Somasekhar Sundaresan: Securities edict a mindless exercise

WITHOUT CONTEMPT

The government has recently promulgated the Securities Laws (Amendment) Ordinance, 2004 to amend the Securities Contracts (Regulation) Act (SCRA) and the Depositories Act, 1996.

Although the ordinance seeks to synchronise the SCRA and the Depositories Act with the Sebi Act, 1992, it appears to be a mindless exercise in copy-pasting provisions of law across statutes, without regard to the consequences.

Consider the law on plea bargaining. The Sebi Act was amended in October 2002 to insert Section 24A. This provision enabled any offence that is not punishable with imprisonment or with imprisonment and fine, to be compounded by the Securities Appellate Tribunal or by any court before which proceedings are underway.

But the draftsmen forgot that Section 24 of the Sebi Act has all along provided that every single violation under it is punishable with imprisonment or imprisonment and fine. Thus the insertion of Section 24A was useless, and no offence under the Sebi Act could ever be compounded.

One would have thought that the government would have used the ordinance to rectify this anomaly. But it has carried mindless drafting to an extreme. The SCRA and the Depositories Act did not have provisions that made every single offence punishable with an element of imprisonment.

The ordinance has copy-pasted into these statutes, the provisions in the Sebi Act that prescribe imprisonment of up to 10 years for every single offence, along with the identical provision on the SAT and other courts being empowered to compound offences that are not punishable with an element of imprisonment. So we now have three statutes with an identical useless dispensation for plea bargaining and compounding of offences.

There is more that is wrong. Penal provisions identical to the Sebi have been introduced in the SCRA and the Depositories Act, without regard to whether the same offence can now be penalised under three statutes.

The stringent and onerous penalties introduced into the Sebi Act since October 2002, have been copy-pasted in the SCRA and the Depositories Act.

For instance, if a stock broker fails to enter into an agreement with a client, he would be liable to a penalty computed at the lower of Rs 1 lakh a day or an aggregate sum of Rs 1 crore, not only under the Sebi Act, but also under the SCRA. If he were also a depository participant he would be liable to an identical penalty under the Depositories Act as well.

In other words, the same offence is punishable with equal stringency under three separate statutes. There is no other known unconstitutional and perverse dispensation of treble jeopardy, under any other Indian law.

Similar instances of identical penalties in a sum of the lower of Rs 1 lakh a day, or Rs 1 crore in the aggregate for the same offence, under each of the Sebi Act, the SCRA and the Depositories Act, abound.

These include failure to file returns, to furnish information sought, and to redress investor grievances with the time prescribed by Sebi. So also, breaches where no separate penalty has been prescribed are punishable with a penalty of up to Rs 1 crore under each of the Sebi Act, the SCRA and the Depositories Act.

Some market intermediaries have been faced with every single transaction during a period of lapse in compliance being treated as individual violations, with separate proceedings and penalties being imposed for each transaction. By this token, the potential for the government to raise funds from the capital market would therefore be limitless.

Thankfully, the provisions of Section 15J of the Sebi Act, which prescribe guidelines to be adopted for imposing penalty""the gain made by the contravention, the detriment caused by the contravention, and any repetitive nature of the contravention""too have been copied into the SCRA and the Depositories Act.

But in practice, adjudicating officers never even deal with these guidelines and simply opt for the maximum penalties that the statute provides.

There is a lot the ordinance could have done but failed to do. It could have laid down more elaborate sentencing guidelines by adopting the specific criteria and guidelines that the Supreme Court has time and again laid down for imposition of penalties, and which the SAT is forced to reiterate whenever it finds it necessary to interfere with the quantum of penalty imposed by Sebi.

The ordinance could have incorporated safeguards against vexatious penalisation, in disregard of constitutional safeguards upheld by the apex court.

The ordinance could have effected remedial amendments to the Sebi Act to ensure that adjudicating officers deal with the penalty amounts as maximum penalties, and not as the only penalty that may be imposed.

Sections of the media have recently been criticising the re-constituted three-member SAT for reducing some penalty amounts. The earlier single-member SAT too was criticised on similar lines.

Perhaps the focus of such debate should shift to why the SAT in any constitutive form, is finding it necessary to interfere with the quantum of penalties to make penalties equitable. The answer lies in the lawmakers writing laws that give confidence to its users that operating in the market is worth the legal and regulatory risk.

TAILPIECE: The mindless nature of effecting amendments through the ordinance is evident in another provision too. The SCRA has been amended to provide that dividend on mutual fund units would accrue to a seller of units, if the purchaser has not lodged the units for transfer.

In an era where any mutual fund worth its salt is an open-ended fund, and where every remaining listed close-ended fund has been dematerialised, a special ordinance to deal with cases of units not being physically lodged for transfer is anachronistic.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal.)