India: Securities Laws (Amendment) Ordinance 2013

Last Updated: 12 September 2013

Article by Megha Kapoor and Shresth Choudhary1

The Securities and Exchange Board of India (frequently abbreviated SEBI) was established in the year 1988 and all its statutory powers were granted to it on the 12th of April, 1992 under the Securities and Exchange Board of India Act, 1992. SEBI is responsible for regulating the security market of India. The Controller of Capital Issues was the regulatory authority before SEBI came into existence. The Controller of Capital Issues was established and given authority under the Capital Issues (Control) Act, 1947.

Recently, the Securities Law Amendment Ordinance 2013 was tabled in Lok Sabha in order to amend the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996. This ordinance is the result of the approval of the Cabinet that held a meeting on the 17th of July, 2013. The Cabinet in its meeting approved the recommended amendment in the Securities and Exchange Board of India (SEBI) Act and related Acts by enhancing their powers so that they are able to regulate the capital markets more efficiently and deal with the growing problem of illegal collective investment schemes and insider trading.

It may be observed that the securities regulations in India have become extremely extensive and sophisticated in the past two decades. The securities laws are being constantly updated in order to meet the market developments, whether it is in the primary market (Initial Public Offerings (IPOs), Qualified Institutional Placements (QIPs), etc.) or in the secondary markets (insider trading, market manipulation, etc.). However, SEBI has been unable to effectively enforce these laws. It may be stated that these strong laws are no good unless they can be effectively enforced by the regulator.

In order to curb this problem, the Union Cabinet approved the Securities Law (Amendment) Ordinance, 2013 which is to bring about significant changes, especially in the enforcement powers of SEBI along with its authority. Apart from a substantive change in the Ordinance relating to the expansion of the scope of collective investment schemes (CIS), all the other changes are aimed at improving the SEBI's investigative and enforcement powers.

PROVISIONS NEWLY ADDED BY THE ORDINANCE

1. Collective Investment Schemes

The registration or non registration of a collective investment scheme is no longer a perquisite for invoking the jurisdiction of SEBI. There are no longer any doubts regarding SEBI's domain over innovative methods of raising funds from investors, the scope of the Collective Investment Schemes has been clarified under the Ordinance. Under section 11AA of the SEBI Act, which details with the parameters of a Collective Investment Schemes, it has now been 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 Collective Investment Scheme irrespective of whether it is registered or not registered with SEBI. Hence, registration with SEBI is no longer a prerequisite for such a scheme to fall within the regulatory purview of SEBI

2. Investigative Powers

Additional powers have been conferred to SEBI in regard to the investigation done by them. These additional powers are in support of the powers that have been granted to SEBI under section 11 of the SEBI Act. However, these rights are to be exercised only under the authority of the chairman and include the power to search and seize record statements under oath, etc. These rights will be in addition to the currently available powers of SEBI.

Moreover, SEBI has now been granted the right to call for information and record information that is relevant including the telephone call data records. This will act as a boon to SEBI as there is hardly any direct evidence available in most of the insider trading cases and due to the lack of evidence SEBI has to rely on circumstantial evidence.

Further, the power to call for information has also been granted to SEBI wherein information may be called from international sources through regulators in other countries with whom it has entered into an agreement for the sharing of information. These powers will prove to be extremely useful in case of Foreign Direct Investment through entities such as the Foreign Institutional Investors (FIIs) where Know Your Customer (KYC) norm may not have been implemented adequately by the entities involved.

3. Enforcement Methods / Remedies

Powers have been granted to SEBI to attach the violator's property, bank accounts and also to arrest and detain the violators in prison. These powers have been granted to SEBI under the ordinance as it has been noted that even when SEBI was successful in obtaining a favorable outcome in enforcing its regulations, often the consequence on the violators has been less than desirable. An example of this is the Sahara case where despite a favorable outcome from the Hon'ble Supreme Court, there have been delays and difficulties in the enforcement of the orders against the person who is guilty of non-compliance.

4. Special Courts

Ordinance provides that special courts are to be set up in order to deal with cases involving securities regulations. This step has been taken in order to deal and settle the cases involving securities regulations in a timely manner and to avoid the unnecessary delay. However, one of the main reasons that led to the establishment of these special courts is that under the normal procedure there is no track record of criminal prosecution of securities offenders which may act as a deterrent to the markets.

