11/20/13 the PRS Blog » Enhancing SEBI’s Powers

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Enhancing SEBI’s Powers

Recently, there have been instances [1] of certain collective investment schemes

(CISs) attempting to circumvent regulatory oversight [2]. In addition, some

market participants have not complied [3] with Securities and Exchange Board of

India’s (SEBI) orders [4] of payment of penalty and refund to investors.

In August, the Securities Laws (Amendment) Bill, 2013 [5] was introduced in the

Lok Sabha to amend the Securities and Exchange Board of India Act, 1992 [6]

(the SEBI Act, 1992), the Securities Contract (Regulation) Act, 1956 [7] (SCRA,

1956) and the Depositories Act, 1996 [8]. The Bill replaced the Securities Laws

(Amendments) Ordinance, 2013 [9].

The Bill makes the following key amendments:

a) Definition of Collective Investment Schemes

The SEBI Act, 1992 defines CISs [10] as schemes in which the funds of investors

are pooled, yield profits or income and are managed on behalf of investors. It

also exempts certain types of investments which are regulated by other

authorities.

The Bill introduces a proviso to the definition of CIS. This proviso deems any

scheme or arrangement to be a CIS if it meets all three of the following

conditions: (a) funds are pooled, (b) it is not registered with SEBI, or it is not

exempted by SEBI Act, 1992, and (c) it has a corpus of Rs 100 crore or more.

These provisions could potentially lead to some schemes not conventionally

defined as CIS to fall under the definition. For instance, partnership firms

operating in the investment business or real estate developers accepting

customer advances could be termed as CISs.

SEBI has been given the power to specify conditions under which any scheme or

11/20/13 the PRS Blog » Enhancing SEBI’s Powers

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arrangement can be defined as a CIS. This raises the question of whether this is

excessive delegation of legislative powers – usually the parent act defines the

entities to be regulated and the details are entrusted to the regulator.

b) Disgorgement (repayment) of unfair gains/ averted losses

SEBI has in the past issued orders [11] directing market participants to refund i)

profits made or ii) losses averted, through unfair actions. The Bill deems SEBI to

have always had the power to direct a market participant to disgorge unfair gains

made/losses averted, without approaching a court. This power to order

disgorgement without approaching a court is in contrast with the provisions of

the recently passed Companies Bill, 2011 [12] and the draft Indian Financial

Code [13] (IFC) which require an order from a court/tribunal for disgorgement of

unfair gains.

Further, the Bill specifies that the disgorged amount shall be credited to the

Investor Education and Protection Fund (IEPF), and shall be used in accordance

with SEBI regulations. The Bill does not explicitly provide the first right on the

disgorged funds to those who suffered wrongful losses due to the unfair actions,

unlike the draft IFC.

c) Investigation and prosecution

The Bill empowers the SEBI chairman to authorise search and seizure operations

on a suspect’s premises. This does away with the current requirement of

permission from a Judicial Magistrate. This provision removes the usual

safeguards regarding search and seizure as seen in the Code of Criminal

Procedure, 1973, the recently passed Companies Bill, 2011 and the draft Indian

Financial Code.

The Bill also empowers an authorised SEBI officer to, without approaching a

court, attach a person’s bank accounts and property and even arrest and detain

the person in prison for non-compliance of a disgorgement order or penalty

order. Most regulators and authorities, with the exception of the Department of

Income Tax, do not have powers to such an extent.

d) Other Provisions of the Bill

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1. http://www.sebi.gov.in/sebiweb/home/detail/25683/yes/PR-Order-in-the-matter-of-

M-s-Saradha-Realty-India-Ltd-

2. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1373456813231.pdf

3. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1360766525407.pdf

4. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1360766381815.pdf

5. http://164.100.24.219/BillsTexts/LSBillTexts/asintroduced/111_2013_eng_LS.pdf

6. http://www.sebi.gov.in/acts/act15ac.pdf

7. http://www.sebi.gov.in/acts/contractact.pdf

8. http://www.sebi.gov.in/acts/act03a.pdf

9. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1374641164254.pdf

10. http://www.sebi.gov.in/faq/cis_faq.html

11. http://www.sebi.gov.in/cmorder/IPO.html

12. http://www.prsindia.org/billtrack/the-companies-bill-2011-2122/

13. http://www.prsindia.org/administrator/uploads/general/1370600640_FSLRC%20Report%20Summary.pdf

14. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1291879532674.pdf

15. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1291879532674.pdf

16. http://www.sebi.gov.in/cms/sebi_data/attachdocs/MoUSebi.pdf

The Bill retrospectively validates consent guidelines [14] issued by SEBI in 2007

under which SEBI can settle non-criminal cases through consent orders, i.e.,

parties can make out-of-court settlements through payment of

fine/compensation. The United States Securities and Exchange Commission

settles over 90% of non-criminal cases by consent orders [15].

The Bill retrospectively validates the exchange of information between SEBI and

foreign securities regulators through MoUs [16].

The Bill sets up special courts to try cases relating to offences under the SEBI

Act, 1992.

For a PRS summary of the Bill, here [17].