Budget 2018 impact: Sebi gets more power to penalise stock exchanges

The Finance Bill 2018, in addition to proposing amendments to the direct and indirect tax laws, has proposed amendments to certain other laws, such as the Securities and Exchange Board of India Act, 1992, the Securities Contract Regulation Act, 1956 (SCRA), and the Depositories Act, 1996.  Highlights of the proposed amendments are:

Amendments to the SCRA

The government proposes to empower the Securities and Exchange Board of India (Sebi) to levy penalties for matters, such as failure to furnish information, failure to redress investor’s grievances and failure to comply with listing conditions.

Amendments to the SEBI Act

Power to levy penalty:  Sebi, alongside giving directions, is now being empowered to levy a penalty. Though Sebi has been exercising the power to levy penalty, specific provisions have been made under Section 11 of the Act to remove the existing lacunae in the regime.

Power to penalise AIF, REITs, investment advisors, research analysts: Section 15EA and 15EB in the Act propose to provide for penalty for default made by Alternative Investment Funds (AIF), Infrastructure Investment Trusts (IIT) and Real Estate Investment Trusts (REITs) and by investment advisors and research analyst.
 

Sebi has been empowered to impose penalties of up to Rs 100,000 per day, subject to a maximum of Rs 10 million or three times the amount of gains made, on AIF, IIT and REITs that fail to comply with the Sebi directions.
 

Similarly, penalties of up to Rs 100,000 per day, subject to a maximum of Rs 10 million, would now be applicable to investment advisers and research analysts for non-compliance of Sebi regulations.

Power to penalise stock exchanges, clearing corporations

Penalties between Rs 50 million and Rs 250 million or three times the amount of gains made, whichever is higher, have been introduced on the failure of stock exchanges and clearing corporations to conduct their affairs with their agents or persons associated with the securities markets.

The legal representative of a deceased person liable to pay penalties

In first of its kind provision, powers are now being given to the recovery officer to recover the amount of disgorgement and other amounts payable by a person from his/her legal representative in case of his/her demise. “The amendment has also provided that the recovery would only be to the extent of the estate of the deceased,” said Deepika Sawhney, partner & head, securities laws and transaction advisory, Corporate Professionals.

Empowering the whole-time Members

Amendments in provisions of Section 11B of the Act empowers whole-time members to levy penalties. Till now, whole-time members have been passing only remedial and preventive directions. Imposition of penalties was being done by adjudicating officers for which separate proceedings were conducted.

Key amendments to the Depositories Act

Similar to the power to impose penalties on stock exchanges and clearing corporations, Sebi is to be empowered to impose similar penalties on depositories that fail to conduct their business in compliance with the law. “With the severe penalties that could be imposed by the Sebi, going forward, these amendments should have a significant deterrent effect on anyone who may take the law lightly,” noted Vishal Gandhi, founder, Gandhi & Associates.