Sebi ordinance brings continuity and a curious change
Since July 2013, Securities and Exchange Board of India (Sebi) has been armed with more investigative and enforcement powers thanks to the Securities Laws (Amendment) Ordinance that was promulgated by President Pranab Mukherjee. The regulator has also been given powers to go after collective investment schemes of over Rs.100 crore, and to its credit Sebi has passed orders against quite a few such schemes during the time the ordinance has been in force.
The ordinance, however, lapsed in mid-January and in what is perhaps a first, it got promulgated for the third time on 28 March by the President. Why are these powers so important for the regulator to have? And why not just wait for new laws to be passed in this regard when a new government is formed and Parliament is in session? An ordinance is typically in force for a period of six months, unless it lapses owing to the reassembly of Parliament.
The reason it was important for the government to push for a re-promulgation was so that Sebi could continue to exercise the powers it has started using when the ordinance was in force between July 2013 and January this year. For perspective, consider a scenario where the regulator had attached the property of a person who hadn’t paid a penalty. If the ordinance, which allows Sebi to attach the property, ceases to be in operation for a long time, the person will be free to dispose his/her property. The re-promulgation does help with respect to continuity.
At the same time, there are some changes compared with the ordinance issued in 2013. One curious change is to allow the regulator to supersede an order issued by an adjudicating officer if “it considers that the order is erroneous to the extent that it is not in the interest of the securities market”. In such cases, Sebi has been allowed to make a fresh inquiry and enhance the quantum of penalty proposed by the adjudicating officer. According to Sebi rules, while the chairman and/or whole-time board members issue orders relating to debarment etc., monetary penalties are decided by adjudicating officers.
The new model envisaged in the ordinance is strange and avoidable, to say the least. The adjudicating officer is expected to be independent and decide on the quantum of penalty after hearing the investigation arm of Sebi and the person against whom the charge is brought. If Sebi is aggrieved with the order passed by the officer, the right approach would be for it to challenge the order at the Securities Appellate Tribunal (SAT). Allowing Sebi to make a fresh inquiry and pass a fresh order puts in question the independent role of the adjudicating officer. With Sebi being given these overriding powers, such officers may find it convenient to consult Sebi on what the quantum of penalty should be. One can argue that from the perspective of the person against whom the case is being fought, there is always the option of moving SAT. However, the ordinance adds an unnecessary level of adjudication.
Another change is the government’s decision to add a safeguard to allay concerns about regulatory overreach. It has done this by stating in the ordinance that the Sebi chairman must record in writing its reasons for authorizing a search and seizure operation. Sebi had issued a detailed procedure for search and seizure operations in January this year, which included, among other things, a request in writing from the investigating officer to the Sebi chairman for a search warrant. The added safeguard in the ordinance is welcome, as the responsibility for ordering a search warrant lies with the chairman—it makes sense for the issuing authority to record reasons. The ordinance also provides for Sebi to take the assistance of a police officer or a central government officer in its search and seizure operations.
While the above two are welcome measures, the option to override the decision of the adjudicating officer is best left unused. Hopefully when these laws are enacted through Parliament, the provision would have found its way out.