The principal amendments and modifications are considered as follows:-
1. Long arm jurisdiction
In a global economy with investors in securities including foreign institutions and also dealing in securities occurring directly or indirectly outside India, question often arises as to whether the jurisdiction of SEBI can extend to such parties who are situate outside India. A long arm jurisdiction therefore becomes essential to cover the applicability of the Act to such transactions and parties. A similar provision exists in FERA, 1973. It is, therefore, considered necessary to make explicit provisions in the Act so as to secure definite compliance of the statutory norms also by foreign investors. By clause 1(3), the new Act, is sought to be made applicable even to foreign citizen or entities registered outside India so long as there is an appropriate nexus between such entities and transactions having bearing on Indian securities market.
2. Definitions:
Some of the principal definitions which have been inserted or reviewed are as follows:-
(i) "derivatives" - The new definition proposed by Clause 2 (h) is based on the definition of the expression `derivatives’ as suggested in the report of L.C.Gupta Committee appointed by SEBI.
(ii) "Securities and Exchange Board" has been amended to clarify that
SEBI shall continue to function as a statutory entity without break
notwithstanding the repeal of SEBI Act,1992 with added functions and
new responsibilities.
(iii) "fraudulent and unfair trade practices" and "Insider Trading" The said expressions have been statutorily defined in the proposed recommended Bill in order to overcome a possible contention that the prohibition and/or penalties pertaining to the above-referred practices do not have direct statutory base inasmuch as the same are prescribed mainly by regulations. The ingredients of such undesirable practices or offences are nonetheless set-forth in detail in these statutory regulations in order to provide flexibility and to encompass variations of such practices which may evolve in future. The Committee reasonably expects that the statutory regulations made in this behalf shall be updated from time to time in the light of the experience gained and the new problems which may arise.
(iv) "intermediary" an inclusive definition of intermediary has been inserted, with provision for expanding the scope thereof by issue of subsequent notification by the Board. The definition of intermediary now includes a variety of market operator and service providers.
(v) "issuer" an inclusive definition has been inserted to cover any person who issues or proposes to issue any security and persons in control or management. This would form the basis of Regulation of an issuer, (who is presently excluded from the SEBI Act). Moreover the regulation of issuer under the Companies Act is far too limited, since several issuers are not necessarily companies , but either forms of legal entities.
(vi) "mutual fund" a new definition of mutual fund has been inserted so as to specifically include the Unit Trust of India. The said definition is more or less analogous to that prescribed in the mutual fund regulations framed by SEBI, save and except, in respect of new categories now sought to be included.
(vii) "offer document" a new definition of offer document has been inserted which includes any document through which securities are offered, whether generally, or by private placement and also include those in electronic form. Combined with the definition of private placement and other special provisions for the regulation of 'issue' or 'sale' of securities and the prescription of civil and criminal consequences, this provision is a vital addition to the Securities Act and forms the key basis of prescription and enforcement of disclosure standards in offer documents.
(viii) The Committee is firmly of the view that save as specified in the exclusionary clause of the relevant section, private placements should be regulated. The proposed (new) definition of " private placement " provides that private placement means an issue of securities to a restricted number of offerees not exceeding the maximum number specified in the Board, complying also with such other conditions as may be prescribed, including in respect of maximum value thereof at one time or during the specified time and not calculated to result directly or indirectly in such securities being available for subscription for purchase by persons other than those receiving the offers or invitation.
(ix) "qualified institutional investors" a new definition of qualified institutional investors has been inserted to provide for recognition and registration of certain classes of large and sophisticated investors whether domestic or otherwise. This would form the basis of a comparatively less rigorous disclosure regime for certain kinds of issues directed only to such investors. The developmental role of SEBI in the evolution of such regulation would be evident.
(x) "securities" a comprehensive definition of securities is the cornerstone of the Securities Act. The present definition under Section 2(h) of SCRA has been modified to include depository receipts, instruments issued by mutual funds instrument commonly known as securities, participation certificates, derivatives, options, futures, hybrid securities, and also instruments which entitle the holder to any kind of property. Accordingly, securities issued by plantation companies, time shares, and the like are also brought within the scope of securities. Further a provision for notification of new classes of securities as they arise is also incorporated.
