Thursday, August 14, 2014

SEBI : A Need for Revitalisation and Proper Justice


The Securities and Exchange Board of India was constituted more than 20 years ago and has worked very effectively in a large number of areas to improve disclosures, investors' protection, investors' education, up gradation of capital market systems, rules and procedures. The important role played by SEBI in bringing Indian Capital Market, among best capital markets in the world need very sincere appreciation.

SEBI has not been able to ensure sustained confidence of the investors, intellectuals, bureaucrats as well as general public in the capital market. The society at large still has major apprehensions regarding risk of fraud and manipulation from the capital market.
Lok Sabha has recently unanimously approved The Securities Laws (Amendment Bill) 2014 to provide more teeth to SEBI to enable them to take actions against promoters raising funds through ponzi scheme i.e. saving schemes, deposit schemes or collective investment scheme or other similar schemes collecting money from public at large, without proper registration, approval and compliance
of regulatory procedures. SEBI has also been given power for search and seizure as well as attachment of assets. Powers to launch recovery proceedings, disgorgement of amount and seek call-data records in its investigations of securities-related offences has also been extended. The amendments brought about to SEBI Act are with a view to address cases like Sahara or Saradha Chit Fund and similar other cases mushrooming in different names and styles collecting money from public at large. The power to regulate such schemes was very well needed. The powers to search and seize are to be exercised with great care and only in very extreme circumstances and the rules need to be brought in to ensure adequate checks and balances. SEBI need to work in a non-intrusive manner as per the thinking of the Central Government as committed by FM in his Budget speech. The detailed regulations need to be in place and need clarity of jurisdiction between MCA, RBI and SEBI.
It is however, very important for the government, including the legislature as well as judiciary to examine as to how far it is necessary to concentrate so much judicial and administrative power in one organization.

SEBI CURRENT POWERS

SEBI is currently empowered to bring out all necessary rules, regulations and guidelines to protect the interest of investors and to regulate the capital market, market intermediaries, stock exchanges, companies raising debt and equity from the market as well as to regulate all kinds of raising of resources, except financial market, money market and foreign exchange market which is currently regulated by Reserve Bank of India. SEBI is empowered to undertake regular surveillance of the capital market and various participants including mutual funds, venture capital funds REITs, Infrastructure Investment Trust, listed companies, besides all other capital market participants. SEBI is further empowered to investigate into the affairs of the capital market, to enable SEBI to monitor compliance of all regulatory guidelines and to ensure prevention of manipulation, fraudulent and unfair trade practices. SEBI has been making substantial and commendable efforts in the aforesaid directions. There are serious reservations amidst investors at large and more importantly among the learned intellectuals of the country about safety of their investments in the capital market. SEBI need to examine the major reasons behind such precarious situation and should initiate some real positive action to ensure at least reasonable safety of investment from manipulative practices and unfair trade.

FREE ISSUE PRICING- NEED FOR CHECKS AND BALANCES

SEBI need to re-examine as to whether it is appropriate to continue complete freedom on issue pricing or the same is required to be regulated by independent valuation. In case full freedom of issue price is proposed to be continued, SEBI may consider mandatory allotment of additional shares, if the share price of public issue falls by more than 20% of the issue price, within 1st year of the issue. On the basis of weighted average price in the 1st year of issuance, the correct issue price can be determined. (Market is the best to determine the correct value-Price) and additional shares can be issued to the public shareholders, who bought such shares at an exorbitant higher price so that the average cost per share can be brought near to the real market value. This will dilute the promoters' holding and the promoters will be more careful in future. The promoters can also be given an option to subscribe additional shares at the same price, in case they do not wish to dilute the shareholding percentage.

JUDICIAL MECHANISM

SEBI is rightly empowered to make rules, regulations and guidelines, to undertake surveillance and also to undertake a detailed investigation into any manipulated, fraudulent and unfair trade practices. The government and the judiciary need to consider as to whether it is appropriate that the power to issue show cause notice, the power to undertake an enquiry, the power to undertake adjudication of an offence and also power to recommend punishment as well as power to ultimately impose harsh penalty and heavy fines remain concentrated in one institution i.e. SEBI. The investigating authorities, show cause issuer, enquiry officials, adjudicating authorities, punishing authorities are all working under the supervision and control of SEBI Chairman and Whole Time Member. The purpose of this editorial note is not to levy any allegations on Hon'ble institution like SEBI but the entire purpose of this proposition or questioning is to ensure higher credibility to the entire exercise being undertaken by SEBI and to ensure internal control on possibility of misuse of power. It is therefore very important that the power to issue show cause notices, the power to make enquiries, power to make adjudication and most importantly power to levy penalty are decided by independent judiciary. It is important that the entire judicial power, being currently exercised by Adjudicating Officer and Whole Time Member of SEBI are all assigned to an independent judicial system. It is also very necessary that investors are adequately compensated for the loss incurred by them due to fraudulent and manipulative practices. so that appropriate action can be initiated against erring unscrupulous promoters and market participants and justice reach near the investors and not concentrated at Mumbai.

CONFIDENTIALITY:

SEBI also need to consider that various investigations, show cause notices, adjudication and punishments are kept completely confidential at least till the final penalty is levied. In case the investigation or interim actions are made public, even innocent persons credibility and image can get adversely impacted, specially if at same stage it is determined that the person or company was not actually guilty. Transparency needs balancing in the interest of justice.

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