As we have already
discussed here the wide powers conferred
upon SEBI by the virtue of Securities Law Amendment Ordinance 2013,
I shall be discussing, in this post, as to why the newly unfettered powers
granted to SEBI must be exercised with great caution and restraint. Further,
the powers which are handed over to SEBI by way of an Ordinance are sought to
be vested permanently by the Parliament. Thus, an analysis of some anomalous
amendments emanating in Securities Law Amendment Ordinance 2013 would follow
now.
Now the Ordinance has
proposed five fundamental and essential changes to the prevailing statutory
framework of securities regulations in India. The five changes, as introduced,
are listed below-
I.
Giving explicit statutory recognition to the
process of Consent Order.
II.
Widening of regulatory net for Collective
Investment Schemes (CIS) and Ponzi Schemes
III. According statutory approval and sanction for
taking away fraudulent and ill gotten gains from the violators commonly known
as disgorgement.
IV. Granting
search and seizure powers to SEBI
1.
Legality Of Consent Order
A consent order is like an
out-of-court settlement in the context of charges of violation in securities
law. It was introduced in 2007 by SEBI to ensure speedy trial of the cases
relating to securities market.
Now, the Ordinance grants
statutory approval and sanction to the consent orders of the SEBI passed over
the several past years from any challenge. It may be recalled here
that the legal basis for guidelines relating to consent order was challenged
before the Delhi High Court. However, the PIL was not successful. Thus, it
appears that to overcome this and other related concern that the securities
ordinance has specifically inserted Section 15JB to
empower SEBI to settlement of proceedings with retrospective effect from 20th
April, 2007. Also, the first guidelines
relating to consent order was issued on 20th April, 2007.
Now, the newly inserted SECTION 15JB (2) states that SEBI may
agree to a proposal for settlement on such terms “as may be determined by the
Board in accordance with the regulations
made under this Act”
SECTION
15JB (3) further reads as follows:-
“The settlement proceedings
under this section shall be conducted in
accordance with the procedure specified in the regulations made under this Act.”
Interestingly, no such Regulations, as mandated, have
ever been framed for the settlement proceedings. Only guidelines were issued in
the form of Circular by the SEBI. Therefore, it seems that the earlier
Guidelines relating to consent order are liable to be set aside as not being
Regulations. Therefore, it remains to be seen as to how the lawmakers tackle
this anomalous situation. Further, the big question which currently lies before
the SEBI is whether it can issue any CONSENT order at all till the Regulations
are notified?
2.
Widening Of Regulatory
Net For CIS
& Ponzi Schemes
The Ordinance has granted a
new power to SEBI under Section 11AA of the SEBI Act which says that any
pooling of funds under any scheme or arrangement, which is not registered with
SEBI or is not convered under Sub-section (3) of the SEBI Act, involving a
corpus amount of Rs 100 crore or more shall be deemed to be a Collective
Investment Scheme or CIS. Now, the text of the newly inserted provision Section
11AA is very ambiguous. It seems to suggest that any pooling of money over Rs
100 crore would be deemed as CIS even though other vital elements of CIS like
profit motive is not met. For instance, if a bunch of residents of an old
building come together to get a redeveloper to break-down and rebuild their
property and a few more apartments to share profits with the redeveloper, they
would be creating a CIS if the cumulative value of the property is Rs 100 crore
(one can easily have just 10-12 apartments in a building add up to this value
in Mumbai). Likewise, individual projects and transactions that are privately
syndicated to a small number of "big boys" would be exposed to
illegality.[1]
Arguably, if a private
limited company that is not covered by the regulated activity listed in
Regulation 11AA(3) were to make a private placement among just five private
equity investors, so long as the collective investment size exceeds Rs 100
crore, the arrangement would be a CIS in the eyes of law.[2] Thus,
the amendment relating to CIS is liable to be challenged as being arbitrary and
vague. Therefore, for the time being, SEBI must ensure that it exercises its
power pertaining to regulation of CIS with much care and caution.
3.
Widening Of Search
& Seizure Powers
The ambit of the
investigative powers of the SEBI has been considerably amplified and widened.
Currently, SEBI can call for investigation in respect of any transaction which
is under investigation. Now, the Ordinance has granted power to SEBI to call ‘ANY
PERSON’ who ‘IS IN THE OPINION’ of the board relevant for the investigation or
inquiry. The power to call for information has been widened to realm of mere
suspects to the realm of any person who can give relevant information
pertaining to the matter under investigation. However, these powers are much
wide and should be exercised with due caution.
Also, till now, where the
investigating agency (SEBI) has reasonable ground to believe that the books,
registers, other documents, records of any intermediary or any person connected
or associated with the securities market could be destroyed, altered, falsified
or kept secret then the SEBI could make an application to the Court for seizure
of such materials. However, the Ordinance has removed the obligation of mandatorily
getting Court order for seizure purposes. Therefore, inter alia, SEBI is now empowered, without Court’s authority, to- (a)
enter and search, (b) break open any lock, (c) search any person, (d) require
any person to provide the necessary facility to inspect documents, (e) seize
any such books of account or other documents, or (f) record a statement on oath.
Thus, the external check of the Court has been completely removed. Therefore,
these aforementioned powers must be exercised with great care and caution.
4.
Provision Regarding Ill-Gotten Gains or Disgorgement
The Ordinance has added a
new provision relating to taking away of ill gotten gains or disgorgement by
the SEBI. The disgorged amount shall be credited to the Investor Protection and
Education Fund established by SEBI. Now, since SEBI has been allowed to form
norms and regulations for the utilization of the disgorged amount, it is must
be ensured that SEBI comes up with detailed regulations to effectively redress
the grievance of the victims of fraud/insider trading or other violations.
Merely taking away of the disgorged amount from the fraudulent investors would not
do any good to the victims unless and until the disgorged funds so collected is
effectively utilized to restitute the position of the victim.
Lastly, the Ordinance has
also proposed other amendments like establishment of Special Courts for speedy
trail of matters relating to securities market. Thus, the aforementioned
discussed provisions would immensely
help in effectively tackling the fraudulent schemes like Ponzi schemes, CIS in
the securities market. But, it should be noted that SEBI must put in additional
checks and balances upon itself through apt regulation and guidelines so that
the wide and unfettered powers granted by the Ordinance is not used
arbitrarily.
To view the Securities Law
Amendment Ordinance, 2013, please click here.
I can also be contacted at- rishabh.a.09@gmail.com
[1]See http://www.business-standard.com/article/opinion/new-sebi-act-has-one-missing-link-113072800717_1.html,
last visited 09/08/2013
[2] Ibid
No comments :
Post a Comment