Broad Definition Of Security Crucial For Regulating Plantation

India needs to adopt the US model for regulating plantation schemes that have mushroomed all over the country.

The Securities Contracts Regulation Act, 1956, already includes a clause which puts the onus on the central government to declare instruments that could be called as securities.

Tom Keyes and Paritosh Sharma, consultants at Price Waterhouse, feel the next embarrassment for regulators in India would be these plantation schemes if a clear cut definition is not construed to bring them under the regulatory purview.

"Under the US model, such schemes are treated as securities and all SEC regulations apply," says Keyes. "It is important to give a broad definition of a security and not a rigid one to include all agro-based schemes.

 

Once it is clearly defined that such units are a security, all rules pertaining to a security apply." According to Sharma, the Securities Contracts Regulation Act (SCRA), 1956, has one provision in the definition that needs to be enacted. "The SCRA says the definition of securities includes besides shares, scrips and other things, any such instruments as may be declared by the central government to be securities. There is a need to enact this provision for agro-based schemes which will bring them under the purview of Sebi." The Securities and Exchange Board of India has already framed guidelines on collective investment schemes.

However, there is confusion about definition of the term securities. The Sebi chairman has written to SEC requesting them to detail how they have managed to define such schemes as securities.

While the SEC response is still awaited, the government has also announced that it will initiate a separate legislation for agro-based schemes. Keyes said that in US, such schemes fall under the traditional 'Howey test' for investment contracts.

An investment contract is defined as any contract or profit-making scheme whereby a person invests his money in a common enterprise and expects to make a profit solely from the efforts of the promoter or a third party who is responsible for the management.

The SEC and courts have broadly construed this phrase so as to apply the registration requirements of the 1933 act to a wide variety of financial schemes.

"This definition brings any scheme issued publicly under the SEC jurisdiction. So even if these are not registered as securities, or are issued privately ,fraud provisions in the US are still applicable to such an offer," Keyes added.

Sharma is of the opinion that India needs to have a similar broader definition for such agro-schemes. "In the US, courts construed the phrase to apply registration required.

In India, it needs to be seen as to who would do it. he confusion that exist is particularly on this issue." Regulations for these schemes need to have continuous reporting requirements as these are private companies, greater disclosures in a systematic format indicating cost incurred per unit, total expenses incurred in making acquisitions of land and other facilities and detailed disclosure on the risk perception for the protection of the investor.

Keyes also feels that the practice involved in marketing this issue differs from region to region. Broader regulations and penalties that would hurt need to be imposed on these companies, he said.