Seven notes for Sebi's new boss

WITHOUT CONTEMPT

Any change of guard at the Securities and Exchange Board of India (Sebi) has always been a big event, not only with huge media coverage, but also with advice pouring in from all quarters on what the new chairman should do or shouldn't do.

This is not without reason. Even the Supreme Court recently pointed out how the Sebi Act, 1992 ran counter to the doctrine of separation of powers.

The Supreme Court noted that Sebi exercises legislative power by making regulations, executive power by administering its regulations and judicial powers by adjudicating disputes in implementing them.

Such integration of powers, in the Supreme Court's view, could raise several public law concerns. It is in this context that a quick listing of a few critical legal issues that ought to be addressed by the person heading such a powerful organisation would be in order.

First, an internal policy on disciplinary action is overdue. Sebi has powers to issue preventive directions, to suspend or cancel the license of any intermediary, to impose stiff monetary penalties, and to initiate criminal prosecution.

Each of these four options is without prejudice to the others, and the constitutional validity of this framework has not yet been tested. These measures are in addition to disciplinary action that self-regulatory organisations such as stock exchanges can themselves impose.

It is important to ensure that the same person is not punished for the same offence more than once. The use of emergency powers under Sections 11(4) and 11B ought to be reserved for emergencies, and not used as punitive provisions.

Criminal prosecution ought to be launched only in terrible cases where the standard of proof required in a criminal action is indeed available. Suspending or cancelling an intermediary's license or imposing stiff penalties for trivial, harmless and clerical back-office errors is highly avoidable.

The concept of "suspended sentences" should be initiated"" punish a violator, but suspend the sentence until the violation is repeated. This will help attain greater discipline and fear of the law.

Second, the advance ruling regime ought to be improved. There is little point in providing delayed, antiseptic non-binding interpretations or no-action letters in respect of regulations written by Sebi itself.

While this presents an interesting business model""write laws that are difficult to comprehend, and charge fees for interpreting them""the mandate of the regulator is neither to make money this way nor lose credibility over it.

Third, recent amendments to the Takeover Code have made the law different for different persons investing in different listed companies.

The extent to which one may purchase shares in a listed company is not uniform, and is tied to the provisions of a bilateral listing agreement between the respective target companies and stock exchanges. This is highly undesirable, and has severely slammed the brakes on merger and acquisition activity.

Worse, one provision prohibits acquisitions, if the minimum public shareholding threshold is likely to be breached while another provision prescribes options for dealing with such breach.

Fourth, the Delisting Guidelines have made listing in India most fearsome and even conflict with the long-standing principles of corporate commercial law.

For instance, if a stock exchange delists a stock, the "promoters" would have unlimited liability by having to buy out public shareholding at a rate to be fixed by arbitrators of stock exchanges. No stock exchange by-law provides for such arbitration.

Fifth, foreign stock exchanges have become more attractive destinations for unlisted Indian companies. While this calls for introspection, an obscure circular issued by the government refers to a so-called "standard requirement" prescribed by Sebi of such unlisted Indian companies listing abroad, to also mandatorily list in the domestic stock market within three years of becoming profitable.

Since Sebi has not prescribed any such requirement, it ought to clarify this position to the government urgently, since this circular is impeding the ability of Indian companies to go global.

Sixth, the Indian primary market is booming, even while the Central Listing Authority (CLA) is yet to take off. The very concept of Sebi, itself a delegate of Parliament's powers, sub-delegating powers to a self-created authority, and sitting in appeal over that authority's decisions, is repugnant to good law and governance. The still-born CLA should be disbanded and be done away with on the lines of the fate of corporate governance ratings.

Finally, the chairman should take a hard look at Sebi's internal views on review of the very legislation that has created Sebi.

Some of the proposals are preposterous (seeking powers to give priority to investors selected by Sebi over secured creditors when an intermediary is wound up) while others are inelegant (seeking to get statutory exemption for Sebi officers from attending prosecution proceedings).

Contrary to popular belief, the era of cynicism towards regulation is long-dead in India, and the culture of compliance has spread in a big way.

Recurrence of scandals is no indication of weakness of a regulator. No one would doubt that the strictly-regulated US market has one of the most-feared capital market regulator - regardless of the size of scandals that keep cropping up in that market.

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