During the Budget Speech 2018, Hon’ble Finance Minister Mr. Arun Jaitley announced amending Securities and Exchange Board of India Act 1992 (“SEBI Act”), Securities Contracts (Regulation) Act 1956 (“SCRA”), and Depositories Act 1996, to streamline adjudication procedures and to provide for penalties for certain infractions. These proposals are in the Finance Bill, 2018.
While the amendment through Budget Speech look procedural and routine, the devil is in the detail. In my view, the Finance Bill, 2018 is going to have significant change in securities laws and might impact some of the pending cases as well.
What is most interesting aspect of the amendments being that a Whole Time Member (WTM) as well as an Adjudicating Officer of SEBI, both will be entitled to impose penalty. Under securities laws, almost a decade long jurisprudence was available through various rulings of High Courts, Supreme Court and Securities Appellate Tribunal (SAT) that a WTM usually passes remedial and preventive directions (such as debarment from securities markets, prohibition from accessing capital market, disgorgement etc.), while an Adjudicating Officer imposes a monetary penalty. Hitherto, a WTM could pass penal orders by canceling or suspending the license of a registered intermediary. This balance has been made swinging pendulum now and is likely to cause ambiguity in absence of clear guidelines.
For the first time, provisions are being introduced to penalize the failure of a stock exchange or a clearing corporation to conduct its business in a manner which is not in accordance with the rules and regulations made by SEBI. Perhaps it is a policy change post regulatory learning after the colocation issue at National Stock Exchange (NSE) and mayhem at erstwhile National Spot Exchange Limited (NSEL) in commodities market.
On the lines of what was argued in the book authored on SEBI Act, the Finance Bill, 2018 has proposed now introducing a provision for imposing monetary penalty on any person who furnishes or files false, incorrect or incomplete information, return, report, books or other documents in the same manner as a person who fails to furnish the required information. This amendment under various sections is applicable to an individual, a registered intermediary as well as a stock exchange as well.
In recent years, while SEBI had framed Regulations for Alternate Investment Funds (AIFs), Real Estate Investment Trust (REITs), Infrastructure Investment Trusts (INVITs), there was no penal provision in SCRA against them or their managers for violating listing and delisting conditions. Finance Bill proposes to plug this loophole in SCRA. Similar provisions relating to AIFs, INVITs, REITs have been introduced in SEBI Act. The penalty proposed in these cases is 1 Lakh Rupees each day of failure extendable to higher of 1 Crore or 3 times the profit made. This is a welcome measure to seek accountability on certain malpractices.
For the first time, there are provisions introduced in SEBI Act for imposing penalty on an Investment Advisor or a Research Analyst for 1 Lakh Rupees each day of failure extendable to 1 Crore.
There is also an amendment to state that the settlement amount (excluding legal costs and disgorgement amount) realized under SCRA will be credited to the Consolidated Fund of India.
The Finance Bill provisions also introduce continuance of SEBI Recovery of Penalty Proceedings against a legal representative for sums due from securities laws defaulter even when the defaulter dies. While a general rule is that in case of a fraud, penalty is considered to be personal is nature and the proceedings get abated on the death of an accused, this amendment will mean SEBI proceedings will continue to recover penalties from an estate of a person. For an already clogged litigation system of SEBI, seeking this amendment is perplexing.
This piecemeal approach of amending securities laws through Finance Acts almost every year has brought more challenges than the solutions.
While many of these provisions are welcome and some create ambiguity, Hon’ble Finance Minister missed the opportunity to introduce the provisions to seek accountability of SEBI by fixing a statutory timeline for finishing an investigation or for passing an order. An overhaul of securities laws - after public feedback - is the need of the hour.(Author is an ex-SEBI official and Regulatory Lawyer. Views are his own. Twitter: @sumit12agrawal)