India: SEBI Commands Increased Authority

Last Updated: 8 August 2013
Article by Varuna Bhanrale, Ashish Kabra and Vyapak Desai

On July 18, 2013 the President of India promulgated the Securities Laws (Amendment) Ordinance, 2013 ("Ordinance") amending the Securities Exchange Board of India Act, 1992 ("SEBI Act"), Depositories Act, 1996 and Securities Contracts (Regulation) Act, 1956 ("SCRA") (collectively, the "Acts"). The ordinance, in essence, is aimed at providing greater power and authority to the Securities Exchange Board of India ("SEBI") to deal with securities law violations and to protect investor interests. The capital markets watchdog now has wide ranging powers for conducting an inquiry or investigation, settling disputes, enforcing its directions etc. The Ordinance amends the Acts to grant wider powers to SEBI in terms of the investment schemes it can monitor and regulate as also the steps which SEBI may undertake in regard to such collective investment schemes. Following is a brief on few critical changes which have been brought about by the Ordinance.

KEY AMENDMENTS IN THE ACTS AS UNDER THE ORDINANCE

1. Investigative Powers

Previous Provision

Amended Provision after the Ordinance

Section 11(2): Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for:
***
(ia) calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board;

Section 11(2): Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for:
***
(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities;

Section 11C(8): Where in the course of investigation, the Investigating Authority has reasonable ground to believe that the books, registers, other documents and record of, or relating to, any intermediary or any person associated with securities market in any manner, may be destroyed, mutilated, altered, falsified or secreted, the Investigating Authority may make an application to the Judicial Magistrate of the first class having jurisdiction for an order for the seizure of such books, registers, other documents and record.

Section 11C(8) Where in the course of an investigation, the Investigating Authority has reason to believe that any person or enterprise, as the case may be, to whom a notice under subsection (3) has been issued or might be issued,—
(a) has omitted or failed to provide the information or produce documents as required in the notice; or
(b) would not provide the information or produce documents which shall be useful for, or relevant to, the investigation; or
(c) would destroy, mutilate, alter, falsify or secrete the information or documents useful for, or relevant to, the investigation,
then, the Chairman may, after being satisfied that it is necessary to do so, authorise the Investigating Authority or any other officer of the Board (the officer so authorised in all cases being hereinafter referred to as the authorised officer), to-
(i) enter and search, with such assistance, as may be required, the building, place, vessel, vehicle or aircraft where such information or documents are expected or believed to be kept;
(ii) break open the lock of any door, box, locker, safe almirah or other receptacle for exercising the powers conferred by sub-clause (i), where the keys thereof are not available;
(iii) search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account or other documents;
(iv) require any person who is found to be in possession or control of any books of account or other documents, maintained in the form of electronic record, to provide the authorised officer the necessary facility to inspect such books of account or other documents.
Explanation.— For the purposes of this sub-clause, the expression "electronic record" shall have the meaning assigned to it in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.
(v) seize any such books of account or other documents found as a result of such search;
(vi) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;
(vii) record on oath the statement of any person who is found to be in possession or in control of the information or documents referred to in sub-clauses (i), (iii) and (iv)."

Analysis

Owing to the aforementioned changes in the SEBI Act, the investigative powers of SEBI have been broadened manifolds. SEBI's power to call for information is now not limited to banks / corporations / other authorities and to that extent SEBI can ask any person to provide information in regard to any transaction under inquiry.

Further, SEBI's power of investigation is now independent from any initial judicial check. Against the previous requirement of making prior application to the Judicial Magistrate in cases where investigation was deemed necessary, it is the Chairman of SEBI who now has the power to authorize the investigating authority to undertake the necessary action, thereby doing away with the initial judicial scrutiny.

Also, by means of a new provision, Section 11(2)(ib), being inserted in the SEBI Act, SEBI now enjoys the power to call for or provide information to any authority in India or outside, which has functions similar to SEBI. This specific amendment has been brought into effect retrospectively i.e. from March 6, 1998, which is the same date on which SEBI and Securities and Exchange Commission of United States signed the Memorandum of Understanding for cooperating and sharing information for enforcing U.S. and Indian securities laws.1

2. Collective Investment Schemes

Previous Provision

Amended Provision after the Ordinance

Section 11AA: (1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) shall be a collective investment scheme.

