A committee headed by Justice MH Kania and comprising several senior jurists has given a report suggesting a wide range of changes to the Securities and Exchange Board of India (Sebi) Act. The recommendations clarify the rights and powers of the regulator and sometimes circumscribe the boundaries of its rules and actions.
There are some excellent, often subtle, recommendations to improve Sebi’s operational efficiency. It has also not hesitated to reject some of the changes proposed by the regulator. An important recommendation is to empower Sebi to file winding-up petitions against intermediary firms, on the lines of the powers available under the RBI Act and the Banking Regulation Act. It also recommends Sebi have some powers over professionals, to the extent that those caught in malpractices or certifying false information can be barred from appearing in proceedings before the regulator. These will clearly strengthen Sebi’s regulatory teeth and broaden its reach.
Interestingly, after 14 years of formal market regulation, the Kania committee is the first to show concern for innocent clients of dubious capital market intermediaries, caught in the crossfire of regulatory action. The plan was to recommend a special provision be introduced in the Securities Laws (Amendment) Bill of 2003 to say investors’ assets and money should be held in trust by intermediaries. And that no authority shall attach or seize such assets.
So far, Sebi has not had the power to disallow public issues. All it can do is to demand tough disclosures or delay its comments about the prospectus. The Kania panel now plans to tone down this over-zealous deregulation, after the scrapping of control over capital issues, by recommending Sebi be allowed to frame specific guidelines to regulate or prohibit prospectuses of shady companies attempting to raise public money.
There are several interesting recommendations to give Sebi control over a lot of money for investor protection activities. It wants Sebi to have its own Investor Protection Fund (IPF), on the lines of the Subscriber Education and Protection Fund under the PFRDA Ordinance of 2004. This Fund is to be used for investor education and to compensate small investors in accordance with guidelines that Sebi has already established for such compensation to be provided by investor funds of stock exchanges.
While this seems laudable, what needs to be examined is how many investors have actually been able to access IPFs already available with stock exchanges and if this system of compensating individuals has worked well at all. Interestingly, the committee plan was to recommend Sebi be allowed to take over the unutilised money in the IPFs of stock exchanges. We learn that in larger bourses this amount is in excess of Rs 100 crore. Like section 205-C of the Companies Act, this Fund will also be carved out of dividend or interest under mutual fund, collective investment or venture schemes, as well as any money or security lying unclaimed with market intermediaries for seven years. The panel also wants all monetary penalties imposed by Sebi to be credited to this Fund (as opposed to the Consolidated Fund of India).
• The Kania committee’s proposals will definitely strengthen Sebi’s teeth
• Missing is a readiness to move from the traditional model of regulation
• There isn’t enough to rescue Sebi from the quagmire of pending cases
Interestingly, the Kania panel has been careful not to follow the JJ Irani committee’s footsteps on some issues. For example, it notes the Joint Parliament-tary Committee’s recommendation to give Sebi comprehensive powers over listed companies and the Investor Educat-ion and Protection Fund (IEPF), but has refused comment. It is also silent on the issue of consolidation of securities’ laws and has refused to recommend that Sebi be the sole authority to administer the Securities Contracts (Regulation) Act. This was important to Sebi, as it would have given the right to recognise new stock exchanges, at a time when the RBI is stepping on its turf, in setting up an exchange called the Negotiated Dealing System to deal in government debt, without calling itself a exchange or seeking any specific approvals under the SCRA. Curiously, the Committee shows no such reticence in recommending the retirement age for members of the Securities Appellate Tribunal be raised to 65.
Missing from this otherwise excellent set of recommendations is a willingness to move away from the traditional, British, model of regulation. The committee wants Sebi to have the power to compound offences and violations under its Act, on the lines of the new Foreign Exchange Management Act. This is a peculiar form of settlement, allowing firms to wriggle out of problems by paying tiny fines, without any public disclosure or embarrassment and certainly no deterrent impact.
Clearly, the broader issue raised by the recent 25-year sentence handed down to Bernie Ebber, the high-flying former chief of WorldCom, has been lost in India. It is that the regulator must be allowed to settle lesser crimes through plea-bargaining and/or imposing hefty fines, with full public disclosure. Only then will it have the time, space and cooperation from other market participants to go after the big crooks. The regulator today is bogged with over 3,000 pending cases, of which over 1,000 cases have been heard and are languishing for want of orders. While the panel is going along with a recommendation that will push some of the decision-making authority for levying fines or penalties down the Sebi hierarchy, this is not enough to pull the market watchdog out of what is turning into a regulatory quagmire. In fact, there have been very few regulatory orders from Sebi in the past couple of months. In an obviously over-heated capital market, that is sending all the wrong signals to manipulators and mischief-makers.