Securities Markets Code | Rewrite from scratch existing laws to form new legislation

Finance Minister Nirmala Sitharaman in her Budget Speech announced the proposal to consolidate the multiple laws governing securities markets into a single Securities Markets Code. The proposal is long overdue, but the announcement is cryptic.

Other than saying that these laws will be consolidated into a “rationalised, single” code, nothing further has been stated. The big question is whether the new code will merely combine the multifarious provisions into one place with minor fine tuning, or whether one can read far more into the word ‘rationalised’.

One does hope there is much more to it, for the existing laws are practically ancient. The changes over the years have been more of patchwork and firefighting, rather than a complete relook.

The Securities Regulation Act, for example, is 65-years-old. The parent SEBI Act itself is nearly three decades old. Interestingly, the last comprehensive effort to consolidate the laws was made nearly 22 years back by the Justice Dhanuka Committee which even presented a draft consolidated code. Nothing came of this effort. While there have been reviews thereafter, they have been partial.

Granted, much of the provisions having day-to-day practical relevance are contained in regulations that are formulated by SEBI. Thus, subjects such as frauds in securities markets, insider trading, takeovers, etc. are in regulations that are more speedily modified. Yet, the parent laws have important provisions such as those relating to penalties, procedures, powers of SEBI, etc.

Credibility of the securities markets are regularly questioned with the dirt of scams, frauds, etc. coming out with alarming frequency — whether of price manipulation, corporate frauds, front running and insider trading, etc. Each time, one is left with the concern whether the law is lacking in some fundamental aspects.

One does hope that the effort to consolidate and rationalise is backed by comprehensive review by an expert committee. The areas needing attention are several but if one could make a wish list of those needing attention, here are some.

One is the needless overlap and duplication between the Companies Act and Securities Laws. In several areas, particularly those relating to corporate governance, accounting, remuneration, etc., there is duplication, often resulting also in contradiction. Listed companies should ideally be governed by a single regulator — SEBI — which has expertise, focus, and is even relatively fleet footed. Curiously, the Companies Act provides that some specified provisions shall be ‘administered’ by SEBI. These provisions should simply be shifted to the new consolidated code.

Two, is the delayed action by SEBI. Violations may have taken place in the distant past but yet, since there is no time limit in law, action is often taken after years, even a decade or more. The parties may be at a loss to find relevant papers, the concerned staff may have moved on, memory obviously would have become hazy, etc. On appeal, at times, such hugely belated actions are struck down but relatively minor violations should have an expiry date for actions.

Proceedings are routinely initiated even for relatively minor violations such as delayed filings. Such proceedings are time consuming to both parties. The delay may be minor and having no ulterior motive and/or serious consequence. SEBI is bound by procedural technicalities to follow every step meticulously and this is a different way of saying that the proceedings will be prolonged and cumbersome.

The fact that SEBI has powers to levy a large penalty means the party has to take care to present its case well and fight vigorously. Ideally, a simple table of fees/penalty depending on delay may be prescribed. This is common in other laws. It is only where the delay is shown to be malicious or beyond, say, one year, that formal proceedings for stricter punishment may be initiated.

Three, there is the worry of multiple proceedings for the same violation, not just under different laws and by different regulators, but also under the securities laws themselves. Unscrupulous persons could use this to their advantage by legislative arbitrage, playing one regulator/law against another and seeking to get away with the least and/or no punishment. But generally, parties may face a multitude of proceedings either at the same time, or worse, one after the other. At the very least, the law should provide for a single comprehensive proceeding for a particular violation, preferably by a single regulator.

There are significant developments happening in recent times, many of them are tech-based and the laws seem plainly outdated. Cryptocurrency is a good example. The current laws cannot categorise it — whether as a currency, or as a security or just another asset. One thus also does not know who would be the best regulator to regulate it. The result is a knee jerk ban as the Reserve Bank of India imposed last year (and then struck down by Supreme Court), and now a law is proposed for a total ban.

A wiser approach is to understand this instrument better, make amendments in law and put it under a specific regulator. Algorithmic and hi-frequency trading in securities are other hi-tech areas that put challenges and require proper consideration.

Considering that SEBI also regulates commodities (now, gold exchanges too) and may also find government securities within its domain, a different outlook may be required to regulate unlike instruments and assets. This, again, requires stepping back even farther and relooking at the scheme of regulation.

In conclusion, it is commendable that finally a proposal is made to have a single and common code to regulate operations in the securities markets. However, one hopes that the effort is comprehensive and the law is rewritten from scratch, taking into account the experience of several decades and the issues relevant to current times.