Securities Amendment Ordinance, 2013: More powers to SEBI to tackle fraudulent schemes

[Note: Author and Contributor of this blog post is Risabh A. Gupta, 3rd Year Student, B.B.A. LL.B. (Hons.), National Law University, Odisha]

Recently, the Securities Amendment Ordinance 2013 has been approved by the Union Cabinet and promulgated by the President of India to give Securities Exchange Board of India (SEBI) more regulatory powers to tackle widespread fraudulent investment schemes across the country. Among various other pertinent things, the ordinance grants jurisdiction to SEBI to effectively regulate various collective investment schemes (CIS) which were allegedly run by the Saradha Group. Thus, before outlining the features of the Securities Amendment Ordinance, it would be very pertinent to know what exactly happened in Saradha scam and then the features of the Ordinance would be discussed as to how it tries to plug in the regulatory and enforcement loopholes.

Saradha group activities and the subsequent scam

     The Saradha group was allegedly running a vast array of collective investment schemes (CIS). Under the scheme, agents were appointed and recruited from the local rural communities and these agents were supposed to collect money from the people by issuing secured debentures and redeemable preferential bonds on commission basis.  Thus, using this scheme huge amount of money was raised by over 100 companies under the Saradha Group. While all along this multi crore scam was taking place, SEBI completely failed to tackle and stop the scam from perpetuating even when it had detected a foul play by the Saradha Group way back in 2009.  Add to this, there were over multitudes of companies which were running similar fraudulent collective investment schemes (CIS), chit funds and multi level marketing scam which the SEBI has utterly failed to regulate and keep a check on their functioning. This in turn has duped a wide number of innocent investors mostly from rural areas.

The Securities Amendment Ordinance, 2013: Features

This perceptible regulatory gap is now sought to be addressed through the ordinance route. The Ordinance seeks to address the visible regulatory gap currently prevailing pertaining to CIS, chit funds scams.  The Ordinance brings out noteworthy changes, predominantly on the enforcement powers and authorities of SEBI. Also, there has been a substantial change relating to the expansion of the ambit and scope of collective investment schemes (CIS).

The Ordinance has formulated amendments to the three securities laws in India, which are (i) the SEBI Act, 1992, (ii) the Securities Contracts (Regulation) Act, 1956 and (iii) the Depositories Act, 1996. The key changes are as follows:

I.         Collective Investment Schemes

The scope of the CIS has been clarified in order to avert any uncertainty pertaining to SEBI’s domain over new methods of raising funds from the investors.

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 precondition and pre-requisite for such scheme to fall within the regulatory purview of SEBI.

II.         Enforcement Methods and Remedies

There have been many instances where although the SEBI has been successful in getting favourable conviction against the defaulters, quite often the enforcement has been very liberal and not desirable at all. The recent Sahara case aptly portrays the enforcement difficulties faced by the SEBI even when the former has been successfully convicted.  There have been considerable hindrances and log jams in enforcing the Court’s order 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.

III.         Special Courts

One of the chief and pertinent sections of the Ordinance is that it seeks to establish a special court in order to ensure that cases involving securities regulation which go to the court are handled in a timely manner. However, the fact remains that visibly there has been no track record of criminal prosecution of securities offenders that may act as a deterrent. But again, as we have seen the constitutional challenge to the NCLT (National Company Law Tribunal) formed under the aegis of Companies Act, it remains to be seen whether such impediments would be faced by the securities law special court in its establishment and functioning.

IV.         Investigative Powers

Additional powers have been conferred upon the SEBI under Section 11C of the SEBI Act which deals with investigation of the fraudulent practices. The additional powers of search and seizure, recording of statements under oath would further strengthen the currently available powers of SEBI.

Furthermore, this ordinance has tried to resolve a bone of contention in various insider trading cases by conferring upon SEBI the right to call for information and record relevant information, including telephone data records. Thus this negates the requirement of direct evidence which is rarely available. Also, international developments like the conviction of Rajat Gupta and Rajaratnam in insider trading cases also demanded that SEBI ought to granted more power. The conviction of these persons in U.S. was obtained on the basis of call records.

Also, the power of SEBI is extended to obtaining information from international sources through regulators in other countries with whom it has entered into an arrangement for sharing of information.

Lastly, the Securities Amendment Ordinance has endeavoured to bring in worthy steps forward in fostering greater stringent regulations in securities, predominantly in the area of effective enforcement.