Sebi Act needs serious spring cleaning

WITHOUT CONTEMPT

The government has seen through the winter session of Parliament without much ado on securities laws. The much-anticipated Bill to amend the Securities and Exchange Board of India Act, 1992 (Sebi Act) was not tabled.

Lawmakers anywhere in the world are fond of emphasising how the world is near its end, particularly when it comes to the capital markets. Exaggerating scams and frauds helps politicians conjure imagery of how everything about governance is wrong and how the administration never thought through the prospect of potential malpractices in the market.

In practice, the constitutional system in India still does not effectively hold a mirror to our own lawmakers on how shabbily they have been performing when it comes to making laws. Every time there is a scam that gets a high profile in the media, regulators get conferred with greater powers, and stakes for users and practitioners of the law get enhanced with higher penalties and more stringent compliance provisions. Much of this proceeds so mindlessly that the very legal concept of "legislative intent" can be laughable.

The Sebi Act, right since inception, is a classic example of how Parliament has always played a secondary role. The inception of the Act was in the form of a presidential ordinance, which later got confirmed into an Act. Thereafter, virtually once every two-and-a-half years, the Act has been amended, with material and far-reaching amendments always taking the form of a presidential ordinance, followed by amending of the Act by Parliament without any material change in the provisions.

The last round of amendments in 2002 and the introduction of substantive penal powers in 1995 are cases in point.

Yet there are some awful mistakes and drafting errors that riddle the Act. This winter session may have passed without the government having to table an amendment complaining that Parliament has not adequately delegated powers to Sebi. However, our law-makers would do well to pass an amendment just to clean up some patent blunders and errors that riddle the Act.

Just to take an example, when the stakes for violations were raised in 2002 by a presidential ordinance, Section 24A was introduced to enable plea bargaining and compounding of offences. However, the provision that was written into the Sebi Act made it clear that if there was any prospect of a sentence of imprisonment, no compounding would be allowed

Section 24 of the Act has provided since inception that every single offence under the Act is punishable with imprisonment.

Expectation that this was an error and that the law-makers would clean up proved to be unreasonable. Parliament went on to amend the Securities Contracts (Regulation) Act, 1956 (SCRA) by copy-pasting not only the content of the compounding provisions of Section 24A but also the very contents of Section 24 itself, which provided for every violation being punishable with imprisonment.

There are several other issues around the Act which need a clean-up. Just to take an example, Section 15H imposes a penalty of Rs. 25 crore or three times the gain made, whichever is higher, should any person fail to disclose his aggregate shareholding before acquiring any shares. All the substantive disclosure provisions under the Act (these are under the takeover regulations and the insider trading regulations) prescribe disclosure post-acquisition and not prior to acquisition.

Perhaps it would be fruitful to run one round of amendments through an ordinance just to clean up such provisions. It need not take a scam for such a clean-up exercise to be introduced.

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

somasekhar@jsalaw.com