[The following guest post is contributed by Mubashshir Sarshar, who is a lawyer and an alumnus of National
Law University Delhi. The author can be reached at [email protected].]
Law University Delhi. The author can be reached at [email protected].]
Two standalone incidents
within a span of one year have managed to change the entire paradigm of the securities
market transactions in India. The Sahara and Saradha episodes symbolised the
stark loopholes that existed in the regulatory regime controlling the affairs
of securities market transactions in India.
within a span of one year have managed to change the entire paradigm of the securities
market transactions in India. The Sahara and Saradha episodes symbolised the
stark loopholes that existed in the regulatory regime controlling the affairs
of securities market transactions in India.
While a slew of legislative
changes were brought into company law in the form of Chapter III, Part II of
the Companies Act, 2013 in line with the Supreme Court judgment[1] to tackle the
interpretation of ‘private placement’ given by Sahara.
changes were brought into company law in the form of Chapter III, Part II of
the Companies Act, 2013 in line with the Supreme Court judgment[1] to tackle the
interpretation of ‘private placement’ given by Sahara.
As for Saradha, since
the Parliament was not in session, the President after being satisfied about
the gravity of the situation used his emergency law making powers and
promulgated an ordinance three times in a row to tackle the situation in the
interim. After the expiration of the third ordinance, a Bill was tabled in the
monsoon session of the 16th Lok Sabha to give legislative sanctity
and to amend certain unilateral provisions contained in the said ordinance. The
Bill reinstated certain provisions in the SEBI Act, digressing from the
Ordinance to an extent, in order to include a check and balance mechanism for
the regulatory authority i.e. SEBI. The Parliament passed the Bill in the first
week of August after which it received the assent of the President on 22 August
2014 and was simultaneously published in the official gazette to bring the Securities Law (Amendment) Act, 2014 (“Act”) into force.
the Parliament was not in session, the President after being satisfied about
the gravity of the situation used his emergency law making powers and
promulgated an ordinance three times in a row to tackle the situation in the
interim. After the expiration of the third ordinance, a Bill was tabled in the
monsoon session of the 16th Lok Sabha to give legislative sanctity
and to amend certain unilateral provisions contained in the said ordinance. The
Bill reinstated certain provisions in the SEBI Act, digressing from the
Ordinance to an extent, in order to include a check and balance mechanism for
the regulatory authority i.e. SEBI. The Parliament passed the Bill in the first
week of August after which it received the assent of the President on 22 August
2014 and was simultaneously published in the official gazette to bring the Securities Law (Amendment) Act, 2014 (“Act”) into force.
As the recital of the
Act provides, it is a legislation to amend and plug the existing loopholes in
three cardinal legislations controlling the securities market transactions in
India, namely the Securities and Exchange Board of India (SEBI) Act, 1992, the
Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
Act provides, it is a legislation to amend and plug the existing loopholes in
three cardinal legislations controlling the securities market transactions in
India, namely the Securities and Exchange Board of India (SEBI) Act, 1992, the
Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
Although, certain
reforms introduced under the Act have already been discussed in a previous
post when the provisions were in the form of a Bill, the following are
certain predicaments which could potentially become a point of judicial interpretation
and construction in the days to come.
reforms introduced under the Act have already been discussed in a previous
post when the provisions were in the form of a Bill, the following are
certain predicaments which could potentially become a point of judicial interpretation
and construction in the days to come.
1. Power
to SEBI to seek permission for search and seizure from a designated
Court/Magistrate in Mumbai
to SEBI to seek permission for search and seizure from a designated
Court/Magistrate in Mumbai
The erstwhile Section
11C (8) of the SEBI Act provided that in case the investigative authority had
any reasonable ground to believe that any documents associated with securities
market may be destroyed, it may make an application to a Judicial Magistrate of the first class having jurisdiction for an
order for the seizure of such documents. Further, there were certain other
pre-qualifications prescribed under the said section before a magistrate could
authorize such search and seizures.[2]
11C (8) of the SEBI Act provided that in case the investigative authority had
any reasonable ground to believe that any documents associated with securities
market may be destroyed, it may make an application to a Judicial Magistrate of the first class having jurisdiction for an
order for the seizure of such documents. Further, there were certain other
pre-qualifications prescribed under the said section before a magistrate could
authorize such search and seizures.[2]
The Ordinance on the
other hand removed all such impediments and gave the Chairman of SEBI
unfettered powers to authorize the search and seizures without any prior judicial
approval.
other hand removed all such impediments and gave the Chairman of SEBI
unfettered powers to authorize the search and seizures without any prior judicial
approval.
However, the Act now reinstates
the erstwhile position with a minor change,[3] requiring SEBI to approach
a Magistrate or Judge of a designated
court in Mumbai as may be notified by the Central Government before undertaking
the operations.
the erstwhile position with a minor change,[3] requiring SEBI to approach
a Magistrate or Judge of a designated
court in Mumbai as may be notified by the Central Government before undertaking
the operations.
