A different ball game for Sebi now

The Sebi has acquired sweeping new powers under an Ordinance. Much depends on the speed, efficiency and decisiveness with which it can enforce them

The Securities and Exchange Board of India (Sebi) Ordinance of July 18, marks a watershed in the regulatory architecture for the financial markets in India for several reasons.

First, Sebi's new powers - both substantive and procedural - are sweeping in nature. They include:

(i) the powers of search and seizure and recovery and attachment of assets that glean significantly from the powers commonly exercised by the revenue collection agencies;

(ii) a substantial expansion of the definitions as in the case of collective investment schemes (CIS) to widen the regulatory reach to deal with the prolific growth of such schemes; and

(iii) the power to seek information from a wide range of agencies to include telephone call data records with respect to any securities transaction being investigated by Sebi.

 

Second, the Ordinance by giving retrospective effect to several specific actions and orders of Sebi, especially for consent proceedings and disgorgement of ill-gotten gains from insider trading and unfair trade practices, imparts legal sanctity to Sebi's powers to pass such orders and to past orders too.

Third, by enabling special courts to be set up to try all existing offences and future offences under the Sebi Act, the Ordinance not only seeks speedier trial but also, in a sense, gives recognition to the seriousness of financial crimes. Sebi will now have to frame regulations to give effect to some of the powers like search and seizure, CIS schemes, and consent orders for which circulars are already operational. This should take not more than a couple of months.

Sebi's new powers makes it stand apart from other statutory regulatory bodies in the country, whether in the financial market or otherwise. It goes to the current Sebi chairman's credit to have been able to persuade the finance ministry to grant these powers and to issue an Ordinance. The sweep of the new powers should result in a paradigm shift in Sebi's extant surveillance and investigation mechanisms and make a more focussed and effective enforcement possible. That certainly will be the least of the expectations.

Three questions arise. One might be tempted to ask whether such sweeping powers were necessary, and Sebi critics would love to harp back on the regulator's track record to justify the question. It would also be reasonable to examine the implications of these powers on the functioning of Sebi. The answer to the first question is an unequivocal yes, for more reasons than one. Players in the financial world usually try and remain a step ahead, urged by the impulses that are in the nature of their businesses. Many players even try to operate in the penumbra of the regulatory ambit. This leaves the regulator always playing catch-up and it can ill-afford to feel hamstrung by the absence of adequate powers to be able to act decisively and timely. At the same time, it cannot allow market players to refuse furnishing information or continue to submit false information with contumacious obduracy, or to violate securities laws with impunity by taking advantage of weaknesses in the laws. In recent times there were several instances where all the above happened. So, the sweeping powers and in some cases giving legal sanctity for actions retrospectively were necessary as well as seeking all records of telephone conversations to help in the cases of insider trading. But it goes without saying that these powers are bound to make life pretty uncomfortable for many market participants.

The two principal implications of the new powers on Sebi's functioning would be on manpower and the systems and processes for surveillance, investigation and enforcement. Experts and commentators, however, seem to have focussed only on the enhancement of the staff strength. While it does not require great imagination to suggest that Sebi would need to beef up its staffing and even open more offices across the country to make the new powers operational, of no mean significance is the quality and expertise of the manpower. It may not be easy for Sebi to quickly enhance the numbers only by recruiting Sebi's own staff. Sebi would have to lean on other institutions for staff on secondment. The new powers are likely to attract and encourage many people to join Sebi. The recruitment drive would have to be accompanied by large-scale training on understanding securities laws and of the new powers, the dynamics of the market, and on an on-boarding programme of the new recruits at all levels. The new powers would also require a serious review and overhaul in many cases of Sebi's existing apparatus and mechanisms for surveillance, investigations, enforcement as well as developing the new ones.

Managing the huge expectations that the new powers will inevitably engender is a challenge. In financial markets fraud and abuse happen. Many players who are now experiencing discomfiture with the new powers, will be on the look out for instances of failure to challenge the powers. In fact, a public interest litigation was filed even before the ink could dry on the Ordinance. Some of the new powers may also be challenged once Sebi begins to test them. The brunt of the blame on Sebi for failure would, therefore, rest heavier. Sebi would have the unenviable task of working out the best ways to deal with these issues and in this, its best insurance would be the speed, efficiency and decisiveness in enforcing the laws effectively. This in turn would be closely correlated with the quality of the staff and agility of the enforcement apparatus.

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The author was formerly executive director of Sebi and is currently an advisor and consultant to Deloitte Tohmatsu Touche India Pvt Ltd and the World Bank
pratipkar21@gmail.com