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With the government arming the Securities and Exchange Board of India (Sebi) with greater powers to crack down on stock market offenders, the market regulator has to beef up its teams and technologies to put the newly-acquired capabilities to good use, said former senior officials. To effectively implement powers such as passing orders on attachment and sale of properties, search and seizure operations and disgorgement, it would also have to devise frameworks or operational guidelines.
“Sebi will have to expand its HR (human resources) and technical capacity to increase efficiency, though lack of manpower may not be a material thing to begin with,” said M S Sahoo, secretary, Institute of Company Secretaries of India and former whole-time member of Sebi.
The regulator would have to ensure adequate manpower in crucial departments, including surveillance, investigation and enforcement, former regulatory officials said. For this, it might have to rope in senior officials from investigation agencies. “Most of these things (new powers) come under the enforcement division. Now, Sebi will have to reinforce its enforcement team,” said J N Gupta, founder and managing director of proxy advisory firm Stakeholders Empowerment Services and former Sebi executive director.
Sebi’s employee-intermediary ratio is among the lowest in the Asia-Pacific region, an analysis shows. The regulator’s 2011-12 annual report stated it regulated about 70,000 entities with a staff strength of just 640. Financial Supervisory Services, the South Korean integrated financial regulator that oversees about 3,000 intermediaries, including brokerages and insurance companies, has an employee strength of about 1,700.
Gupta said as some new powers were vested with the chairman alone, the regulator might soon have to formulate guidelines to ensure these weren’t used arbitrarily. “The order has to come from the highest level. This is a good thing, as it would prevent misuse. But the chairman will also need a framework for taking action. A lot will depend on how efficiently these guidelines are framed,” he said.
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The broadening of the scope for Sebi to regulate and crack down on Ponzi and unauthorised collective investment schemes (CIS) is crucial, as it would bridge the regulatory gap most companies exploit. “Now, all sorts of CIS, even those for which no securities have been issued, would fall within Sebi’s ambit. This would widen the regulator’s powers and, to a certain extent, plug the regulatory arbitrage where entities devised schemes that didn’t fall under the jurisdiction of either Sebi or the Reserve Bank of India,” said R S Loona, managing partner, Alliance Corporate Lawyers and former Sebi executive director. “Today, Sebi is passing orders (against CIS entities), but it isn’t able to pass on the benefits to investors. Now, it would be able to attach and sell properties and pass on the benefits to investors,” he added.
“All kinds of schemes floated—Ponzi, multi-level marketing and time-share---which didn’t fall under any definition, would now be covered. Any form of pooling money would be deemed a CIS. This is a good precursor to the Indian Finance Code, which would have a principal-based approach to tackle money-collecting schemes,” said Sahoo.
Gupta said though Sebi might not be able to ensure Ponzi schemes weren’t started, it could efficiently deal with these now. “CIS violation can only be stopped completely once the banking sector and other regulators are involved and work together,” he added.
