Jurisdiction - India
Reports and Analysis
India – SEBI Turns 25.

12 June, 2013

It’s been quite a journey so far for one of India’s younger regulators and indeed as SEBI turns 25 this year, there is reason enough for it to deserve much more than a few congratulatory pats on the back. A rocky road full of obstacles meandering through the gorges and valleys of the mountain ranges that used to be the Indian securities markets in the late eighties and the early nineties has now been converted into an expressway of sorts where the interests and security of the investing lay man is of paramount importance. The credit for transformation which ensured the emergence of the Indian markets as one of the world’s most robust though not the most sophisticated markets fairly and squarely lie with SEBI, much of the journey is yet to be completed. Thus, today there is a necessity for examining whether SEBI is suitably equipped to undertake this journey and an assessment is required to gauge the measures which need to be implemented to ensure the SEBI is empowered to fulfil its mandate in the evolved circumstance.


As it stands today, SEBI, per se, is one of the most empowered regulatory authorities. It has within itself the three facets of governance: the executive, the legislature and the judiciary. The executive branch generally deals with the regulation of market intermediaries, investigations and surveillance of the market systems, administration of the general market structure etc. The legislative branch is tasked with the drafting of various rules, regulations, guidelines and circulars as well as proposing amendments to and monitoring the operation of the various acts propounded by the Indian Parliament within which SEBI and the Indian market mechanism operates. The judicial arm of the regulator is responsible for passing of various types of orders against market participants in the Indian markets ranging from debarment from accessing the securities markets, disgorgement of ill gotten gains, monetary penalties to the tune of Rs. 25 crores or three times the amount of profits made or loss avoided, cancellation of registration of market intermediaries, cease and desist orders and the list goes on..


The natural question which raises its head in the light of the over arching powers already vested with SEBI is whether there is any further need to strengthen the arm of the regulatory authority and give in to its long standing demands of greater powers of investigations and surveillance, search and seizure, attachment of properties of offenders, greater powers regarding the enforceability of its orders, etc.


A careful study of the last 25 years will reveal a startling fact: major scams have always forced the hand of the central government which in turn had proceeded to give in to longstanding demands of the regulator for strengthening the regulatory arm. Past instances would be the Harshad Mehta Scam of 1992 and the Ketan Parekh Scam of 2000. Within a few years of these scams breaking out, the regulator had emerged stronger than before and better suited, armed and equipped to take on rogue elements and in restoring order and confidence in the market mechanisms. Though these last few years may well go down the annals of Indian History as the ScamGate years, what is that major scam which today has raised the requirement of the central government finally acceding to the demands of SEBI to further empower it to restore order in the Indian markets?


The answer lies in the study of two cases: the Sahara matter and the exploding ponzi sceme/chit fund/money market scams in the eastern states.


The Saharas have not only made a mockery of SEBI but they have also made a mockery of the entire judicial system in India. In a nutshell, two Sahara group companies which were privately held had taken advantage of a loophole in the Indian legal system and issued hybrid instruments to more than 50 people, claiming that since they were private limited companies, they come within the regulatory purview of the Registrar of Companies and not restricted by the norms governing issues to the public, which is a well regulated domain under the jurisdiction of SEBI. Though SEBI had passed several orders, interim and final, the Saharas have indulged in forum hopping across the length and breadth of India hopping from the Securities Appellate Tribunal to several High Courts and the Supreme Court. Following this, several companies have come up which are raising monies in a similar fashion from the public at large and seeking shelter under the general defences that have been raised by Sahara. Similar exploitation of the money markets is happening with the burgeoning of schemes akin to ponzi schemes where several companies in the eastern states are raising monies from the public by floating schemes akin to collective investment schemes but not submitting to the regulatory purview of SEBI by registering under the Collective Investment Scheme Regulations. The seriousness of the financial implications on the general public has fortunately hogged limelight recently with the schemes floated by the Shardha Group going caput. The eastern states are witnessing daily loss of lives in the form of suicides by investors and agents alike while SEBI seemingly gracing the sidelines as a toothless tiger!