This is positive step from
the erstwhile position as pointed out by the Finance Minister in his
introduction to the Bill in the Lok Sabha,[4] stating that while
approaching a magistrate of an area where the search was to be conducted, the
whole issue would become public and the purpose of a search was defeated as
secrecy was an essential element of any search operation. On the other hand,
power in the hands of executives without any safeguards is bound to be abused.
Hence, the check and balance approach promulgated under the Act is a welcome
step.
the erstwhile position as pointed out by the Finance Minister in his
introduction to the Bill in the Lok Sabha,[4] stating that while
approaching a magistrate of an area where the search was to be conducted, the
whole issue would become public and the purpose of a search was defeated as
secrecy was an essential element of any search operation. On the other hand,
power in the hands of executives without any safeguards is bound to be abused.
Hence, the check and balance approach promulgated under the Act is a welcome
step.
However, the latest position
of the government to designate special magistrates/judges from where a sectoral
regulator could obtain permission before conducting a search and seizure
operation could have repercussions and judicial scrutiny of other sectoral
regulators especially that of the Income Tax authorities under Section 132 of
the Income Tax Act, 1961 and more recently that of the Competition Commission under
the proposed Section 41(3) of the Competition (Amendment) Bill, 2012.
of the government to designate special magistrates/judges from where a sectoral
regulator could obtain permission before conducting a search and seizure
operation could have repercussions and judicial scrutiny of other sectoral
regulators especially that of the Income Tax authorities under Section 132 of
the Income Tax Act, 1961 and more recently that of the Competition Commission under
the proposed Section 41(3) of the Competition (Amendment) Bill, 2012.
2. Excessive delegation of power to
SEBI with regard to Collective Investment Schemes
SEBI with regard to Collective Investment Schemes
Under Section 11AA of
the SEBI Act, two addendums have been added by the Act. The first one being a
proviso to sub-section (1) which essentially brings under SEBI’s purview any
corpus of funds amounting to Rs. 100 crore or more which is not regulated by
any other sectoral regulator and the second one being a new sub-section (2A)
which allows SEBI to frame regulations for any scheme to be considered as a
collective investment scheme, without prescribing any guidelines on the
criteria that SEBI may use to formulate such regulations.
the SEBI Act, two addendums have been added by the Act. The first one being a
proviso to sub-section (1) which essentially brings under SEBI’s purview any
corpus of funds amounting to Rs. 100 crore or more which is not regulated by
any other sectoral regulator and the second one being a new sub-section (2A)
which allows SEBI to frame regulations for any scheme to be considered as a
collective investment scheme, without prescribing any guidelines on the
criteria that SEBI may use to formulate such regulations.
Both these addendums, in
my opinion invite huge ramifications for SEBI so far so it is not able to
clearly cull out what ‘pooling of funds’ would be deemed to mean and what would
constitute a collective investment scheme apart from the four attributes
specified under the present Section 11AA(2) of the SEBI Act.
my opinion invite huge ramifications for SEBI so far so it is not able to
clearly cull out what ‘pooling of funds’ would be deemed to mean and what would
constitute a collective investment scheme apart from the four attributes
specified under the present Section 11AA(2) of the SEBI Act.
Further, if the
delegated authority provided to SEBI to frame regulations for collective
investment scheme is tested on the anvil of constitutionality and in the
backdrop of the Supreme Court judgment in the case of In Re Delhi Laws Act,[5] it might be considered as
a case of excessive delegation of power.
delegated authority provided to SEBI to frame regulations for collective
investment scheme is tested on the anvil of constitutionality and in the
backdrop of the Supreme Court judgment in the case of In Re Delhi Laws Act,[5] it might be considered as
a case of excessive delegation of power.
3. Power of Disgorgement
A new sub-section in the
form of sub-section (5) under Section 11 of the SEBI Act has been inserted by
the Act to provide that any amounts collected through disgorgement (repayment) i.e.
amount of profit made or the loss averted in the said fraudulent transaction, after
an issuance of a direction under Section 11B of the SEBI Act or Section 12A of
the Securities Contracts (Regulation) Act, 1956 or Section 19 of the
Depositories Act, 1996 would be credited to the Investor Protection an
Education Fund (“IPF”).
form of sub-section (5) under Section 11 of the SEBI Act has been inserted by
the Act to provide that any amounts collected through disgorgement (repayment) i.e.
amount of profit made or the loss averted in the said fraudulent transaction, after
an issuance of a direction under Section 11B of the SEBI Act or Section 12A of
the Securities Contracts (Regulation) Act, 1956 or Section 19 of the
Depositories Act, 1996 would be credited to the Investor Protection an
Education Fund (“IPF”).
