Can Sebi shed responsibilities and keep powers?

It cited illegal fund raising to acquire more powers; it doesn't want to monitor such schemes now

In the summer of 2013, when the heat was on the Securities and Exchange Board of India (Sebi) for not acting in time to prevent scams such as Saradha and Rose Valley, officials then cited lack of powers to search, seize and attach assets of these unscrupulous money pooling schemes.

Even at the Sebi's silver jubilee celebrations in May 2013, the issue of money pooling schemes and the powers needed figured prominently the chairman's speech (Click here to read the story).

Some of these powers were granted through the ordinance route. Even as Sebi was warming up, in May 2014, the Supreme Court made a scathing remark on the role of regulators in these illegal money raising scams. In a judgment in a case involving Orissa-based operator Alok Jena, the bench of T S Thakur and C Nagappan made scathing remarks on the role of regulators in these scams.

The judgment said, "What is important is that if upon investigation it is found that Sebi did have the jurisdiction to act in the matter but failed to do so then such failure may tantamount to connivance and call for action against those who failed to act diligently in the matter. Suffice it to say, that the scam of this magnitude going on for years unnoticed and unchecked, is suggestive of a deep rooted apathy if not criminal neglect on the part of the regulators who ought to do everything necessary to prevent such fraud and public loot. Depending upon whether the investigation reveals any criminal conspiracy among those promoting the companies that flourished at the cost of the common man and those who were supposed to prevent such fraud calls for a comprehensive investigation not only to bring those who were responsible to book but also to prevent recurrence of such scams in future."

Following discussions in various forums, it was decided to amend the laws to give powers to the regulator. In August 2014, the Securities Laws (Amendment) Act 2014 was passed (click here to read the story).

While at the ordinance stage, Sebi was given powers to do search and seizure without permission, the Act said such a permission would be necessary though it would be by a designated special court to be constituted to deal with Sebi matters.

Thus, after a direct indictment from the Supreme Court Sebi got a significant amount of additional powers and a better definition of money pooling schemes that came under its purview.

The amendments were in two parts. One was the amendment to Section 11 AA, which added certain clauses that more clearly defined which are the schemes that will fall under Sebi purview. The Rs 100 crore threshold and the clause empowering central government to notify any such scheme were under this section.

Separately there were amendments and insertions to various sections that dealt with investigative powers, calling for information and attachment of assets etc. It seems after the definition became clear, there was a huge load of cases that came Sebi's way.

In January, responding to a Public Interest Litigation filed by an NGO called Humanity Salt Lake, Sebi told the Supreme Court that it had passed interim orders in a number of cases, but referred four times such cases to other agencies.

Additional Solicitor General Maninder Singh told the court that Sebi had passed interim orders against 299 entities, including 76 Collective Investment Schemes (CIS) and 223 Deemed Public Issues (DPI).

DPIs are cases where companies raise money from more than 49 persons, without following Sebi's public issue norms.

He said some 1,538 cases, which do not fall under the jurisdiction of Sebi, have been transferred to other agencies (click here to read the story).

In the same case, Sebi in its affidavit had informed the apex court that ponzi schemes did not fall under its regulatory purview and only the state governments concerned can control them. The stock market regulator had also said banned activities cannot be regulated by any regulator and just be stopped if it is intimated about such schemes or it takes suo motu cognisance. Sebi had also told the apex court in its affidavit that it has been "alert and proactive in tackling the menace of unauthorised money mobilisation".

Going by these submissions, it appears that Sebi wants to stick strictly to its jurisdiction. It did not want to interpret it widely to include all kinds of ponzis, whose modus operandi may go beyond the definition of CIS and DPIs, which fall under its watch.

Recent news reports suggest that it does not want even the CIS jurisdiction at all. If that was the case, this gives rise to the moral question if it can continue to enjoy those investigate powers, which are not restricted to CIS cases alone.

It also makes one wonder if a regulator can unilaterally surrender responsibilities bestowed upon it by the parliament because it is unable to dispose these of efficiently.

However, a March report in Moneylife magazine suggested something more serious. Citing a whistlowblower letter by some Sebi officials, Moneylife said that there were "verbal instructions" to close these cases or transfer them to other agencies prematurely.

"There were verbal instructions to close cases or refer them to other agencies in large numbers. The letter provides data to show 88.9 per cent increase in closed cases in 2015-16. The documents show that Kolkata alone closed as many as 698 cases in the first 11 months of 2015-16 and had just eight officers in charge of CIS along with other work. Similar numbers, tables and charts are provided for all regional offices of Sebi. At the same time, the number of cases taken up for action is woefully small. The whistleblower alleges that after 2014, Sebi's top brass quickly delegated responsibility for deciding to lower level functionaries and closures are, often, based on verbal instructions and impractical deadlines," the Money life report said.

Is this then a case of Sebi wanting to shed responsibilities, which it had cited in first place to acquire more powers?