Section 11AA: (1) Any scheme or arrangement which satisfies the conditions referred to in subsection (2) or sub-section (2A) shall be a collective investment scheme.

Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme.

Section 11AA (2) Any scheme or arrangement made or offered by any company under which,---
***

Section 11AA (2) Any scheme or arrangement made or offered by any person under which,---
***
(2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act.

Analysis

The Ordinance has enlarged the scope and kind of entities which would be covered under the definition of "Collective Investment Scheme" ("CIS") as defined under Section 11AA of the SEBI Act, 2002. The effect of the amendment inter alia is that any pooling of funds under any scheme or arrangement, even if such scheme is not registered with SEBI, in so far as it has a corpus amount of one hundred crore rupees or more shall be considered a CIS (unless the same has been specifically excluded from the regulatory purview under clause 3 of Section 11AA of the SEBI Act).

In recent past, SEBI had received complaints and grievances from investors in relation to certain entities who were pooling funds but had not registered themselves as a CIS with SEBI. In one such case2 the steps undertaken and the oversight and control exercised by SEBI for the protection of the investors over the investment schemes were resisted by the opposite party on the ground that the scheme in question was not covered under the definition of 'CIS' under Section 11AA of the SEBI Act. Thus, by virtue of the amendment the definition of CIS has now been expanded with the aim of curbing any such objections from parties that contend that a particular fund raising activity does not fall within the purview of CIS.3 However, the amendment is not clarificatory in nature and to that extent keeping in view the intent behind such change in the definition of CIS, it may now well be argued that all such fund raising activities undertaken prior to the Ordinance were not covered by the dentition of CIS as per previous provisions.

3. Special Courts

The Ordinance has brought about an important amendment in the dispute resolution mechanism under the Acts. The newly inserted Sections 26A, 26B, 26C, 26D and 26E of the SEBI Act, provide for establishment of special courts for speedy trial of offences under the Acts. Similar provisions have also been inserted in the SCRA Act and the Depositories Act. The provisions of the Code of Criminal Procedure, 1973 would be applicable to the proceedings of these special courts unless otherwise stated in the Acts.

4. Disgorgement

Previous Provision

Amended Provision after the Ordinance

Section 11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-
***
it may issue such directions,-
***

Section 11B. Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-
***
it may issue such directions,-
***
Explanation.—For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

Analysis

The addition of the explanation to Section 11B of the SEBI Act clarifying that SEBI has and should be deemed to always have had the power to pass disgorgement orders spells positive news for persons who have suffered financial loses owing to offences committed by persons in violation of securities laws. In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts.4

The power of SEBI to issue disgorgement orders has been questioned in the past on the ground that the SEBI Act does not expressly confer this power on SEBI.5 This clarificatory amendment, which has been inserted in all the three Acts, thus clears the position and empowers SEBI to pass disgorgement orders.

5. Settlement Proceedings

The Ordinance amends the SEBI Act (and the other two Acts) to insert the following new section:

"Section 15JB. (1) Notwithstanding anything contained in any other law for the time being in force, any person, against whom any proceedings have been initiated or may be initiated under section 11, section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an application in writing to the Board proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.

(2) The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board in accordance with the regulations made under this Act.

(3) The settlement proceedings under this section shall be conducted in accordance with the procedure specified in the regulations made under this Act.

(4) No appeal shall lie under section 15T against any order passed by the Board or adjudicating officer, as the case may be, under this section."

Analysis

Thus, the amended Acts provide for settlement of the proceedings initiated or to be initiated for alleged defaults by a person upon application to SEBI by such person. However, the process and manner in which the settlement applications and proceedings are to be handled have largely been left to the discretion of SEBI. Highly subjective yardsticks, such as nature, gravity and impact of defaults, have been laid down for the same.

