Currently, SEBI has discretionary powers to issue a show-cause notice (SCN) to an individual or entity suspected of violating the securities laws even if the alleged offence had taken place several years ago-the law does not impose a limitation statute on SEBI for issuing SCNs. Consequently, there have been several instances where, due to the inordinate delays in initiation of enforcement proceedings, recipients of SCNs have faced grave difficulties in mounting an effective defence and proving their innocence on account of factors such as limited recollection of facts and non-availability of relevant records. While, at present, almost no law in the country mandates the maintenance and storage of records (including stock-trading and financial records) for more than eight years, it is interesting to observe that there have been instances where SEBI has issued SCNs to alleged offenders after over eight years from the date of the alleged violation.

In the past, SEBI's unbridled powers have been sought to be restrained by the Securities Appellate Tribunal (SAT), which has time and again set aside SEBI's orders on the ground of inordinate delay in issuing SCNs. SAT has routinely emphasised that, irrespective of the lack of a statutorily prescribed limitation period, SEBI should initiate its adjudication proceedings against alleged violators within a reasonable period of time. However, the interpretation of what constitutes 'reasonable' for issuing SCNs is subjective and case-specific, and it does not facilitate setting an uniform time-frame within which SEBI must initiate and complete adjudication proceedings. As a result, market participants are constantly wary of being pulled up by the regulator for alleged violations that they might have committed several years ago. Introducing statutorily-prescribed limitation periods for SEBI to initiate enforcement proceedings is perhaps a better alternative, and will give clarity to market participants and the regulator alike. Reportedly, the finance ministry has been engaging with SEBI to explore the possibility of introducing deadlines for issuing SCNs. In December 2021, the Association of National Exchanges Members of India had also filed a representation with the finance ministry, urging it to introduce a time-limit for SEBI issuing SCNs against market intermediaries.

Introducing defined limitation periods would have several advantages. It will encourage SEBI to complete investigations in a timely manner. Swifter regulatory actions would instil greater confidence in the investor community and bolster market stability. The regulator will also be able to efficiently utilise its limited resources as it will not be required to investigate very old matters. Further, shorter gaps between the commission of an alleged violation and the receipt of the SCN will improve the respondent's ability to collate necessary evidence and recollect important facts/information to appropriately address the allegations made in the SCN, making the entire enforcement process more equitable and efficient.

While introducing statutory limitation, certain key elements must be kept in mind, viz., the timeframe for which the limitation period will run and the date from which the limitation period will commence.

Given the varied nature and severity of securities-law violations, a blanket limitation period for the issuance of SCNs would not be suitable. Limitation periods must address the present difficulties faced by market participants as well as provide sufficient time to SEBI to initiate enforcement proceedings. For instance, for technical violations including failure to comply with disclosure norms, a shorter limitation period should be prescribed. Whereas for grave violations such as indulging in insider trading and fraudulent market practices, a longer limitation period should be prescribed. In some instances, fraudulent and manipulative activities may be designed in a manner to evade detection, resulting in the discovery of the fraud by aggrieved investors or SEBI long after the commission of the illegal act(s). For such violations, SEBI may normally require more time to investigate the matter and build charges against the alleged violators.

In India, prescribing varied limitation periods for enforcement agencies is not a novel concept. For instance, under the Income Tax Act, 1961, an assessing officer can serve a notice to an assessee within three years from the end of the relevant assessment year. However, in serious cases of concealment of income that amounts to or is likely to amount to `50 lakh or more for a year, a notice can be served to an assessee within 10 years from the relevant assessment year. This framework serves a dual purpose. First, it helps to alleviate the fear of taxpayers of their tax assessments being reopened many years after they file returns. Second, it sets a reasonable timeframe within which the enforcement agency is obliged to detect and initiate appropriate enforcement proceedings.

With respect to the date of commencement of the limitation period, in case of technical violations, the date of the violation can be considered to be the commencement date and could be, say, three years. With regard to grave violations such as insider trading or market manipulations, the limitation period could commence from when the alleged offence is discovered by SEBI, or from the date when it can be presumed that SEBI should have discovered the alleged offence after exercising diligence. It could be, say, five years for usual cases and eight years from discovery for unusual cases where information has been deliberately suppressed. A similar framework has been prescribed for the Securities and Exchange Commission in the US for dealing with specific securities-law violations. However, appropriate and clear guidelines regarding the date of presumed discovery of offences by SEBI must be put in place to avoid convolution of the enforcement process.

Introducing statutorily -limitation periods for SEBI to initiate enforcement proceedings is long overdue and the framing of the same will certainly be a complex process. The concept has been derived from the common law principle of laches that was designed to "promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared". The purpose is to require diligent prosecution of nonclaims, thereby providing finality and predictability in legal affairs and ensuring that claims will be resolved while evidence is reasonably available and fresh (Blacks Dictionary). Therefore, among other things, detailed empirical studies, consultation with all stakeholders and a review of limitation periods prescribed in other jurisdictions must be undertaken to develop an appropriate limitation period framework for SEBI to initiate enforcement proceedings.

This article was first published in the Financial Express

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