Sebi ordinance gives regulator more teeth

The government announced on July 18 that it had issued an ordinance to give Sebi more powers against illegal collective investment schemes and to curb insider trading. The release went on to say that

A. Sebi would have powers to regulate any collective investment schemes with a corpus of Rs 100 crore or more,

B. Sebi could seek information, including call records, from anybody in connection with its investigations, and lastly

C. Special courts will be set up to try Sebi’s cases to speed up the process. The release’s headline also mentioned that Sebi could attach assets but the body did not amplify on that. The release ended by saying that amendments to the necessary acts were being done, through this ordinance.

The ordinance titled Securities Laws (Amendment) Ordinance, 2013 itself runs into 16 pages and has several important amendments. The text of the ordinance was not available immediately and it was only later last week that it became available on the Taxmann website. Here are in brief are some crucial amendments that have not been widely highlighted.

Bilateral agreements: Sebi has been empowered to ask for information from and provide information to international regulators. This is a retrospective amendment that has been given effect from March 6, 1998, the date that Sebi signed its first bilateral agreement with the US Securities and Exchange Commission.

Disgorgement: Specific provision to force disgorgement–of gains or avoidance through illegal means–have been provided. Sebi had passed disgorgement orders in the past too, but there were no specific provisions in the Sebi Act for it to do so.

A clarification in the form of an amendment: This form of amendment gained infamy in the Vodafone tax dispute. Here, the Ordinance ‘clarifies’ that Sebi always had the powers to issue disgorgement orders. This may be to bolster Sebi’s case in incidents where disgorgement orders may have been issued but have been challenged.

Attachment, arrest and receivership: If a person fails to comply with Sebi’s directions to pay a penalty, to refund money or disgorge ill-gotten gains, then Sebi can attach the person’s property and bank accounts, put the person in prison and also appoint a receiver to manage such a person’s estate.

Consent given statutory teeth: The Ordinance has issued a retrospective amendment, another form of amendment that created a lot of controversy after the 2013-14 Budget. In this case, the Ordinance states that Sebi will be empowered to enter into consent proceedings and this will be with effect from April 20, 1997. That incidentally is the date that Sebi’s circular on consent proceedings was issued.

These amendments are coming at interesting times. News reports indicate that Reliance Industries’ appeal to the Securities Appellate Tribunal in a high profile case of alleged insider trading will come up for hearing on July 22 2013. It is not clear if the Ordinance will have any bearing on this case. The powers to disgorge come at a time when controversy rages over people being duped of money in Ponzi schemes such as the recent Saradha case in West Bengal. Sebi’s ongoing fight with the Sahara group over refund of money to depositors is also a high profile one; and the difficulties being faced by Sebi in getting the refund process organised may also have been the motivation behind some of the amendments.

Here is a more detailed analysis of the ordinance, that has come into effect from July 18, 2013:

Information and records can be asked from any person

This section is covered in the press release. It amends the existing section (sub-section 2, clause ia) of the Securities and Exchange Board of India Act, 1992 (Sebi Act), which empowers Sebi to ask banks, regulators or government bodies to submit information needed for its investigation. It now says that Sebi can ask for information and records and can ask for it from any person. That gives it broad sweeping powers to call for information and also access details such as call records or possibly even email records.

The clause introduces a new clause (ib) after the above one. This is a retrospective amendment, given effect from March 6, 1998. It empowers Sebi to either ask for or give information to other authorities, whether in India or abroad, that have similar functions as Sebi. The circumstances in which this information can be shared or asked for is to detect violations of securities laws.

This appears to empower Sebi to collaborate with international regulators, to seek information or even provide it, and use this information to investigate violations of Indian securities law. This specific date refers to the date when Sebi signed its first bilateral agreement with the US Securities and Exchange Commission. This amendment seeks to give Sebi the regulatory sanction to share and ask for information, it would appear. Whether this is just a precautionary amendment or pertains to some case where Sebi was unable to get the information it asked for is not known.

Disgorgement: a new sub-section (sub-section 5) has been added that will see all disgorgement proceeds, either under the Sebi Act, the Securities Contract Regulation Act or the Indian Depositories Act, credited to the investor protection fund. This empowers Sebi to credit disgorgement monies into this fund. Earlier, the undistributed portion of the money was going into the consolidated fund of India managed by the central government.