An interesting observation in this regard is that the new provision has been deemed to be effective from April 20, 2007, which happens to be the date on which SEBI had issued Guidelines for Consent Orders and for considering requests for composition of offences under the Acts ("Guidelines")6. These Guidelines had later been amended by SEBI's circular dated May 25, 20127 by means of which consent orders were to be issued based on objective criteria as regards the kinds of cases which could be considered for consent orders and the process for determining and imposing a penalty. Thus, the amended Guidelines were instrumental in improving transparency and reducing discretion of SEBI in passing consent order.8 However, the application of the new provisions relating to settlement proceedings has the effect of undoing the checks placed by the aforementioned Guidelines.

Thus, it would now have to be seen whether the securities market regulator would frame similar regulations under sub-section (2) of Section 15JB to provide for guidelines in accordance with which the matters may be settled. This is essential from the perspective of persons availing the benefit of the provisions as they would require clarity to a certain extent to understand the quantum of amount they may be required to pay or the nature of terms they would be subject to as part of the settlement. Without such clarity the aim with which such provisions have been inserted may not be achieved.

It would also be apt to note over here that the new section specifically denies any right of appeal to the Securities Appellate Tribunal to the applicant against the order of SEBI in the settlement proceedings, which further mandates for stipulation of more objective criteria's and transparent procedure in regard passing of such settlement orders.

6. Enforcement

The Ordinance puts in place new provisions in the Acts whereby if a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of SEBI, including any direction of disgorgement, then the recovery officer will have the power to undertake the following steps:

  1. attachment and sale of the person's movable property;
  2. attachment of the person's bank accounts;
  3. attachment and sale of the person's immovable property;
  4. arrest of the person and his detention in prison;
  5. appointing a receiver for the management of the person's movable and immovable properties

Analysis

It is observed that the Ordinance has given SEBI not only sweeping powers to investigate but also teeth giving it powers of enforcement, a power which was not vested in SEBI earlier. The aforementioned powers of enforcement seem to be all encompassing and they are further streamlined by the detailed procedure and provisions for enforcement which are listed under the aforementioned sections of the Income Tax Act, 1961

CONCLUSION / ANALYSIS

In conclusion it maybe stated that the Securities Laws (Amendment) Ordinance, 2013 brings about important and also positive amendments to the Securities Exchange Board of India Act, 1992, the Depositories Act, 1996 and the Securities Contracts (Regulation) Act, 1956. The amendments confer upon SEBI wide powers to be able to monitor the implementation of the securities laws and to curb the offences thereunder. To ensure the success of these amendments it is necessary that SEBI use its newly conferred powers of investigation, issuing of disgorgement orders, acceptance of settlement applications and enforcement judiciously.

To view the Securities Laws (Amendment) Ordinance, 2013 please click here.

Footnotes

1 http://www.sec.gov/news/digest/1998/dig030698.pdf

2 Alchemist Infra Realty Limited & Anr. v. The State of Jharkhand & Others, W.P. (C) No. 1195 of 2013 and W.P. (C) No. 1198 of 2013

3 Press release dated July 18, 2013, Press Information Bureau, Government of India (available at: http://www.finmin.nic.in/press_room/2013/ordinance_securitiesLaw_SEBI.pdf)

4 Karvy Stock Broking Ltd. v. Securities and Exchange Board of India, [2008] 84 SCL 208 (SAT)

5 Dushyant N. Dalal and Ms. Puloma D. Dalal v. Securities and Exchange Board of India, MANU/SB/0112/2010"

6 SEBI Circular No. EFD/ED/Cir-1/2007 (April 20, 2007) (available at: http://www.sebi.gov.in/circulars/2007/CirEFD2007001.pdf)

7 SEBI Circular No. CIR/EFD/1/2012 (May 25, 2012) (available at: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1337946507938.pdf)

8 Nishith Desai Associates Hotline 'Indian Capital Market Regulator Amends Consent Order Circular: Scope Significantly Reduced' dated May 31, 2012 maybe referred to for more details (available at: http://www.nishithdesai.com/1/?item=Research+and+Articles/NDA+Hotline/Corpsec+Hotline&article=1203)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Varuna Bhanrale
Ashish Kabra
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions