[Sumit Agrawal is a regulatory lawyer and ex-SEBI official. Views are his own. Twitter: @sumit12agrawal]
During his Budget Speech 2018, the Finance Minister spoke about amending the Securities and Exchange Board of India Act 1992 (“SEBI Act”), the Securities Contracts (Regulation) Act 1956 (“SCRA”), and the Depositories Act 1996, to streamline adjudication procedures and to provide for penalties for certain infractions. The detailed proposals are in the Finance Bill, 2018.
While the amendments proposed through the Budget Speech appear procedural and routine, the devil is in the detail:
SEBI can impose penalty under SEBI Act and SCRA
Amendments to the SEBI Act and the SCRA are proposed so as to allow SEBI to impose penalties on any person who has contravened any provisions under these legislations. At present, only the Adjudicating Officer (AO) has authority to imposed monetary penalty.
Hitherto, a Whole Time Member (WTM) of SEBI could pass penal orders only in case of a registered intermediary by canceling or suspending its license – and all other orders were considered to be remedial and preventive in nature (such as debarment from securities markets, prohibition from accessing capital market, disgorgement etc.). There are numerous judicial pronouncements that subscribe to this position. This balance has been affected now and is likely to cause ambiguity in absence of clear guidelines as to when a WTM or AO will be entitled to pass penalty order.
Importantly, the Central Government may be required to bring in uniform procedures to be followed by a Whole Time Member for imposition of penalty on the lines of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.
Enforcement against REITs, AIFs, InVITs, IAs & RAs
In recent years, while SEBI had framed regulations for Alternate Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (INVITs), there was no penal provision in the SCRA or the SEBI Act against them or their managers for violating listing and delisting conditions. This loophole has been plugged. For the first time, there are provisions introduced in the SEBI Act for imposing minimum penalty on Investment Advisors (IAs) or Research Analysts (RAs).
While minimum penalty in any case is avoidable, these provisions were needed to keep a check on malpractices by these new classes of intermediaries, rather than dealing with them under residuary provision of section 15HB of the SEBI Act – as is being done currently.
Hefty penalty proposed on Market Intermediaries
New penalty provisions are proposed to be inserted into the SCRA, the SEBI Act and the Depositories Act in cases where market intermediaries fail to conduct their business in accordance with prescribed rules or regulations:
(a) minimum fine of Rs. 5 crore under the SCRA on Stock Exchanges and Clearing Corporations.
(b) Minimum penalty of Rs. 5 crore under the Depositories Act, 1996 on Depositories
All settlement amount realized under the SEBI Act, the SCRA and the Depositories Act to be credited to the Consolidated Fund of India
It has been proposed that all settlement amounts (excluding legal costs and disgorgement amounts) realized under the SEBI Act, the SCRA and the Depositories Act shall be credited to the Consolidated Fund of India. Revenues received by the Government and expenses incurred by it, excluding the exceptional items, are part of the Consolidated Fund of India. No money can be withdrawn from this fund without Parliament’s approval.
Legal representative liable to pay dues of deceased person
The general rule is that, in case of a fraud, penalty is considered to be personal is nature against the accused and the proceedings to penalize such person get abated on the death of such accused. New provisions relating to continuance of the legal proceedings are proposed to be inserted in the SCRA, the SEBI Act and the Depositories Act whereby a legal representative shall be liable to pay in case penalty has been imposed before the death of deceased person. This amendment will mean the SEBI will continue to recover penalties from an estate of a person. For an already clogged litigation system of SEBI, seeking this amendment is perplexing.
– Sumit Agrawal