Collective investment schemes
The Ordinance amends Section 11 AA of the Sebi Act that deals with Sebi’s powers to regulate collective investment schemes.

This section adds a new section that, in addition to the conditions specified in the current act to determine which collective investment schemes are regulated, says that any pooling of funds under any scheme or arrangement, with a corpus of Rs 100 crore and above will be deemed to be a collective investment scheme and regulated by Sebi.

At present, the Sebi Act refers to collective investment schemes run by companies. The word company has been replaced with person, therefore ensuring any person, firm, company or other entity can be covered under this scheme.

In addition, a new section (2A) has been added to say that any scheme that fulfils conditions stipulated under the regulations made under this Act can also be included as a collective investment scheme. Since amending the Act will require going to parliament, this gives Sebi the powers to make regulations to ensure that schemes that structure themselves to avoid being regulated can be brought under the scope of the Sebi Act.

In the same breath, the Ordinance also allows Sebi, in consultation with the government, to exempt any scheme from being included under the purview of a collective investment scheme.

A clarifying amendment
In Section 11B of the Sebi Act, the Ordinance seeks to issue what has been called a retrospective clarificatory amendment. This form of an amendment became controversial in the Vodafone tax case. In this case, the Ordinance says that the powers to issue orders under Section 11B include and shall be deemed to have always included the power to direct persons who have been found guilty of violating the law, to disgorge the profit made or loss averted. At present, this section has a broad ambit that gives Sebi the right to issue orders as appropriate to protect investors and the securities market.

Search and seizure
The ordinance amends Section 11C that deals with collection of evidence by Sebi. At present, Sebi has the right to ask for documents and for officials to present themselves to answer  questions. For a search and seizure or a raid on a premise, it needs a judicial order from a first class magistrate.

Since this may be time-consuming or even be difficult to obtain, the Ordinance now allows the Sebi chairman to authorise a raid on a business that is under investigation and there is reason to believe that it is not providing the required documents or may destroy evidence. It allows Sebi to seize both physical and electronic records.

The Ordinance also gives Sebi powers to make regulations that take care of any eventuality that prevents it from accessing evidence.

Consent orders
The Ordinance has introduced provisions into the Sebi Act regarding consent orders. This was not mentioned in the government release. What’s more important is that this has been made with retrospective effect, from 20 April, 1997. This is the date that Sebi had issued a circular that prescribed the framework and procedure for obtaining consent orders from Sebi.

A new Section 15JB has been introduced with effect from the above date that  covers a person who is being investigated for offences under Section 11 (a broad section to protect investor interests and regulate markets and intermediaries), Section 11B (another broad section to protect investor interests), Section 11D ( cease and desist proceedings), sub-section 3 of Section 12 (suspension or cancellation of registration of intermediaries) or Section 15I (includes many measures but the more important ones include defaults related to insider trading, takeover regulations, and violations by mutual funds and stock brokers). Such persons can file for a settlement with Sebi. The Board can consider settling the case and also prescribe the regulations under which such settlements can be done. The section also says that the decision cannot be appealed to the Securities Apellate Tribunal.

The Ordinance also provides for the setting up of Special Courts by the central government, to which all existing cases too can be transferred and will take up all new cases.

Attachment proceedings, powers to arrest and receivership
Sebi now has the powers to attach and sell a person’s movable and immovable property, attach bank accounts, power to imprison, and appoint a receiver to manage the offender’s assets. These powers will come into play if the person fails to comply with the Board’s direction to refund money, fails to comply with a disgorgement order, or fails to pay the penalty levied.

The Securities Contracts (Regulation) Act, 1956
The Ordinance also amends certain provisions of this act to reflect the amendments made in the Sebi Act. The ordinance states that disgorgement will deem to have been part of the Act right from the beginning. It also allows for settlement proceedings and just as the Sebi Act amendment, this has been given effect to from April 20, 2007. A similar provision regarding attachment of assets, arrest powers and receivership has been enacted. And provisions for setting up special courts have been put in place.

The Depositories Act, 1996
The same provisions as mentioned above have been given effect to here as well.

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