Sebi panel suggests measures to strengthen enforcement, recovery mechanism

A Sebi panel on Tuesday suggested measures to strengthen markets watchdog's enforcement mechanism and improve the system of recovery of siphoned off money.

The committee headed by former Supreme Court Judge Anil Dave has proposed a method of quantification of profit made by the defaulter and loss caused to investors.

In addition, the committee has examined the insolvency, recovery and securities laws jurisprudence of India and abroad and suggested suitable changes in the Insolvency and Bankruptcy Code to ensure that insolvency law is not used as a refuge by defaulters, thereby protecting the interest of investors.

It also made comprehensive recommendations to improve the present system of recovery of siphoned off money.

The regulator has invited public comments till July 7 on the suggestions made by the committee.

In its 424-page exhaustive report, the panel also recommended amendment in Intermediaries Regulations to the Securities and Exchange Board of India (Sebi). It has suggested that a two-tier enquiry process of registration for intermediaries should be replaced with an enquiry process as two-stage enquiry does not add much value and in fact, causes further delays in the completion of the enquiry proceedings.

It has been proposed to provide for the opportunity of personal hearing to be given by the designated authority (DA) and not by the designated member (DM).

At present, the opportunity of personal hearing is granted by the DM, issues relating to inspection of documents and/or cross-examination increases at this stage of the enquiry proceeding.

Currently, only four whole-time members (WTMs), who also function as the DM, have been appointed to Sebi by the central government.

Due to such work getting concentrated before the WTMs, the chances of more time being consumed at the second tier of enquiry becomes high.

On the other hand, the regulator is not constrained by the number of officers who may be appointed as a DA.

Suggesting a process that need to be adopted in enquiry proceedings, the committee said that process related to granting of an opportunity of personal hearing, inspection of documents, cross-examination AMO should be granted by theDA.

After conducting a detailed enquiry and after considering all the representation and the facts and circumstances of the case, the DA may submit a report recommending appropriate action.

Upon receipt of the report of the DA, the DM may issue a show cause notice calling upon the noticee to submit within 21 days, a suitable response as to why action as recommended by the DA or any other action may not be initiated.

The show cause notice should also clearly specify that no opportunity of personal hearing would be granted and all the submission, if any, may be made only in a written form.

With regard to recovery of money, the panel has noted challenges with the existing law and thus suggested measures with regard to interim attachment.

It has recommended that Sebi should be given power to impound and retain the proceeds or securities or money not exceedingthe value of the proceeds in respect of any transaction, which is under investigation.

At present, attachment relates to the proceeds actually involved in violation of any of the provisions of this Act.

In respect of quantification of profit made and loss caused to the investors as a result of the default, the committee said that public non-mandatory guidelines shouldbe issued for the benefit of all stakeholders, which can be constantly revised and updated with ease.

It suggested that quantification of profit wherever possible should be done on the basis of the composite default and liability should generally be imposed on a jointand several basis. When imposing liability on an individual basis, quantification may not be required where the penalty otherwise imposed is sufficient.

"When imposing penalties, quantification of loss is generally appropriate in cases of joint and several liability or in case of the main accused noticee(s) rather than for 'victimless defaults' or for each and every individual involved in the default since apportioning loss between multiple defaulters may be even more difficult than apportioning illegal gains," it suggested.

Further, there is no equity between defaulters at time of directing joint disgorgement or joint penalties. Also, the amount of penalty to be levied within the range provided by law.

In order to arrive at an appropriate penalty to be levied on the persons who violate securities laws, the panel recommended to consider factors like the amount of disproportionate gain or unfair advantage, wherever quantifiable, as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default; and the repetitive nature of default.