REPORT OF THE COMMITTEE PERTAINING TO REVIEW AND REFORM OF SECURITIES LAWS UNDER THE CHAIRMANSHIP OF JUSTICE D

REPORT OF THE COMMITTEE PERTAINING TO REVIEW AND REFORM OF SECURITIES LAWS UNDER THE CHAIRMANSHIP OF JUSTICE D.R.DHANUKA.

PREFACE

1. A healthy and vibrant capital market is the very foundation of economic reform and development. Such a market pre-supposes the existence of a progressive and effective securities law regime that is strictly and swiftly enforced. The securities legislations are presently distributed over an array of acts and have not been comprehensively reviewed since several decades. It is only in 1992 that a securities market regulator was established. The Capital Issues (Control) Act, 1947, was repealed only in 1992. Much of the regulation that has evolved thereafter is in the form of delegated legislation and interpretative opinions of SEBI. A holistic attempt to consolidate, harmonise, modernise and rationalise securities legislations was long overdue. Both development, and enforcement are being hampered by an antiquated and vague regime that has not kept pace with the times, and certainly not with the globalization of the economy or the institutionalisation of the capital markets. During the last several decades, the power to make delegated legislation has been liberally exercised. It is the very need of the hour. Section 30 of the SEBI Act,1992 empowers the Board to frame regulations for the purposes of the Act. Having regard to the fast changing scenario, the SEBI has been framing detailed regulations on a variety of subjects within the purview of the Act. Without curtailing the scope of regulation making power of SEBI, the Committee has thought it fit and proper to recommend amendments in the rities laws as it is felt that the relevant legislation must itself tackle the main problems faced by the market and the investors. `If India's capital market is to thrive and integrate into the global economy and market place, this is clearly unacceptable. It is in the last few years that the whole industry has changed and embraced modern technology with a quantum leap, at the same time, the regulatory environment has been formalised on the major world stock markets to reflect the fact that securities trading is now more than any other industry, a truly global one on which the sun never sets. The present attempts to rationalise the laws, on the verge of the next millenium, is not a day too early.

2. Presently, the securities law regime is broadly comprised in the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Companies Act, 1956 (some chapters), and the Depositories Act, 1996 and of course rules, regulations and other forms of delegated legislation thereunder. With the repeal of the Capital Issues (Control) Act, 1947, the antiquated regulation pertaining to capital issuances was abrogated. These legislations serve different purposes and required consolidation and harmonisation.

Some other related legislations do also have limited relevance to the subject matter, such as the Public Debt Act, 1944, some of the provisions of Contract Act, 1872, Unit Trust of India Act, 1963 etc. These legislations do not form the core of securities law in India but are nevertheless relevant to some extent.

3. The last few years have witnessed great upheavals in the capital markets. The ebb and flow of the markets has severally affected investor confidence. There is a general perception that the small investor is shying away from the primary and secondary markets. There is more than a grain of truth in this, and perhaps the inadequacies of the enforcement regime is to some extent, a contributory to this phenomenon. The proverbial difficulties in punishing market offenders or promotors who have vanished along with their companies after raising capital, can at least in part be attributed to an inadequate legislative scheme. A government which enacts a progressive yet strict securities law regime has the best chance of restoring the confidence of the investor, who must receive assurance that the rules of the market will be enforced and that the regulator has both the will and the legal means to achieve this objective. What better assurance than a comprehensive securities law regime, which measures upto global standards. Investor protection has been a key theme of the review exercise of this committee.

4. Irrespective of which end of the political spectrum constitutes the government, the commitment towards the revival of the capital markets rests on a common policy platform. The capital markets depend extensively on institutional investment both domestic and foreign just as they do on the small investor. The foreign investor's appetite and expectations are whetted by a considerably more sophisticated, developed and yet heavily regulated securities market outside India. Hence the temptation to 'export' the capital markets in the form of depository receipt programs. It is the dream of all of us that the Indian markets must be reckoned the very best in Global context. It is therefore desirable that the Clearing and Settlement Systems and Regulations and enforcement be strengthened and improved further.

5. A number of areas relating to domestic market regulations are uncertain. For instance, the statutory basis for regulation of private placements, allocation of liability for misstatement in offer documents concerning private placements, constitution of apex stock exchanges, prescription of continuous disclosure standards, setting down the statutory basis for full and fair disclosure by issuers and the basis of punishing or exonerating them where due diligence was exercised is unclear. As is evident from the preamble to the SEBI Act, SEBI plays the role both of a market developer and a regulator. It therefore constantly faces conflicting pressures both in its desire to develop and add depth to the capital market on the one hand and on the other, to prescribe and enforce regulations. Periodically, `scams’ and scandals are uncovered with disastrous consequences for small investors. Whilst such scandals or scams expose the weakness of the system, they inevitably provide the necessary policy impetus and strengthen public opinion for greater regulation and stricter enforcement. As a market regulator, SEBI’s position is perhaps unique in comparison with other similar institutions worldwide, particularly in view of the delicate balancing act of developer and regulator that it is called upon to perform. The issues relating to reform of the corporate law code have been engaging the attention of the Central Government for some time now. Dematerialisation of securities and the enactment of the Depositories Act 1996 as well as the constitution of the Committee for reform of the Companies Act 1956 are evidence of this phenomenon. The task of review and amendment of the securities laws entrusted to this Committee are a logical extension of this endeavor. SEBI’s attempt to set up a comprehensive regulatory system would be meaningful only if there are strong and comprehensive legislative underpinnings.