(xi) "self regulatory organisations" has been inserted for the first time and acquires relevance in the light of new chapter V which has been introduced for the recognition, regulation and empowerment of self regulatory organisations. The SEBI Act presently does not make adequate provisions for the statutory basis on which self regulatory organisations are to be established or are to function. The Committee has identified the development of self regulatory organisations as an important feature of the mature growth of the capital markets and has reached the conclusion that the present legislative provisions are inadequate in respect of this subject matter even if the same are to be inferred from the broad provisions of the existing legislation and making of explicit provisions in the new legislation is necessary.
(xii) "stock exchange" the definition of "stock exchange" presently contained in SCRA has been modified to include also an association of stock exchange's promoted by other recognised stock exchange.
(xiii) "venture capital fund" as in the case of Mutual Fund's the statutory definition of venture capital fund has been established to provide for the statutory basis of its regulation.
Chapter II – The Board
The Committee has recommended that the existing SEBI Act,1992 be repealed in view of the proposal to enact new consolidated legislation to be known as the Securities Act,1998. Notwithstanding the repeal of the existing legislation, the Board shall continue as an independent legal entity without any break enjoined to perform additional functions and discharge new responsibilities as well. The statutory Board need not be re-established. The Committee has incorporated a specific provision in this behalf in Section 3 of the proposed Securities Act and also the necessary saving clause in Section 119 thereof.
Chapter III - Powers and functions of the Board.
Under the existing SEBI Act, 1992, the subject of "Powers and Functions of the Board" is dealt with in Sections 11, 11A and 11B of the Act. The committee has sought to rationalise the said provisions and enlarge the scope and ambit of powers and functions of the Board in the light of suggestions and recommendations received by the Committee from stock exchanges, self regulatory organisations operating in the market and knowledgeable individuals. As for example, the committee has provided for registration for foreign institutional investors and expanded the scope and ambit of functions pertaining to Mutual Funds so as to include UTI. Provisions have been made for mutual co-operation and assistance between SEBI and other regulatory bodies i.e. its counter parts in other parts of the world. The committee has expanded the scope of Section 11B of the SEBI Act so as to empower the SEBI to issue various directions to the issuers, intermediaries, self regulatory organisations, investors and other persons. Under the proposed new legislation, SEBI is sought to be empowered to grant reliefs to aggrieved investors by awarding compensation as well as by directing stock exchanges and others concerned to deposit or retain the amounts in dispute etc. It has now been provided that the stock exchanges may provide for clearing corporations instead of clearing houses with the prior approval of SEBI. Provision has been made to enable SEBI to assist its foreign counterparts by way of sharing information, etc. Express statutory provision has been made to prohibit certain acts such as insider trading, fraudulent practice,etc.
Professionals :
It is axiomatic that professionals like Advocates, Solicitors, Chartered Accountants and Company Secretaries shall have to play a significant role in relation to Securities Practice and Administration of securities laws. It is common knowledge that experts like Advocates, Solicitors, Chartered Accountants, Company Secretaries issue certificates and opinions in relation to public offers and certify accounts. Thus the participation of professionals in the process of making a public issue and other related matters is of considerable significance. If high ranking professionals operating as professionals within this sphere, happen to be negligent or party to documents which may mislead authorities, investors or members of the public, whether intended or not, the consequences of such negligence or misleading certification are too grave. The committee has given considerable thought to this problem. It must be said to the credit of the concerned professions that the erring members of the profession are few.
The committee has therefore recommended insertion of a separate section in the proposed new legislation in the nature of non-obstante clause. If SEBI discovers serious lapses or misleading certificates by professionals certified as true and correct during the course of performing its functions, SEBI shall be entitled to make a reference to the disciplinary committee of the Bar Council and Institute of the Chartered Accountants for taking necessary disciplinary action against the member concerned. The committee has recommended that in such an eventuality it should be open to SEBI not to accept certificates or certified accounts or written opinions from such experts pending such reference and disciplinary enquiry so as to enable SEBI to function smoothly.
