There is multiple jeopardy in penalising securities offences

WITHOUT CONTEMPT

There is once again a clamour in the media for granting more powers to the financial regulators, and one of the grounds is the success rate for regulatory actions.

Against this backdrop, as a case study, let us examine the regulatory framework for stock brokers. Stock brokers are governed by the Sebi Act, 1992 (the Act), and, the Sebi (Stock Brokers and Sub-Brokers) Rules, 1992 (the broker rules), and the Sebi (Stock Brokers and Sub-Brokers) Regulations, 1992 (the broker regulations), made under the Act.

In addition, there are the by-laws (exchange by-laws), made by stock exchanges, and further rules and regulations made by exchanges. And of course, there is the Securities Contracts (Regulation) Act, 1956 (SCRA), now substantially administered by Sebi, and the Securities Contracts (Regulation) Rules, 1957 (SCRR), made under the SCRA.

The first line of regulation is the exchange by-laws, which regulate a broker's conduct in all material particulars.

The exchange by-laws, and the rules and regulations made under them, are a self-contained code, and have been in existence for as long as the Indian capital market. Today, the by-laws across exchanges are substantially similar. Sebi controls the exchange by-laws""exchanges cannot amend them without Sebi's approval; but Sebi can amend them by issuing directions.

The exchange by-laws have formed the basis for drafting the broker regulations. Many of the material provisions of the exchange by-laws are found in the SCRR, and provisions from these two bodies of law, are also in the broker regulations.

A breach of the exchange by-laws or the SCRR is a violation of the broker rules. A breach of the broker rules is a violation of the broker regulations. A breach of any of the SCRR, the broker rules and the broker regulations, is a violation of the exchange by-laws.

In short, the various pools of law governing a stock broker are intertwined, and a breach of any provision in any one of them, consequently leads to imposition of penalties in the others.

Now consider the penalties. The exchange by-laws contain a comprehensive scheme of penalties ranging from monetary penalties for operational breaches, to serious penalties such as suspension or expulsion.

For a violation of the broker regulations, Sebi can initiate "enquiry proceedings" under the Sebi (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. The penalties range from a censure to cancellation of registration, and more recently, a monetary penalty of up to Rs 1 crore.

There is also another stream of penalties under the Act. If the same offence is covered under Chapter VIA of the Act, "adjudication proceedings" can be initiated and severe monetary penalties can be imposed"" some of these are without limit.

Section 15HB even empowers imposition of a penalty of up to Rs 1 crore for violation of any provision of the Act, rules or regulations under the Act, or directions issued by Sebi, for which no separately penalty is provided.

For the same offence, Sebi can also initiate criminal prosecution punishable with imprisonment of up to 10 years or with fine of up to Rs 25 crore, or both.

Add to all of this, the general powers to issue directions in the interest of the securities market under Sections 11(4) and 11B of the Act, which too are often used to impose penalties.

Often, in imposing a penalty under the broker regulations, payment of a penalty under the exchange by-laws is cited as admission of guilt. So also, offences tried under enquiry proceedings are referred to adjudication proceedings as well.

In the past, even when a finding of guilt is under consideration of the Securities Appellate Tribunal, criminal prosecution has been launched.

Stock brokers are but an example. The same principle applies to other market intermediaries as well. The lawmakers would do well to make the law equitable, and bring it in line with the spirit of the Constitution, which prohibits imposition of penalty for the same offence more than once.

This principle has always been referred to as the doctrine of a "double jeopardy"""it was perhaps never imagined that a multiple jeopardy of this nature could evolve.

TAILPIECE:
The broker regulations got written when the opaque floor-based open outcry trading system was in place, and needs urgent review.

For instance, the National Stock Exchange has done away with the need to maintain a physical "order book" to record the time of receipt of orders from clients, because this information gets automatically generated when the order is placed on the trading system by the dealer taking the client's phone call.

But other exchanges have not kept pace and non-maintenance of the order book by members of other bourses is still penalised by Sebi.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal)