With new tools, SEBI trains an eagle eye on Ponzis

Harpreet Singh Pankaj Tewari | Updated on August 11, 2013 Published on August 11, 2013

Halfway through its silver jubilee year, the Securities and Exchange Board of India has received a shot in the arm. The recently promulgated Securities Laws (Amendment) Ordinance, 2013 proposes a number of welcome changes, and empowers SEBI to regulate hitherto unregulated fund collection schemes. It also proposes to arm the regulator with more investigating tools to deal with crimes related to the securities market.

Recently, the US imposed high-profile sanctions for offences related to insider trading. The use of wire-tapping and other electronic records to nail down the culprits expectedly drew comparisons between the regulatory regimes of India and the US.

Investigative tools

SEBI has for a while been seeking greater powers to access email and phone records, and conduct search and seizure. Under previous regulations, SEBI had limited powers of search and seizure — that too, after approval from a judicial magistrate of first class.

Tackling securities market offences requires swift action, so the process often proved to be a handicap. The new regulations empower SEBI to conduct search with the approval of its Chairman, which would hopefully facilitate prompt investigation and thwart attempts to destroy evidence.

The power to attach and sell the properties of defaulters is a significant step, and should help recover monetary fines.

SEBI can also make a reference to income tax authorities to recover tax dues. This would bring tangible relief to investors who are victims of fraud and wrongdoing.

Calling for call records

Under the previous regime, SEBI’s power to call for information and records was restricted to intermediaries and persons associated with the securities market.

Crucial information could not be accessed from people not associated with the securities market. Now it can ask for information from ‘any person’ irrespective of association with the securities market. This includes telephone records, which can provide circumstantial evidence to tighten the case.

In the US and other advanced countries, wire-tapping and phone records are critical investigative tools, which are admissible as evidence.

SEBI had the power to regulate collective investment schemes offered by companies, provided they met certain criteria under the SEBI Act. However, the regulator could not check non-corporates that came up with innovative schemes. There has been a spurt in the number of cases where investors have lost huge amounts of money.

Curbing ponzi schemes

The new provisions bring under SEBI any collective scheme with a corpus of Rs 100 crore or more. Additionally, SEBI can include any other scheme as collective investment, subject to conditions. This could curb the menace of Ponzi schemes, which exploit the loopholes in the system to deceive gullible investors.

A robust capital market is critical to economic growth. Effectively tackling insider trading and other capital market offences is vital to maintain investor confidence and boost India’s image as a safe investment destination.

Through the changes, the Government has made a strong statement about its commitment to reforms. The regulator has been armed with ample powers — the onus is now on SEBI to deliver.

Harpreet Singh is Executive Director, and Pankaj Tewari is Senior Manager, Risk Advisory Services, PwC India

Published on August 11, 2013
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