Education of Professionals
The Committee recommends that in due course the Board may consider organising investors education programmes for the benefit of the members of the public, for talks of notable persons on the subject and by publishing relevant literature. The Committee is conscious of the view that the implementation of this recommendation would require resources and planning. The Committee hopes that in due course SEBI would evolve investor educational programme. The Committee also recommends that the professional institutes like the Bar Council, Law Societies and the Chartered Accountants Institute also do organise specialised courses for training their members in securities legislations and practice so that the regulatory authorities are able to receive best possible professional guidance and assistance.
Chapter IV - Registration of Intermediaries
Chapter IV deals with " registration of intermediaries’’ within the purview of the proposed new section. The scope and the ambit of the said section is much wider than Section 12 of the existing SEBI Act,1992. By the proposed new section, it is sought to be provided that no intermediary associated with the securities market covered under the notification which may be issued by the Board shall operate in the securities market except under and in accordance with the conditions as to registration obtained from the Board. The Committee has recommended that regulations be framed requiring registration from SEBI even in cases where no such registration was required in certain situations before the commencement of the Securities Laws (Amendment ) Act,1995. By the second proviso to proposed new section 17, it is sought to be provided that the persons sponsoring or causing to be sponsored any collective investment schemes or credit rating agency in the securities market immediately before the commencement of the Securities Laws ( Amendment ) Act,1995 for which no certificate of registration was required prior to such commencement may continue to operate till such time when regulations are framed by the Board under sub-section (2) of Section 112 in this behalf.
Chapter V Self Regulatory Organisation.
Chapter V is a new insertion relating to the Self Regulatory Organisation (SROs). The said chapter is drafted in furtherance of one of the key recommendations of the Committee relating to encouragement, registration, development and regulation of Self-Regulatory Organisations. SEBI shall have to play a significant role for development of Self-Regulatory Organisations.
The concept of regulation of professionals operating in the market by their own peers and maintenance of professional standards is better developed through the mechanism of Self-Regulatory Organisations. The Committee is of the view that the commitment to prevent fraudulent and manipulative practices can be better achieved through this mechanism. The Committee has also provided that SEBI should be authorised to take assistance of Self-Regulatory Organisations in respect of registration of intermediaries, etc. subject to the control, directions and supervision of SEBI.
Chapter VI - Recognised Stock Exchanges -
Stock exchanges are also liable to be considered as self-regulatory organisations in so far as such exchanges deal with broker-members, etc. The provisions of Chapter VI are supplementary to the provisions of Chapter V in so far as recognised stock exchanges are concerned. The committee has provided in Section 33 of the proposed new legislation that the provisions contained in Chapter V of the Self Regulatory Organisations shall also be applicable to the recognised stock exchange in so far as the same are not inconsistent with the special provisions pertaining to the stock exchanges set out in Chapter VI thereof.
Chapter VI is patterned upon the relevant provisions of SC(R) Act, 1956 more particularly in the context of Section 3 to 12 thereof. The committee has made enabling provisions for registration of Apex and federal stock exchange which may be sponsored or promoted by the existing recognised stock exchanges. Such a federal or Apex stock exchange is expected to provide for the inter connectivity of the stock exchanges. The committee has made several provisions in the draft-Bill in respect of primary membership as well as trading membership of such Apex or federal stock exchanges. The committee has reached the conclusion to the effect that the concept of territorial operation enshrined in existing Section 13 of SCRA, 1956 has become obsolete and deserves to be abolished. The committee has therefore made provisions in this direction. For avoidance of doubt, the committee has expressly provided for establishment of a clearing corporation in lieu of clearing houses and entrustment of the functions of the clearing houses to the clearing corporation. In this respect, SEBI shall have to play its own role. The Committee has recommended that the stock exchange may entrust the function of the clearing house to a clearing corporation separately constituted with the prior approval of the Board. In case of supersession of Governing Board, existing provision has been modified, to enable the Board to retain some members of the superseded governing board in the adhoc governing body till the new governing board is reconstituted. In the existing provisions of SC(R) Act, SEBI has concurrent power with the Central Government and some powers have been delegated to SEBI by the Central Government. The Committee has now proposed that all such powers should be conferred upon a singly body i.e. SEBI so as to avoid multiplicity of authority.
