With fewer teeth than desired, can Sebi bite under new law?

Moneycontrol Bureau

The central government recently moved an amendment to three key laws relating to capital markets aimed at arming regulator Securities and Exchange Board of India (Sebi) with more powers to reduce fraud.

The move, among other things, enables Sebi to regulate collective investment schemes (such as chit funds and other deposit-taking schemes) and carry out search-and-seizures apart from enabling the regulator to impose stricter penalties in cases of fraudulent activities.

But even as the new bill will greatly enhance Sebi's powers with regards to capital markets regulation compared to what it currently holds, the bill in the newer form dilutes some of the powers that were proposed in the original ordinance put out by the previous government in 2013.

For instance, the ordinance had rested search-and-seizure powers with the Sebi chairman while the bill says orders "for the seizure of books, registers, other documents and records" can only be issued by a judicial magistrate, in order to "balance greater powers with necessary safeguards".

The move may come as a setback to the regulator even as Sebi chairman UK Sinha said the regulator, under the new bill, now had "enough powers to deal with fraudulent cases".

Interestingly, it was Sinha himself who had last year called for search-and-seizure powers to be vested with the regulator itself.

"... I think the most important impact, once this Bill is passed by the Parliament will be to give a signal to the people, who are in the habit of raising unauthorised money from gullible investors, is that the Parliament does not approve of it...," Sinha told reporters recently.

Towards, that end the bill allows the regulator to oversee collective investment schemes but pegs the minimum threshold for such schemes to come under the regulator's purview at Rs 100 crore.

But the high threshold could lead to several small schemes slipping through the net, former Sebi member MS Sahoo told the Mint newspaper .

Since the ordinance was approved, Sebi has initiated action against schemes where funds up to Rs 5,000 crore had been raised, according to a PTI report.

But the new bill also provides for some flexibility to the regulator in terms of levying penalties in cases involving fraud.

For instance, in cases of violation of insider trading norms, Sebi can now levy penalty of a minimum of Rs 10 lakh, extending up to Rs 25 crore, or three times the unlawful profits made (whichever is higher) – this was earlier Rs 25 crore or three times the profits.

According to Sahoo, the earlier clause stipulating a minimum fine of Rs 25 crore led to several issues with respect to settlement in cases where profits were very small.

"The new Bill will ensure that the fine matches the gravity of the crime committed," he told Mint.

Sebi will now also be empowered to attach movable or immovable properties and attach bank accounts in case a violator fails to comply with the regulator's orders.