IMPORTANT CASE-LAWS

Saradha Group Case

In the 70's, the legislature took steps to secure the economy of the nation. The Legislature had nationalized a large banking sector. During that time period, there were many problems which were being faced by Indians, especially which were to be named were the Indian Villagers & farmers; who were given loans but with a large amount of interest. This had been a heavy load on those Indian villagers & farmers.

The nationalization of the banking sector was to help those Indians villagers who were suffering this huge problem. The banks had come up with various schemes for the Indian villagers. This was the period for globalization. There were foreign banks who also invested huge amount of investments. The private banks were equally involved. They had also invested equally in the market. The small investment market was captured by many vultures," as stated in the judgment of; Basabi Rai Chowdhury Vs. Union of India & Ors.,2 which was given my Calcutta high Courrt dated 19.06.2013. The deposits were collected from the depositors and they were paid a high rate of interest which they never got from the market by investing the same amount of investment. But to this, The system had collapsed. Because of this, the small companies came under the scanner of Reserve Bank of India. There were certain companies who were functioning without any valid license. To which the the Reserve Bank of India took action, by compelling them to stop functioning. Sanchayini Saving was also one of them.

They used to collect lump sum deposits from the depositors and pay them high rate of interest that they could not get from the market by reinvesting the said sums. Very soon, the system had collapsed. There were many who did not have access to the banks. They also did not know how to operate this. For the same, The bank had several excuses. And tye mentors also agreed with the same. The finance companies flourished, and so did the Saradha group. The involvement was of 30,000 crores. The petitioner had filed a Public interest Litigation, where she came to know that Saradha Group was one of the largest chit fund company which had been operating from Eastern India.

On April 16, 2013 the state had informed the court about the "Saradha group." One of the directors, Monaj Negel, was arrested on April 20, 2013. Later 3 other people were also arrested for the same. One of them , was Sri Sudipta Sen, nabbed from Jammu & Kashmir.

The investments were fraudulently being sold as "chit fund," under the "Chit Fund Act (1982).which is regulated by the state government.

The state government of west Bengal was warned by SEBI about the saradha group's chit fund. Saradha had changed its way, this time the group had sold large numbers of share of various listed companies, siphoning off the proceeds of the sale to accounts which have not been identified.

The Saradha group's activities like CIS and not the chit fund were being identified by SEBI in 2012 and SEBI had demanded to stop operating its investment schemes. However, the Saradha Group never stopped until it was collapsed in April 2013.

Sahara Case3

The Judgment given in this case acts as a milestone in India's Corporate landscape, as it not only sanctifies SEBI's absolute powers to investigate the matters of listed companies, but also the matters pertaining to the unlisted companies. Under this judgment, SEBI has been vested with myriad powers to investigate into any matter concerning the interest of the investors even if it pertains to companies which are not listed. It clarifies the significant points of law and removes the grey areas relating to the issues of securities by the so called unlisted companies which are trying to take advantage of the loopholes of law. This Judgment has also bridged the jurisdictional gap which previously existed between that of "the Ministry of Corporate Affairs (MCA)" & "SEBI". It is also hoped that in the future this judgment will be instrumental in preventing turf war between the "MCA" & "SEBI" concerning the jurisdiction issues as it categorically iterates that in the matter of public interest, both SEBI & MCA will have concurrent jurisdiction.

CONCLUSION

The ordinance passed by the Union Cabinet on the 18th of July, 2013 and tabled on Lok Sabha on 12th August, 2013 can be said to be exquisite in nature as it has acted as oil in a rusted mechanism. This ordinance has granted powers to SEBI that are required by it in order to regulate the securities market in today's world. SEBI was established by the government in order to control and regulate the securities market. The powers that have been granted to SEBI under the ordinance are somewhat similar to the powers that are given to the securities market regulators in foreign countries such as the USA. Hence, it may be stated that the ordinance passed by the union cabinet in regard to SEBI does not grant some special powers of SEBI but provides it with the mechanism that is required by it in order to regulate the securities market efficiently in today's world.

Footnotes

1 4th Year Law Intern from Ideal Institute of Management and Technology, GGIP University

2 MANU/WB/0147/2013

3 MANU/SC/0735/2012

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.

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.

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