The Committee has recommended that the blank transfers be totally banned. The investors would continue to suffer if circulation of blank transfers is permitted. The Companies should be obligated to consider and decide applications for transfer of shares expeditiously. In a regime where dematerialisation is increasingly available, hardship caused by delayed receipt of transferred shares would be minimised.
Chapter VII - Issue, Listing and Delisting of Securities
Chapter VII in the proposed bill is a salutary provision recommended by the committee. The committee has recommended that it shall be obligatory on every issuer of securities to observe and follow the provisions of the Act, Regulations, Guidelines, directions made by the Board from time to time. The Board has been enjoined to lay down disclosure standards by framing appropriate regulations as is more particularly set out in Section 34(2) of the new Bill. The committee has formulated a new provision to the effect that the issuer and all others concerned shall be liable to compensate the investors and subscribers for the losses suffered by reason of untrue statements contained in the offer documents if such investors or subscribers have subscribed to the securities on the faith of the offer documents. The committee has thus taken further steps for protection of investors which is the real need of the hour. The committee has formulated Section 35 in the proposed new Bill specially dealing with the subject of private placements. The committee has made detailed provisions for listing and delisting of securities in view of complaints and representations received by the committee from stock exchanges, organisations concerned and knowledgeable individuals. The committee has formulated a provision to the effect that the amount of listing fee whether in lump sum or otherwise shall be recoverable from the errant company and its directors jointly or severally as arrears of land revenue. As regards delisting of securities the committee has formulated the grounds on which the stock exchange may delist the securities. It has also come to the notice of the committee that instances of defaults on the part of issuers and others in complying with the listing provisions are increasing. The committee has taken the view that breach of listing provisions should be firmly dealt with by the stock exchanges by imposing recurring fines on the defaulters as well as by insisting on rectification of the default. It has come to the notice of the committee that the directors or persons in management of the issuer company plead on various occasions that the company alone is liable for the default and the victim of the fraud or the investor concerned has no remedy against the directors or persons in management of the issuer company. The committee has made suitable recommendations in this behalf by providing that in such an eventuality the directors or persons in management of the issuer shall be jointly and severally personally liable for payment of fine and for compliance of listing obligations. A grievance was made before the committee to the effect that on occasions the issuers applied to the stock exchange concerned for voluntary delisting of its securities to the prejudice of the investors. The committee has recommended that a suitable provision be incorporated in the Act that no entity shall resort to voluntary delisting of the securities without obtaining specific prior approval of holder of securities which are sought to be delisted by a special resolution of atleast three-fourth majority in number passed in the general meeting and on other appropriate conditions. The committee has endeavored to improve upon the existing provisions in respect of right of appeal against refusal of stock exchanges to list securities of public companies.
Chapter VIII - Contracts and Options in Securities
Chapter VIII deals with the subject of "contracts and options in securities". The committee has received several suggestions and considerable significance is attached to review of the existing provisions of Section 13 to 18 of SCRA. Section 13 of the existing SCRA provides that the provisions of the said section shall apply to such State and area to which the said section is made applicable by issue of notification by the Central Government in the official gazette. Section 13 as well as 14 of the said Act thus deal with the subject matter of prohibited or regulated contracts in securities in notified areas only. At the time when the said Act was enacted, the relevant provisions of the said Act were brought into force in specified territories by issue of relevant notification in the official gazette. The concept of approval of exchanges with reference to specified territories is abolished. In view of this basic conceptual change the committee has formulated its proposals by recommending insertion of section 40 in Chapter VIII of the Act. The committee has however provided that the stock exchange may establish additional trading floors with the prior approval of the Board.
