Tightening the regulatory noose on fraudsters, Parliament today cleared a key bill to allow Sebi to act against ponzi operators and market manipulators more effectively through search and seizure, attachment orders and recovery proceedings and with access to call data records.
Besides, a special Sebi court would be set up in Mumbai to fast track prosecution proceedings launched by Sebi, as also to clear search and seizure operations proposed by Sebi.
This marks a dilution from the direct powers granted to Sebi Chairman through as many as three ordinances in the past one year to authorise search and seizure operations and is being seen as a safeguard against any possible misuse of such powers by the capital markets regulator.
The new bill, which has as many as 57 clauses to amend various sections of the Sebi Act and two other related legislations and was passed in Lok Sabha on August 6, was cleared by Rajya Sabha today. This paves the way for notification of new legislations to amend relevant Sebi Acts.
This comes more than one year after the first ordinance was promulgated by the previous government in July 2013 to grant additional powers to Sebi to take on fraudsters and other defaulters. The ordinance was promulgated for the second time in September last year, followed by a third ordinance in January this year, as a bill could not be passed in the Parliament at that time to grant permanent powers to Sebi.
The third ordinance also lapsed late last month, leaving Sebi without these extra powers which were used by the regulator in nearly 1,500 cases during their validity period.
The ordinance, which had 30 clauses, was brought in the backdrop of lakhs of small investors being duped by numerous fraudulent investment schemes across the country, like in the alleged Saradha scam and other such cases in West Bengal.
The bill gives Sebi powers to act against all illegal money-pooling schemes involving Rs 100 crore or more, launch recovery proceedings, pass disgorgement orders for ill-gotten money and facilitate its return to identifiable investors, and seek call data records and other information from any person, company, bank, authority or organisation during its probes.
However, these powers do not include authority to tap phones and other electronic data directly.
Replying to debate on this bill in Rajya Sabha, Finance Minister Arun Jaitley said, "The Sebi Act has now been fine-tuned and the new architecture of this Act is that if you have a collective investment scheme (CIS) and were not covered under the original language, a wider language has been introduced. If you are having a big scheme. You will be included in it."
It was earlier felt that fraudsters were using various regulatory loopholes to launch illicit money-pooling schemes and evade action.
On Sebi being asked to seek permission from special courts to conduct search and seizure operations, Jaitley said that the original Act provided that such permissions would be required from the courts across the country with jurisdiction over the particular area where such operations were required.
As there were apprehensions that such a system was time-consuming and prone to leak of information, the Ordinance brought in by the previous government granted direct powers to Sebi for any search and seizure, Jaitley said.
"Members (of Parliament) had expressed dissatisfaction against this provision that this is too arbitrary a power. Therefore, this power had to be tapered down. I therefore discussed the issue with various stakeholders including Sebi, by which Sebi functioning does not become difficult or impossible," he said.
Explaining the rationale behind such a court being set up in Mumbai, Jaitley said that Sebi's headquarters were in that city and therefore it would be better to have the designated court there only, as it would taper the arbitrariness of the power and also make it easier for Sebi to act upon.
Jaitley also said that the new Act would not come in the way of other regulations, such as the Companies Act.
The new Act would retain powers given to Sebi through the ordinances for ordering arrest and detention in prison of persons found to be in default during recovery proceedings.
Besides tweaking certain powers earlier granted to the markets regulator through ordinances, the Act will have some new provisions including to provide for minimum penalties ranging from Rs one lakh to Rs 10 lakh, depending on the nature of the case.
This minimum penalty would be Rs 10 lakh for insider trading cases, while the same for matters relating to fraudulent and unfair trade practices would be Rs 5 lakh. It has been now proposed that Sebi can impose a penalty amount "while shall not be less than Rs 10 lakh, but which may extend to Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher."
For conduct of search and seizures, Sebi officers would continue to enjoy powers to seek help of local police or other government officers in such operations.
With regard to setting up of special courts, the government said there would be no immediate financial implication on the Consolidated Fund of India.
"The central government may, if required, provide budgetary support at a later stage and accordingly, the Department of Expenditure would be approached in accordance with the rules," according to the bill.
The bill also provides for a provision that appeals cannot be made against orders passed under the consent settlement mechanism.
It also allows for express powers for the settlement (compounding) and empowering Sebi to enhance the penalty imposed by an adjudicating officer.
Once the bill becomes an Act, Sebi would have powers to call for information "not only from the people or entities associated with the securities market but also from persons who are not directly associated with the securities market".
Besides, the capital market watchdog would get increased powers to crack the whip on illegal investment schemes.
"Further, in view of large pendency of cases, it is necessary to constitute Special Courts for prosecution of offences under the securities law to provide speedy trial," the government said.
As per the bill, any unregistered scheme having a corpus of Rs 100 crore or more would be deemed as a collective investment scheme.
Instead of First Class Judicial Magistrate, the Magistrate or Judge of such designated court in Mumbai -- as notified by the central government -- would have jurisdiction to issue an order "for the seizure of books, registers, other documents and records".
According to the government, it has become necessary to "further strengthen the regulatory provisions to ensure effective enforcement of the securities market related law while ensuring its orderly development".