If a Saradha-type scam breaks out now, chances are the perpetrators will go scot free. That is because capital markets regulator, the Securities and Exchange Board of India (SEBI), has just lost the teeth it had acquired a few months ago by way of an ordinance.
The ordinance, which had given the regulator additional powers to market manipulations of the more sophisticated kind and regulate illegal deposits and ‘Ponzi’ schemes, lapsed on Wednesday. The lapsing of the ordinance could become a major cause of embarrassment to the market regulator.
The ordinance was brought in place of the Securities Laws (Amendment) Bill, 2013, which aims to amend three laws, namely, the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
It must be reissued to ensure the continuance of actions already initiated by SEBI, including framing of regulations, appointment of recovery officers, organising capacity-building programmes and taking action against irregularities and frauds in the securities market. The Government failed to get the Securities Laws (Amendment) Bill, 2013 passed in the winter session of Parliament, which began on December 5.
Investor interest The Bill was aimed at protecting investor interest and ensuring orderly development of securities markets. It proposed to empower SEBI to call for information not only from people or entities associated with the securities market, but also from persons who were not directly associated with the market.
It also empowered SEBI to provide effective protection of investors in cases of fraudulent diversion of monies raised from investors.
The Bill also intended to help SEBI monitor collective investment schemes. Further, in view of large pendency of cases, the Bill prescribed the setting up of Special Courts for prosecution of offences under securities laws. The ordinance had essentially conferred these powers to SEBI.
The regulator has already notified five sets of rules, including those for search and seizure. It has also issued orders for attachment and recovery, using the power given to it by the ordinance.
Legal validity These orders could now be challenged in court. Legal pundits say if the basis for those orders ceases to exist, they may be pronounced as ‘null and void’ by a court. However, it will not affect cases in which action has been initiated and completed.
However, the Finance Ministry believes that any action ordered on the basis of power derived from the provisions of the ordinance will be unaffected, even it lapses. However, Ministry mandarins do admit that there will be an impact on matters where no final decision has been taken.
The ordinance also prescribes that registration with SEBI will be mandatory for pooling money amounting to over Rs 100 crore.
The Saradha scam in West Bengal highlighted the regulatory gap and overlap in curbing fraudulent investment schemes. Now, the fear is that Ponzi schemes may become active again.
Although the Finance Ministry is seeking the Law Ministry’s opinion to re-promulgate the ordinance dated September 16, there is a constitutional hitch.
Article 123 of the Constitution says that the President can promulgate an ordinance between two sessions of Parliament, if the matter requires immediate action. An ordinance has the same force and effect as an Act of Parliament.
The hitch The problem now is that the winter session of Parliament was adjourned sine die on December 18, but the President is yet to prorogue the session. The formalities of winding up the session are not yet complete and, in fact, Parliament can be re-convened any time.
Hence, reissuing the ordinance becomes an issue. The Government issued the ordinance on July 18 and re-promulgated it in September, after it failed to get the Bill passed in the monsoon session of Parliament.
Converting an ordinance into an Act would require approval by both Houses of Parliament in the next session. Otherwise, the ordinance expires six weeks from the time Parliament begins its session.