MC Explains: Why are Sebi’s search-and-seizure ops more serious than routine inquiries?

Legal experts said that the operations can indicate a greater degree of urgency. (Photo by Anete Lusina: Pexels; Representational image)

The market regulator Securities and Exchange Board of India (SEBI) can either approach an entity with inquiries as part of an investigation or the regulator can also carry out  search-and-seizure operations at the entity's premises.

Legal experts told Moneycontrol that search-and-seizure is more serious than standard inquiries from the regulator, and that the former can involve more intrusive examinations and may imply more serious allegations.

Here's an explainer breaking it down.

Also read: MC Explains: What is Sebi's latest move to curb IPO price manipulation?

Is a search-and-seizure operation different from routine enquiries to assist an investigation?

Yes.

How is it different?

Ravi Prakash, associate partner at legal and business consulting firm Corporate Professionals, said, "Search-and-seizure operations are markedly more serious than standard inquiries. They involve SEBI officials physically entering premises (at times with the support of local police) and seizing documents, records and electronic devices. This level of intrusiveness may disrupt business operations and invade privacy."

He added that such operations require a strong prima facie case and judicial authorisation, indicating a higher threshold of suspicion and urgency.

Vasudha Goenka, partner at law firm Cyril Amarchand Mangaldas, said, "A search and seizure operation is carried out pursuant to the investigating authority of SEBI obtaining an order of the magistrate or judge of the designated court under Section 11C (9) of the SEBI Act.”

She added, "A search-and-seizure operation is considered more serious than getting inquiries from SEBI as it grants the investigating authority lawful power to enter the premises where records/documents are kept, search such premises and seize documents as deemed necessary by the investigating authority as part of the investigation, and keep them in his custody till the conclusion of investigation. This is unlike other inquiries where the investigating authority seeks specific information/documents from a person."

Why does SEBI opt for such operations?

Goenka said that this is used in cases where complex technology has been used for market manipulation and to conceal identities, which makes it challenging for SEBI to uncover evidence by mere inquiries. A search-and-seizure operation would help the regulator unearth market manipulation, for instance, by examining seized electronic devices.

Prakash said that the regulator opts for this route when there is a "significant risk of evidence tampering or destruction or where cooperation is not being offered by the parties under SEBI's lens".

He added that this may be used to unravel complex fraud schemes or insider trading cases where mere inquiries may not suffice to uncover hidden or concealed evidence.

What are the implications for those at the receiving end?

Goenka said that based on the evidence obtained, "appropriate action" may be taken by the regulator.

According to Prakash, these operations have "profound implications" for the persons or entities being investigated.

Also read: MC Explains: What is the 'safe harbour' clause under Section 9A of Income Tax Act, and why does it need a relook?

He said, "The immediate consequence is reputational damage, as the mere fact of being subjected to such an operation implies serious allegations, affecting business relationships and market perception. Legally, the evidence collected can lead to fines, penalties or even imprisonment for securities law violations. Operationally, these operations can disrupt normal business activities, causing financial losses and affecting business continuity. These types of proceedings also send shock waves and panic signals to the investor community."