The committee has received several proposals for revising the provisions of law concerning spot delivery contracts. The committee is informed that there is at times a large scale evasion of law by individuals or firms carrying on business of dealing in spot delivery contracts. The existing provisions of law provided for regulation and control over the business of dealing in spot delivery transactions only on issuing of notification by the Central Government in this behalf. The committee has reached the conclusion that by a separate provision (Section 45 of the proposed new Bill) it should be provided that no person shall carry on business of dealing in spot delivery contracts unless it was in accordance with the rules and bye-laws of the recognised stock exchange. As regards regulation of individual spot delivery contracts, the committee has taken a balanced view to the effect that such contracts should be regulated only to such extent and in manner as provided by the notification issued by the Board after taking into consideration the exigency of the situation. The committee is conscious of the fact that it would not be fair to require all ‘spot delivery transactions’ to be regulated by the stock exchanges or by SEBI. The committee has therefore listed seven categories of cases in the exclusionary clause set out in clause 46(3) of the proposed legislation. If the sale or delivery of security is made on spot delivery basis pursuant to a family arrangement or if such transaction falls within other specified categories set out in the exclusionary clause such spot delivery contracts should be exempted from the purview of the Act.
Section 20 of the SCRA prohibited transactions dealing with options in securities. The said section was omitted by the Securities Laws (Amendment) Act, 1995 with effect from 25.1.95. The committee has therefore formulated a positive provision in the new Bill to provide that contracts in options, futures and derivatives shall be deemed to be valid provided that such contracts are entered into as per regulations framed by the Board or bye-laws of the stock exchange approved by the Board in this regard.
In the same Chapter the committee has provided 2 categories of cases where the parties concerned shall have to resort to compulsory dematerialisation as matter of statutory compulsion. The said 2 categories are as under :-
Doubts as to the validity of the Repo transactions surfaced under certain court decisions, as a result of which parties entering into such transactions do not have the necessary confidence that such arrangements would eventually be enforceable, should the need arise. A market as important as the debt market cannot meaningfully be developed in the backdrop of such fundamental ambiguities, and, the Committee, therefore, is of the view that these doubts be removed by appropriate changes which have now been suggested.
Chapter IX - A market regulator without powers of investigating and enforcement is like a lion without teeth. The provisions as to investigation and enforcement are conspicuous by their absence under the SEBI Act to except any meaningful supervision or enforcement of the market without such powers would be to except the impossible from SEBI. In this behalf, the Committee heard representatives of various departments in relation to the inadequacies pointed out by the Investigation, Enforcement and Surveillance (I.E.S.) Department. Accordingly, the provisions of Chapter IX which provide for the appointment of Investigating Officer, the powers of Discovery and Production of Evidence, Search of premises, issue search warrants, impoundng of ill gotten gains, seizure of documents, examination of persons, summoning and production of documents, assistance by other statutory or other regulatory agencies or other bodies have now been inserted for the first time. These are on lines similar to other economic legislations such as the Income Tax Act,1961, Foreign Exchange Regulation Act,1973, and the like.
We do not live in a Police State but rather consequently it is also necessary that the rights of a private citizen be fully protected. In the Bill provision has been made to prevent the misuse of these important powers, and to ensure that the personal liberty of the citizens is not intruded in an unreasonable or illegal manner. The jurisprudence on this aspect has already evolved through a number of decisions of the Courts. The manner in which these powers would be exercised is well defined. The Committee has assumed that SEBI and its officers would have due regard to these principles while exercising these powers when granted and use and exercise them in a reasonable fashion respecting the constitutional rights of all citizens. These additional powers are being recommended on that basis.
Towards this end, inter alia, provision has been made against vexatious searches, and the appropriate tests as to satisfaction of certain facts and circumstances to the exercise of powers have been provided for. As appropriate the rules of administrative law and relevant aspects of natural justice ( and not necessarily all its facets ) are incorporated in the statutory provisions.
`Approver evidence’ may sometimes be the only means available to exposing, proving and punishing major violations particularly in complex economic crimes. Accordingly, the provisions to give immunity from prosecution in return for a true and full disclosure has been made for. The appropriate rules as to presumption of culpable mental state and burden of proof have also been incorporated so as to enable meaningful enforcement. In the course of investigation, SEBI or its Investigation officers may come into possession or control of confidential information. Appropriate provision is made to charge the officer with the duty to keep such information confidential unless the discovery is required under law. Such provisions are also part of the standard legislative scheme followed in other economic legislations.
