India’s capital market regulator is now one of the most powerful such watchdogs in the world. The government’s silver jubilee gift to the Securities and Exchange Board of India (Sebi), which has just completed 25 years, came in the form of an ordinance last week.
The focus of most media reports has been Sebi’s newly acquired powers to oversee all deposit-taking companies that are collecting Rs.100 crore or more from the public, but there is more to it. Sebi now has six new teeth to make its bite more effective.
One, the power of recovery. Until now, Sebi could penalize any entity for market manipulation, insider trading and other wrongdoing but didn’t have the power to impose penalties. In the past five years, orders that levied at least Rs.125 crore in penalties were ineffective as companies and people involved in wrongdoing did not pay. Sebi could, of course, prohibit them from trading in the market and take them to court. Typically, therefore, market intermediaries and listed companies pay up but many who are not regulated by Sebi and don’t want to be in the market don’t. Now, like the income-tax department, Sebi can attach their properties and sell them to realize penalties.
Two, access to more information. Until now, Sebi could ask for information only from regulated entities, listed companies and banks. It could not seek information from insurance companies, investors, unlisted companies and many others. Now, it can get information, including phone records, from any entity it wishes to. This will strengthen the scope for investigation.
Three, search and seizure. Sebi will no longer need to get the nod of a magistrate to launch a search and seizure exercise for its investigation. Like the income-tax department, it can raid the premises of any entity and search, armed with a warrant. The clearing authority for such search and seizure exercises is the Sebi chairman.
Four, special courts to speed up resolution of cases. Thousands of cases, mostly civil, have been pending for decades. Now, there will be special courts to clear the backlog.
Five, the consent platform gets legal sanctity. The consent process that allows an entity to settle with the regulator by paying money, without admitting or denying guilt, did not have any sanction by the Sebi Act until now. The process could have been challenged in a court of law. The ordinance has plugged that gap.
Six, the power to oversee so-called collective investment schemes (CIS). Until the collapse of the Saradha group—once one of eastern India’s biggest deposit-taking companies—in April 2013, many large non-banking firms had taken in thousands of crores of rupees from millions of investors in West Bengal and other Indian states. These deposit-taking firms offer significantly higher returns than regular banks, mostly by inventing businesses that don’t exist. Neither the Reserve Bank of India nor Sebi could regulate them. Sebi, in fact, got into a protracted legal battle against two such companies in West Bengal—MPS Greenery Developers Ltd and Rose Valley Real Estates and Constructions Ltd—to stop them from collecting public deposits under CIS. Now, such a company that has collected at least Rs.100 crore will be supervised by Sebi, except for nidhis, chit funds and companies registered with state governments.
The last time the Sebi Act was amended to give it more powers was in 2002 in the wake of the Ketan Parekh scam. The penalty for insider trading and market manipulation was raised from Rs.5 lakh to Rs.25 crore and Sebi was empowered to call for records from all regulated entities and banks to enhance its investigation capability.
The new-found powers are sweeping. Sebi will now need to recast the organization to be able to exercise them. I would think Oliver Wyman, an international management consulting firm that has been engaged with Sebi to fine-tune the organizational set-up, will work overtime to complete the task. Market manipulators and insider traders will have no escape now.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.