Every time there is a major regulatory development in the United States, the Indian media goes into paroxysms. Whet-her they are convulsions of delight or despair is dictated by the context of what has happened in the US.
The latest in this class is the complaint of insider trading filed by the United States Securities Exchange Commission (SEC) against many individuals in a Manhattan court. The list of individuals includes Anil Kumar, a member of the much-feted Indian School of Business and reputed hedge fund manager Raj Rajaratnam.
What is striking is that the regulator has exposed the feet of clay of stalwarts with a formidable reputation and standing. However, what strikes the Indian media is an apparition that the SEC has more powers than our Securities and Exchange Board of India (SEBI). Nothing could be farther from the truth.
Take the Raj Rajaratnam case itself. The SEC has had to file a complaint before a court (see http://www.sec.gov/ litigation/complaints/2009/comp21255.pdf) asking the court to pass orders to disgorge the alleged gains earned by way of insider trading, to restrain the accused from acting as officers or directors of any issuer of securities, and to pay civil monetary penalties under the US securities laws.In India, SEBI itself is armed with powers to take each of the aforesaid actions in absolute terms — not just as interim measures.
On an almost daily basis, SEBI issues directions under Sections 11 and 11B of the SEBI Act asking people not to deal in securities or to access capital markets or to be associated with capital markets. SEBI has wide powers to issue “such directions as it deems fit” with the only touchstone of rationale being the “interests of the securities market”.
Using this very power, SEBI has also been passing final orders asking people accused of wrong-doing to disgorge the earnings made out of the alleged wrong-doing. Indeed, in the past, SEBI has even argued that it has the powers to get anyone who could have allegedly been more alert, and there-fore could have allegedly averted frauds on the system (regardless of any statutory obligation to play the role of gatekeeper), to pay the value of the impact of fraud and then chase the actual fra-udsters as and when they are held guilty.
Chapter VIA of the SEBI Act, 1992 empowers SEBI to inflict monetary penalties directly without the intervention of any court. Adjudicat-ing Officers, who are employees of SEBI, acting as quasi-judicial officers have the power to impose civil monetary penalties. These penalties can be as high as Rs 25 crore or three times the benefit gained due to the violation.
SEBI has also written subordinate legislation in the form of regulations governing market intermediaries registered with it to impose disciplinary penalties ranging from censure to cancellation of registration.
The only area where SEBI does not have powers for direct action without an intervention of a court is the ability to send people to jail. Section 24 of the SEBI Act requires SEBI to file a complaint before a criminal court to get an accused convicted and jailed for contravention of any provision of the SEBI Act, or rules or regulations made under it.
For all other regulatory action, SEBI has powers to act by itself without having to knock the doors of a court or any judicial body and present compelling evide-nce to take such action. The only check and balance on SEBI’s power is the Securities Appellate Tribunal, which is empowered to hear app-eals from any order passed by SEBI. Judicial interven-tion of any nature can come into play only after SEBI has taken action.
Yet, every time there is a new scam, commentators in India clamour for “more powers” in SEBI’s hands. The reality is that it has all the powers necessary at a regulator’s command — powers that are even greater than those wielded by the SEC, which has to marshall compelling facts and satisfy a court about its version of the story before taking action, not after having taken action.
When judicial review is only subsequent, even if the court rectifies a wrongful regulatory action, significant injury gets inflicted on the person accused. No remedy can undo such impact. That is a privilege the SEC does not enjoy, but SEBI does. (The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)