SEBI may get greater powers to check money-pooling frauds

PTI | | Updated on: Mar 12, 2018

Market regulator SEBI may get greater powers to check money-pooling frauds by various entities across the country, as the Government is considering a major overhaul of regulations governing such schemes.

The proposed critical amendments to the securities laws, would also involve the capital markets regulator getting direct powers for attachment of properties, search and seizure of assets and powers to seek information from any entity in relation to its probes against erring persons and entities.

The amendments could be made to a host of regulations, including the SEBI Act, the Securities Contracts (Regulation) Act and the Depositories Act, a senior official said.

As a result, SEBI could be given powers for overall regulation and oversight of all kinds of money-pooling activities and the definition of Collective Investment Schemes would be expanded to include all kinds of activities involving collection of Rs 100 crore or more public money, he added.

While CIS operations already come under SEBI’s jurisdiction, many companies try to challenge the regulator’s actions taking advantage of loopholes in the existing norms and on the grounds of multiplicity of regulators.

The official said that SEBI has been given assurance by the Government that the regulations would be amended soon.

While proposals to these effects are being pursued by SEBI for almost four years now, a strong need to push with these changes has been felt in the recent months in the wake of a long-running tussle between SEBI and Sahara Group.

The recent developments involving an alleged defrauding of lakhs of investors by West Bengal-based Saradha group and other entities in the state have further underscored the need to change the regulations to give greater powers to SEBI.

SEBI was earlier of the view that a separate regulator should be considered for all kinds of public money-pooling activities by non-listed entities under a separate act.

Alternatively, SEBI has been seeking amendment to the SEBI Act to widen the scope of CIS definition to include all kinds of money collection schemes.

As per the proposed changes, any pooling of funds under an investment scheme involving a collective amount of Rs 100 crore and above should be considered CIS activity, while SEBI would be empowered to specify the parameters for determining as to what constitutes pooling of funds from the public for the purpose of treating them as CIS operations.

SEBI had first proposed an overhaul of securities laws way back in June 2009, but the establishment of Financial Sector Legislative Reforms Commission (FSLRC) later led to the Finance Ministry asking SEBI to pursue only critical changes.

The Commission was asked to rewrite and harmonise the entire set of financial sector laws in the country, including those involving SEBI and the capital markets.

Later in June 2011, SEBI proposed only critical amendments to the securities laws that it felt were necessary and could not wait for the FSLRC recommendations.

The Capital Markets watchdog again took up the matter with the Centre in November 2012, pursuant to which the Finance Ministry sought some clarifications and a revised set of proposals was sent again by SEBI earlier this year.

In the meantime, FSLRC has submitted its recommendations, but the Government has decided to move ahead with SEBI’s proposals with regard to critical amendments in the securities laws as various steps suggested by the Commission need more deliberations and might take time, the official said.

The suggestions made by SEBI include powers similar to the Income Tax Department for recovery of monetary penalties and setting up of special courts to deal with criminal prosecution for violation of securities laws. The proposals were sent to Finance Ministry for necessary amendments to relevant securities laws, after being discussed by SEBI board.

The amendments have been sought in view of the challenges faced by SEBI in areas such as the recovery and realisation of monetary penalties and regulation of pooling of monies from public by schemes, including those in the nature of collective investments, among others.

SEBI has been facing major impediments on its investigation and enforcement powers with regard to protecting investments by attachment of assets. It has also faced challenges to enforcement and implementation of its orders.

Besides, it has been feeling restrained in taking actions against erring entities, as it lacks an effective power of search and seizure and powers to call for information from any person in relation to enquiry or investigation.

SEBI has also sough direct powers to attach/sell movable and immovable properties without recourse to court of law, in order to take effective enforcement action if the concerned entity has either disappeared, or raised money in violation of securities laws, or has fraudulently diverted public money.

These would help SEBI enforce compliance with its orders for refund of public monies collected through illegal means.

Regarding search and seizure powers, SEBI has said it can carry out such operations presently only after the approval from the Chief Metropolitan Magistrate.

However, this requirement renders the power ineffective due to the confidential nature of investigation and delays involved in obtaining such approvals, SEBI has said, while seeking direct search and seizure powers.

SEBI has also said that it should be expressly empowered to obtain necessary information from other regulators and the entities not directly linked to capital markets.

While conducting market surveillance and investigations, SEBI often requires information from persons and companies who are not directly under its jurisdiction, but may have information that is crucial for its investigations.

The regulator said it has come across many cases where money trail of investigation transaction is traced involving private banks/NBFCs/ private lenders and so on.

Further, in many cases, it becomes almost impossible to identify the insider/fraudster syndicate as information flow is through phone/cell phone provided by private telecom companies, SEBI has said.

On being requisitioned for desired information, they plead lack of SEBI jurisdiction and withhold the same.

“Due to such inhibitions, SEBI’s cases are weakened as circumstantial evidences may not be sufficient to establish desired preponderance of probability,” SEBI said, while seeking necessary powers to allow it to seek information from any person in the process of investigation.

It has also sought establishment of special Courts to deal with criminal prosecution for violation of securities laws in view of the large pendency of prosecution cases, and has suggested that counsels representing SEBI may be deemed to be public prosecutors.

Published on April 27, 2013
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