Sebi panel suggests tweaks to enhance regulator's enforcement function

Dave panel identifies four broad areas the need to be revamped, seeks to quicken process leading to issuance of final order against an intermediary

The enforcement function of the Securities and Exchange Board of India (Sebi), which is one its most critical, is set for an overhaul. A high-level committee led by A R Dave, a retired Supreme Court judge, submitted a 424-page report aimed at the enforcement mechanism, on Tuesday.

“The committee has considered various issues pertaining to the enforcement mechanism of the board (Sebi) and made recommendations thereon to make it more robust and efficient. The recommendations seek to introduce tactical, strategic, and systemic changes to the enforcement process to improve capabilities of Sebi in protecting investors and indicting defaulters,” the report said.

The panel has identified four areas for enhancing the enforcement function. These are intermediary regulations, recovery of dues, quantification of ill-gotten gains, and synergies between the securities and insolvency laws.

A securities lawyer said implementation of the panel recommendation would be akin to upgrading the operating system for Sebi.

The panel added that the processes followed by Sebi, under the Intermediaries Regulation, 2008, are “unjustifiably drawn-out”. They have underscored the need to conclude a proceeding against an intermediary in a timely manner. The intermediary could be a stock exchange, depository, clearing corporation, mutual fund, or broker. 

“Sebi is required to adhere to principles of natural justice in the course of its proceedings against an intermediary. However, such adherence cannot be meant to extend the application to such an extent that permits holding the system hostage at the cost of compromising the very   interests of investors,” the panel said.

It has called for the process leading to the issuance of a final order against an intermediary to be faster.

On the issue of recovering dues such as fees, penalties, or disgorgement amounts, the mechanism followed by Sebi’s recovery officer needs several modifications, given existing provisions don’t recognise concepts like clubbing of income or e-auctions, the panel added.

On the area of disproportionate gains made by a violator, the panel has said Sebi could make use of financial economics.

“The committee notes that over a period of time, violations of the securities laws have become complex... In view of the same, the committee advocates the use of financial economics, as used in other securities jurisdictions.”

The panel has cited examples of techniques used in jurisdictions such as the US, acknowledging how difficult it is to quantify potential losses caused to a shareholder due to securities fraud.

“Quantification in the context of a dynamic securities market is both a science and an art, based on def-ined principles drawn from law, economics, accounting, and mathematics, while being imprecise at the same time. To the extent possible, Sebi should attempt to quantify the unlawful gains made and losses caused to investors,” the report says.

“The committee has examined the insolvency, recovery, and securities laws jurisprudence of India and abroad, and suggested suitable changes in the code to ensure the insolvency law is not used as a refuge by defaulters, thereby protecting the interest of investors,” the Dave-led panel has stated.

Sebi has invited public comments by July 7 on various recommendations made by the panel.