How Securities Laws are Enforced in India: Some Facts from a New Data-set of SEBI Orders

As the regulator of one of the world’s largest stock markets by market capitalization, the Securities and Exchange Board of India (SEBI) has several enforcement tools at its disposal. These include imposing monetary penalties, cancelling licences of regulated intermediaries and pursuing criminal proceedings against violators of the laws, regulations and rules administered by SEBI. Moreover, the law confers wide powers on SEBI to issue directions to intermediaries, and, more broadly, to persons associated with the securities market. Such directions may be of a prohibitory nature, such as restricting companies from raising capital in the public markets, disqualifying persons from acting on the board of publicly traded companies and restricting access to the capital market altogether. They may be of a remedial nature such as disgorging illegal gains made by violators or directing restitution to wronged investors.

While the law has widened SEBI’s enforcement authority over time, it does not define what kinds of violations will invite which type of enforcement sanction, or lay down the proportionality standards for different kinds of violations or violators. Similarly, at a practical level, there is little to no information on how the allocation of enforcement resources is done, the time involved in conducting investigations and hearing proceedings or the average duration for which a non-monetary sanction lasts. This leads us to ask multiple questions. How has SEBI used its enforcement powers over time? Has it prioritized enforcement against some kinds of misconduct over others? If yes, have the priorities stayed static or changed over time? Do certain types of violations consistently entail certain types of sanctions? How efficient are the enforcement proceedings in terms of the time taken, and what is the success rate for enforcing such sanctions?

Unlike some Indian financial sector regulators, SEBI follows a due process before issuing enforcement orders, involving the issuance of a show cause notice and a hearing and it publishes each enforcement order passed by its officials systematically on its website. This transparency in enforcement allows us to establish some basic facts on securities laws enforcement in India over a long observation period. In a new paper, Devendra Damle and I analyse over 8,000 enforcement orders passed by SEBI over a span of ten years to answer some of the questions raised above.

We find that since its inception, the enforcement powers of SEBI have consistently increased. In particular, in the period between 2014 and 2018, the enforcement authority exercisable by the board of SEBI (as distinguished from that exercisable by the adjudication officers) has increased significantly. We also find that the overall intensity of enforcement, as measured in terms of number of enforcement actions taken, increased significantly after 2017.  Second, while SEBI is empowered to issue monetary penalties and undertake other types of enforcement actions not involving a monetary penalty, we find a 60-30 split in favour of monetary penalties. That is, the enforcement is largely undertaken through monetary penalties, even as the proportion of enforcement undertaken through non-monetary sanctions is not trivial. Settlements account for less than 10% of the enforcement orders. That being said, the proportion of settlements has increased over time. Third, we find that a bulk of the enforcement capacity is channelized towards sanctioning misconduct among unregulated entities in the secondary market. The violations of fraudulent and unfair trading practices regulations, insider trading regulations, takeover regulations and the broker regulations, constitute a majority of the enforcement actions in our data. Fourth, while the enforcement actions take, on an average, close to two years from the date of issuance of a show cause notice (SCN) to complete, the enforcement actions involving the imposition of non-monetary sanctions take much longer to conclude than the others. Fifth, we find that during our study period, in nearly 80% of the cases SEBI found the person accused of the misconduct guilty and imposed a sanction. In the absence of data on appeals against the orders passed by SEBI or a benchmark ’win-rate’ of a comparable regulator, we are unable to comment on whether this is a high or low conviction rate. Finally, we find that in an overwhelming proportion of the orders imposing a monetary penalty, neither the amount involved in the violation nor the basis for arriving at the monetary penalty is specified. An overview of the key findings of our paper are summarized in this post.

In India, the field of securities laws is often studied from the perspective of a specific case, an individual legislative amendment or a specific judgement. While such analysis is useful, an empirical approach can help us develop a systematic understanding of the manner in which the regulator uses the wide variety of enforcement tools available to it, the manner in and consistency with which it seeks to enforce against different kinds of misconduct and the overall efficiency of its enforcement functions over a longer time period. The consistent publication of easily accessible enforcement orders by SEBI on its website makes it possible to undertake such systematic research on securities laws enforcement in India. This paper is one such effort to begin developing more systematic knowledge on enforcement of private law in India.

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Bhargavi Zaveri

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