In addition to these, the Indian markets are also witnessing increased manipulative activities such as insider trading, front running and manipulation of prices of securities. The need is being felt of adapting to these changes and arming SEBI tooth and nail with broad ranging powers such as accessing call records of conversations between suspected manipulators to establish the linkages between the manipulative operators and using these call records as primary evidence in nailing the offenders as per law. The exchange surveillance and investigative mechanisms as well as the in-house surveillance and investigative mechanisms of SEBI are also in the red for not being able to successfully track and proceed against such operators. Even if some activity is tracked, a watertight case against the operators is not being built to withstand the rigors of the Indian judicial scrutiny because of lack of corroborative evidence like telephonic conversation records.  This lacunae which is plaguing SEBI’s ability to fight the pervasive menace of insider trading, front-running and other manipulative activities is best highlighted when SEBI’s track record in such matters is compared with the US regulator SEC.The recent conviction of Mr. Raj Rajaratnam and Mr. Rajat Gupta in the US and the use of call records by the authorities as evidence during the proceedings consolidated the regulators case against the accused leading to the conviction.


The debate whether it is high time for the government to take a call on the issue of SEBI a further empowered SEBI has been a long and strenuous one and has been raging ever since the founding blocks of the regulatory organisation were laid way back in 1988. Every passing scam has seen the regulators arm being strengthened further to tackle the manipulative operators. It may be said that the scamsters have ensured that India is blessed with a strong and empowered regulator.  We may well see the emergence of a revitalized, rearmed and refurbished responsible regulator with the means and wherewithal to police, monitor and adjudge one of the last remaining vitalised securities market in the world. Though the need for empowerment is drastic, caution should be exercised and reasonable checks and balances should be introduced to ensure that the business community continues to freely transact business or trade in the markets and that power is exercised after applying discretion and the fundamentals of reasonableness.


A stroke which has managed to send jitters down corporate India demonstrating that the Regulator @ 25 has evolved into a much more determined and mature being was the recent order passed by SEBI against erring promoters of some of corporate India’s big wigs. SEBI has come down heavily in promoters who failed to meet the deadline set for meeting the minimum public shareholding norms for public companies which lapsed on June 3, 2013. SEBI came out with an interim order against erring promoters and directors of 105 companies who had failed to comply with the requirements.The directions issued by SEBI include freezing of voting rights and corporate benefits like dividend, rights, bonus shares, split, etc. of the promoters or promoter group of the non-compliant companies with respect to the excess of proportionate shareholding in respective companies. These restrictions would be in place till such time these companies comply with the minimum public shareholding requirement.The regulator has also prohibited the promoters or promoter group and directors of the non-compliant companies from buying, selling or otherwise dealing in the securities of their respective companies except for the purpose of complying with the norms. SEBI has also restrained them from holding any new position as a director in any listed company till such time these companies comply with the norm.SEBI also reiterated that it may take further action in accordance with law for non- compliance with the norms and stated that its latest order be treated as a show cause notice for the same.The Securities Contracts (Regulation) Rules, 1957 were amended in 2010 to provide for minimum and continuous public shareholding requirement in listed companies in private sector at 25 per cent. The idea behind the move was that a dispersed shareholding structure was essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. This reaction of SEBI has shocked the industry on one hand but such measures do make a statement that the regulator is serious at its efforts to make the markets fair for all players be it companies, small investors or institutions.


A rejuvenated, revitalized and empowered SEBI is the need of the hour to maintain the integrity and solidarity of the Indian Securities Markets which today has evolved into one of the sturdiest amongst the emerging economies. A stronger SEBI will be instrumental in maintaining the high standards which the investors have become used to in an age where regular scams on a monthly basis are raising the eyebrows of the common man. It has long been the case that SEBI has been teething rock and a beacon of hope for the common man and all efforts should be taken to maintain this position of SEBI which is the result of 25 years of perseverance and hard work by countless officers of the regulator.


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For further information, please contact:


Sanjay Israni, Partner, Rajani Associates
Prachi Doshi, Rajani Associates

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