Chapter -X
Newly inserted Chapter VIA in SEBI Act,1992 makes provisions for penalties and abetment in relation to diverse violations under the Act or the Regulations. This Chapter has been continued with appropriate modifications in the form of Chapter X under the new Act. Having regard to some of the new areas of regulation such as regulation of issuer, or as to misstatement in offer documents (public or private), appropriate penalties are now, sought to be provided. In so far as insider trading is concerned not only the insider but any other person who may have benefited through dealing in unpublished price sensitive information, knowing it to be so would be punishable. Penalties for fraudulent and unfair trade practices have also been provided for on similar basis as in the case of insider trading.
The Committee is of the view that the monetary amount of penalties presently prescribed in Chapter VIA are highly inadequate and the Committee has thought it fit to recommend, substantially raising these amounts only then would they have deterrent value in connection with economic offences of this nature.
Provision has also been made for power to force disgorging of profits unlawfully made, without any monetary limit.
Penalties in certain cases may even be as high as three times the amount of illegal profits made or losses illegally averted. A mechanism of adjudging such penalties has been provided through adjudicatory mechanism by the Board through these officers not below the rank of a Division Chief. The orders of such Adjudicating officers are appealable to the Securities Appellate Tribunal (SAT).
The provisions of present Section 15J of the SEBI Act,1992, dealing with factors to be taken into account by the Adjudicating Officers has been expanded to include also investor interests, enforcement of discipline, the gravity and seriousness of the contravention and any other relevant factors. The Committee was of the view that the present set of criteria prescribed under Section 15J required expansion as aforesaid.
In order that the provisions as to adjudication of penalties should not operate in an unduly harsh fashion in cases where intermediaries or experts have otherwise conducted themselves in a professional manner and without negligence, or if they have acted with due diligence, they shall not be liable. Of course this is not excuse for the issuer. An appropriate defence (‘due diligence defence’) in that behalf with appropriate rules as to burden of proof has been made.
Consequently it would be a defence or exclusion from liability for penalty where such parties can prove that they conducted themselves with due diligence and without fraud or negligence.
It is hoped the legislative scheme now proposed will make professionals appropriately conscious of their liability and they would proceed with appropriate care and caution in advising their clients particularly, as the burden of proof in relation to such liability for proving the exercise of due diligence would be upon them.
Provision for compounding of SEBI offences :
The Committee has received suggestions that SEBI Act should be amended to provide for compounding of offences under the new Act.. The Committee has its own reservations in this behalf. In view of the recent scams and growing evil of fraudulent practices in the market, the committee has recommended substantial change in the securities legislation so as to make provisions for deterrent punishment. In view of the above-approach, the committee has reached the conclusion that the stage for permitting compounding of SEBI offences by resorting to plea-bargain has not yet reached in Indian jurisprudence. It is in larger public interest that the serious wrong doers are brought to book and are adequately punished at a trial which should be speedy and expeditious rather than giving them a chance to escape from penalties of law merely by offering " Composition monies’’
Chapter XI - The establishment of a Securities Appellate Tribunal (SAT) has already been provided in Chapter VIB of the SEBI Act,1992. The Committee understands that the Tribunal has recently become functional. The establishment and function of such Tribunal is a necessary constitutional safeguard having regard to the scope and extent of the adjudicatory and intrusive powers which are sought and conferred upon SEBI and which is finalised in the scheme of Chapter VIIB has substantially been retained. Certain lacunae have been clarified so as to provide for unambiguous interpretation of these provisions.
SEBI and its officers are often called upon to act both as regulators and adjudicators of the first instance. Consequently, there is considerable scope for mixing up these rules and for enthusiastic interpretation and enforcement, sometimes without having due regard to settled constitutional and constitutional law principles. There is thus a very heavy responsibility on the Appellate Tribunal to function with independence and provide the necessary expertise required to act as a Securities Appellate Tribunal. Having regard to the wide range of powers that are now conferred upon SEBI and its officers, the Committee earnestly hope for and would expect independent, unbiased functioning of the Appellate Tribunal, distanced from SEBI and having due regard to the principles of Administrative Law. The provisions of Chapter XIII and XIV have essentially been consolidated from the provisions of the SEBI Act,1992 and SC(R) Act,1956.
Chapter XII - To protect the interests of investors pending execution of contract, it has been provided that the intermediary concerned shall hold securities or money of the investors and trustees and they will be liable as such for breach.