms of effective
enforcement.