SEBI overhauls enforcement norms

Market regulator SEBI is set to overhaul its enforcement mechanism, which is a function that mainly provides for consequences of non-compliance of its policies and penal action. To the layman, it’s a mechanism of ‘punishment for violations’ and ways of implementation of policies, in a nutshell.

A committee led by former Supreme Court judge AR Dave which was set up to review the norms, submitted its 424-page recommendations. The committee identified four areas for enhancing the enforcement function. It included intermediary regulations, recovery of dues, quantification of ill-gotten gains, and synergies between the securities and insolvency laws.

Subtle changes were suggested to norms such as the ‘fit and proper’ criteria, which deals with a person or entity who can or cannot be associated with the stock market entities or dealings, recovery of money due from various entities under the securities law, various powers and procedures of the board.

Quantification of disproportionate gain or unfair advantage and loss caused by investors as a result of default and related issues. It also included gains made by insider-trading and related offences and its disgorgement, which is distribution of recovered money among shareholders in the market.

Principles of natural justice

The committee said the process followed by SEBI so far under intermediaries is ‘unjustifiably drawnout’ and there was a need to conclude proceeding in a timely manner. Intermediaries can include stock exchanges, depositories, clearing corporations, mutual funds, or brokers.

“SEBI is required to adhere to principles of natural justice in the course of its proceedings against an intermediary. However, such adherence cannot be meant to extend the application to such an extent that permits holding the system hostage at the cost of compromising the very interests of investors,” the committee said.

“The specific amendments proposed in relation to quantification gains and recovery of money due under securities law would certainly have a positive impact on the enforcement process. While the penalties are levied and orders are passed, the main challenge has been the implementation to ensure that the ends of justice are met. Particularly, since in most cases the amounts payable or refundable would be to a number of investors as opposed to mere payment of a penalty to a regulator,” said Moin Ladha, Partner, Khaitan & Co.

“Quantification in the context of a dynamic securities market is both a science and an art, based on defined principles drawn from law, economics, accounting, and mathematics, while being imprecise at the same time. To the extent possible, SEBI should attempt to quantify the unlawful gains made and losses caused to investors,” the committee said.

“Doing away with the duplication in the procedure, a quicker resolution to intermediary defaults and non-compliances will strengthen the fiduciary nature of this profile and boost investor confidence in the markets,” Vidisha Krishan, Partner, Corporate and Capital Markets.

According to the committee, it examined insolvency, recovery, and securities laws on jurisprudence in India and abroad, and suggested suitable changes in SEBI laws to ensure the insolvency law is not used as a refuge by defaulters, thereby protecting the interest of investors.

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