The Securities and Exchange Board of India (SEBI), the regulator of thecountry's 24 stock exchanges is often described as the watchdog of the capitalmarkets. Some would, however, argue that the analogy is quite inappropriategiven the inadequate powers that have been conferred on SEBI. If at all acomparison can be made with a member of the canine species, cynics contend thebody should be described as a lapdog, a gentle pet whose bark is usually muchworse than its bite.
Those not so favourably disposed towards SEBI -- for instance stock marketplayers and financial intermediaries -- argue that the organisation hassufficient powers but, like most bureaucratic bodies, tends to be lethargic andwakes up only after the burglars have committed a theft.
The management of SEBI, on the other hand, claims that it is inadequatelyempowered to initiate punitive action against offenders and that its clout isakin to that of a toothless tiger. It is said that the regulator of the mostadvanced of capital markets in the world, namely the Securities and ExchangeCommission of the US has far more wide-ranging punitive powers than SEBI.
Here is a list of the powers that SEBI does 'not' possess that was recentlyprovided to members of the Joint Parliamentary Committee (JPC) investigating thestock market scandal involving brokers like Ketan Parekh. SEBI does nothave the power to search and seize premises to gather evidence. It also does nothave the power to impound documents that could serve as evidence duringprosecution.
In this respect, SEBI officials are clearly handicapped vis-a-vis theircounterparts in the income tax department as well as officials dealing withcustoms and central excise duties, besides those working for the EnforcementDirectorate which oversees foreign currency transactions.
In a note presented to the Union Cabinet that was considering issuing anordinance to empower SEBI, the Home Ministry opposed any move to grant SEBIofficials the power to conduct search-and-seizure raids. This is perceived to bean instance of traditional intra-governmental rivalry, a turf battle between twowings of the government -- the Ministry of Finance and the Ministry of HomeAffairs -- both of which are headquartered in the North Block.
SEBI officials cannot at present summon witnesses who are not directlyconnected with the securities market-- like the banker of an investor-- but whocould be in possession of crucial evidence. In addition, despite being aquasi-judicial body, SEBI does not have the power to impose penalties againstany individual who fails to appear before it, that is, not comply with a summonsissued against the concerned individual.
SEBI can under such circumstances start proceedings for prosecution but thejudicial system is rather time-consuming. Besides the SEBI Act, the legalframework available to the regulatory body includes various enabling regulationsand other legislation like the Securities Contract (Regulations) Act and theDepositories Act.
Under the SEBI Act, the board has powers vested in a civil court while tryinga suit only with respect to the following: (a) the discovery andproduction of books of account and other documents, (b) summoning for theattendance of persons and examining them on oath, and (c) inspection ofany documents of any person.
Under Section 11 of the SEBI Act, the body can call for information, conductan inquiry, an audit or an inspection of the stock exchanges, mutual funds(barring, of course, the biggest one of them all, namely, US-64 or the UnitScheme of 1964 of the Unit Trust of India that was established under a separateAct of Parliament) and other persons associated with the securities market. Thisis where SEBI's powers end. Since it does not have the power to force a personto comply with its summons, investigations invariably tend to get delayed.
According to SEBI, after it completes its investigations, it cannoteffectively enforce punitive action because of 'inadequacies in enforcementpowers'. For instance, it is pointed out that the current legal framework inIndia does not provide SEBI the power to impound or 'disgorge' ill-gotten gainsor profits that arise out of market manipulation or insider trading. WheneverSEBI has attempted to do so, its actions have been successfully challenged incourts of law and stalled.
SEBI also does not possess powers to impose monetary penalties on violators.'Even when there are provisions for penalties, such as in the cases ofinsider trading, the penalties provided are very meagre and are not commensuratewith the gains made or losses avoided,' the regulatory body has lamented whilereplying to a JPC member's question.
SEBI cannot collect penalties nor can it issue interlocutory directions whileproceedings are pending. Conversely, it cannot also grant immunity fromprosecution. Moreover, SEBI does not have the power to compound offences. Mostcapital market regulators the world over, especially in the US, have such powersand use these effectively because of their 'immediate impact' since the processof prosecution takes time.
Thus, the regulator of India's bourses claims that it is 'unable to takeadequate action even after an investigation establishes violation of SEBIregulations' in its statement to the JPC. Whereas SEBI has been issuing what itcalls 'general directions' under Section 11 of the Act, its powers in thisregard have been challenged in a number of courts of law.
SEBI was constituted in April 1988 as a body to protect the interest ofinvestors and promote the orderly and healthy growth of the country's capitalmarkets. It was not until four years later that SEBI was formally converted intoa 'statutory' body. SEBI was initially constituted by persons who were ondeputation from the Reserve Bank of India and the Industrial Development Bank ofIndia. The body has currently over 330 employees located at its offices atMumbai, Delhi, Kolkata and Chennai.
Even after it was converted into a statutory body in 1992, the Uniongovernment took its own sweet time empowering SEBI. During the proceedings ofthe earlier JPC which had inquired into the 1992 stock market scandal,committee members were provided a series of letters written by the then SEBIChairman G.V. Ramakrishna to the then Finance Secretary Montek Singh Ahluwaliacomplaining about how the Ministry of Finance had dragged its feet aboutgranting powers to the regulator.
Regulations governing the activities of brokers and sub-brokers were issuedin 1992, rules relating to insider trading came the following year whileregulations prohibiting fraudulent and unfair trade practices were put in placein 1995. The same year, SEBI acquired powers to issue summons to individuals.
But, as already stated, these powers were insufficient because these did notcover bankers. Besides, the regulator could not conduct search and seizureoperations to obtain evidence documents nor could it impound documents.
SEBI had appointed the Justice Dhanuka committee to identify deficiencies inthe existing laws. The panel has made a number of suggestions that include thefollowing: the SEBI Act should be applicable to overseas entities dealing insecurities in India; SEBI should have powers to compensate investors to redressgrievances; it should be allowed to impound profits made by market manipulationand price rigging; it should be allowed to attach properties, and; it shouldlevy penalties to for failure to obey summons and directions.
The Dhanuka committee has also suggested that the Securities AppellateTribunal be enlarged to comprise at least two members and that the SecuritiesContract (Regulations) Act be repealed and its provisions suitably incorporatedinto the SEBI Act together with specific provisions of the Companies Actrelating to securities transactions.
Another study conducted at the behest of the Finance Ministry by N.L. Mitra,former principal of the National Law School, has suggested the enactment ofseparate legislation for investor protection. It has also concurred withparticular recommendations of the Dhanuka committee like the granting of powersto SEBI to award compensation to aggrieved investors and said promoters anddirectors should be held personally liable in this respect. Mitra has suggestedthat special courts be set up to deal with financial frauds.
India's capital markets are bound to expand over time. At present, the sharesof over 9,800 companies are listed on 24 stock exchanges. Between one millionand two million transactions take place each working day through over 10,000registered domestic brokers and sub-brokers. In addition, players in the stockmarkets include more than 500 foreign institutional investors with over 1,300sub-accounts, besides large numbers of corporate bodies (registered in thecountry and overseas), banks, mutual funds and financial institutions.Currently, there are online trading terminals in more than 450 cities and smalltowns spread all over the country.
A suitably empowered regulator is a crying necessity not merely to checkscams that have been periodically breaking out, but also to protect theinterests of small investors.
(The author is Director, School of Convergence @ International ManagementInstitute, New Delhi. He has been a print and television journalist for over 24years.)
