SEBI ACT, 1992
National Conference on Securities Market Regulations
FICCI – SILF
New Delhi
Somasekhar Sundaresan
Partner, JSA, Advocates & Solicitors
May 3, 2006
1
Legislative Framework
Securities and Exchange Board of India Act, 1992
Rules made by the Government of India
Regulations made by SEBI
Securities Contracts (Regulation) Act, 1956
Securities Contracts (Regulation) Rules, 1957
Depositories Act, 1996
Stock Exchange Bye-Laws
Depository Bye-Laws
Clearing Corporation Bye-Laws
Listing Agreements with Stock Exchanges
Companies Act, 1956
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Regulatory Legacy
Every 2-3 years there has been a new ‘scam’
Each scam has led to SEBI being conferred with
greater powers
1988 – GOI Resolution
1992 – SEBI Act
1995 – New Powers
Adjudication penalties
Power to make regulations without GOI approval
Power to prosecute without GOI approval
1999 – Appeal provisions strengthened
2002 – Stringent penalty powers conferred
2004 – New Ordinance with even more powers
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Segregation of Powers
SEBI Act delegates power to make
regulations
Central Government approval until 1995
Now, only tabling in Parliament is required
Administration by SEBI officials
Sentencing is also by SEBI officials
Prosecution too to be done by SEBI
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Penal Framework
Four-pronged penal framework
Directions in investor interest
Adjudication Proceedings
Criminal Prosecution
Enquiry Proceedings
Each course without prejudice to the others
Replication in three Statutes
Action under Companies Act, 1956
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Directions in Investor Interest
Wide-ranging creative measures
Penal directions – whether or not
remedial is only abstruse legal theory
Power to issue directions replicated in
respective SEBI Regulations
Even natural justice can be suspended
No statutory timeframe for finite action
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Adjudication Proceedings
General standard minimum penalty of
Rs. 1 lakh per day
In some cases, no upper limit
Three times the value gained, subject to
minimum penalty of Rs. 25 crore
Five times the value of un-issued contract
note
Five times the excess brokerage charged
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Adjudication Proceedings
Conflicting provisions on penalty
Section 15J prescribes penalty criteria
Amount of disproportionate gain or unfair
advantage
Amount of loss caused to investors due to
default
Repetitive nature of default
Penal provisions prescribe fixed penalty
No timeframe for action
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Criminal Prosecution
Any contravention of any provision, rule
or regulation is a criminal offence
Offence is punishable with:
Imprisonment of upto ten years; or
Fine of upto Rs. 25 crores; or
Both
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Criminal Prosecution
Failure to comply with Adjudication Officer’s
orders attracts penalty of:
Imprisonment of at least one month, and upto ten
years; or
Fine of upto another Rs. 25 crores; or
Both
New concept of private prosecution in the
SCRA
Sessions Court alone may try offences
10
Enquiry Proceedings
May be initiated against any market intermediary
Minor Penalties
Warning / Censure
Suspension of registration for less than three months
Prohibiting operations for upto six months
Debarring a partner / wholetime director for upto six months
Debarring a branch / office from operations for upto six
months
Major Penalties
Aforesaid penalties for more than six months
Cancellation of registration
Suspension of registration for over three months
11
2004 Ordinance
SCRA and Depositories Act amended to
provide powers to :-
Issue directions
Impose adjudication penalties
Criminal Prosecution
Penalize for same offences as punishable
under SEBI Act
12
Appellate Structure
Any order passed by SEBI is appealable
Consent orders not appealable
Appeal from SAT lies directly in the
Supreme Court – only questions of law
Jurisdiction of civil courts entirely
barred
Writ jurisdiction of High Courts rarely
used
13
Appeal Record
On average, more than one order a day
Contrary to popular belief: -
Only 30% orders are appealed
In 63% cases, SEBI orders are upheld
Judicial attitude furthers the regulator’s cause
Higher the profile, lower the prospect of success
Regulators tend to be under-staffed
Law officers defend actions, but not consulted
before action
14
Plea Bargaining
Still-born provision for compounding
Only offences without element of imprisonment
compoundable
Every offence has imprisonment penalty
Compounding available only for criminal
prosecution
Civil adjudication penalty may still be levied
Anomalous provision replicated in other laws
Consent Orders provide a way out
15
Immunity Power
GOI may provide immunity from any
penalty or prosecution
Immunity may be issued only on
recommendation by SEBI
If proceedings have commenced, no
immunity possible
Application for immunity could lead to
proceedings
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Conclusions
Robust wide-ranging regulatory powers
No segregation of functions and powers
Multiple-jeopardy for same offence
Plea bargaining provision is still-born
No guidelines for issuance of directions
Sentencing guidelines for penalties too broad
Search & Seizure powers hardly used
Granting more powers may be destructive
Make the securities market as safe for
practitioners as for investors
17
THANK YOU
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