An Ordinance was issued on 18th July, 2013 amending
securities laws such as the SEBI Act, etc. Some provisions have
immediate effect while certain others have retrospective effect from
different dates. Some amendments are technical and meant to clear
certain doubts/concerns or strengthen the validity of certain
provisions. A couple of others are a little serious. One grants special
powers of search and seizure to SEBI. Another gives wider powers to
gather information. Yet another provision grants powers to SEBI to
arrest and jail people for strange reasons—if he does not pay penalty,
does not refund monies, or a mere nonpayment of fees, etc. Others like
special courts are meant to expedite prosecution of offenders.
The
important amendments can be briefly described as follows. The Consent
Order process, which presently operates through Guidelines, has now been
given specific legislative sanction. Special Courts are now authorised
to be set up for speedy prosecution of offences. Powers to search and
seize without need for sanction by Magistrate are given to SEBI. Powers
to recover monies from defaulting parties are also given. Disgorgement
of proceeds of unlawful transactions/activities also now has legislative
sanction. The scope of provisions relating to collective investment
schemes (CIS) has been expanded and certain large Schemes are treated as
CIS by a deeming fiction. SEBI also can now collect information from
practically anybody and not from a limited set of persons as was the
position earlier.
Similar amendments are made in regard to some
of these aspects to other securities laws—the Securities Contracts
(Regulation) Act, 1956 and the Depositories Act, 1999.
Some important amendments are discussed in a little more detail.
Collective Investment Schemes
SEBI—as
early as 1999—made fairly stringent Regulations for registration and
regulation of Collective Investment Schemes (“CISs”). It may be
recollected that CISs are schemes that pool monies from the public and
invest in certain businesses. The profits, after expenses, of such
businesses are intended to be divided amongst the investors. Often,
specific assets are earmarked to individual investors so the returns
from such assets are identifiable. The best example of this is mutual
funds, which are of course specifically excluded from the definition of
CIS but are still a good example to understand the concept.
However,
in practice, numerous schemes were introduced for fancy businesses
(teak plantations, goat raising, etc.). Some of them gave false promises
of high returns. Some were simply loans raised but disguised as CISs to
avoid various restrictions of other laws on raising of monies from the
public. Many of these schemes were found, usually too late, to be
outright Ponzi schemes where, on one hand the funds were used to pay
hefty commissions to motivate agents to collect monies and on the other,
the rest of the monies were used to repay interest and principal on
earlier loans. By the time the scam was discovered, most of the recent
investors could recover nothing.
The amendments and Regulations
of 1999 did help in closure of many leading schemes. However, recent
scams, particularly in West Bengal, showed that they had merely
re-invented themselves and, strangely, they were operating fairly
openly. One wonders whether this is not clearly a failure of the
regulator. SEBI did pass some quick orders in such cases recently but it
appears that it was too late.
Nevertheless, this Ordinance
makes certain amendments strengthening the powers of SEBI. The
definition of CISs has been enlarged to include by deeming fiction
certain large-sized schemes. Any scheme/arrangement of pooling of funds
having a corpus of Rs. 100 crore or more is now deemed to be a CIS.
Thus, it will need prior registration and compliance with several
formalities.
However, schemes which are specifically excluded
from the list will remain excluded from this deeming provision also.
Thus, public deposits raised by companies under corresponding
Rules/Directions, funds raised by mutual funds, insurance companies,
etc. will not be treated as CISs.
This deeming fiction, however, appears
to be unduly wide. The requirements for a scheme to become such a CIS
are simple and minimal (i) it has to be a scheme/arrangement (ii) it
should involve “pooling” of funds (iii) the total “corpus” should be Rs.
100 crore or more.
Would it cover investment in capital of private
limited companies? What about Inter-corporate deposits (or even bank
borrowings)? These and several other types of pooling of funds appear
prima facie to be covered by the new definition.
A question had arisen
whether the restrictions of registration, etc. on CISs were applicable
only if the CIS was set up by a company or whether it was applicable if
set up by other persons too. In Osian Art Fund’s case, for example, this
contention was raised and SEBI held that it also applied to entities
other than companies. However, to put this issue beyond doubt, the word
“company” has now been replaced by the word “person” in the Act. This
now makes it clear that the requirement of registration shall also apply
to other entities. The amendment, however, is not retrospective.