However, again the
formulation of a framework to utilise such disgorged funds has been bestowed on
SEBI. In my opinion, the amount credited in the IPF should primarily be used to
recoup the innocent investors who would have a rightful claim to such amounts.
formulation of a framework to utilise such disgorged funds has been bestowed on
SEBI. In my opinion, the amount credited in the IPF should primarily be used to
recoup the innocent investors who would have a rightful claim to such amounts.
From the standpoint of
SEBI, this addition has lent a fresh lease of life to disgorgement orders
because of the clarity in the law that it has offered and the days to come
should see SEBI come at par with the US Securities Exchange Commission (SEC) in
terms of utilising disgorgement orders to effectively curb securities market
malpractices.
SEBI, this addition has lent a fresh lease of life to disgorgement orders
because of the clarity in the law that it has offered and the days to come
should see SEBI come at par with the US Securities Exchange Commission (SEC) in
terms of utilising disgorgement orders to effectively curb securities market
malpractices.
4. Securities Appellate Tribunal’s (“SAT”) power with regard to settlement
proceedings
proceedings
There is a significant change
in the position of law with regard to SAT’s power to adjudicate upon an appeal
from an order passed by SEBI under settlement proceedings.
in the position of law with regard to SAT’s power to adjudicate upon an appeal
from an order passed by SEBI under settlement proceedings.
The erstwhile Section
15T sub-clause (2) of the SEBI Act essentially provided that no appeal shall
lie with the SAT when an order was made by SEBI with the consent of both the
parties. However, both, the Ordinance as well as the Act has omitted the concerned
sub-section and replaced it with a new addendum in the form of Section 15JB
sub-clause (4) which provides that no appeal shall lie against any order
passed by SEBI in settlement proceedings.
15T sub-clause (2) of the SEBI Act essentially provided that no appeal shall
lie with the SAT when an order was made by SEBI with the consent of both the
parties. However, both, the Ordinance as well as the Act has omitted the concerned
sub-section and replaced it with a new addendum in the form of Section 15JB
sub-clause (4) which provides that no appeal shall lie against any order
passed by SEBI in settlement proceedings.
In my opinion, such a
restriction under the new provision would also come under severe judicial
scrutiny because once a party receives an adverse order from SEBI under the
settlement proceedings and the SAT refuses to entertain the matter for want of
jurisdiction, the natural course of action followed would be to file a writ
petition before a High Court under Article 226 of the Constitution or challenge
the said provision to be unconstitutional before the Supreme Court under
Article 32 of the Constitution.
restriction under the new provision would also come under severe judicial
scrutiny because once a party receives an adverse order from SEBI under the
settlement proceedings and the SAT refuses to entertain the matter for want of
jurisdiction, the natural course of action followed would be to file a writ
petition before a High Court under Article 226 of the Constitution or challenge
the said provision to be unconstitutional before the Supreme Court under
Article 32 of the Constitution.
5. Establishment of Special Courts
A set of new provisions
in the form of Section 26A to 26E has been inserted by the Act, which provides
for the establishment of Special Courts for speedy trial of all offences committed
under the SEBI Act. The Special Court would consist of a single judge appointed
by the Central Government with the concurrence of the Chief Justice of High
Court within whose jurisdiction the judge to be appointed is working. The
Special Court would however, only serve as a Court of Sessions under the jurisdiction
of the designated High Court.
in the form of Section 26A to 26E has been inserted by the Act, which provides
for the establishment of Special Courts for speedy trial of all offences committed
under the SEBI Act. The Special Court would consist of a single judge appointed
by the Central Government with the concurrence of the Chief Justice of High
Court within whose jurisdiction the judge to be appointed is working. The
Special Court would however, only serve as a Court of Sessions under the jurisdiction
of the designated High Court.
This amendment is in
line with Section 435 of the Companies Act, 2013 which also provides for the
establishment of special courts to deal with all offences under the Companies
Act. One could assume that the idea behind this move by the government to
designate special courts to deal with offences under a particular statute is to
provide a more efficient and specialized system of judicial functioning.
line with Section 435 of the Companies Act, 2013 which also provides for the
establishment of special courts to deal with all offences under the Companies
Act. One could assume that the idea behind this move by the government to
designate special courts to deal with offences under a particular statute is to
provide a more efficient and specialized system of judicial functioning.
However, in my opinion,
the legislature has left a lot of leeway for supposition, as to the rationale
for creating a fast track feeder within the criminal justice system, which is
not created by the judiciary but at the discretion of the executive. Although,
in the backdrop of the vast number of securities frauds’ surfacing of late,
such a step is seen in a positive light by the various stakeholders.
the legislature has left a lot of leeway for supposition, as to the rationale
for creating a fast track feeder within the criminal justice system, which is
not created by the judiciary but at the discretion of the executive. Although,
in the backdrop of the vast number of securities frauds’ surfacing of late,
such a step is seen in a positive light by the various stakeholders.
– Mubashshir Sarshar