Having regard to the above factors, this Committee was established by SEBI on 14^th February,1997 under the Chairmanship of Justice D.R.Dhanuka, a former Judge of the High Court of Judicature at Bombay, to review the securities laws. The terms of reference of the Committee are as follows:

To examine the areas of deficiencies in the SEBI Act, Securities Contracts ( Regulation ) Act, the Depositories Act.
To suggest amendments to the provisions of the SEBI Act, Securities Contracts ( Regulation ) Act, Depositories Act with a view to enable SEBI to regulate and develop the securities market and protect the interests of the investors.
To examine the provisions of the Companies Act and to make recommendations for amendments in the Companies Act in order to enable SEBI to better regulate issue of capital, listing of securities, transfer of securities and protect the interests of investors.

Being essentially a law reform Committee, the Committee was constituted entirely of lawyers drawn from practice and other regulatory bodies. The members of the Committee are as follows:-

1) Justice D.R.Dhanuka - Former Judge, High Court of Bombay, Senior Advocate, Advocate Supreme Court of India.

2) Mr. Rafique A Dada, Additional Solicitor General for India and Senior Counsel

3) Mr. Cyril S Shroff, Solicitor, Partner, M/s Amarchand & Mangaldas & Suresh A Shroff & Co.

4)Smt. K.S. Shere, former Principal Legal Advisor to Reserve Bank of India

5) Ms. D.N.Rawal, Executive Director of SEBI and Member Secretary of theCommittee.

The Committee was requested to submit its report within 3 months. Having regard to the nature and quantum of work involved and a very large number of suggestions received, the Chairman of SEBI has been kind enough to extend the time for submitting of the report.

The Committee sent out a questionnaire to a number of agencies, intermediaries, market participants and experts and received comments from many of them. It held a number of meetings and deliberated extensively on the scope of the new securities law regime and upon issues, which come up before SEBI in the course of its administration. The said questionnaire along with the principal conclusions of the Committee is annexed to the report as an Appendix IV.

The Committee was well assisted by the Presidents of Stock Exchanges in the Country and by the professional organisation like the Institute of Company Secretaries and Self-regulatory organisations in the capital market. The names of persons who attended and who responded to the questionnaire in writing are set out in Appendix V. The Committee also drew heavily upon the experience of its members in formulating the scheme for securities law regulation. The Committee also broadly compared the salient features of the legislative and regulatory framework concerning securities laws in other developed and emerging markets and adapted them to the unique market and corporate culture in India. More importantly, having regard to India’s constitutional framework, the rule of law and the wide and powerful jurisdiction of Indian courts concepts of fairness and reasonableness has been sought to be introduced wherever appropriate. The true meaning and purport of the proposed securities law regime would be clear only when the delegated regime in the form of regulations, rules and guidelines is developed. In many countries, a substantial body of jurisprudence has developed in the form of delegated legislation and interpretative opinions from the regulator. The practice of issuance of policy statements, "no action letters", is a vital and powerful instrument of the development of the securities law regime. It gives actual meaning to the law by applying it in context. Of course, its foundations must be traced to the Securities Act.

During the tenure of the Committee, the Working Group set up by the Government of India prepared and circulated Draft Companies Bill. Since several of the provisions of the said proposed bill affect the securities law regime, this Committee made several recommendations in the form of its interim report. Some of the recommendations made by the Committee were accepted by the Government of India and incorporated in the official Bill introduced in Rajya Sabha. The Committee reiterates all its recommendations. The Committee requests that all its recommendations be examined afresh. In all humility, the members of the Committee feel that almost all of its recommendations deserve to be accepted. The Committee is not satisfied with the decision of the then Government of India to incorporate only a few of the recommendations in the Bill. The Committee is happy to learn that the said bills will be examined again by the Government before it is re-introduced in Parliament. The Committee is able to discover several lacunae in the old official bill introduced by the Government during the tenure of earlier Parliament, one of which is illustrated below :

Under the existing Companies Act,1956, the proposed transferee of shares/securities alone has remedy of filing an appeal before the Company Law Board if the transfer of shares/securities is wrongfully refused by the Company. It is reasonable that the transferor must have similar remedy of filing an appeal before the Company Law Board if he is aggrieved by the decision of the Company concerned refusing to transfer the securities. Perhaps this lacunae in the existing legislation has escaped attention.

We are submitting this report as a final report as it is already overdue and the deliberation of the Committee must stand concluded by this time.

However, if the SEBI receives additional comments or suggestions from the members of the public and SEBI finds it necessary to invite this Committee to make a supplementary report, the Committee would do so after studying `public’ comments, new suggestions, if any.

The report of this Committee is in three parts, the first part highlights the recommendation of the Committee on basis of which the Committee has drafted proposed new legislation to be known as Securities Bill,1998 for consideration of the authorities. The text of the draft Securities Act 1998 is set out in Appendix I. The interim report made in relation to the Companies Bill 1997 is set out in the Appendix II. The Committee has formulated its recommendations in relation to the proposed amendment in the Depositories Act,1996. The said recommendations are summarised in Appendix III.

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