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.
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.
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:
1. Collective 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.
2. Investigative 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.
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.
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.
3. Enforcement Methods / 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.
4. Special 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.