Consent Orders
The Guidelines relating to consent orders issued in 2007
enabled numerous cases to be settled without lengthy penal proceedings.
Persons accused of violations of provisions of securities laws, or even
persons who anticipated such allegations, could approach SEBI for
settlement. By payment of a settlement amount and sometimes accepting
certain non-monetary restrictions like debarment, etc. the proceedings
could expeditiously come to an end. Further, the proceedings would end
without admission or denial of guilt by such person.
While the
settlement mechanism was fairly speedy and independent, it attracted
criticism too, part of which was met by recent issuance of the revised
Guidelines. However, serious concerns were expressed over the legal
basis of the consent order guidelines. A PIL was also filed before the
Delhi High Court. If the Guidelines were set aside by the Court as being
without legal basis, hundreds of consent orders passed till now would
have got overturned. A new provision now gives retrospective validity to
the consent order process permitting SEBI to pass such consent orders.
This amendment is effective from April 2007, when the original consent
order Guidelines were issued.
Strangely, the amended provisions
specifically provide that the consent orders shall be in accordance with
Regulations made in this regard. However, no Regulations have been
issued till date and the existing settlement scheme is in the form of
Guidelines. This puts a question mark over all consent orders passed
till date under Consent Order Guidelines. A question arises whether any
Consent Order can be passed till Regulations on Consent Orders are
issued.
It is also provided that consent orders cannot be appealed against. The amendment, being retrospective, will thus invalidate existing appeals or future appeals against any consent order. This may make sense because consent orders are by definition by mutual consent. However, at times, SEBI may reject an application for consent. Discretion remains with SEBI whether or not to accept an application for consent. The Guidelines state that certain types of violations cannot be settled. However, in other cases too, there is discretion with SEBI. Question is whether such discretion is exercised judicially and whether it can be challenged. The new provision, however, provides that no appeal shall lie against the order passed.
The party concerned of course does not lose the right of proceeding with the adjudication or other proceedings in the normal course.
Powers of search and seizure
Till now, SEBI could initiate search and seizure under persons being investigated by making an application to a Magistrate who had jurisdiction over the persons. Certain reporting was also required to be made to the Magistrate. This requirement to apply to and obtain order from the Magistrate has now been dropped. The SEBI Chairman can now issue directions for search and seizure against persons being investigated. The powers of search and seizure have also been made more elaborate.
Powers to collect records from other entities (including telephone records)
Till now, SEBI had powers to seek information from banks or other authorities, etc. for information relating to transactions under investigation. Now the powers have been widened to include “any person”.
Disgorgement of funds
Persons may engage in transactions in contravention with the Act/Regulations and thus make gains or avoid losses. For example, a person may engage in insider trading and make profits or avoid losses. There have been concerns raised whether SEBI has adequate powers to order disgorgement of such gains/losses and direct its use, say, for credit to the Investor Protection Fund.
An explanation now introduced declares that SEBI always had powers to direct disgorgement of profits/losses from persons who have made such profits or avoided losses in contravention of the Act/ Regulations. Further, the amount disgorged shall be credited to the Investor Protection Fund.
It must be noted that disgorgement is in addition to the penalty that can be levied.
Action in case of default in payment of refund, penalty, fees, etc.
In case a person delays or defaults in payment of various types of amounts as he has been ordered or is otherwise required to pay by way of penalty, disgorgement or refund the monies raised or even dues on account of fees payable to SEBI, specific powers to recover such amounts, by attachment and sale of properties have been given.
However, there is a strange power given to SEBI. The person concerned can be arrested and imprisoned for making such defaults. Since power to attach and sell properties is given, the power to arrest and detain seems a little drastic, particularly when they cover even regular dues like fees payable to SEBI.
Conclusion
Powers of search and seizure and arrest and detention are a little scary, particularly considering how widely they are worded. However, it appears strange that instead of examining how powers given in 1999 to regulate/restrict CISs have worked, more powers in broader provisions have been given to SEBI. Based on past experience, persons are scared that the amended provisions will be arbitrarily used especially when governance (implementation and enforcement) is an issue.
