The panel chaired by Justice AR Dave, a retired judge of the Supreme Court, focussed on four main areas – avoiding duplication of proceedings to reduce timeline for passing final orders, improving recovery processes, quantifying alleged gains while levying penalties and interplay between Sebi norms and provisions of the Insolvency and Bankruptcy Code (IBC).
Reducing timelines for investigations and final orders
The panel observed adherence to principles of natural justice against intermediaries should not lead to holding the system hostage and compromising the very interest of investors.
To avoid this, the committee has proposed rationalisation of processes to avoid duplicity of proceedings before the designated authority (investigating officer) and the designated member (whole time member). This, according to the panel, increases the timeline for investigation and final orders unnecessarily.
“It is thus proposed that once the designated authority has provided personal hearing to the intermediary and submitted the report to the designated member, in the second stage of enquiry, the designated member shall, after issuing a notice to show cause and granting an opportunity of written submission to the notice, proceed to pass an appropriate order in the matter in the interest of justice, equity and good conscience," said the panel in its 424 -page report.
In a first step, the present rules require the fact-finding proceedings to be conducted by the approved Sebi officer, and in the second, quasi-judicial proceedings are conducted before the member on the basis of the recommendation of the officer.
The panel also recommended to scrap the requirement of a separate inquiry to determine the profits made and losses incurred. This is currently done after the Sebi inquiry that proves guilt.
“They are two sides of the same," said the panel in the report.
It recommended that investigation, inspection, inquiry and audit processes should also examine the relevant aspects that are necessary to quantify the alleged gains.
While making recommendation for action, relevant Sebi officer would need to bear in mind the amount of disproportionate gain or unfair advantage, amount of loss caused to an investor or group of investors, repetitive nature of the default.
Determining ill-gotten gains for penalty
One of the primary defaults in Sebi orders so far has been the way it determines the penalty for market infractions.
The committee advocates the use of financial economics as used in other securities jurisdictions and has reworked the manner of quantification of profit or loss caused to the investors along those lines.
“The economic world has become flat and the principles for determining the profits made by and losses caused to investors by defaulters need to have a universally sound foundation if investors are to be protected across jurisdictions," the panel said.
Justice Dave observed that the existing manner of quantification of profit is very basic and can be enhanced in view of the technical and financial resources available.
The quantification of illegitimate profit and loss to investors is a complex exercise that involves consideration of several factors such as the determination of net gains and amounts that may be deducted, joint and several liability, applying the correct financial economics techniques, tax considerations, the nature of the violation, the panel said.
The panel recommended quantification of profit (alleged gains due to market infractions) should be determined based on composite default and liability should generally be imposed on a joint basis.
The committee laid emphasis on significance of disclosures and role they play in improving governance. Giving importance to the quality and timing of disclosures and non-disclosures will also enable the regulator to focus on various modes through which illegitimate profit is made by delinquents.
“Once greater attention is paid to disclosures requirements, any trading around the relevant period will allow the board (Sebi) to compute the undue profits made and the losses caused to investors who were denied similar opportunity," said the panel.
The period of investigation, inquiry, audit or examination should ideally encompass the trading around disclosures, it added.
Interplay of Sebi norms and IBC
“Another concern is the manner in which the moratorium provisions of the Code (IBC) are being interpreted. This has the potential to curtail the ability of the board to protect the interest of investors since defaulters of securities laws may use the Code as a refuge from legal proceedings at the cost of public interest," the panel noted in its report.
To avoid this, the panel recommended that Sebi writes to the Ministry of Corporate Affairs (MCA) that where public monies have been illegally siphoned off, then IBC should be amended. This is to ensure that creditors cannot decide on approving a resolution plan to pay themselves or resolve the company using the monies of public illegally acquired.
The list of non-dischargeable debts under the IBC may be expanded to ensure that defaulters of securities laws do not use individual bankruptcy as a refuge from legal liability.
The panel recommended adding provisions of interim attachments to ensure recovery of dues at later stage.
“One of the commonly practiced securities laws violations involves monies raised through public issue of securities being siphoned off by the issuer/promoters to various sister concerns and individuals. Difficulties arise when the aspects of siphoning of the amounts comes to the notice of Sebi after the passing of the final order but during the pendency of the recovery proceedings," said the panel.
It has recommended that Sebi should be given power to impound and retain the proceeds or securities or monies not exceeding the actual value of any transaction, which is under investigation.