Lacklustre report on amending Sebi Act

Yet another report by an expert panel commissioned by the Securities and Exchange Board of India (Sebi) to review the Sebi Act, 1992, the very legislation that created Sebi, was released last week.

The report is important, more for what it fails to do than for what it does. Either the object of this review was never intended to be a serious one, or the mandate given to the expert committee was restricted to what Sebi had wanted it to review.

In the last quarter of 2004, Sebi had circulated a suggestion paper containing the changes Sebi would like to see in the Sebi Act (Without Contempt, dated December 20, 2004: Sebi seeks to review its governing law).

The report of the expert committee does not go anywhere further than the original suggestion paper from Sebi. A few of Sebi's suggestions have been endorsed, a few have just been sympathised with, and a bunch of others have been rejected.

In the process, several serious problems with the Sebi Act that are crying for attention have not even been dealt with.

The areas that crave for attention in the Sebi Act include the multiple jeopardy mechanism whereby the every offence can be penalised with up to three forms of civil penalty and also criminal prosecution, the sweeping powers to issue directions without even conducting any inquiry, and important terms and concepts in the Sebi Act remaining undefined, and being left to definition by Sebi in subordinate legislation.

While these are issues under the Sebi Act, there is a whole host of issues to be dealt with under each of the regulations notified under the Sebi Act.

These include the exclusion of legal representation in enquiry proceedings (against the teeth of a Gujarat High Court holding such provisions to be unconstitutional), and drafting lacunae in the insider trading regulations that lead to severe hardship.

And, we are not even talking of specialised problems such as the last set of amendments to the take-over code, and the impracticality of the delisting guidelines.

The report does not make any incisive impact on many of these issues.

But a few recommendations that are noteworthy include an amendment to the Sebi Act to enable initiation of winding up proceedings by Sebi akin to the Reserve Bank of India Act, and a preferential payment to investors over all other debts of a market intermediary akin to the provisions of the Banking Regulation Act.

An important development is the rejection of Sebi's desire to compel lawyers to part with privileged information about their clients (yes, first principles of constitutional law were deliberated).

The committee has rejected yet another request from Sebi to have powers to directly freeze bank accounts without the supervision of a judicial magistrate.

Similarly, Sebi's request for powers to conduct search and seizure without a magistrate's oversight has also been rejected.

It is interesting that since the conferment of these powers two years ago, there is still no known case of Sebi's efforts to use these powers being thwarted due to magisterial supervision.

The committee has recommended increasing the age of members of the SAT from 62 to 65, but has also proposed to reduce the cooling-off period for Sebi's own executive directors getting elevated to the SAT from two years to one year.

The committee has not recommended an express provision that any such SAT member ought to keep away from proceedings involving files on which he was involved as an officer of Sebi.

The committee has proposed to create an appellate "review commission" within Sebi to review enquiry and adjudication orders, with appeals from orders of the commission lying before SAT i.e. one more internal layer.

In short, this is a lacklustre report. An opportunity to make an impact with the law has been lost.

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

somasekhar@jsalaw.com