SEBI and The Basic Structure of Securities Enforcement in India

1. While there have been judicial pronouncements which have affirmed that there is no statutorily prescribed limitation period for SEBI to initiate (or, for that matter, complete) enforcement proceedings, the courts have time and again expressed that SEBI must act in a timely fashion. While processes have been streamlined in the recent past, powers which are so wide as those of SEBI are squandered if not used expeditiously. Without any certainty about when certain acts or omissions may come under the scanner of SEBI, and whether it would be near-enough in the past to put up any cogent defence, securities market participants, intermediaries and institutions often have to carry on their businesses. It is time that a period of limitation (even with reasonable exceptions) be built into SEBI’s powers, both for closure of investigations and proceedings.  

2. As we have discussed above, as the years go by and we move further and further away from 1992, the teeth of the SEBI’s penal provisions need a sharpening. Given the current rates of inflation, even the steeper penalties imposed by SEBI are likely to lose their efficacy and deterrent effect soon.

3. Without clear policy guidance on what kinds of measures SEBI intends to take in case of a given violation, a potential noticee is handicapped in planning and coordinating his defence. While the principles of res judicata should ideally govern SEBI’s ability to take multifarious action for the same set of violations, the lack of statutory clarity insofar as what would be SEBI’s reaction to a non-compliance impairs a person seeking to bring herself within the four corners of the law. A greater degree of certainty when it comes to possible actions would be a welcome move for both the regulator and the regulated.

4. Two concepts from the US SEC are worth an import:- Administrative law judges and the  ‘Wells Notice’. A Wells Notice is a letter which the US SEC issues to persons on the completion of its investigation indicating the charges which it proposes to bring against them and the probable recommendations for the nature of action proposed to be initiated. Not only will this make efficient the processes at enforcement wing of the regulator, but it will also afford the entity to clear the air before formal charges are brought. In fact, conceptually this is not alien to SEBI – it routinely issues ‘observation letters’ on the completion of an inspection of intermediaries – the same needs only to be tweaked and replicated in investigations/inquiries. Administrative law judges are the equivalent of the current adjudication officers and differ from the Indian structure in that they are external third parties, and not employees of the regulatory agency themselves. Such a distinction enables quicker, more efficient decision making while also respecting the separation of powers.